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 March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-12293
BROADENGATE SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0394313
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3/F, Block 2, Cyber City, South Hi-tech Industrial Park,
Shenzhen, Guangdong Province
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(Address of Principal Executive Offices) (Zip Code)
011-86-755-671-6656
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(Issuer's Telephone Number, including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 [X] No [_]
As of May 13, 2002, 14,393,000 shares of our common stock, $.001 par value were
outstanding. As of such date, the aggregate market value of the common stock
held by non-affiliates, based on the closing bid price on the NASD Bulletin
Board, was approximately $3,875,749.
Index
ESOFTBANK.COM, INC. and Subsidiaries
Page No.
Part I. Financial Information
Item. 1 Financial Statements (Unaudited)
Condensed consolidated statements of operations -
Three months ended March 31, 2002 and 2001 3
Condensed consolidated balance sheets - March 31, 2002 and
December 31, 2001 4
Condensed consolidated statements of cash flows - Three
months ended March 31, 2002 and 2001 6
Condensed consolidated statements of shareholders equity 8
Notes to consolidated financial statements - June 30, 2001 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROADENGATE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(Unaudited)
2002 2002 2001
------------ ------------ ------------
Rmb Rmb US$
REVENUE 2,117,926 2,284,122 $ 275,195
COST OF SALES (1,443,985) (1,689,807) (203,591)
------------ ------------ ------------
GROSS PROFIT (LOSS) 673,941 594,315 71,604
SELLING AND ADMINISTRATIVE
EXPENSES (2,818,282) (1,974,563) (237,899)
------------ ------------ -----------
INCOME (LOSS) FROM OPERATIONS (2,144,341) (1,380,248) (166,295)
OTHER INCOME(EXPENSE)
INTEREST EXPENSE (256,864) (259,422) (31,256)
DIVIDEND INCOME - 493,753 59,488
OTHER INCOME,NET 161,535 11,060 1,333
------------- ------------ ------------
TOTAL OTHER INCOME(EXPENSE), NET (95,329) 245,391 29,565
------------- ------------ ------------
INCOME (LOSS) BEFORE TAXES (2,239,670) (1,134,857) (136,730)
INCOME TAXES 12,979 - -
------------ ------------ ------------
INCOME (LOSS) BEFORE
MINORITY INTEREST (2,252,649) (1,134,857) (136,730)
MINORITY INTEREST IN LOSS (179,335) - -
------------ ------------ ------------
NET INCOME (LOSS) (2,431,984) (1,134,857) (136,730)
============ ============ ============
INCOME (LOSS) PER SHARE (0.19) (0.079) $ (0.0095)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
12,920,000 14,393,000 14,393,000
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
BROADENGATE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2002
(Unaudited)
2001 2002 2002
Rmb Rmb US$
----------- ----------- ----------
ASSETS
CURRENT ASSETS
Cash 7,995,053 142,107 $ 17,121
Accounts receivable 3,192,662 4,144,842 499,379
Deposits and other 555,987 318,959 38,429
Advances to employees 389,008 415,478 50,058
Costs and estimated earnings in excess
of billings on uncompleted contracts 319,444 38,487
----------- ----------- ----------
TOTAL CURRENT ASSETS 12,132,710 5,340,830 643,474
----------- ----------- ----------
NONCURRENT ASSETS
Long-term investment 2,800,000 2,800,000 337,349
Fixed assets 2,432,328 2,360,968 284,454
Advances to employees 326,000 356,185 42,914
Intangibles 1,508,106 1,373,052 165,428
----------- ----------- ----------
TOTAL NONCURRENT ASSETS 7,066,434 6,890,205 830,145
----------- ----------- ----------
TOTAL ASSETS 19,199,144 12,231,035 1,473,619
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings-bank 24,000,000 16,000,000 $1,927,711
Accounts payable - 18,706 2,254
Accrued expenses
Salaries, wages and other compensation337,048 569,845 68,656
Employee fringe benefits 1,539,271 1,607,521 193,677
Taxes 17,458 50,147 6,042
Other 1,183,523 1,386,700 167,072
Customer deposits 15,000 38,327 4,618
Due to directors 4,163,531 4,091,039 492,896
Due to related parties 390,919 502,012 60,483
Due to employees - 246,616 29,712
Billings in excess of costs and estimated
earnings on uncompleted contracts - 535,174 64,479
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 31,646,750 25,046,087 3,017,600
----------- ----------- -----------
MINORITY INTEREST - - -
----------- ----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, par value US$0.001;issued
