SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________to__________.
Commission File No. 0-27929
ETERNAL TECHNOLOGIES GROUP, INC.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1655508
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Sect. D, 5/F, Block A. Innotech Tower,
235 Nanjing Rd. Heping District, Tianjin 300052
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(Address of principal executive offices)
011-86-22-2721-7020
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO _
As of August 20 2006, 40,567,300 shares of Common Stock of the issuer were
outstanding.
TABLE OF CONTENTS
ETERNAL TECHNOLOGIES GROUP, INC.
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheets at June 30, 2006 and 3
December 31, 2005
Unaudited Consolidated Condensed Statements of Operations for the three and six
months ended June 30, 2006 and 2005 4
Unaudited Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 5
Notes to the Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Controls and Procedures 12
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
Signatures 15
Part I. Financial Information
Item 1. Financial Statements
ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2006 and December 31, 2005
(Amounts in United States Dollars)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
June 30, December 31,
2006 2005
------------------ ------------------
------------------ ------------------
ASSETS
Current assets:
Cash and Cash equivalents $ 27,186,142 $ 18,224,488
Short-term investments 9,991,882 9,909,084
Accounts receivable 974,208 7,137,018
Inventories 116,153 135,341
Prepayments and deposits 635,097 257,624
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------------------ ------------------
Total current assets 38,903,482 35,663,555
Advances to distributors 774,371 520,227
Property and equipment, net of accumulated depreciation 7,049,181 7,317,502
Land use rights, net of accumulated amortization 4,739,640 4,828,051
Intangible assets 1,199,026 1,263,409
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------------------ ------------------
Total assets $ 52,665,700 $ 49,592,744
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================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable and convertible debt $ 443,366 $ 443,366
Accounts payable and accrued liabilities 822,441 706,717
Amounts due to related parties 101,174 240,368
Income taxes payable 115,318 -
Derivative financial instrument liability 273,783 562,830
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------------------ ------------------
Total current liabilities 1,756,082 1,953,281
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Commitments and contingencies:
Stockholders' equity:
Preferred shares - $0.001 par value, 5,000,000
authorized, none issued or outstanding - -
Common shares - $0.001 par value; 95,000,000 authorized;
40,567,300 and 39,854,026 shares issued and outstanding
at June 30, 3006 and December 31, 2005, respectively 40,567 39,854
Additional paid - in capital 13,636,496 13,217,874
Subscription receivable (10,176) (10,176)
Retained earnings 35,415,240 33,215,741
Accumulated other comprehensive income 1,827,491 1,176,170
------------------ ------------------
------------------ ------------------
Total stockholders' equity 50,909,618 47,639,463
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Total liabilities and stockholders' equity $ 52,665,700 $ 49,592,744
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================== ==================
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements
ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2006 and 2005
(Amounts in United States Dollars)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------
--------------------------------
2006 2005 2006 2005
-------------- -------------- ------------ ------------
-------------- -------------- ------------
(Restated) (Restated)
Sales $ 10,370,137 $ 10,123,668 $ 14,586,496 $ 12,232,415
Cost of sales 7,594,579 7,471,350 10,384,268 9,037,784
-------------- -------------- -------------- -------------
Gross profit 2,775,558 2,652,318 4,202,228 3,194,631
Depreciation and amortization 266,040 190,168 530,986 380,335
Selling, general and administrative
expenses 913,881 475,655 1,314,530 908,887
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Income from operations 1,595,637 1,986,495 2,356,712 1,905,409
-------------- -------------- -------------- -------------
Other income (expense)
Interest income 48,109 47,853 88,837 96,695
Interest expense - (54,761) - (54,761)
Change in value of derivative
financial instruments 117,435 (104,012) (104,214) (117,483)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Other income (expense), net 165,544 (110,920) (15,377) (75,549)
-------------- -------------- -------------- -------------
Income before provision for
income taxes 1,761,181 1,875,575 2,341,335 1,829,860
Provision for income taxes 102,481 - 141,836 -
-------------- -------------- -------------- -------------
