SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the quarterly period ended September 30, 2004
----------------------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from _______________ to _______________
Commission file number: 000-30644
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China Expert Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 98-0348086
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
Room 2703-04, Great Eagle Centre
23 Harbour Road
Wanchai, Hong Kong
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
852-2802-1555
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, including area code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 |_| No |_|
As of November 12, 2004, there were 23,863,474 shares of the issuer's
common stock, par value US$0.001 per share, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes|_| No |X|
TABLE OF CONTENTS
Page
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PART I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.............................................................2
Item 1. Financial Statements (Unaudited)..............................................................2
Notes to Condensed Financial Statements (Unaudited)....................................................5
Item 2. Management's Discussion and Analysis or Plan of Operation....................................11
Item 3. Controls and Procedures......................................................................15
PART II. OTHER INFORMATION.....................................................................................17
Item 1. Legal Proceedings............................................................................17
Item 2. Changes in Securities and Use of Proceeds....................................................17
Item 3. Defaults Upon Senior Securities..............................................................17
Item 4. Submission of Matters to a Vote of Security Holders..........................................17
Item 5. Other Information............................................................................17
Item 6. Exhibits and Reports on Form 8-K.............................................................17
i
CHINA EXPERT TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
PART I.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 1. Financial Statements (Unaudited)
September 30, 2004 December 31, 2003
(Unaudited) (Audited)
US$ US$
ASSETS
Current assets
Cash and cash equivalents 2,140,713 47,223
Amount due from an officer -- 94,787
Prepayments, deposits and other receivables (note 8) 5,823,864 1,287,889
---------- ----------
Total current assets 7,964,577 1,429,899
Property and equipment, net 14,246 52,120
Intangible assets, net (Note 7) 385,604 674,807
Prepaid expenses (Note 4) 3,150,000 --
Deferred tax assets 165,745 315,745
---------- ----------
Total assets 11,680,172 2,472,571
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable -- 9,686
Deposits received -- 93,141
Accruals 263,081 364,951
PRC business tax 966,168 274,542
Billings in excess of costs and estimated
earnings on uncompleted contracts 90,607 164,820
Advances from shareholders 730 --
Income tax payable 1,283,447 309,634
---------- ----------
Total current liabilities 2,604,033 1,216,774
---------- ----------
Stockholders' equity
Common stock (Note 2 & 9) 3,879,176 3,856,041
Paid-in capital (Note 10) 3,598,200 --
Retained earnings/(accumulated deficit) 1,598,763 (2,600,244)
---------- ----------
Total stockholders' equity 9,076,139 1,255,797
---------- ----------
Total liabilities and stockholders' equity 11,680,172 2,472,571
========== ==========
See the accompanying notes to the unaudited consolidated financial statements
2
CHINA EXPERT TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
US$ US$ US$ US$
Revenue 7,409,365 2,280,918 15,976,322 4,161,162
Cost of revenue (4,359,545) (1,146,649) (9,397,897) (2,029,631)
----------- ----------- ----------- -----------
Gross profit 3,049,820 1,134,269 6,578,425 2,131,531
Other income 10,454 21,373 47,978 49,569
General and administrative expenses (340,202) (196,960) (949,660) (644,125)
Intangible assets amortization (96,401) (96,401) (289,203) (289,203)
Depreciation and amortization (14,117) (45,381) (42,656) (136,142)
Other expenses (Note 2(ii)) -- -- (22,065) --
----------- ----------- ----------- -----------
Income before income tax 2,609,554 816,900 5,322,819 1,111,630
Income tax expenses (Note 6) (451,669) (163,531) (1,123,812) (251,358)
----------- ----------- ----------- -----------
Net income 2,157,885 653,369 4,199,007 860,272
=========== =========== =========== ===========
Net income per share (Note 5(i)) 0.090 0.031 0.179 0.040
=========== =========== =========== ===========
Weighted average number of shares 23,863,474 21,335,000 23,444,458 21,335,000
=========== =========== =========== ===========
See the accompanying notes to the unaudited consolidated financial statements
CHINA EXPERT TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended
September 30,
2004 2003
(Unaudited) (Unaudited)
US$ US$
Cash flows from operating activities :
Net income 4,199,007 860,272
Adjustments to reconcile net income to net cash
provided by operating activities :
Intangible assets amortization 289,203 289,203
Amortization of prepaid expenses 450,000 --
Depreciation and amortization 42,656 136,142
Decrease in deferred tax assets 150,000 132,491
Other expenses 22,065 --
