SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2010
| | 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. 333-146796
HXT HOLDINGS, INC.
(Name of Registrant in its Charter)
NO. 5 FLOOR 6, BLOCK A, SKYWORTH BLDG.HI-TECH INDUSTRIAL PARK, NANSHAN DISTRICSHENZHEN F4 518057(Address of Principal Executive Offices)
Issuer's Telephone Number: 406-282-3188
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act. Yes __ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 __
Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer Accelerated filer _ Non-accelerated filer Small reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
As of January 5, 2011, we had 29,910,000 shares of common stock outstanding.
Documents incorporated by reference: NONE
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements regarding HXT Holdings, Inc., its business and its financial prospects. These statements represent Management’s present intentions and its present belief regarding the Company’s future. Nevertheless, there are numerous risks and uncertainties that could cause our actual results to differ from the results suggested in this Report. A number of those risks are set forth in the section of this report titled “Risk Factors”.
Because these and other risks may cause the Company’s actual results to differ from those anticipated by Management, the reader should not place undue reliance on any forward-looking statements that appear in this Report. Readers should also take note that the Company will not necessarily make any public announcement of changes affecting these forward-looking statements, which should be considered accurate on this date only.
ITEM 1. BUSINESS
We are a Delaware corporation that serves, through our direct subsidiary HXT, as a holding company for HTF, a software company organized under the laws of, and operating in, the People’s Republic of China (“PRC”). Neither we nor HXT has any operations other than acting as a holding company and management company for HTF and raising money for its operations. Because we conduct all of our operations through HTF, we focus in this discussion on the business of HTF. For the sake of convenience and where context allows, we sometimes use the words “we,” “us,” and the “Company” to refer to us together with our subsidiaries, or to refer to HTF alone.
HTF is a provider of applications software and system integration services in China. Specifically, HTF develops and produces three types of industry-specific software and provides related systems-integration services to customers purchasing its proprietary products at no additional charge. In addition, HTF has from time-to-time in the past marketed software products produced by other companies as a value-added reseller; in such cases, HTF provided installation and related systems-integration services at an additional cost to the customer. HTF is not currently involved in any reseller relationships.
HTF currently markets its products and services exclusively within the PRC. Our software application products are highly specialized and designed for use in targeted industries as well as developed to meet the specified needs of our customers. Once we have developed a product line, we may seek to market it to other customers in the same or similar industries. To date, we have developed and sold four types of applications software: Housing Accumulation Fund software, credit guarantee software, family planning software and family planning software.
Our core product is Housing Accumulation Fund software, which accounted for 40% of our revenues in the year ended September 30, 2010. HTF entered this market in 1996 and has more than 150 customers in over 25 provinces throughout China. Our Housing Accumulation Fund software provides information management and sharing capabilities to a variety of groups of participants in China's Housing Accumulation Fund program, a social welfare program funded by contributions from workers and their employers which provides employees with savings accounts intended to enable them to purchase housing. The program was instituted in 1991 by the PRC Ministry of Construction and is administered by regional Housing Accumulation Fund Centers, which in turn are under the supervision of local governments, the Ministry of Construction and the Ministry of Finance.
Our credit guarantee software is designed to provide an information-management and record-keeping system for entities that provide credit guarantees to prospective borrowers of funds. China's Credit Guarantee System was established by the National Economic and Trading Commission in 1999 in order to facilitate the financing of small and medium-sized enterprises ("SMEs"), which often have difficulty obtaining bank loans. The Credit Guarantee System supplements the existing commercial credit guaranty industry, which is composed of various for-profit commercial enterprises. Under the Credit Guarantee System, government-funded local and regional agencies and non-profit organizations provide guarantees to enable SMEs to obtain loans. Our software, which was developed at the request of one such local agency, provides a means of collecting and organizing data from SMEs and performs risk-management functions, such as financial analysis, credit evaluation and risk estimation. The software is marketed for use both by participants in the government-sponsored system and by private, commercial credit guarantors. Since its development in 2003, this product has experienced rapid sales growth. We believe our product is the first credit guarantee software available in China, and we are not aware of any other professional software company that is marketing a competing product.
