China Expert Announces 2006 Fourth Quarter and
Full Year Financial Results
Annual revenues increased 85.7 percent to $66.1 million while income from operations increased 49.6 percent to $21.2 million compared to 2005
Company awarded 14 new e-Government contracts totaling $251.7 million during 2006
HONG KONG, April 12, 2007 -- China Expert Technology, Inc. (OTC Bulletin Board:CXTI), a provider of large-scale network, e-government infrastructure projects for communities and municipal governments in China, today announced 2006 fourth quarter and full year financial results for the period ending December 31, 2006.
Fourth Quarter Highlights:
·
Revenues for the quarter increased 82.8% to $17.4 million
·
During the fourth quarter, the Company was awarded 6 new e-government contracts totaling $157.5 million which will be implemented during the next 3 years
·
Gross margins improved 340 basis points to 55.1% versus the Q4 2005
·
Operating income increased 24.9% year over year to $5.6 million
·
Backlog on December 31, 2006 was $227.8 million consisting of 13 contracts compared to $119.2 million on November 14, 2006 and $39.6 million on December 31, 2005.
Fourth Quarter Financial Results (unaudited)
Revenue for the fourth quarter ending December 31, 2006 increased 82.8 percent to $17.4
million compared to $9.5 million for the fourth quarter of last year. The growth resulted from execution on existing projects, including several which commenced during the year, including the 4th Phases of Jinjiang, systems and application training and maintenance services for Jinjiang, the 3rd and 4th Phases of Dehua, and the 1st and 2nd Phases of Nan’an, in addition to the Huian contract.Cost of revenue for the fourth quarter was $7.8 million compared to $4.6 million for the three months ended December 31, 2005. Gross profit for the fourth quarter increased 94.7 percent to $9.6 million compared to $4.9 million, yielding gross margins of 55.1 percent compared to 51.7 percent for the 2005 fourth quarter. The increase in gross margins resulted from a greater mix of training and system maintenance as a percentage of overall revenue compared to last ye ar and increased operating leverage through higher utilization of the Company’s own work force to deliver these services.
Total operating expenses for the fourth quarter were $4.1 million, which was up significantly from last year primarily as a result of an increase in non cash expenses related to the amortization of prepaid stock based expenses and amortization of prepaid commission expenses for new contracts. Sales and marketing expenses were $0.6 million compared to no such expenses last year, resulting from the amortized prepaid cash commission for sourcing of Cangshan District, Minqing County, Quangang District, Pingtan County, Mawei District and Yongtai County contracts in the fourth quarter. General and administrative expenses also increased significantly to $3.4 million from
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$0.5 million last year due to the increase in amortization of stock based prepaid expenses caused by fair value adjustment in the fourth quarter.
“We are pleased to report another strong quarter of revenue growth on a comparable basis and a record quarter for new contract signings,” stated Mr. Simon Fu, Chief Financial Officer of China Expert Technology, Inc. “New contract wins totaled $157.5 million as the Company secured new e-government implementations across multiple geographic areas within Quanzhou City and Fuzhou City. While we were pleased to report an increase in comparable gross margins, our reported net income for the quarter was impacted by both cash expenses paid to consultants for projects won during the quarter and also for non cash charges associated with amortization of stock based prepaid expenses caused by fair value adjustment. Excluding the two major non cash charges, we reported respectable earnings for the quarter.”
For the quarter, income before tax increased to $1.2 million compared to a loss of $0.4 million in the year ago period. Net income for the quarter was a loss of $0.2 million or ($0.01) per fully diluted share, based on 29.9 million shares, compared to a net loss of $1.4 million, or ($0.06) per fully diluted share for the fourth quarter of 2005, based on 25.1 million shares. On a proforma non-GAAP basis, excluding the $3 million charge due to the change in fair value of derivatives and $2.9 million charge related to amortization of stock based prepaid expenses caused by a fair value adjustment, net income would have been $5.7 million.
