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Cleantech Solutions (CLNT) Update – GeoTeam Commentary

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On December 18, 2012 we issued our preliminary on-the-ground due diligence (DD) findings on Cleantech Solutions International, Inc. (CLNT).  While in some cases we believe that preliminary DD is sufficient enough to form a definitive conclusion regarding a ChinaHybrid operation, sometimes we require more.  This is the case with CLNT.

We appreciate the efforts of the company’s Investor Relations firm who arranged a conversation for us with the CLNT management team in order to discuss a more thorough DD process.   Some of our requests included:

  • Independent verification of cash accounts;
  • Independent verification SAIC/SAT filings;
  • Independent video coverage of manufacturing operations;
  • A list of top/current customers and suppliers.

Unfortunately, CLNT management has informed us that they cannot comply with our request at this time.  Here’s what the company indicated they may be willing to do:

  • Provide their own real-time video records of their factories;
  • SAIC/SAT/bank statements that the company provided to its auditor (not independently);
  • Allow the opportunity to interview current customers/suppliers.

To management’s credit they seem willing to provide us with certain documentation and DD materials, similar to those that they submit to their auditor.  However, we require a more independent process of gathering DD information.  This is undoubtedly the case with CLNT because the company retains the services of Sherb, an auditor that has been previously associated with controversial ChinaHybrid companies.

Furthermore, CLNT has had what we consider to be a history of high CFO turnover.  We are also concerned that the company filed an S-3 (shelf filing) on April 25, 2013 with the stock trading at low valuation multiples and allowing the company to raise up to $5 million using dilutive securities. Given these developments, we cannot further validate CLNT’s operations.

We believe that the steps we outlined are necessary for CLNT to gain investor confidence, see an expansion in valuation multiples and be in a position to attract growth capital at reasonable terms.

As we continue to call for a cleansing of the ChinaHybrid space, we as investors have exercised our right not to invest. In doing so, we have helped to create what could be a fantastic value opportunity if management teams begin to trust that our true motives are to help them gain investor confidence.   It is time that we collectively let these companies know that if they want our money, certain conditions MUST be met:

  • Complete transparency with an openness to independent review;
  • Quality management that cares about investors;
  • Quality advisors: Law Firms, Auditors, IR, and Investment Bankers who have not been tainted over and over again with fraud associations.

This does not seem like so much to ask for, but we are still looking for that one company.

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1 comment to Cleantech Solutions (CLNT) Update – GeoTeam Commentary

  • GeoTeam

    As many of our Geo followers are aware we published an article (http://seekingalpha.com/article/1069121-site-visit-to-cleantech-solutions-reveals-a-busy-and-robustly-growing-operation) published Dec. 18, 2012 about CLNT noting what we found to be a promising development. We observed CLNT operations for some time last fall and came away with what believed was a busy ongoing operation. However, since our article we have asked management to allow us more complete access to their operation so we can further substantiate financials and margins. The long and short of it is the same old song and dance we get from many China based companies in that management offered to “send us” any documentation (the same documentation sent to CLNT’s auditor) we asked for, but would not allow us:

    • any direct access to the facilities,
    • to take any video, or
    • give us permission to retrieve SAIC and SAT documents for ourselves.

    I don’t think we can be any clearer than we were in our follow-up blog post stating:

    [“As we continue to call for a cleansing of the ChinaHybrid space, we as investors have exercised our right not to invest. In doing so, we have helped to create what could be a fantastic value opportunity if management teams begin to trust that our true motives are to help them gain investor confidence. It is time that we collectively let these companies know that if they want our money, certain conditions MUST be met”

    • Complete transparency with an openness to independent review;
    • Quality management that cares about investors;
    • Quality advisors: Law Firms, Auditors, IR, and Investment Bankers who have not been tainted over and over again with fraud associations.

    This does not seem like so much to ask for, but we are still looking for that one company.”]

    This disappointment alone is enough to keep us from holding a long position in CLNT, but the events of the past couple of weeks are even more troubling. As stated in Rick’s article (http://seekingalpha.com/article/1463951-market-s-epic-mistake-causes-cleantech-to-triple) published today it seems there is a very real possibility the CLNT stock is being manipulated during a time when the company is trying to raise money. It matters little to us if management is or is not part of stock manipulation activities. What does matter is that it in our view it’s apparently happening. At this point we view any investment in CLNT as highly speculative. Ultimately, we prefer more certainty in the investments we make.