and outstanding-14,393,000 shares as
of December 31,2001 and March
31,2002 119,462 119,462 14,393
Additional paid-in capital 57,969,605 57,969,605 6,984,290
Subscription receivable (767,411) - -
4
Reserve funds 347,148 347,148 41,825
Foreign currency translation - -
Accumulated deficit (70,116,410) (71,251,267) (8,584,489)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)
(12,447,606) (12,815,052) (1,543,981)
----------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 19,199,144 12,231,035 1,473,619
=========== =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
BROADENGATE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(Unaudited)
2001 2002 2002
Rmb Rmb US$
----------- ----------- -----------
Cash Flows from Operating Activities
Net loss (2,431,984) 1,134,857 (136,730)
----------- ---------- -----------
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation 147,340 247,110 29,772
Amortization of product development costs
98,136 - -
Amortization of Intangible assets - 135,054 16,272
Provision for losses on receivables - Customers
265,089 - -
Minority interest 179,335 - -
(Increase) decrease in
Accounts receivable (1,265,554) (1,140,580) (137,419)
Deposits and other 353,710 67,028 8,076
Costs and estimated earnings in excess of
billings on uncompleted contracts (107,740) (319,444) (38,487)
Increase (decrease) in
Accounts payable and accrued expenses 390,463 555,619 66,942
Customer deposits (11,000) 23,327 2,811
Billings in excess of costs and estimated
earnings on uncompleted contracts 258,122 535,174 64,478
----------- ----------- -----------
Total Adjustments 307,901 103,288 12,445
----------- ----------- -----------
Net Cash Used in Operating Activities (2,124,083) (1,031,569) (124,285)
----------- ----------- -----------
Cash Flows from Investing Activities
Capital expenditures (2,000) (5,750) (693)
Capitalized expenditures for
product development costs 169,964 - -
Advances to employees (34,304) (56,655) (6,826)
Initial Investment of minority shareholder 95,352 - -
----------- ----------- -----------
Net Cash Used in Investing
Activities (301,620) (62,405) (7,519)
----------- ----------- -----------
Cash Flows from Financing Activities
Net borrowings from SiTech Holding 200,000 -
Net short-term borrowings - (8,000,000) (963,855)
Net borrowings from director 571,373 -
Proceeds from subscription receivable - 767,411 92,459
Net borrowings from employees - 246,616 29,712
Net borrowings from a director - 115,908 13,965
Net borrowings from related parties - 111,093 13,385
----------- ----------- -----------
Net Cash Provided by (Used in)
Financing Activities 771,393 (6,758,972) (814,334)
----------- ----------- -----------
6
Net Decrease in Cash (1,654,310) (7,852,946) (946,138)
Cash, Beginning of Period 3,221,718 7,995,053 963,259
----------- ----------- -----------
Cash, End of Period 1,567,408 142,107 17,121
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
7
BROADENGATE SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder's Equity
Three Months Ended March 31, 2001 and 2002
Retained
Common Stock Additional Subscription Earnings Reserve Total
Paid in (Accumulated
Capital Deficit) Funds
No. of Shares Amount Rmb Rmb Receivable Rmb Rmb Rmb Rmb
-------------- ----------- ------------ --------------- ----------- ------- --------
Balance as of January1,
2002 14,393,000 119,462 57,969,605 (767,411) (70,116,410) 347,148 (12,447,606)
Net Loss (1,134,857) (1,134,857)
Proceeds from
subscription receivable 767,411
14,393,000 119,462 57,969,605 767,411 (71,251,267) 347,148 (12,815,052)
8
BROADENGATE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company believes that the interim financial statements contain all
adjustments necessary for a fair presentation of the results for such interim
periods. All of these adjustments are normal recurring adjustments. The results
of operations for interim periods do not necessarily predict the operating
results for the full year. The consolidated balance sheet as of December 31,2001
has been derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles as permitted by
interim reporting requirements. The information included in this report should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations, the audited financial statements and
related notes included in the Company's 2001 Form 10-KSB.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31,2001.
