You may be wondering why the GeoTeam puts such an emphasis on Make Good Provisions (make-goods) when researching United States listed Chinese stocks.  Generally, make-goods are good faith promises and/or targets that a company sets during the initial stages of their reverse merger share exchange process or during subsequent capital raises.  This information can be found in company press releases or SEC filings that describe the share exchange or capital raise transaction. This information is particularly useful in determining a company’s intentions to increase shareholder value as well as aiding investors when valuing the company. Make- goods provide extremely helpful insight  since many of the reverse merger Chinese firms are not followed by analysts.  Consequently, no financial estimates exist.   We have observed that make-goods are more common with Chinese companies than they are with U.S. companies. 

Make-goods may also be commonly referred to as incentive allocations, performance targets or performance thresholds. 

Below is a discussion on two types of make-goods, some that are quantitative in nature and some that are qualitative. 

Quantitative Make-Goods 

Quantitative make-goods deal mostly with specific financial targets usually on an annual basis.  The targets are commonly expressed as pre-tax earnings, net income, earnings per share, revenue, or production goals.  The essence of the make-good is in the contractual requirements set forth in writing with respect to the achievement of particular goals as stated above.  A specified number of shares are placed in escrow that may be dispersed to certain parties mentioned in the verbage of the make-good agreement if targets are not met. Here is an example of a typical quantitative Make Good Provision, in this case for a hypothetical stock:

“….5,915,526 shares of our Common Stock have been placed in escrow that will be distributed to certain investors, via a prescribed formula, in the event that the company fails to achieve certain financial performance thresholds for the 12-month periods ending June 30, 2008 and June 30, 2009.

Financial Performance Thresholds:

1)  2008:

            a) Net Income greater than $8.8 million
            b) Cash from operations greater than $6.5        
                million.
            c) Net income earnings per share equal to or 
                greater than $0.22 (on a fully diluted basis) 
            d) Cash from operations earnings per share 
                equal to or greater than $0.16 (on a fully 
                diluted basis)

2)  2009:

            a) Net Income greater than $13 million
            b) Cash from operations greater than $11        
                million.
            c) Net income earnings per share equal to or 
                greater than $0.33 (on a fully diluted basis) 
            d) Cash from operations earnings per share 
                equal to or greater than $0.28 (on a fully 
                diluted basis) “
 

It is the GeoTeam's opinion that firms will set achievable make-good targets since forfeiting shares would dilute management’ s ownership.

Qualitative Make-Goods  

Qualitative make-goods deal mostly with non-monetary promises set forth in a company’s filings, but similarly require that a certain number of shares be put into escrow that can be released if the promises are not met..  These can be but are not limited to: 

1.      Statements related to Board of Director requirements.

2.      Promises related to attaining a listing on the American Stock Exchange, New York Stock Exchange or the NASDAQ.  

It will become increasingly evident to you that the GeoTeam will spotlight companies that include Make Good Provisions in their filings.  Over the years, we have seen that as make-good targets are achieved or in many cases surpassed, stock value as well as shareholder value has increased accordingly.