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Sunday, September 25, 2005

Eternal Technologies (ETLT) 2nd Quarter 10-Q

10-Q for the period ending June 30, 2005.

Balance Sheet (compared with Dec 04):
Cash dropped by $6 million to $21.3 million (shows up in cash flow)
AR jumped by an order of magnitude! to $10.5 million.
Inventories nearly doubled.
AP increased to $1.85 million from $1.53 million.
$377K due related parties.
Equity up to $40.5 million from $38.2 million.

Income Statement:
Q2 Sales more than doubled from 2004, so did H1 sales. About half is due to increase in cattle embryo transfer revenue, about a third is due to mutton sales increase, the rest due to increase in sheep sales.
Gross margins 26% down from 39% (probably same reason as mentioned in 10-K)
Gross margins for mutton sales was 24.2%, for sheep sales was 24.9%, for embryo transfers was 29.56%.
SG&A rock steady
Q2 net income $1.98 million (remember the lack of taxes till Q3 2008)

Cash Flow:
$6 million used by operations due to astronomical junp in AR.
$232K capital contributed (officers/directors sold stock and contributed the proceeds for operations)
zero investing activities.

Revenue is recognized using SAB 104, when persuasive evidence of an arrangement exists, the price is fixed or determinable, the merchandise is delivered, the title passes, and collectibility is reasonably assured. Given the increase in AR, this is important.

On Feb 1, 2005, entered into 6-month PR agreement with Empire Relations Group. 150K shares as compensation. I didn't see anything there about Eternal Technologies.

They really don't provide any answers for the alarming jump in AR.
However, I had looked at another Chinese agribusiness and saw a similar high use of receivables in sales. If this is the same thing, the company is essentially loaning money to the customer with an unknown recourse and no interest. If 20% of those receivables went bad, the company would have made zero profit. Looking at past results, AR jumps all over the place by essentially an equivalent amount.

The legal proceeding in Louisiana has been moved to Federal Court as requested by ET. The settlement was refused by Bristol, litigation continues.

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