NOTE 2 - ACQUISITIONS
On March 31, 2000, Natural Way Technologies, Inc. (Natural Way) entered into an
Exchange agreement (the Exchange) with World Concept Development Limited
(World), an independent third party. In accordance with the Exchange, Natural
Way acquired 100% of the issued and outstanding shares of World in exchange for
9,300,000 post reverse split shares of Natural Way. Prior to closing, Natural
Way effected a one for five reverse stock split and changed the name of the
Company to ESOFTBANK.COM, INC.
The Exchange has been accounted for using the purchase method of accounting as a
reverse acquisition, whereby the company issuing its shares to effect the
business combination is determined to be the acquirer in the business
combination. This occurs when the shareholders of the issuer have less than a
majority of voting control of the combined entity. The company whose
shareholders retain the majority voting interest in the combined entity is
presumed the acquirer. In the current Exchange, the existing shareholders of
Natural Way will retain a 27% voting interest in the combined entity on
completion of the Exchange. Accordingly, World is deemed to be the acquirer and
the assets of Natural Way were required to be fair valued at acquisition. As
Natural Way had no assets, as of the date of the Exchange, no fair value
adjustment was required. The historical financial information prior to the
Exchange are those of World.
World, a development stage enterprise, was incorporated on October 27, 1999, in
the British Virgin Islands. World incorporated its wholly owned subsidiary
ESOFTBANK Networks (Shenzhen) Co. Ltd. (Shenzhen) on December 30, 1999, in the
Peoples' Republic of China (PRC). World and Shenzhen were incorporated to effect
a merger, exchange of capital stock, asset acquisition or other business
combination with a domestic or foreign, private or publicly held business.
On February 21, 2000, World via Shenzhen, acquired 9.52% of the outstanding
capital of SiTech, a company related through common ownership and management
from Dr. Hongbing Lan, a director and stockholder of both World and SiTech for
approximately $62,650. On the same date, Shenzhen acquired an additional 42.86%
of SiTech from SiTech Hainan Holding Co., Ltd. (Holdings), a company related
through common ownership and management, for approximately $280,000. Since both
entities involved in the acquisition were under common control, the transaction
was accounted for at historical cost in a manner similar to that in
pooling-of-interests accounting. The cash consideration paid in these
transactions was classified as a deemed dividend in the amount of Rmb 2,840,000.
The consolidated financial statements include the results of operations for
World and its subsidiaries from their inception.
On February 21, 2000, Shenzhen also acquired 80% of the newly issued and
outstanding stock of Beijing, a PRC company, from Holdings for an initial
capital investment of approximately $116,000. The remaining 20% of Beijing is
owned by Mr. Lan Hong Yu, the brother of Dr. Hongbing Lan.
During August of 2000, Shenzhen acquired a 2.67% interest for Rmb 2,800,000 in
Xiangyou, a newly formed entity, whose primary stockholder and initiator is the
Hunan Post Office (governmental agency). The new entity's development projects
are to include: a postage computing system, telecommunication technology
development, a postage machinery manufacturing line and other various technology
related systems. The acquisition will be accounted for at the lower of cost or
net realizable value.
9
On October 14, 2001, Shenzhen acquired 70% of the outstanding capital of Dalian,
an unrelated PRC company, in exchange for 307,000 shares of the Company valued
at $.55 per share or approximately $168,675. Dalian is a software company in
Northeastern China focusing on project management software and system
integration. This acquisition was accounted for as a purchase in accordance with
the SFAS No. 141, "Business Combinations."
