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Monday, August 14, 2006

China Expert Technology (CXTI) Q2 results


Q2 period ending June 31, 2006 (also checking against Q1 period ending March 31, 2006):
28 million shares on June 30, 2006.

Wow, cash is way up. But so is accounts receivable ($15 million to $18 million and now $25 million). Where did the $6 million in cash come from?

Prepayments are down by about $4 million. Ok.

Total assets are up to around $50 million (was $41 million in Q1).

An officer loaned an additional $500K to the company. PRC tax payable is down somewhat (which would eat cash). The convertibles are valued now at $1.7 million, the embedded derivatives are carried at around $4 million and the warrants are carried at $9.4 million, all higher.

Additional paid-in capital increased by $1.1 million, probably convertibles and/or warrants flushing through the system.

Retained earnings up $2 million, which is fine.

Revenues are $14 million vs $15.1 million in Q1. Timing of revenue is obviously going to be somewhat lumpy.

Gross margins are unchanged at around 52%, which is good. The advertising expense in back to normal after the huge expense in Q1. G&A expenses are $833K vs $2 million for Q1. So as expected from those numbers, operating income is double the Q1 amount. However, more than half of that is eaten up by the change in fair value of derivatives (the accounting for the toxic convertibles etc). Interest and finance costs were huge at $1.2 million.

Net income shows up as only $281K vs $1.7 million in Q1. Trying to accurately understand what's going on in the business is not easy. I don't like the accounting for toxic convertibles and warrants, but I don't have a better alternative, really (I just guess at a reasonable upper bound on net dilution). Cash flow from operations for THREE months was around $5.5 million... and that's after about a $7 million increase in accounts receivable! So even with a huge increase in promises as income, operations still generated a lot of cash. The real cause of the big difference between cash generated and accounting income was due to the changes in fair value of derivatives and non-cash interest/finance costs. Also, a lot of the "costs and estimated earnings in excess of billings" was converted into cash in Q2.

Capex is tiny, but then so is depreciation. In spite of being a cash intensive business, they aren't really capital intensive in the sense of buying big amounts of equipment that sits around while they hope for revenue.

Financing was pretty much all advances from a former officer (and paying part of it back).

They issued some stock to settle some interest charges (125K shares).

800K shares were issued during Q1 as compensation to employees for services (market price ave was $2.09, for $1.7 million market priced cost). None issued in Q2.

The outstanding related party balances declined, which I consider good.

NOTE 7: The accounting for consultant fees paid with stock is interesting. After the stock is issued, as the stock price goes up, the accounting cost goes up. You know, I kind of like that method because I don't like using undervalued stock to pay for stuff and it should show up somewhere. But it causes an oscillation (which can be useful to make money). The stock price goes up, the costs go up and earnings go down. This causes the stock price to go down, causing the costs to go down, causing earnings to go up, causing the stock to go up, causing earnings to go down. Etc.

NOTE 9: More detail on the toxic convertibles. In November 2005, 2.3 million shares issued at a conversion price of 70 cents (that was the big plunge in stock price after Halloween).

They now have 2 debenture investors remaining.
July 11, 2006: 43K shares issued for accrued interest.

They're now up to 35 million diluted shares using their accounting. In looking at Q1 results, I had assumed 45 million. I may need to bump that up higher, I'm not sure right now. Assume 50 million for now.

Looking forward, they are building up cash. During the last 6 months, they were awarded 8 new contracts worth $114 million: Jinjiang (phase 4), Dehua (phases 3, 4), Nanan (phase 2), Licheng, Shishi, Yinzhou District Ningbo City, Dehua Unified Command System. They started training and maintenance services for Jinjiang.

12 outstanding contracts worth $126 million in revenue. They expect to sign more contracts during the second half of 2006.
The Company anticipates that the existing cash and cash equivalents on hand, together with the cash flows generated from the existing projects will be sufficient to meet the working capital requirements for the on-going projects and to sustain the business operations for the remainder of 2006. Regarding the convertible debentures to be matured in October 2006, the Company anticipates that the debentures will likely be converted into the Company’s common stock by the debenture holders. Otherwise, the Company will ensure that it has sufficient cash to pay off the debentures at maturity. In the event that the Company signs up and commences new contracts, additional financing may be required but there is no assurance that the Company will be able to obtain such additional financing, or on acceptable terms to it.
That's it for now. I might go back and look at this again soon. Overall, I'm happy with it and plan to continue to own the stock.

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