Summary of non-cash gains and expenses through December 31, 2006:
4Q06
Full Year
Change in fair value of derivatives
($3,022,000)
($3,129,000)
Expenses compensated by common stock
$0
($5,460,925)
Employee compensation by common stock
$0
($1,672,000)
Interest expenses and deferred finance costs
($887,269)
($4,606,004)
Amortization of stock based prepaid expenses
($2,909,063)
($3,612,188)
Loss on extinguishment of debts
($504,204)
($504,204)
Total
($7,322,536)
($18,984,321)
As of December 31, 2006 the Company had $10.1 million in cash and equivalents compared to $7.3 million as of December 31, 2005. Accounts receivable increased significantly to $33.6 million as Jinjiang (4th Phase), Dehua (4th Phase) and Nanan (1st Phase) projects were substantially completed and billed at the end of the year, and with the first payment for the Huian project still pending. Prepaid contract costs were $12 million and were directly related to the commencement of Licheng and Shishi City projects near the end of the year, as the Company had arranged prepayments to suppliers for the purchases of hardware on behalf of customers, in addition to down payments to subcontractors for system development during the start-up phase of these projects. In addition, prepaid commissions were $6.9 million and are expected to be expensed during the 2007 calendar year. The current ratio at the end of the fourth quarter was 7.8 to 1. On December 31, 2006, shareholders equity totaled $59.3 million which increased 178 percent compared to the same year ago period.
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Backlog as of December 31 totaled $227.8 million, which is based on thirteen outstanding contracts which have implementation schedules encompassing the next three years. Please refer to the schedule below for more details.
“China Expert Technology utilized successful customer installations as key reference projects to win several significant new contracts during 2006. In total, the Company was awarded 14 new e-Government contracts with a total contract sum of $251.7 million, further strengthening our competitive position and footprint in the Fujian province,” stated Mr. ZHU Xiaoxin, President and CEO. “We initiated work on a number of large multi-year projects which will facilitate further growth during 2007 and 2008.”
The Company pre-announced fourth quarter revenues of $17.4 million and net income of $1.7 million. While revenues were consistent with our earlier pre-announcement, net income was impacted by non-cash charges due to the increase in amortization of stock based prepaid expenses caused by fair value adjustment in the fourth quarter.
2006 Results (audited)
For the year ended December 31, 2006, revenues increased 85.7 percent to $66.1 million compared to 2005. The increase was derived primarily from the commencement of several new projects including the Jinjiang 4th Phase, the Dehua 3rd and 4th Phases, the Nan’an 1st and 2nd Phases and the Huian project. Cost of revenue was $31.3 million compared to $18.9 million, while gross profit was $34.8 million and $16.7 million, yielding margins of 52.6 percent and 46.9 percent for 2006 and 2005 respectively.
Operating expenses were $13.7 million compared to $2.5 million during 2005. The significant increase relates to advertising and marketing expenses resulting from common stock issued to consultants for sourcing government contract wins during the first half of the year and general and administrative expenses related to an employee stock issuance, as well as liquidated damages and amortization of stock based prepaid expenses more adequately detailed in the 10-K filing and the chart above. Income from operations was $21.2 million, up 49.6 percent from 2005.
Income before taxes for 2006 was $13.1 million, compared to $9.3 million in 2005. Income tax expenses were $5.2 million compared to $2.8 million respectively for 2006 and 2005, and were significantly higher than a normalized rate due to the non-cash and non-recurring charges. Net income was $7.8 million compared to $6.5 million and diluted earnings per share were $0.22 compared to $0.26 utilizing 29.0 million and 24.5 million shares for 2006 and 2005. On a proforma non-GAAP basis, excluding the non-cash charges not related to equity compensation as outlined in the table above, net income for 2006 would have been $19.7 million.
Guidance
For 2007, management expects to report revenues in the range of $72 to $74 million and net income of $20 to $21 million. For 2008, management is providing revenue guidance in the range of $124 to $126 million and net income of approximately $35 to $36 million. Two variables to take into consideration are specifically non-cash charges related to amortization of stock based prepaid expenses caused by fair value adjustment and shares outstanding utilized for earnings per share calculation in each respective reporting period.
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The first charge could potentially impact reported GAAP net income. The second could impact reported diluted earnings per share. Currently, the maximum number of shares the Company could have outstanding under any scenario would be approximately 38.7 million. Additionally, the Company has anticipated an increase in their corporate income tax rate to 25 percent for 2008 as a result of recent tax reform in the PRC related to standardization of corporate income tax rate.