NOTE 3 - SHORT-TERM BORROWINGS-BANK
On May 29, 2000 the Company entered into a one-year credit facility with
Shenzhen Commercial Bank for RMB 16 million at 5.3125%. The credit facility is
secured by shares in the Company owned by Dr. Lan, director and shareholder of
the Company.
On Aug. 25, 2001, the one-year credit facility was extended to Aug. 25, 2002 at
5.3125%.
NOTE 4 - FOREIGN CURRENCY CONVERSION
The Company's financial information is presented in U.S. dollars. Reminbi, the
functional currency of the Company has been converted into U.S. dollars at the
exchange rate of 8.3 to 1.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
BroadenGate Systems, Inc. is a software outsourcing service provider operating
in the People's Republic of China. The Company develops comprehensive
outsourcing solutions for systems development and implementation projects and
provides consulting services in the telecom, network security, e-Business, ERP,
CRM EGIS sectors.
We believe that we are well positioned for growth in the developing information
technology ("IT") industry in the PRC and internationally. With the PRC joining
the WTO and the Beijing's 2008 Olympics, the IT outsourcing demand should
increase during the next several years.
Since its inception in 1996, the company has grown with the Chinese domestic IT
industry. BroadenGate is now leveraging its domestic expertise to enter the
global outsourcing market, and to co-op with leading multinational software
vendors in the Chinese market, such as Oracle and IBM. Building on the synergy
between the Chinese and global markets, BroadenGate hopes to continue to
increase its market share at home and win higher-margined contracts abroad.
Recent Developments
The Company continues to increase its business base by forming close
partnerships with some of the leading companies in the PRC, including Huawei
Technology, which is among the largest manufacturers of telecommunications
equipment in Asia. Our revenue mainly base on the four project management
centers which were established last year. We are always trying to improve the
management of the PMCS.
1. A Telecommunication & Internet Center: We have over 100 engineers currently
working in this PMC, and have outstanding contracts for over 30 million RMB in
2002 with Huawei. We have reached an agreement of cooperation with the China
Policy Security Bureau, to use our solutions in Internet access, network
management and security, which should produce significant marketing potential in
China. 2. A Development & International Center: We recently won a COBOL software
development contract for approximately 15 million Yen (US1,150,000) in Dalian
with SCM a subsidiary of Mitsubishi Corporation. 3. A Project Management
Software & System Integration Center: This division is based on the Dalian
Tongzhou Computer Software Co., Ltd. System (Tongzhou), and serves more than
1,000 clients in architectural, chemical, metallurgical, transportation,
manufacturing and energy; 4. An E-Business and E-Banking Center: This center is
new, but during the coming year, we anticipate building a local e-banking system
in Hainan island.
Besides outsourcing services, we also develop software with ownership of
intellectual rights, such as BroadenGate Network Checking System. We anticipate
it will increase our revenues and lower the operating risk.
We will focus on the Chinese and Japanese markets this year. However, if the
Company is to be a dominant player in the industry, it is critical to establish
a physical presence in the US.
RESULTS OF OPERATIONS
Revenues. Revenues increased by $20,023 or 7.8% to $275,195 for the three months
ended March 31, 2002 from $255,172 for the period ended March 31, 2001. This
increase in revenues resulted from increased software outsourcing.
Cost of Sales. Cost of sales increased by $29,617 or 17% to $203,591 for the
three months ended March 31, 2002 from $173,974 for the same periods ended March
31, 2001. Cost of sales as a percent of revenues was 74% for the first quarter
ended March 31, 2002 compared to 68% for the same periods ended March 31, 2001.
This increase in cost of sales resulted from increased revenues and a change in
the mix of products sold. The increase in cost of sales as a percentage of
revenue is attributable to an increased percentage of sales from human resource
outsourcing, which has a lower profit margin than software development.
11
Selling and Administrative Expenses. Selling and administrative expenses("SGA")
decreased by $101,653 or 30% to $237,899 for the first quarter ended March 31,
2002 from $339,552 for the same periods ended March 31, 2001. This decrease in
selling and administrative expenses resulted from decreased marketing expenses,
decreased research and development expenses, and decreased professional
expenses. We anticipate retaining a strict control over our expenditures. Our
objective is to minimize SG&A expenditures without impairing our capacity to
provide services.