Family planning software is our newest product. HTF began developing this product in 2003 for use by government family planning management departments, public education organizations and nonprofit family planning associations, and recently completed its first sales of the software. Our family planning software is designed for use in connection with the national network for disseminating family planning information, which was established pursuant to a mandate by the PRC government. The product creates a large-scale, networked database that can be accessed by users. Its functional capabilities include data collection and processing, statistical reporting, search engine features, an "early warning" system for monitoring rapid population increases and system maintenance.
In addition to our four lines of proprietary software products, we also offer software products made by other manufacturers as a value-added reseller. In such cases, we provide installation, configuration and related systems integration services. We currently market products made by two other companies: Lenovo, which is the largest information technology company in China, and Microsoft.
HTF's principal offices are located at the Hongchong Building, No.05, Floor 27, Luohu District, Shenzhen, P. R. China, 518002.
Products and Services
Housing Accumulation Fund Software
The public accumulation fund system for housing construction in China was introduced in 1991 by the PRC Ministry of Construction. "Housing Accumulation Funds" are long-term housing reserve accounts which are maintained for the benefit of employees and are funded with mandatory contributions by both the employees and their employers. The contributions are deposited in accounts at designated commercial banks and managed by regional Housing Accumulation Fund Management Centers ("Centers"), which in turn are supervised by local governments, the PRC Ministry of Construction and the PRC Ministry of Finance (collectively referred to as "Supervisors").
Although employees own their respective shares of the Housing Accumulation Funds, they do not have any control over the investment of the funds. An employee can withdraw his or her respective share of the funds in any of the following situations: to purchase, build or renovate a home; to retire; if unable to work; if the employee is relocating outside of China; if the employee is repaying debt secured by a mortgage; or if the employee's rent exceeds a designated percentage of his salary.
The Housing Accumulation Fund program was established by the PRC Government as a social welfare system in an attempt to address the problems of low employee salaries and insufficient savings for purchasing housing. It was designed as a stable, long-term reserve fund for improving housing conditions. The PRC Central Government State Council issued "Administrative Regulations for Housing Accumulation Funds" on March 24, 2002 to promote and more effectively manage the system. By the end of 2002, the regulations had been adopted in nearly 2,000 counties across China and the total amount by the PRC Government deposited in the system had reached approximately RMB 500 billion (approximately U.S. $62.5 billion).
HTF developed its first version of Housing Accumulation Fund software in 1996. By the end of 2006, HTF had sold a total of over $6 million of such software. HTF currently holds registered PRC copyrights on this product category and sells to over 150 customers in over 25 provinces in China.
Our Housing Accumulation Fund software provides a complete, computerized information management solution for the national Housing Accumulation Fund Management system. The Housing Accumulation Fund system involves four types of users: Housing Accumulation Fund Management Centers, which are local government agencies that manage and administer the system; Supervisors, as described above; designated commercial banks where the contributed funds are deposited and held; and the participating employees and employers, which include a large number of government offices, state-owned and private companies, for-profit and non-profit organizations that contribute to the funds (collectively "Units").
HTF offers four versions of its Housing Accumulation Fund software—a "Center version", a "Supervisor version", a "Bank version" and a "Unit version". Each of these versions was developed to serve the specific needs of the various groups of participants, allowing them to create, manage and analyze a database of information relating to Housing Accumulation Funds, including employee information, deposits and withdrawals, individual loans, housing subsidies, housing purchases and sales, property records and other information. HTF believes it was the first company to bring Housing Accumulation Fund software to market, and, to our knowledge, it is still the only company in the industry that offers multiple, user-specific versions of this type of software.