Net income $ 1,658,700 $ 1,875,575 $ 2,199,499 $ 1,829,860
============== ============== ============== =============
Net income per common share
basic and diluted $ 0.04 $ 0.06 $ 0.05 $ 0.06
============== ============== ============== =============
============== ============== ============== =============
Weighted average number of
common shares outstanding,
basic and diluted 40,567,300 30,679,630 40,321,041 30,679,630
============== ============== ============== ============
============== ============== ============== ============
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
ETERNAL TECHNOLOGIES GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Amounts in United States Dollars)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
2006 2005
---------------- ----------------
----------------
(Restated)
Cash flows from operating activities
Net income $ 2,199,499 $ 1,829,860
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 530,986 380,335
Common stock issued for service - 134,261
Change in value of derivative financial instruments 104,214 172,244
Changes in operating assets and liabilities:
Inventories 20,553 (571,734)
Accounts receivable 6,234,810 (9,023,668)
Prepayments and deposits (374,874) -
Accounts payable and accrued expenses 69,152 597,497
Account payable to related parties (141,619) 104,879
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-------------- ----------------
Net cash provided by operating activities 8,642,721 (6,376,326)
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-------------- ----------------
Cash flows from investing activities:
Advances to distributors (249,796) -
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-------------- ----------------
Net cash provided by investing activities (249,796) -
-------------- ----------------
-------------- ----------------
Cash flows from financing activities:
Capital contributed - 232,812
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-------------- ----------------
Net cash provided by financing activities - 232,812
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-------------- ----------------
Effect of exchange rate changes on cash 568,729 -
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Net increase (decrease) in cash and cash equivalents 8,961,654 (6,143,514)
Cash and cash equivalents, beginning of period 18,224,488 27,473,354
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Cash and cash equivalents, end of period $ 27,186,142 $ 21.329.840
============== ================
Supplemental disclosure of cash flow information:
Interest Paid $ - $ -
================ ================
================ ================
Tax paid $ 26,518 $ -
================ ================
================ ================
The accompanying notes are an integral part
of these unaudited consolidated condensed financial statements
ETERNAL TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in United States Dollars)
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1. Background and Critical Accounting Policies
Pursuant to an exchange agreement, Eternal Technologies Group, Inc.,
("Company") formerly known as Waterford Sterling Corporation, completed its
acquisition of 100% interest of Eternal Group Limited and Subsidiaries on
December 12, 2002. The Company has treated the transaction as a reverse
merger for accounting purposes. Following the acquisition, the former
shareholders of Eternal Technology Group Limited, a British Virgin Islands
limited liability company, now owns approximately 85% of the issued and
outstanding common shares of Eternal Technologies Group Inc.
Eternal Phoenix Company Limited was incorporated in the British Virgin
Islands with limited liability on March 3, 2000. Pursuant to a resolution
passed on June 17, 2000 Eternal Phoenix Company Limited changed its name to
ETERNAL TECHNOLOGY GROUP LTD., ("Eternal"). Eternal is a holding company
for investments in operating companies.
Eternal acquired 100% of Willsley Company Limited ("Willsley"), a company
incorporated in the British Virgin Island with limited liability on May 16,
2000. Willsley's principal activity is investments and owns 100% interest
in Inner Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd
("Aershan").
Aershan was incorporated in the People's Republic of China ("the PRC") with
limited liability on July 11, 2000 and its principal activities are to run
a breeding center, transplant embryos, and to propagate quality meat sheep
and other livestock breeds in Inner Mongolia.
E-Sea Biomedical Engineering Co. International Ltd. was incorporated on
October 20, 2004 under the laws of the British Virgin Islands. (E-Sea)
E-Sea owns all of the issued and outstanding stock of E-Sea Shenzhen which
owns a Chinese patent for dialysis technology and produces and markets a
series of instruments for detecting breast disease specifically breast
cancer by applying its image processing technology. E-Sea was acquired as
of the close of business on September 30, 2005.