Changes in operating assets and liabilities :
Increase in prepayments, deposits and other receivables (4,535,975 (1,140,325
(Decrease)/increase in accounts payable (9,686 107,093
Decrease in deposits received (93,141 --
(Decrease)/increase in accruals (101,870 184,348
Increase in PRC business tax 691,626 810
(Decrease)/increase in billings in excess of costs and estimated
earnings on uncompleted contracts (74,213 413,652
Increase in income tax payable 973,813 --
---------- ----------
Net cash provided by operating activities 2,003,485 983,686
---------- ----------
Cash flows from investing activities :
Purchase of property and equipment (4,782 (14,915
---------- ----------
Net cash used in investing activities (4,782 (14,915
---------- ----------
Cash flows from financing activities :
Repayment from/(advance to) officers 94,787 (1,619,800
Advance from a shareholder -- 449,871
---------- ----------
Net cash provided by/(used in) financing activities 94,787 (1,169,929
---------- ----------
Net increase/(decrease) in cash and cash equivalents 2,093,490 (201,158
Cash and cash equivalents, beginning of period 47,223 299,332
---------- ----------
Cash and cash equivalents, end of period 2,140,713 98,174
========== ==========
See the accompanying notes to the unaudited consolidated financial statements
3
CHINA EXPERT TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. CHANGE OF COMPANY NAME
On April 12, 2004, the name of the Company was changed from Leopard
Capital, Inc. to China Expert Technology, Inc. ("CXTI"), with all the
required filings submitted to the United States Securities and Exchange
Commission.
2. BASIS OF PRESENTATION
(i) The accompanying consolidated financial statements of CXTI and its
subsidiaries (the "Group") have been prepared in accordance with
generally accepted accounting principles in the United States of
America for interim consolidated financial information. Accordingly,
they do not include all the information and notes necessary for
comprehensive consolidated financial statements.
In the opinion of the management of CXTI, all adjustments, which are
of a normal recurring nature, necessary for a fair presentation of
the operating results for the three months and nine months ended
September 30, 2004 have been made. Results for the interim periods
presented are not necessarily indicative of the results that might
be expected for the entire fiscal year.
(ii) On February 9, 2004, CXTI completed a share exchange with the
stakeholders of China Expert Network Company Limited ("CEN"), a Hong
Kong incorporated company (the "Exchange"). As the Exchange resulted
in the former stakeholders of CEN owing greater than 50% of the
common stock of CXTI, the Exchange has been treated as a reverse
takeover with CEN as the accounting acquirer and CXTI as the
accounting acquiree. Accordingly, the purchase method under reverse
takeover accounting has been applied except that no goodwill is
recorded on the consolidated balance sheet.
The consolidated financial statements are issued under the name of
the legal parent, CXTI, but are a continuation of the financial
statements of CEN. The comparative figures are those of CEN.
3. DESCRIPTION OF BUSINESS
CXTI continues to be engaged in the provision of system integration
services, consultancy services and agency services. All the Group's
revenues for the interim periods presented in the consolidated
financial statements are derived from a governmental organization in
Fujian Province of the Peoples' Republic of China (the "PRC") with
contract sums aggregated to US$24,911,000.
5
CHINA EXPERT TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. DESCRIPTION OF BUSINESS (CONT'D)
In addition, the Group has obtained two contracts in the PRC with
contract sums amounting to approximately US$18,249,000 and
US$14,551,000 respectively. The former contract is currently at the
development stage and the latter contract has not yet commenced.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company balances
and transactions are eliminated in consolidation.
Use of estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates required to be made
by management include the recoverability of long lived assets and
recognition of revenue under long term contracts. Actual results could
differ from those estimates.
Prepaid expenses
Prepaid expenses represent the aggregate fair value of the Company's
common stock issued in return for the consultancy works provided by
certain consultants to the Company. The fair value is determined by
reference to the average price of the Company's common stock as quoted
on the Over the Counter Bulletin Board ("OTCBB") at the date of
issuance. The prepaid expenses are amortized on a straight-line basis
over the terms of the consulting agreements of five years.
5
CHINA EXPERT TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue recognition
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, the completed
contract method of accounting, whereby revenue is recognized when the
work is completed, is used.
Cost of Revenue
Cost of revenue comprises labor and other cost of personnel directly
engaged in providing the services, subcontracting and attributable
overhead costs. Cost of revenue does not include any allocation of
depreciation or amortization expense.
6
5. NET INCOME PER SHARE
(i) The basic net income per share is calculated using the net
income and the weighted average number of shares outstanding during the interim
periods.