The four versions of software are compatible with each other and with products sold by other companies, allowing data to be migrated and reconciled from one user's system to another. Thus, the original data recorded by each Unit (including personal and account information for each employee participating in the system) is automatically submitted via telephone modem or through an internet network to its regional Center, which records the information in the designated employee account and automatically produces relevant documentation for each account. The documentation is then forwarded to the designated bank for the fund, which performs clearing and settlement using the Bank version software.
Supervisors can use their version of the software to retrieve relevant data from the Centers and the Banks and receive detailed information concerning deposits, withdrawals and loans through the statistical reporting and analytical functions. At the end of each month, users can run checks through a special "module" to reconcile their information with that of the other users in the system, thereby ensuring the accuracy of data at each point in the system. Centers can also use the software to produce statistical reports and perform analysis for decision-making.
Our software replaces the previous system of manual input and handling of information, which often produced errors, especially with the dramatic increase in the number of employees participating in the system, and which we believe was inefficient. We believe that by automating many of the recordkeeping functions which were formerly performed by hand, our software system provides more scientific, robust, and efficient management for the national Housing Accumulation Fund system and standardizes the flow of information among the various different types of users in the system.
The design and operation of any applications software must be based on certain operating systems and database platforms. The software structure design must also meet the needs of clients' current and future businesses. We believe that HTF's Housing Accumulation Fund software series meets these criteria. Our products are compatible with most international operating systems and database platforms, and are designed to meet the complicated needs of different customers, as described below. Certain characteristics of HTF's Housing Accumulation Fund software are set forth below:
HTF's software products are designed with various functions packaged in discrete modules; this modular design allows users to select individual functions according to their specific needs when purchasing our software. We believe that this ability to customize the functionality of our products to meet the specific needs of our customers will enable us to effectively address their changing requirements.
Credit Guarantee Software
HTF began to develop its credit guarantee software in 2002, at the request of the Shenzhen City Small-to-Medium-Sized Enterprises Credit Guarantee Center. The project was funded by a $44,010 (RMB 300,000) grant from the Shenzhen Science & Technology Bureau, which we received in 2003. In September 2003, HTF released its first version of the software, "Credit Guarantee Management Information System," which was then successfully implemented in Shenzhen City Small-To-Medium-Sized Enterprises Credit Guarantee Center.
China's Credit Guarantee System was established by the National Economic and Trading Commission in 1999 in order to facilitate the financing of small and medium-sized enterprises ("SMEs"), which have difficulty obtaining bank loans. The government-sponsored Credit Guarantee System supplements the existing commercial credit guaranty industry, which is composed of various for-profit commercial enterprises. Under the Credit Guarantee System, government-funded local and regional agencies and nonprofit organizations provide guarantees to enable SMEs to obtain loans.
HTF's software provides a means of collecting and organizing data from SMEs and performs risk management functions, such as financial analysis, credit evaluation and risk estimation. The software is marketed for use both by participants in the government-sponsored system and by private, commercial credit guarantors. As of September 30, 2010, HTF's credit guarantee software is sold to 72 credit guarantee organizations in Shanxi, Jiangshu, Ningxia, Guangdong, Neimeng, Shandong and other provinces.
We are not aware of any other credit guarantee software available in China. Furthermore, we believe that our existing relationships with municipal credit guarantee organizations which purchase our software will enable us to retain a large market share for this product even if competitors enter the field. Based upon statements by the President of China Economics Technology Investment Guarantee Co., Ltd., we estimate that in several years there will be approximately 5,220 credit guarantee entities in China. Assuming an average price of approximately $14,670, (RMB 100,000) per system, we estimate that the market for this product could be up to $76 million (RMB 521,419,500) within a few years.
HTF's credit guarantee management software is based on the Microsoft Visual Studio.net software development platform and database technology. Some basic specifications of the software are as follows:
As with our Housing Accumulation Fund software, our credit guarantee software is packaged in modules, allowing users to "customize" their systems by selecting and purchasing particular functions to meet their needs. Presently available functions for this software include business flow control, risk management, data analysis, and decision-making features. It also has two general application modules: a document management module and an office management module, which provide assistance to customers in their daily operations.