Inventory
Livestock inventories that are purchased for embryo transplanting, resale,
or meat processing are recorded at historical cost. Estimated costs of
raised livestock prior to use for embryo transplanting, sale, or meat
processing are accumulated and capitalized as inventory at the balance
sheet date. Embryo inventories are recorded at historical cost. Inventories
are measured at lower of cost and net realizable value using the first-in
first-out ("FIFO") or weighted average cost formulas. The Company performs
a quarterly review of its inventory to identify slow moving, obsolete or
otherwise impaired inventory. The identification process includes
historical performance of the inventory, current operational plans for the
inventory, as well as industry and customer specific trends. If actual
results differ from management expectations with respect to the selling of
inventories at amounts equal to or greater than their carrying amounts, an
adjustment to inventories would be made.
Land Lease Rights and Amortization
Land lease rights in Mainland China were stated at the amount of the
prepayment less accumulated amortization. Amortization of land lease rights
was calculated on the straight-line basis over the term of the lease of
approximately 25 years. The land lease rights with respect to the Company's
farm were originally purchased from the Chinese government for $6,000,000
and such rights extend through 2025. The farm is located in Wulagai
Development Area in Inner Mongolia.
Foreign Currency Translation
The Company's reporting currency is the US$. The Company maintains no
material accounts in currency of the United States of America. All of the
subsidiaries maintain their books and accounts in the People's Republic of
China currency, which is called Renminbi ("RMB"). Translation of the
balance sheet amounts from RMB into US$ has been made at the single rate of
exchange on June 30, 2006 and December 31, 2005, of 8.01 and 8.07 RMB/US$,
respectively. The income statement has been translated at the average rate
of exchange in effect during the period of 8.04 RMB/US$ and 8.3 RMB/US$ for
the six months ended June 30, 2006 and 2005, respectively. No
representation is made as to whether the RMB amounts could have been, or
could be, converted into US$ at that rate on June 30, 2006 or 2005 or at
any other date.
The quotation of the exchange rates does not imply free convertibility of
RMB to other foreign currencies. All foreign exchange transactions continue
to take place either through the Bank of China or other banks authorized to
buy and sell foreign currencies at the exchange rates quoted by the
People's Bank of China. Approval of foreign currency payments by the Bank
of China or other institutions requires submitting a payment application
form together with invoices, shipping documents and signed contracts.
On July 21, 2005, China effectively revalued its currency by removing its
"peg" against the U.S. dollar at 8.3:1 and measuring it against a basket of
currencies of which the U.S. dollar is only one.
ETERNAL TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in United States Dollars)
- --------------------------------------------------------------------------------
1. Background and Critical Accounting Policies, continued
Revenue Recognition
In accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenue
from the sale of livestock, embryos, and raw materials is recognized when
persuasive evidence of an arrangement exists; the price to the buyer is
fixed or determinable; the merchandise is delivered to the customer and
title passes; and collectibility is reasonably assured.
Stock-Based Compensation
Stock compensation expense for stock granted to non-employees has been
determined in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and the
Emerging Task Force consensus in Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
conjunction with Selling Goods or Services ("EITF 96-18"), as the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
Effective January 1, 2006 the Company adopted the revision to SFAS 123
("SFAS 123R"), "Share-Based Payment", that focuses primarily on accounting
for transactions in which an entity obtains employee services in
share-based payment transactions utilizing the modified prospective method.
This statement replaces SFAS 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees". SFAS 123R requires companies to expense the fair
value of employee stock options and similar awards.
Use of Estimates
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Recent Accounting Pronouncements
In November 2004, FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting
for abnormal amounts of idle facility expense, handling costs, and wasted
material (spoilage). Among other provisions, the new rule requires that
items such as idle facility expense, excessive spoilage, double freight,
and rehandling costs be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal" as stated in ARB No. 43.
The adoption of SFAS No. 151 during the first quarter of 2006 had no
material impact on the Company's consolidated financial position, results
of operations.
2. Condensed Financial Statements and Footnotes
The interim consolidated financial statements presented herein have been
prepared by the Company and include the unaudited accounts of the Company
and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in the consolidation.
These condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions to Form 10-QSB and Item 310 (b) Regulation S-B.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. The condensed consolidated financial statements should be read
in conjunction with the Company's consolidated financial statements for the
year ended December 31, 2005 and notes thereto included in the Company's
Form 10-KSB.
In the opinion of management, the unaudited consolidated condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Company as of June 30, 2006, the results of operations for the three
and six months ended June 30, 2006 and 2005, respectively. Interim results
are not necessarily indicative of full year performance because of the
impact of seasonal and short-term variations.
3. Cash and Cash Equivalents
At June 30, 2006, the Company maintains bank accounts in the PRC of
approximately $27,186,142.
4. Notes Payable
The Company's promissory notes payable are in default at June 30, 2006 and
2005 and the holder of the notes has filed suit for payment of the notes.
The Company believes it has meritorious defenses to the lawsuit related to
the notes.
ETERNAL TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in United States Dollars)
- --------------------------------------------------------------------------------
5. Income Taxes
The companies operate in several jurisdictions and may be subject to
taxation in those jurisdictions.
It is management's intention to reinvest all the income attributable to the
Company earned by its operations outside of the United States of America.
Accordingly, no United States corporate taxes have been provided in these
consolidated financial statements. The Company has a U.S. net operating
loss carry forward of approximately $2,300,000 expire in years between 2022
and 2025. However a valuation allowance has been provided as management
does not expect the tax benefits to be realized. No other significant
deferred assets or liabilities existed at December 31, 2005. The Company's
net operating loss carry forwards may be subject to annual limitations,
which could reduce or defer the utilization of the losses as a result of an
ownership change as defined in section 382 of the Internal Revenue Code.
Under current law of the British Virgin Islands (BVI), any dividends and
capital gains arising from the Company's investments are not subject to
income tax in the British Virgin Islands.
Companies with operations in the Peoples Republic of China may be subject
to taxes for income therein. The Income Tax Law of the Peoples Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises
provide certain exemptions from taxation. Under current PRC law, Aershan is
exempt from taxation as Aershan's operations currently benefit from a tax
holiday. The tax holiday, granted by Xilingol League, which is the local
government, and the central PRC government, commenced on the incorporation
of Inner Mongolia Aershan Agriculture and Husbandry Technology Co., Ltd.,
in July 2000. The Company has benefited from this holiday since inception
and anticipates that the holiday will extend through July 2008.
The tax holiday resulted in tax savings that account for substantially the
entire difference between the income tax provision that would be expected
using United States federal statutory tax rates and the tax provision of
zero for the three and six months ended June 30, 2005. The tax provision
for the corresponding period of the current year were $102,481and $ 141,836
respectively, all from the business activities of E-Sea.
6. Contingencies
In conjunction with certain subscription agreements entered into during
2003, the Company has agreed to register the shares issued under a Form
SB-2 registration statement. There were penalties for not timely meeting
filing and effectiveness deadlines, and the Company received claims related
to these penalties. On May 24, 2005 the Company issued convertible notes,
allowing for conversion of the penalty to the Company's common stock, to
the holders of the subscription agreements who accepted settlement. One
subscription agreement holder elected to not accept a convertible note and
is pursuing legal action as discussed in Part II, Item 1.
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC,
and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company's results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
7. Related Party Transactions
During the three and six months ended the Company engaged in various
transactions with related parties as follows:
- --------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ---------------------------------
------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- ----------------
Common stock sold by
officer/director
with proceeds contributed to
the
Company for payment of
operating
expenses $ - $ 50,435 $ - $ 232,812
ETERNAL TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in United States Dollars)
- --------------------------------------------------------------------------------
8. Segment Reporting
The operating segments presented are the segments for which separate financial
information is available and for which operating performance is evaluated
regularly by management to decide how to allocate resources and in to assess
performance. The Company evaluates the performance of the operating segments
based on income from operations that is defined as total revenues less operating
expenses.