The following is a summary of the projects (in $Millions) on hand as of December 31, 2006:
| | | | | | | | |
Projects
|
Tentative Start Date
| Target Completion Date |
Contract Sum
|
Recognized in 2003
|
Recognized in 2004
|
Recognized in 2005
|
Recognized in 2006
| O/S Contract Sum |
Jinjiang (1st Phase) | Apr 03 | Jan 05 | 24.7 | 4.7 | 17.8 | 2.2 | -- | -- |
Jinjiang (2nd Phase) | May 05 | Aug 06 | 9.9 | -- | -- | 7.9 | 2 | -- |
Jinjiang (3rd Phase) | May 05 | Aug 06 | 12.5 | -- | -- | 6.7 | 5.9 | -- |
Jinjiang (4th Phase) | Jan 06 | Oct 06 | 5.4 | -- | -- | -- | 5.4 | -- |
Jinjiang System & Application Training | Feb 06 | Nov 06 | 1.7 | -- | -- | -- | 1.7 | -- |
Jinjiang System Maint. | Feb 06 | Jan 09 | 3.8 | -- | -- | -- | 1.2 | 2.6 |
Dehua (1st Phase) | Apr 04 | Aug 06 | 15.6 | -- | 8.9 | 6.7 | -- | -- |
Dehua (2nd Phase) | Jan 05 | Nov 05 | 11.8 | -- | -- | 11.8 | -- | -- |
Dehua (3rd Phase) | Jan 06 | Jun 07 | 9.2 | -- | -- | -- | 7.1 | 2.1 |
Dehua (4th Phase) | Mar 06 | Dec 06 | 11.3 | -- | -- | -- | 11.4 | -- |
Nan’an (1st Phase) | Aug 05 | Mar 07 | 13.1 | -- | -- | -- | 12.5 | 0.6 |
Nan’an (2nd Phase) | Aug 06 | Jul 07 | 18.3 | -- | -- | -- | 7.7 | 10.6 |
Huian | Jan 06 | Jul 08 | 14.5 | -- | -- | -- | 9 | 5.5 |
Licheng | Nov 06 | Oct 09 | 31.2 | -- | -- | -- | -- | 31.2 |
Shishi City | Oct 06 | Sep 09 | 37 | -- | -- | -- | -- | 37 |
Yinzhou District Ningbo City (design & plan) | Apr 06 | Oct 06 | 0.3 | -- | -- | -- | 0.3 | -- |
Jinjiang Unified Command System |
Nov 05
|
Mar 06
|
0.6
|
- --
|
- --
|
- --
| 0.6 | -- |
Dehua Unified Command System | Mar 06 | Jul 06 | 0.6 | -- | -- | -- | 0.6 | -- |
Cangshan District, Fuzhou | Jul 07 | Jun 09 | 12.7 | -- | -- | -- | -- | 12.7 |
Minqing County, Fuzhou | Oct 07 | Sep 10 | 22.3 | -- | -- | -- | -- | 22.3 |
Quangang District | Jul 07 | Aug 10 | 30.8 | -- | -- | -- | -- | 30.8 |
Pingtan County, Fuzhou | Oct 07 | Sep 10 | 22.4 | -- | -- | -- | -- | 22.4 |
Mawei District, Fuzhou | Oct 07 | Sep 10 | 21.7 | -- | -- | -- | -- | 21.7 |
Yongtai County, Fuzhou | Jul 07 | Jun 10 | 28.5 | -- | -- | -- | -- | 28.5 |
Total | | | 359.9 | 4.7 | 26.7 | 35.3 | 65.4 | 227.8 |
The conference call will take place at 4:30 p.m. EDT on Thursday, April 12th. Interested participants should call 877-715-5297 when calling within the United States or 973-582-2851 if calling internationally. There will be a playback available until 11:59 p.m. eastern time April 19, 2007. To listen to the playback, please call 877-519-4471 when calling within the United States or 973-341-3080 when calling internationally. Please use pass code 8639653 for the replay.
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This call is being webcast by ViaVid Broadcasting and can be accessed by clicking on this linkhttp://viavid.net/dce.aspx?sid=00003D69 or at ViaVid's website athttp://www.viavid.net . The webcast can be accessed through May 12, 2007.