Our new product, a new credit guarantee management software which was developed in 2008 is already on the market at the end of 2009. This credit guarantee management software is based on Browser/Server (B/S) structure as opposed to Client/Server (C/S) Structure.
Family Planning Software
Family planning software is our newest product. HTF began developing this product in 2003 for use by government family planning management departments, public education organizations and nonprofit family planning associations, and recently completed its first sales of the software. However, in 2010 and 2009, we did not generate any revenue from this product.
Family planning is a basic national policy officially instituted by the PRC government during the 1970's and 1980's. The PRC government has committed to building a national network for disseminating population and family planning information, and calls for 80% of China's 3,000 counties to have access to a central information system for women of child-bearing age in the near future.
HTF's family planning software is designed for use in connection with that central information system. It creates a large-scale, networked database that can be accessed by users without connecting to the internet and automatically switches between the "online" and "offline" status. The system combines the "internet browser server and client local server" structure.
HTF's population and family planning management software provides such functions as data collection, processing, statistical reporting, search engine capabilities, an "early warning" system for monitoring rapid population increase and system maintenance. The system is used by different levels of government family planning management departments, public education organizations and family planning associations. The system is intended to automate the input, processing and analysis of information, thereby enabling faster information exchange than is currently possible under the existing manual input system. In addition, by creating a central database which can be accessed by various organizations throughout China, our system will allow for increased sharing of information and data resources, which we believe will improve the quality and consistency of services offered by the organizations participating in the network and allow them to operate more efficiently.
Based upon recent population and demographic statistics, we estimate that the number of potential users of the software is over 400,000.
The Overall Computer Software Market in China
The overall market for computer software in China has experienced rapid growth in recent years. Considered to be a "strategic industry" by the PRC government, the software industry has received strong support from the PRC government in the form of grants and other funding to individual companies, rewards, preferential tax treatment, patronage by government organizations seeking to establish computerized information and record-keeping systems and encouragement of software exports.
Modernization efforts in China, including the competitive transformation of many of China’s traditional industries following the country’s entry into the World Trade Organization in 2001, have greatly increased the demand from governments at the national, provincial and local levels for computerized data reporting and information management and exchange capabilities, and the demand from private industry for various operations-related software applications. Given China's status as a "developing nation," we believe that this growth in demand will continue well into the future. To date, much of the Chinese software industry's product offerings have consisted of highly specialized or customized products which target specific industries or geographic markets and have limited applicability to larger, more general audiences. Because design of these products requires specialized knowledge of the Chinese government and its programs and industries specific to China, we believe that barriers to market entry for foreign competitors are high.
In addition, the Chinese software market consists of a large number of small companies and is highly fragmented. We believe that this creates an opportunity for us to achieve growth and improve our profitability through consolidating acquisitions, which will enable us to realize economies of scale in our operations.
Under the Software Products Registration Administrative Regulations promulgated by the Ministry of Information Industry in 2001, no software products are permitted to be sold in the PRC unless they are registered with the local authority designated by the Ministry. All of our products are registered with the State Economic Development Bureau and Shenzhen Information Offices.
Software products include system software and applications software. System software markets are mostly dominated by foreign software manufacturers, while most Chinese software companies, including HTF, are dedicated to the applications software market. Applications software products can be divided into three categories: industry-specialized software, general enterprise software, and generally-used software. Industry-specialized software is designed for use in a particular industry such as telecommunications, finance or taxation. General enterprise software is designed to perform a specific, particular function (such as accounting) but can be used in a number of different industries. Generally-used software is designed to perform a basic computing function (such as internet web browsing, word processing or anti-virus protection) and is widely used by government, private enterprise and individuals for business, personal and recreational purposes. All of our products—Housing Accumulation Fund software, credit guarantee software, property management software and family planning software—are industry-specialized software products.