The Company has identified two reportable segments: agricultural genetics and
medical devices. The agricultural genetics segment activities include a breeding
center, embryo-transplantation, and propagating quality sheep meat and other
livestock breeds in Inner Mongolia, PRC. Medical devices' operations include the
manufacture, development, sales, marketing and delivery of medical devices in
the PRC. Included in "Other" are corporate-related items, insignificant
operations and costs that are not allocated to the reportable segments.
Information regarding our reportable segments for the six months ended June 30,
2006 and 2005, is as follows:
Agricultural Medical
Genetics Devices Corporate Total
---------------- ---------------- ---------------- ----------------
2006
- -------------------------------------
- -------------------------------------
Revenues $ 12,522,328 $ 2,064,168 $ - $ 14,586,496
Income from operations 2,022,248 944,726 (610,262) 2,356,712
Depreciation and amortization 394,855 136,131 - 530,986
Total assets 46,668,036 5,985,406 12,258 52,665,700
2005
- -------------------------------------
- -------------------------------------
Revenues $ 12,232,415 $ - $ - $ 12,232,415
Income (loss) from operations 2,285,875 - (380,466) 1,905,409
Depreciation and amortization 380,335 - - 380,335
Total assets 43,553,836 - - 43,553,836
Information regarding our reportable segments for the three months ended June
30, 2006 and 2005, is as follows:
Agricultural Medical
Genetics Devices Corporate Total
---------------- ---------------- ---------------- ----------------
2006
- -------------------------------------
- -------------------------------------
Revenues $ 8,913,757 $ 1,456,381 $ - $ 10,370,137
Income from operations 1,423,849 685,213 (513,425) 1,595,637
Depreciation and amortization 197,834 68,206 - 266,040
Total assets 46,668,036 5,985,406 12.258 52,665,700
2005
- -------------------------------------
- -------------------------------------
Revenues $ 10,370,137 $ - $ - $ 10,123,668
Income (loss) from operations 2,137,165 - (150,670) 1,986,495
Depreciation and amortization 190,168 - - 190,168
Total assets 43,553,836 - - 43,553,836
ETERNAL TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in United States Dollars)
- --------------------------------------------------------------------------------
9. Non-Cash Investing and Financing
During the three and six months ended the Company engaged in various
transactions with related parties as follows:
- --------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
------------------------------
2006 2005 2006 2005
-------------- -------------- ------------- -------------
Common stock issued to convert
debt $ 52,262 - $ 419,335 -
10. Restatement
The accompanying June 30, 2005 financial statements have been restated to
properly account for derivative financial instruments associated with
convertible debt. Following is the impact of the restatement:
As Originally Filed
2005
------------------------------------
------------------------------------
Current assets $ 33,085,482
Total assets 43,553,836
Current liabilities 2,999,563
Common stock subject to
registration right
penalties -
Stockholders' equity 40,554,255
Revenues 10,123,668
Gross profit 2,652,318
Income from operations 1,986,495
Other income and expenses (6,908)
Net income 1,979,587
Basic and diluted earnings per
share 0.06
As Restated
2005
------------------------------------
------------------------------------
Current assets $ 33,085,482
Total assets 43,553,836
Current liabilities 3,434,704
Common stock subject to
registration right
Penalties 91,675
Stockholders' equity 40,138,225
Revenues 10,123,668
Gross profit 2,652,318
Income (loss) from operations 1,986,495
Other income and expenses (110,920)
Net income 1,875,575
Basic and diluted earnings per
share 0.06
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company's business is seasonal. Accordingly, the results of operations for
the three and six month periods ended June 30, 2006 are not indicative of the
results for any other quarter, period or for the fiscal year.
The following is derived from, and should be read in conjunction with, our
unaudited consolidated condensed financial statements, and related notes, as of
and for the three and six months ended June 30, 2006 and 2005.
Three Months Ended June 30, 2006 Compared to Three months Ended June 30, 2005
Revenues
Revenues for the three months ended June 30, 2006 increased by $246,469 or 2.4%
to $10,370,137 from $10,123,668 for the corresponding period of the prior year.