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
Net income (US$) 2,157,885 653,369 4,199,007 860,272
=========== =========== =========== ===========
Weighted average number
of shares outstanding 23,863,474 21,335,000# 23,444,458 21,335,000#
=========== =========== =========== ===========
Basic net income per
share (US$) 0.090 0.031 0.179 0.040
=========== =========== =========== ===========
# The number represents the number of shares issued by CXTI
for the Exchange.
(ii) The diluted net income per share is not presented as there is no
dilutive effect for all periods.
7
CHINA EXPERT TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAX EXPENSES
Income tax expenses represent the sum of current and deferred taxes.
Current tax is calculated at 15% on the estimated assessable profits of
a subsidiary operating in the PRC for the interim and quarter periods
presented.
Valuation allowances of US$22,000 and USD$216,000 has been provided on
deferred tax assets for the three months ended and nine months ended
September 30, 2004 respectively primarily due to the uncertainty in
generating future income by CEN. The Group determined that the
valuation allowance was required based upon the recent losses of CEN.
7. INTANGIBLE ASSETS
The intangible assets are information databases and represent costs for
acquiring the expert information data assembled by and lists and
details of projects developed by parties independent to the Group.
The information database is stated at cost less accumulated
amortization at the balance sheet date.
8. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
At September 30, 2004 and December 31, 2003, the balances comprised of the
following :
September 30, December 31,
2004 2003
USD USD
(Unaudted) (Audited)
Prepaid contract costs 5,735,401 1,223,518
Rental and other deposits 88,463 64,371
--------- ---------
5,823,864 1,287,889
========= =========
8
CHINA EXPERT TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. COMMON STOCK
No. of shares Amount
US$
Authorized :-
Common stock at US$0.001 par value 200,000,000 200,000
=========== ===========
Issued and outstanding :-
Common stock at US$0.001 par value
At January 1, 2004
CEN share capital -- 3,856,041
CXTI share capital 728,474 --
Shares issued for acquisition of CEN (Note 2(ii)) 21,335,000 21,335
Shares issued in return for provision of
consultancy works (Note 8(i)) 1,800,000 1,800
----------- -----------
At September 30, 2004 23,863,474 3,879,176
=========== ===========
Note :-
(i) On February 18, 2004, the Company entered into consulting
agreements (the "Agreements") with several consultants for the
provision of corporate finance and reporting, information
technology process improvement and technology support services
to the Company. The terms of these Agreements commenced on
February 18, 2004 and will expire on February 17, 2009. In
consideration of the consulting services provided, the Company
agreed to issue in aggregate 1,800,000 of the Company's common
stock to the consultants.
10. PAID-IN CAPITAL
The paid-in capital represents the excess of the aggregate fair value
of the Company's common stocks issued under the Agreements (Note 9(i))
over the par value of the stock issued. The fair value is determined by
reference to the average price of the Company's common stock quoted on
the OTCBB at the date of issuance.
9
CHINA EXPERT TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK INCENTIVE PLAN
(i) At the annual meeting of the stockholders held on January 21,
2003, the Company's 2002 Stock Incentive Plan (the "Plan") was
approved. Under the Plan, the Compensation Committee of the
Board of Directors, in its discretion, may grant common stock
or options to purchase common stock of the Company to key
employees, consultants, and non-employee directors of the
Company.
The purpose of the Plan is to improve the Company's ability to
attract, retain and compensate highly competent key employees,
non-employee directors and consultants and to motivate
selected key employees, non-employee directors and consultants
of the Company to achieve long-term corporate objectives, by
awarding certain options to purchase the Company's common
stock, and to receive grants of common stock subject to
certain restrictions.
The Compensation Committee of the Board of Directors shall
have the authority to determine all matters relating to the
options to be granted under the Plan including selection of
the individuals to be granted awards or stock options, the
number of stocks, the date, the termination of the stock
options or awards, the stock option term, vesting schedules
and all other terms and conditions thereof.
(ii) No options or awards have been made, exercised or lapsed
during the three months and nine months ended September 30,
2004.
12. PENSION PLANS
The Group participates in a defined contribution pension scheme under
the Mandatory Provident Fund Schemes Ordinance ("MPF Scheme") for all
its eligible employees in Hong Kong.
The MPF Scheme is available to all employees aged 18 to 64 with at
least 60 days of employment with of a subsidiary operating in Hong
Kong. Contributions are made by the subsidiary at 5% of the
participants' relevant income with a ceiling of HK$20,000. The
participants are entitled to 100% of the subsidiary's contributions
together with accrued returns irrespective of their length of service
with the subsidiary, but the benefits are required by law to be
preserved until the retirement age of 65.