About the e-government project:
The e-government project is aimed at establishing a national electronic government system, in which existing and expected government networks and applied systems can be combined to form uniform technology standards and regulations and consequently a uniform national government service platform. The term e-government is a process in which the government is able to take advantage of modern information and communication technologies to integrate the management and service of governmental functions on the Internet, optimize and reform the government structures and working processes, and provide good and standard international administration and service to the society without time and space limitations.
About China Expert Technology, Inc:
CHINA EXPERT TECHNOLOGY, INC. ("CXTI") is a company listed on the OTC Bulletin Board under the trading symbol: CXTI, with its subsidiaries (collectively the "Group") situated in Hong Kong and China. The group is specialized in providing large-scale network infrastructure construction (mainly e-government projects) for communities and municipal governments in China. The Group's existing major clients includes municipal governments and government authorities principally located in the Fujian Province. Income is derived mainly from four areas, e-government, technology achievement appraisal, expert consultation and project database.
Safe Harbor under the Private Securities Litigation Reform Act of 1995: The statements which are not historical facts contained in this press release are forward-looking statements that involve certain risks and uncertainties including but not limited to risks associated with the uncertainty of future financial results, regulatory approval processes, the impact of competitive products or pricing, technological changes, the effect of economic conditions and other uncertainties as may be detailed in the Company's filings with the Securities and Exchange Commission. In addition, words such as “believes,” “intends,” “expects,” “may,” “will,” “should,” “plan,” “projected,” “contemplates,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or similar terminolo gy may indicate forward looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Use of Non-GAAP Measures: This press release includes financial measures for net income (loss) and diluted earnings per share calculations which excludes certain non-cash costs not calculated in accordance with generally accepted accounting principles (GAAP). Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the Company's net income and income per share and to compare it with historical net income and income per share prior to the adoption of SFAS 123R by the Company effective January 1, 2006.
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For more information, please contact:
| |
For the Company: | Investors: |
Phoebe Lam China Expert Technology, Inc Tel: +852-2802-1555 Fax: +852-2583-9222 Email:phoebe@chinaexpertnet.com | Matthew Hayden Hayden Communications, Inc. Tel: +858-704-5065 E-mail:Matt@haydenir.com |
|
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CHINA EXPERT TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | |
| | | December 31, |
|
| | 2006 | | 2005 |
| | | US$ | | US$ |
| | | | | |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents | | | 10,073,823 | | 7,326,595 |
Account receivables, net of allowance for doubtful accounts of nil and nil at December 31, 2006 and 2005, respectively | | |
33,631,372 | |
15,423,852 |
Cost and estimated earnings in excess of billings (Note 9) | | | 781,646 | | 1,082,969 |
Amount due from a director | | | - | | 609 |
Amount due from a former officer (Note 7) | | | 984,359 | | 24,229 |
Prepayments, deposits and other receivables (Note 8) | | | 18,862,836 | | 9,797,938 |
Deferred finance costs | | | - | | 539,756 |
Current portion of stock based prepaid expenses (Note 6) | | | 1,582,500 | | 500,000 |
| | |
| |
|
Total current assets | | | 65,916,536 | | 34,695,948 |
| | |
| |
|
Property and equipment, net (Note 4) | | | 15,752 | | 28,999 |
Intangible assets, net (Note 5) | | | - | | - |