This increase resulted from an increase in sheep embryo transfer revenue of
$1,346,155, and the inclusion of E-Sea's sales of $1,458,099. These amounts were
offset by decrease in cattle embryo transfers of $656,104, a decrease in the
sale of sheep of $231,437 and a decrease in the sales of roll mutton of
$1,645,320.
Cost of Sales
Cost of sales for the three months ended June 30, 2006 increased by $123,229 or
1.6% to $7,594,579 from $7,471,350 for the corresponding period of the prior
year. This increase resulted from a 2.4% increase in sales. The gross profit
margin from cattle embryo transfers was 27%, gross profit margin from sheep
embryo transfers was 8.3%, the gross profit margin from the sale of roll mutton
was 19.7% and on the gross margin on the sale of E-Sea products was 55.5%.
Depreciation and Amortization
Depreciation and amortization expenses increased by $75,872 or 39.9% to $266,049
from $190,168 for the corresponding period of the prior year. This increase is
attributable to the acquisition of E-Sea.
Selling and Administrative Expenses
Selling and administrative expenses increased by $438,226 or 82.6% to 913,881
from $530,416 for the corresponding period of the prior year. This increase
resulted primarily from an increase in professional fees, but also included an
increase in salaries of $85,893 related to board approved changes in employees
salaries and an increase in public relation fees of $72,917.
Other Income (Expense)
For the three months ended June 30, 2006 the company experienced a small
increase of $256 in other income (interest) to $48,109 from $47,853 for the
corresponding period of the prior year. The increase is attributable to an
increase in balances on deposit.
For the three months ended June 30, 2006 the company had a positive change in
the value of derivative instruments of $117,435. For the three months ended June
30, 2005 the company had a negative change in the value of derivative
instruments of $104,012.
For the three months ended June 30, 2006, the Company provided taxes on its
income from its E-Sea operations. The remained of the Company's income is from
agricultural activities and benefits from a tax holiday. Since E-Sea was not
part of the affiliated group as of June 30, 2005, there was no provision for
income taxes for the corresponding period of the prior year.
As a result of the foregoing, the company had net income of $1,658,700 or $.05
per share for the three months ended June 30, 2006 compared to net income of
$1,875,575 or $.06 per share for the corresponding period of the prior year.
Six Months Ended June 30, 2006 As Compared to Six Months Ended June 30, 2005
Revenues
Revenues for the six months ended June 30, 2006 increased by $2,354,081 or 19.2%
to $14,586,496 from $12,232,415 for the corresponding period of the prior year.
This increase is primarily attributable to the addition of E-Sea, which
generated revenues of $2,064,168.
Cost of Sales
Cost of sales for the six months ended June 30, 2006 increased by $1,346,484 or
14.9% to $10,384,268 from $8,037,784 for the corresponding period of the prior
year. This increase resulted from the addition of E-Sea, which had cost of sales
of $787,612, and from changes in the sales mix of cattle embryo transfers, sheep
embryo transfers and sales of roll mutton.
Depreciation and Amortization
Depreciation and amortization expenses increased by $150,651 or 39.6% to
$530,986 from $380,335 for the corresponding period of the prior year. This
increase is attributable to the acquisition of E-Sea.
Selling and Administrative Expenses
Selling and administrative expenses increased by $405,643 or 44% to $1,314,530
from $963,648 for the corresponding period of the prior year. This increase
resulted primarily from an increase in professional fees, but also included an
increase in salaries related to board approved changes in employees salaries and
an increase in public relation fees.
Other Income (Expense)
For the six months ended June 30, 2005 the company experienced a decrease in
other income of $60,172. This resulted from a decrease in interest expense of
$54,761 the six-month period ended June 30, 2006 due to debt conversions.
The Company provided taxes on its income from the E-Sea operations of $142,126
for the six-month ended June 30, 2006. E-Sea was not part of the affiliated
group during the corresponding period of the prior year.
As a result of the foregoing, the Company had net income of $2,199,499 or $.06
per share for the six months ended June 30, 2006 compared to net income of
$1,829,860 or $.06 per share for the corresponding period of the prior year.