As stipulated by the PRC government regulations, the subsidiary
operating in the PRC is required to contribute to the PRC insurance
companies organized by the PRC government which are responsible for the
payments of pension benefits to retired staff. The monthly contribution
of the subsidiary was equal to 9% of the salaries of the relevant
staff. The subsidiary has no obligation for the payment of pension
benefits beyond the annual contributions described above.
The assets of the schemes are controlled by trustees and held
separately from those of both subsidiaries. Total pension cost was
US$5,049 and US$2,664 during the three months ended September 30, 2004
and 2003 respectively.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of our plan of operation should
be read in conjunction with our condensed consolidated financial statements and
notes thereto appearing elsewhere herein. This Quarterly Report on Form 10-QSB
should also be read in conjunction with the Company's Annual Report on Form
10-KSB.
Results of Operations
The following table sets forth, for the periods indicated, certain operating
information expressed as a percentage of revenue:
Three months ended Nine months ended
September 30, September 30,
2003 2004 2003 2004
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Revenues 50.3 58.8 48.8 58.8
----- ----- ----- -----
Gross Profit 49.7 41.2 51.2 41.2
Other Income 0.9 0.1 1.2 0.3
General and administrative expenses (8.6) (4.6) (15.5) (5.9)
Other expenses -- (0.1) -- --
----- ----- ----- -----
Income before income tax 35.8 35.2 26.7 33.3
----- ----- ----- -----
Income tax expenses (7.2) (6.1) (6.0) (7.0)
----- ----- ----- -----
Net Income 28.6% 29.1% 20.7% 26.3%
----- ----- ----- -----
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
REVENUES. Revenues were US$7,409,365 in the three months ended September 30,
2004 compared to US$2,280,918 in the three months ended September 30, 2003. The
increase in revenues in the three-month period is attributable to increased
contract revenue of the Company's e-government projects. All the Company's total
revenue is derived from the JinJiang e-government project.
COST OF REVENUES. Cost of revenues were US$4,359,545 in the three months ended
September 30, 2004 compared to US$1,146,649 in the three months ended September
30, 2003 as a result of increased costs associated with higher revenues. As a
percentage of revenues, cost of revenues were 58.8% in the three months ended
September 30, 2004 compared to 50.3% in the three months ended September 30,
2003. Gross profit was US$3,049,820 in the three months ended September 30, 2004
compared to US$1,134,269 in the three months ended September 30, 2003. As a
percentage of revenues, gross profit decreased to 41.1% in the three months
ended September 30, 2004 from 49.7% in the three months ended September 30,
2003.
OTHER INCOME. Other income was US$10,454 in the three months ended September 30,
2004 compared to US$21,373 in the three months ended September 30, 2003. The
decrease was primarily attributable to the decrease in income received from
achievement appraisal. As a percentage of revenues, other income decreased to
0.1% in the three months ended September 30, 2004 from 0.9% in the three months
ended September 30, 2003.
11
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
US$340,202 in the three months ended September 30, 2004 compared to US$196,960
in the three months ended September 30, 2003. This increase was primarily
attributable to the amortization of prepaid expenses of US$180,000. As a
percentage of revenues, general and administrative expenses decreased to 4.6% in
the three months ended September 30, 2004 from 8.6% in the three months ended
September 30, 2003.
INCOME BEFORE INCOME TAX AND INCOME TAX EXPENSES.
Income before income tax was US$2,609,554 in the three months ended September
30, 2004 compared to US$816,900 in the three months ended September 30, 2003.
This increase was attributable to the increase in the level of work under the
JinJiang e-government contract.
Income tax expenses were US$451,669 in the three months ended September 30, 2004
compared to US$163,531 in the three months ended September 30, 2003. This
increase is attributable to increase in the PRC enterprise income tax as a
result of a substantial increase in the revenue.
NET INCOME. Net income was US$2,157,885 in the three months ended September 30,
2004 compared to US$653,369 in the three months ended September 30, 2003. This
increase is attributable to the reasons set forth above.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
REVENUES. Revenues were US$15,976,322 in the nine months ended September 30,
2004 compared to US$4,161,162 in the nine months ended September 30, 2003. The
increase in revenues in the nine-month period is attributable to the substantial
completion of the first phase of the JinJiang e-government contract.