Stock based prepaid expenses (Note 6) | | | 1,780,313 | | 1,062,500 |
Deferred tax assets (Note 11) | | | - | | - |
| | |
| |
|
Total assets | | | 67,712,601 | | 35,787,447 |
| | |
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| |
|
| | |
| |
|
Current liabilities | | |
| |
|
Accounts payable | | | 252,575 | | 644,470 |
Accrued payroll and employees’ benefits | | | 72,839 | | 49,115 |
Other payables and accruals | | | 378,773 | | 687,837 |
Amount due to a director | | | 96,823 | | 97,115 |
Amount due to a former officer (Note 7) | | | 1,797,122 | | 850,172 |
Amounts due to shareholders | | | - | | 730 |
Income taxes payable | | | 1,362,531 | | 1,514,217 |
PRC business tax payable | | | 1,123,788 | | 641,793 |
Deferred tax liabilities (Note 11) | | | 470,804 | | 97,783 |
Convertible debentures, net of discount of nil and US$3,665,439 at December 31, 2006 and 2005, respectively (Note 10) | | |
2,879,969 | | 733,000 |
Embedded derivatives (Note 10) | | | - | | 3,631,000 |
Warrants (Note 14) | | | - | | 5,532,000 |
| | |
| |
|
Total current liabilities | | | 8,435,224 | | 14,479,232 |
| | |
| |
|
Commitments and contingencies (Note 13) | | |
| |
|
| | |
| |
|
Stockholders’ equity | | |
| |
|
Common stock, par value US$0.001, authorized 200,000,000 shares; issued and outstanding December 31, 2006: 30,597,604 shares; December 31, 2005: 25,902,996 shares (Note 14) | | |
30,598 | |
25,903 |
Additional paid-in capital | | | 40,657,410 | | 12,101,755 |
Accumulated other comprehensive income | | | 2,015,239 | | 450,641 |
Retained earnings | | | 16,574,130 | | 8,729,916 |
| | |
| |
|
Total stockholders’ equity | | | 59,277,377 | | 21,308,215 |
| | |
| |
|
Total liabilities and stockholders’ equity | | | 67,712,601 | | 35,787,447 |
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CHINA EXPERT TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| | | | | | | |
| | Year ended December, 31 |
| | 2006 | | 2005 | | 2004 |
| | US$ | | US$ | | US$ |
| | | | | | |
| | | | | | |
Revenue | | 66,059,245 | | 35,568,606 | | 26,831,135 | |
Cost of revenue | | (31,301,262) | | (18,887,176) | | (14,469,900) | |
| |
| |
| |
| |
Gross profit | | 34,757,983 | | 16,681,430 | | 12,361,235 | |
Other operating income | | 176,074 | | 47,869 | | 2,872 | |
General and administrative expenses | | (7,404,217) | | (1,625,667) | | (1,193,849) | |
Advertising and marketing expenses | | (6,125,611) | | (623,578) | | (1,101,205) | |
Consultancy fees for reverse takeover | | - | | - | | (2,940,000) | |
Amortization of intangible assets (Note 5) | | - | | (289,352) | | (385,604) | |
Depreciation of property and equipment (Note 4) | | (15,776) | | (18,171) | | (36,222) | |
Other operating expenses | | (180,000) | | - | | (22,065) | |
| |
| |
| |
| |
Income from operations | | 21,208,453 | | 14,172,531 | | 6,685,162 | |
| |
| |
| |
| |
Other income (expenses) | |
| |
| |
| |
Interest income | | 104,855 | | 34,386 | | 24,350 | |
Interest expenses and finance costs | | (4,606,004) | | (702,012) | | - | |
Loss on extinguishment of debts | | (504,204) | | - | | - | |
Change in fair value of derivatives | | (3,129,000) | | (4,244,186) | | - | |
| |
| |
| |
| |
Income before income tax | | 13,074,100 | | 9,260,719 | | 6,709,512 | |
Income tax expense (Note 11) | | (5,229,886) | | (2,757,400) | | (1,882,671) | |
| |
| |
| |
| |
Net income | | 7,844,214 | | 6,503,319 | | 4,826,841 | |
| |
| |
| |
| |
Other comprehensive income | |
| |
| |
| |
Foreign currency translation adjustment | | 1,564,598 | | 450,641 | | - | |
| |
| |
| |
| |
Comprehensive income | | 9,408,812 | | 6,953,960 | | 4,826,841 | |
| |
| |
| |
| |
Net income per share (Note 12) | | | | | | | |
Basic: | |
| |
| |
| |
Net income per share | | US$0.28 | | US$0.26 | | US$0.20 | |
Weighted average common stock outstanding | | 28,498,423 | | 24,545,570 | | 23,673,802 | |
| |
| |
| |
| |
Diluted: | |
| |
| |
| |
Net income per share | | US$0.22 | | US$0.26 | | US$0.20 | |
Weighted average common stock outstanding | | 28,990,845 | | 24,545,570 | | 23,673,802 | |
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