Liquidity and Capital Resources
As of June 30, 2006, the Company had cash and cash equivalents of $27,186,142
and working capital of $37,147,400. This compares with cash and cash equivalents
of $18,224,488 and working capital of $33,710,274 as of December 31, 2005.
Cash provided by operating activities totaled $8,642,721 for the six months
ended June 30, 2006. This compares with cash used in operating activities of
$6,376,326 for the corresponding period of the prior year. This $15,199,881
positive increase was almost entirely attributable to changes in trade
receivables and the timing of collections.
Cash used in investing activities was $249,796 for the six months ended June 30,
2006; however the Company used no cash in investing activities during the period
ended June 30, 2005. All of the cash used in investing activities during the six
months ended June 30, 2006 was for advances to product distributors.
There was no cash provided from financing activities for the six months ended
June 30, 2006. This compares with cash provided from financing activities of
$232,812 for the six months ended June 30, 2005. The 2005 amount consists
entirely of contributed capital.
At June 30, 2006, the Company lists notes payable of $443,366. These notes are
currently the subject of litigation where the Company is challenging their
validity.
The Company has cash and bank balances of $27,186,142 at June 30, 2006 and these
balances are more than sufficient to cover its PRC operations. However, if the
Company is to expand outside the PRC, as it anticipates doing, or pay its
non-PRC obligation, it will have to sell additional shares of its stock or
borrow funds from third parties. Unless the Company is able to either borrow
funds or sell additional shares, it will have insufficient resources to carry
out its business objectives outside the PRC for the next twelve (12) months.
Item 3. Controls and Procedures
We strive to maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designated and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls. Our former independent accountants, Thomas Leger & Co. LLP conducted
audits of our financial statements for 2002, 2003 and 2004. In connection with
the issuance of its report of the independent registered public accounting firm,
Thomas Leger & Co. LLP reported to our Board of Directors two material
weaknesses under standards established by the Public Company Accounting
Oversight Board regarding some elements of our system of internal controls. They
noted the following material deficiencies:
(i) The Company's reported financial statements relating to the acquisition of
E-Sea Biomedical Engineering Co. International, Ltd. were indicative of a
material weakness in controls over closing procedures and the accounting for
non-routine transactions. We determined the Company lacked certain procedures
and required expertise needed to properly account for non-routine transactions
(such as acquisitions of other businesses) and preparation of its required
financial statement disclosure in accordance with U.S. G.A.A.P. and SEC rules
and regulations.
(ii)The Company has restated its consolidated financial statements for the
year-ended December 31, 2002 to reflect merger costs of $867,411 as post
acquisition activity. The restatement is considered a material weakness over
financial reporting as defined by the PCAOB.
We have conducted a review of the errors requiring restatement, including a
separate review by our board of directors to determine what remedial measures
were necessary. We believe our management has taken or is in the process of
taking the steps necessary to correct the errors and avoid similar errors in the
future. One important measure is to have our President also become involved in
the review of our internal controls and procedures.
As required by SEC rule 13a-15(b) we conducted an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer, President and Vice President of Finance, the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer, President and Vice President of
Finance concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to us (including our
subsidiaries) required to be included in our periodic SEC filings.
Our new independent accountants, Ham Langston & Brezina LLP conducted an audit
of our financial statements for 2005. In connection with the issuance of its
report to the Board of Directors, Ham, Langston & Brezina LLP reported two
material weaknesses under standards established by the Public Company Accounting
Oversight Board regarding some elements of our system of internal controls. They
noted the following specific material deficiencies.
(i) The Company lacked the required expertise needed to properly account for
non-routine transactions (such as the acquisition of other businesses and
preparation of its required financial statement disclosure in accordance with
U.S.G.A.A.P. and SEC rules and regulations.
(ii) The Company has restated its consolidated financial statements for the
year-ended December 31, 2004 to reflect the accounting for derivatives. The
restatement is considered a material weakness over financial reporting as
defined by the PCAOB.