COST OF REVENUES. Cost of revenues were US$9,397,897 in the nine months ended
September 30, 2004 compared to US$2,029,631 in the nine months ended September
30, 2003 as a result of increased costs associated with higher revenues. As a
percentage of revenues, cost of revenues were 58.8% in the nine months ended
September 30, 2004 as compared to 48.8% in the nine months ended September 30,
2003. Gross profit was US$6,578,425 in the nine months ended September 30, 2004
compared to US$2,131,531 in the nine months ended September 30, 2003. As a
percentage of revenues, gross profit decreased to 41.2% in the nine months ended
September 30, 2004 from 51.2% in the nine months ended September 30, 2003.
OTHER INCOME. Other income was US$47,978 in the three months ended September 30,
2004 compared to US$49,569 in the three months ended September 30, 2003. The
decrease was primarily attributable to the decrease in income received from
achievement appraisal. As a percentage of revenues, other income decreased to
0.3% in the three months ended September 30, 2004 from 1.2% in the three months
ended September 30, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
US$949,660 in the nine months ended September 30, 2004 compared to US$644,125 in
the nine months ended September 30, 2003. This increase was primarily
attributable to the amortization of prepaid expenses of US$450,000. As a
percentage of revenues, general and administrative expenses decreased to 5.9% in
the nine months ended September 30, 2004 from 15.5% in the nine months ended
September 30, 2003.
INCOME BEFORE INCOME TAX AND INCOME TAX EXPENSES.
Income before income tax was US$5,322,819 in the nine months ended September 30,
2004 compared to US$1,111,630 in the nine months ended September 30, 2003. This
increase was attributable to the increase in the level of work under the
JinJiang e-government contract.
Income tax expenses were US$1,123,812 in the nine months ended September 30,
2004 compared to US$251,358 in the nine months ended September 30, 2003. This
increase is attributable to increase in the PRC enterprise income tax as a
result of a substantial increase in the Company's third quarter revenue
recognition.
NET INCOME. Net income was US$4,199,007 in the nine months ended September 30,
2004 compared to US$860,272 in the nine months ended September 30, 2003. This
was primarily due to the reasons described above.
12
Liquidity and Capital Resources
As of September 30, 2004, the Company had US$2,140,713 of cash and cash
equivalents and US$5,360,544 of working capital as compared to US$47,223 and
US$213,125 respectively, at December 31, 2003.
The Company believes it has sufficient cash and cash equivalents for the next
twelve months of operations.
The Company believes its operations have not been and, in the foreseeable
future, will not be materially adversely affected by inflation or changing
prices.
Recently Issued Financial Standards
The Company believes that recently issued financial standards will not have a
significant impact on our results of operations, financial position or cash
flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared under
accounting principles generally accepted in the United States of America. We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. Associated with this, we
believe the following are our most critical accounting policies in that they are
the most important to the portrayal of our financial condition and results and
require our management's most difficult, subjective or complex judgments. Actual
results could materially differ from those estimates. We have disclosed all
significant accounting policies in the notes to the financial statements
included in this Form 10-QSB. The financial statements and the related notes
thereto should be read in conjunction with the following discussion of our
critical accounting policies. Our critical accounting policies are:
Revenue recognition
We recognize revenue from fixed price long-term contracts 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, the
completed contract method of accounting, whereby revenue is recognized when the
work is completed, is used.
Intangible Assets
We account for our intangible assets in accordance with SFAS No.142,
"Goodwill and Other Intangible Assets." Intangible assets with an indefinite
life are not amortized. Intangible assets with a definite life are amortized on
a straight-line basis over their estimated useful lives. Indefinite lived assets
will be tested for impairment annually, and will be tested for impairment
between annual tests if an event occurs or circumstances change that would
indicate that the carrying amount may be impaired. Intangible assets with a
definite life are tested for impairment whenever events or circumstances
indicate that the carrying amount may not be recoverable. An impairment loss
would be recognized when the carrying amount of the intangible asset exceeds the
estimated undiscounted cash flows used in determining the fair value of the
asset. The amount of the impairment loss to be recorded is calculated by the
excess of the asset's carrying value over its fair value. Fair value is
generally determined using a discounted cash flow analysis.
Allowance for Doubtful Accounts
We regularly monitor and assess our risk of not collecting amounts owed
to us by our customers. This evaluation is based upon a variety of factors
including: an analysis of amounts current and past due along with relevant
history and facts particular to the customer. Based upon the results of this
analysis, we record an allowance for uncollectible accounts for this risk. This
analysis requires us to make significant estimates, and changes in facts and
circumstances could result in material changes in the allowance for doubtful
accounts.
