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Sunday, September 25, 2005

China Expert Technology (CXTI) 10-K

year ending Dec 31, 2004
incorporated in Nevada, offices in Hong Kong
24,414,679 shares outstanding Dec 31, 2004.
originally QQQ-Huntor Associates, 1995 changed domicile to TX, merged with Unimex Transnational Consultants. 1996 re-org, acquired Dakota Mining & Exploration Ltd, changed name to Canadian Northern Lites, Inc with Dakota as subsid. Voluntary registration 10-SB in 1999. 2000 merged with Leopard Capital and became a Nevada company with the name Leopard Capital Inc. (talk about changing your spots) Dec 2000 spun off Dakota to shareholders due to declining comodity prices for mining companies. No subsidiaries since Dec 31, 2003. 2001 converted 1.6 million non-voting shares to voting common becoming a subsidiary of Hudson Capital Corporation. Feb 2004, reverse merger with China Expert Network Company Ltd. an HK company. China Expert is a wholely owned subsidiary of Company, shares of China Expert are the most significant asset. Expert Network (in PRC) is China Expert's subsidiary.

Company performs IT work to governments and corporations involved in creating "e-governments". Also large-scale network infrastructure construction, public LAN construction, SW devel, website planning, etc.
The Company is the only private enterprise with the authority to provide technological achievement appraisal services for IT companies in China.
[Dollars are US dollars]
Contracts with three city governments in Fujian, PRC
Jinjiang, 4/03-1/05, $22 million (got the company going)
Dehua, 4/04-8/06, $18 million
Nan'an, 3/05-3/07, $14.5 million
These include one additional year of maintenance
Also a new 3 year contract in Jinjiang worth $3.9 million starting 1/05.
Also provides training programs to 500 officials in Jinjiang.
2/05 awarded contract worth $1.8 million for training and materials to 3,500 officials in Jinjiang.
Jinjiang was a model e-government system for 82 cities in Fujian province.

Up to 100 employees during peak operations. 50 at end of 2004, all FT.
No R&D in the past, but will do some in 2005.
Competition exists, but Expert Network has some advantages.
No legal proceedings.
Company reached profitability in 2004 after finishing development stage.

Company is paid on a milestone basis. First milestone is 6-9 months, with payment within 30 to 60 days. Company wants to grow fast and may need outside sources of cash.

Should get another 2 contracts for $30 million in 2005 and will need to raise $10 million for working capital, could be an equity placement. The net result should be a 15% growth in revenues and profits for fiscal 2005.

2004 (vs 2003)
Gross profits in 2004: 46% (down from 52%)
SG&A in 2004: 10.21% (down from 26%)
taxes: 7% (up from 5.4%)
net income: 28.95% (up from 21.36%)
all increase in revenue was due to Jinjian project
Net income: $7.77 million (up from $1.2 million)
Cash flow from ops: $6.3 million (up from $1.7 million)
Advances to officers/directors burned a lot of cash

Auditors: PKF, Hong Kong. This is changed later to BDO McCabe Lo & Co
And the CEO resigns as well.

Dec 04 balance sheet:
Total assets: $17.3 million ($12.6 million equity)
Total current assets: $14.6 million
current assets are 22% cash, 30% AR, 27% prepayments, 20% loan to director
non-current assets are nearly all prepayments
current liabilities: $4.6 million ($2.1 tax, $0.97 AP, $0.96 PRC business tax)

revenue: $26.8 million
net income: $7.77 million (details above)

operational cash flow: $6.3 million (AR=-4.4, prepay=-2.6, AP=+0.96)
capex essentially zero
finance was $3 million loan to director/officer

Company issued 1.8 million shares to contractors for payment for financial services etc. through 2009. Aone of the consultants didn't provide services and surrendered 550K shares which was then cancelled.

Furniture, fixtures, office equipment: 5 years
Computer equipment and SW: 3.3 years
cars: 3.3 years
leasehold improvements: min(3.3 years, lease term)

Prepaid expenses are the fair value of stock issued for consultant work (average price at date of issue). These are straight-line amortized over the terms of the agreements of 5 years.

This is badly explained:
Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the year in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the year in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting, whereby revenue is recognized when the work is completed, is used.
Share based payment SFAS 123R, Company is currently assessing impact.

furniture, fixtues, office equip: $207K
computer equipment, SW: $100K
cars: $74K
nearly entirely depreciated

intangible information databases $1.9 million (cost, paid in shares in 2000), depreciated down to $289K.

The amount due from an officer was from Lai Man Yuk (was paid in 2004). No interest, unsecured, no fixed terms of repayment. [where can I get one of those?]

The $360 (three hundred and sixty dollar) loan to a director (apart from the above) is to Kung Sze Chau. 5.22% interest, unsecured, due Jan 14, 2005. It was not paid off on time, but subsequently paid. There is a $730 loan from directors/shareholders, interest-free, unsecured, no terms.

Other related party stuff: received interest from Kung Sze Chau of $22K. Paid rentals to former officer Lai of $168K.

Prepayments are prepaid contract costs ($3.8 million) and rental and other deposits ($44K).

Billings at the end of 2004 were $33 million (all paid).

Deferred tax assets of $983K offset by valuation allowances of $720K.

Shares outstanding: 24.4 million. (2.9 million were issued for payments in 2004). 825K shares reserved for stock options. None had been awarded yet.

Lease obligations are max $106K per year, total $241K.

Directors and Officers
Zhu Xiao Xin, 38, President and Director since Feb 2004. Owns 7.76%. Previously executive manager for Syscan Technology (Shenzhen) and president of Shenzhen Hecheng Technology Corp. VP of Expert Network Development (Shenzhen). Qualified economist.
Kung Sze Chau, 57, CEO and Director since Feb 2004 (actually since 2000). Owns 8.64%. 20 years experience in investment/management, specializing in bio pharm and property.
Chaing Min Liang, 40, CFO since Nov 2004. Owns zero. Chinese CPA. Taught auditing and accounting for 6 years. Working in auditing/accounting with many listed companies.
Lai Man Yuk owns 10.39%
Tsang Chi Wai Eric owns 5.98%
Chan Chak Mo owns 9.28%
Li Sze Tang owns 15.2%
Wong Lap Woon owns 8.16%

A lot of the above ownership is via China Data Holdings Ltd which owns 45.18% of the company.
Also Ibroader Development which owns 16.81%.
Also China Link Investment Group Ltd which owns 10.28%
I-Mode Technology Ltd owns 9%
all (3 of them) current officers and directors own 16.4%

Audit fees: $103K
tax fees: $2K

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