Other than the foregoing initiatives, there were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect such internal controls subsequent to the date of their evaluation.
While we have taken or are in the process of taking the foregoing steps in order
to address the adequacy of our disclosure controls and procedures, and, in
addition, to develop and implement a formal set of internal controls and
procedures for financial reporting in accordance with SEC's proposed rules to
adopt the internal control report requirements included in Section 404 of the
Sarbanes-Oxley Act of 2002, the efficiency of the steps we have taken to date
and the steps we are still in the process of completing is subject to continued
management review supported by confirmation and testing by our internal and
external auditors. As a result, it is likely that additional changes will be
made to our internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As of May 16, 2006, we were a party to one legal proceeding. The proceeding
involves a lawsuit brought by Western Securities Corporation seeking payment of
$500,942 on two outstanding promissory notes, one to Market Management, Inc. and
one to Thomas L. Tedrow plus accrued interest since July 11, 2004, attorney's
fees, cost of collection and other court costs. This cause of action was
initially filed in Federal District Court in the Eastern District of Louisiana.
The Company filed a Motion to Dismiss for lack of personal jurisdiction or
alternatively a Motion to Dismiss for lack of venue.
In October 2005, the Court granted the Company's motion for a change of venue
and the case was moved to the Southern District Court of Texas in Houston,
Texas. The Company believes that the case is without merit and the basis of the
promissory note involves expenditures not made on the company's behalf.
Furthermore, the Company has significant counterclaims that it plans to assert
against Mr. Tedrow and Market Management, Inc.. The Company believes that this
matter will be resolved during 2006 and that the Company will prevail on all
counts.
The State Court in New York dismissed a cause of action, filed by Bristol
Investments Limited against the Company, on February 14, 2006. On March 30, 2006
without stating a new cause of action, Bristol Investments Limited re-filed the
cause of action against the Company.
As of August 20, 2006, there are no other causes of action pending against the
Company.
Item 2. Changes in Securities
During the three month period ended June 30, 2005 there were no changes in
securities.
Item. 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
31.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
ETERNAL TECHNOLOGIES GROUP, INC.
/s/ JIANSHENG WEI
-------------------------------------
August 21, 2006 Jiansheng Wei, Chief Executive Officer
/s/ ZHENG SHEN
August 21, 2006 -------------------------------------
Zheng Shen, Chief Financial Officer
CERTIFICATIONS
EXHIBIT 31.1
Certification by Jiansheng Wei Pursuant to Securities Exchange Act Rule
13a-14(a)
I, Jiansheng Wei, certify that:
1. I have reviewed this quarterlyl report on Form 10-QSB of Eternal Technologies
Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 21, 2006
/s/ JIANSHENG WEI
Jiansheng Wei
Chief Executive Officer
EXHIBIT 31.2
Certification by Zheng ShenPursuant to Securities Exchange Act Rule 13a-14(a)
I, Zheng Shen, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Eternal Technologies
Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15-15(f) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 21, 2006
/s/ ZHENG SHEN
Zheng Shen
Chief Financial Officer
EXHIBIT 32.1
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned, Jiansheng Wei, the Chief
Executive Officer of Eternal Technologies Group, Inc. (the "Company"), hereby
certifies that, to his knowledge:
(i) the Quarterly Report on Form 10-QSB of the Company for the six months ended
June 30, 2006, as filed with the Securities and Exchange Commission on the date
hereof (the "Report") fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii)the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 21, 2006
/s/ JIANSHENG WEI
Jiansheng Wei
Chief Executive Officer
EXHIBIT 32.2
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned, Zheng Shen, the chief financial
officer of Eternal Technologies Group, Inc. (the "Company"), hereby certifies
that, to his knowledge:
(i) the Quarterly Report on Form 10-QSB of the Company for the six months ended
June 30, 2006, as filed with the Securities and Exchange Commission on the date
hereof (the "Report") fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii)the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 21, 2006
/s/ ZHENG SHEN
Zheng Shen
Chief Financial Officer