Other income, Net. Other income, net consists of interest income and expense,
bank charges, recovery of prior expenses , foreign exchange gains or losses,
other miscellaneous income, and investment income. Other income, net totallig
$29,565 for the three months ended March 31, 2002, compared to other expenses,
net totaled $11,485 for the period ended March 31, 2001. This increase in other
income, net resulted principally from investment income. The total amount of
investment income was $59,488 for the first quarter of 2002,compared to zero for
the corresponding period of 2001. The increase resulted from the cash dividend
distributed by Xiangyou.
Income Taxes. Income tax expense decreased by $ 1,564 or 100% to zero for the
three months ended March 31, 2002 from $1,564 for the same periods ended March
31, 2001. Although the income of the Company increased, our company has been
certificated as Hi-Tech company by local authority, and the government has
refunded all taxes.
Minority Interest. Minority interest represents the 20% interest in eSoftBank
(Beijing) Software Systems Co. Ltd., the 47.6% of SiTech Hainan Ltd. and 30% of
Tongzhou (Dalian) Computer Co., Ltd., not owned by the Company.
As a result of the foregoing, the net loss decreased by$156,280 or 53% to
$136,730 for the three months ended March 31,2002 from $293,010 for the period
ended March 31,2001. We believe that the foregoing trend will continue. As our
revenues increase and expenses decrease, we expect that our operations as a
software outsourcing services provider and subcontracting platform will result
in smaller losses and, ultimately, profitability. Notwithstanding our
expectations, however, there is no assurance that we will ever become
profitable.
Liquidity and Capital Resources
As of March 31, 2002, we had cash of $17,121 and a deficit in working capital of
$2,374,126. This compares with cash of $188,845 and negative working capital of
$2,206,250 as of March 31, 2001. Our cash decreased because of a refund of
borrowings and a net loss. However, our working capital deficit is principally
the result of our net operating losses.
Cash used in operating activities totaled $124,285 for the three months ended
March 31, 2002. This compares with cash used in operating activities of $260,046
for the period ended March 31, 2001. The change in cash flows from operating
activities principally resulted from a reduced net operating loss for current
period.
Cash used in investing activities totaled $7,519 for the three months ended
March 31, 2002,compared to cash used in investing activities of $32,207 for the
period ended March 31, 2001. This change mainly resulted from no capitalized
expenditures for product development costs and no other fixed assets
expenditures in the current period.
Cash used in financing activities totaled $814,334 for the three months ended
March 31, 2002. This compares with cash provided by financing activities of
$92,939 for the period ended March 31, 2001. The net change is attributable to
reduced borrowings in the current period and no loan repayments in the current
period.
For the three months ended March 31, 2002, we have no plans for any major
capital expenditures.
Based on our current level of cash, the deficit in working capital and current
level of expenditures in our business, it will be necessary to seek additional
sources of funding over the next twelve months. Management is negotiating with
its banks for more project finance to fund operations for the current year.
However, without outside financing or the sale of stock the Company has
insufficient resources to continue its business operation for the next twelve
months. No assurance can be given that the Company will be able to obtain any
financing or sell any of its shares.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Items 3 - 5. We have nothing to report under these items.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Broadengate Systems, Inc.
By: /s/ Dr. Hongbing Lan
-----------------------
Dr. Hongbing Lan
Chief Executive Officer
By: /s/ Hongyu Lan
-----------------------
Lan Hongyu
Principal Accounting Officer
Dated: May 12, 2002
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Name Title Date
------- -------- --------
/s/ Hongbing Lan Chairman, Chief Executive Officer May 12, 2002
----------------
Dr. Hongbing Lan
/s/ Xinmin Gao Director May 12, 2002
--------------
Mr. Xinmin Gao
/s/ Fa Ding Liu Director May 12, 2002
---------------
Mr. Fa Ding Liu