Editor's note: The following article was written by Maj Soueidan, the founder of The Markets Edge Hedge Fund and GeoInvesting.
NEW YORK ( TheStreet) -- Asia Cork (AKRK) has been on the GeoTeam's radar since Aug. 20. We were encouraged that, in its 2009 first-quarter 10-Q, the company hinted that business was on the verge of rebounding from the negative effects of the global recession.
Asia Cork's second- and third-quarter results reflected and reaffirmed this sentiment. Add that the stock was selling below its book value, and the story began to gain some luster.
Well, after further due diligence, we eventually found the proverbial monkey in the wrench. In June 2008, the company consummated an offering of convertible promissory notes and common stock purchase warrants to an investor (identified as Ancora Greater China Fund, in a June 2008 8-K filing) for aggregate gross proceeds of $700,000. The one-year note obligation was past due as of June 2009. The company's obligations under the promissory notes were secured by an aggregate of 7,630,814 shares of common stock pledged by the company's CEO (Pengcheng Chen) and chairman (Fangshe Zhang).We were unsure as to the dilutive implications of potential activities required to rectify this issue. As indicated in our earlier article, Opportunities in Cheap Chinese Stocks, these situations often present prospects for savvy investors who can identify imminent resolutions to liquidity roadblocks. Stocks mentioned in the article, such as Orient Paper (ONP), Lotus Pharmaceuticals (LTUS) and China Agritech (CAGC), have handsomely rewarded investors who followed this train of thought. We also mentioned AKRK as a stock to watch. On Dec. 31, 2009, we noticed some increased trading activity in Asia Cork shares. Unable to locate any news on the wires, we decided to sift through SEC documents and noticed recent S-4 filings outlining a series of transactions where the company's CEO and chairman disposed of 7.93 million shares. Given the CEO and chairman pledged 7,630,814 personal shares to cover the debt obligation owed to the investor, we are speculating that these shares were transferred to the investor to settle the debt obligation, maybe putting the liquidity issue to rest.
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