13
Impairment on Tangible and Intangible Assets
We review our long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, we estimate the future cash flows expected to result from
the use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized. Otherwise, an
impairment loss is not recognized. Measurement of an impairment loss for
long-lived assets and identifiable intangibles would be based on the fair value
of the asset.
Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock Based Compensation" and provides alternative
methods for accounting for a change by registrants to the fair value method of
accounting for stock-based compensation. Additionally, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require disclosure in the significant
accounting policy footnote of both annual and interim financial statements of
the method of accounting for stock based-compensation and the related pro-forma
disclosures when the intrinsic value method continues to be used. The statement
is effective for fiscal years beginning after December 15, 2002, and disclosures
are effective for the first fiscal quarter beginning after December 15, 2002.
In January 2003, (as revised in December 2003) the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", an
interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated
Financial Statements". Interpretation No. 46 addresses consolidation by business
enterprises of variable interest entities, which have one or both of the
following characteristics: (i) the equity investment at risk is not sufficient
to permit the entity to finance its activities without additional subordinated
support from other parties, which is provided through other interest that will
absorb some or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest: the direct or indirect ability to make decisions
about the entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses.
Interpretation No. 46, as revised (46R), also requires expanded
disclosures by the primary beneficiary (as defined therein) of a variable
interest entity and by an enterprise that holds a significant variable interest
in a variable interest entity but is not the primary beneficiary.
Interpretation No. 46R, applies to small business issuers no later than
the end of the first reporting period that ends after December 15, 2004. This
effective date includes those entities to which Interpretation 46 had previously
been applied. However, prior to the required application of Interpretation No.
46, a public entity that is a small business issuer shall apply Interpretation
46 or Interpretation 46R to those entities that are considered to be
special-purpose entities no later than as of the end of the first reporting
period that ends after December 15, 2003. Interpretation No. 46R may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
changes in SFAS No. 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. This statement is
effective for contracts entered into or modified after September 30, 2003 and
all of its provisions should be applied prospectively.
14
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involves instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under SFAS No. 150 are obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This Statement shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after September 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity, as to which
the effective date is for fiscal periods beginning after December 15, 2004.
We do not expect the aforementioned statements and pronouncements to
have a material impact on our consolidated financial position or results of
operations.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, under the
section "Plan of Operation," and elsewhere relate to future events and
expectations and as such constitute "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of us to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements and to vary significantly from
reporting period to reporting period. These forward looking statements were
based on various factors and were derived utilizing numerous important
assumptions and other factors that could cause actual results to differ
materially from those in the forward looking statements, including, but not
limited to: uncertainty as to our future profitability and our ability to
develop and implement operational and financial systems to manage rapidly
growing operations, competition in our existing and potential future lines of
business, and other factors. Other factors and assumptions not identified above
were also involved in the derivation of these forward looking statements, and
the failure of such other assumptions to be realized, as well as other factors,
may also cause actual results to differ materially from those projected. We
assume no obligation to update these forward looking statements to reflect
actual results, changes in assumptions or changes in other factors affecting
such forward looking statements.
Item 3. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this report, we carried out an
evaluation under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures are effective and timely
alerting them to material information required to be included in our periodic
SEC reports.
15
b. Changes in Internal Controls:
There were no significant changes in the Company's internal control
over financial reporting that occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect the Company's
internal control over financial reporting. We have not identified any
significant deficiencies or material weaknesses in our internal controls, and
therefore there were no corrective actions taken.
16
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of the Quarterly Report on
Form 10-QSB:
Exhibit No. Description
31.1 Certification of the President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certifications of the President and the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There was one 8-K filed during the quarter ended September 30, 2004.
(1) Current Report filed on Form 8-K dated November 4, 2004
reporting the resignation of a director and officer of the Company.
17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 15, 2004 CHINA EXPERT TECHNOLOGY, INC.
By: /s/ Zhu Xiaoxin
---------------------------------------------
Name: Zhu Xiaoxin
Title: President and Director
(Principal Executive Officer)
Dated: November 15, 2004 By: /s/ Kung Sze Chau
---------------------------------------------
Name: Kung Sze Chau
Title: Chief Executive Officer and Director
Dated: November 15, 2004 By: /s/ Cheung Ming, Jeff
---------------------------------------------
Name: Cheung Ming, Jeff
Title: Chief Financial Officer
(Principal Financial Officer)
18