HTF in the Overall Computer Software Market in China
As a producer of our own software, from June 2000 through December 2010, we are eligible for a refund of 14% of the value-added tax we pay. If the refund is used for operations, it is exempt from income tax.
HTF was designated a "National Certified Software Company" in 2002. Under the regulations promulgated by the Ministry of Information (Industry), "National Certified Software Company" status is accorded only to software companies which own the intellectual property rights to their products and have at least 50% of their employees engaged in research and development. We intend to hire additional Research and Development employees and thereby regain compliance with the requirement. While such status is not required to produce or sell software in the PRC, it entitled us to certain privileges and benefits.
Market for Housing Accumulation Fund Software
China has 31 provinces and 4 municipalities directly under the PRC central government, in which are located 332 cities and 2,860 counties. According to the "Administrative Regulations for Housing Accumulation Funds," every city must have one Center and every county must have branch Centers. We estimate that every Center will have at least two banks to work with, that every Center will have about 1,500 Units (employers that deposit funds), and that every branch Center will have 350 Units. Therefore, we estimate that there will be approximately 332 Centers, 2,860 branch Centers, more than 6,000 Banks (branches of the five national commercial banks), and more than 1.5 million Units which can be potential users of our Housing Accumulation Fund software.
The cost of our Housing Accumulation Fund software to different types of users can vary significantly depending upon which function modules are selected and purchased. The four versions available incorporate different sets of functions and therefore vary substantially in price. For example, the price of the Unit version software is much less than that of the Center version software because it includes fewer function modules. In addition, the Center version software, which incorporates multiple modules, can vary in price depending upon the number and type of modules selected by the customer.
Based upon the foregoing, we estimate the potential total size of China's Housing Accumulation Fund software market at over $5 billion (RMB 42.3 billion). Within such market, the total potential market for applications software is approximately $430 million (RMB 3.53 billion), the total potential market for related systems integration services is approximately $4.4 billion (RMB 36.02 billion), and the total potential market for other related software services is approximately $170 million.
Aside from large demand for software and systems integration services from Centers, Banks and employers, we believe that there may also be increasing demand for software and system upgrade services. While a recent reorganization of the Housing Accumulation Fund Center system has temporarily decreased the demand for our Housing Accumulation Fund software, we believe that, once the reorganization is completed, there will be an increase in demand for software updates and upgrades. Our goal is to maintain our market position and expand.
Market for Credit Guarantee Software
On January 1, 2003, the "Small-to-Medium-Sized Enterprises Promotion Act" was released. The law ensures legal protection for various credit guaranty organizations that provide credit guarantees to SMEs. The Act stipulates that county level and higher government organizations establish and promote a government-funded SME credit guarantee system, to supplement the commercial credit guaranty industry and create an environment conducive to SME financing. The system is composed of three levels of credit guarantee organizations: government credit guarantee entities, commercial credit guarantee entities, and inter-enterprise financing guarantee entities.
The number of credit guarantee entities has increased from 203 in 2000 to 582 in 2001, 848 in 2002, over 1,000 in 2003, and over 4,000 in 2006. These entities are spread over all of China's 31 provinces except Tibet, with annual growth of 125%, according to the Small-to-Medium Sized Enterprises Net website. These entities have guaranteed a total of approximately $14.3 billion (RMB 117.9 billion) of loans for 48,318 enterprises. We believe that this high growth rate reflects strong government backing and pressing demands from SMEs for credit guarantees.
At the end of 2006, only a small number of the more than 4,000 existing credit guarantee organizations have computerized systems for their operations flow and service management. According to the President of China Economic Technology Investment Guarantee Co., Ltd., the total market for credit guarantee software and systems integration could be as large as $68 million (RMB 558 million). We believe that the credit guarantee software business will be HTF's fastest growing segment in the near future.
The family planning software market is composed of various levels of government family planning management departments, public education organizations and family planning organizations. Currently, there are approximately 2,860 counties in China, each of which has at least 130 branch offices dealing with population and family planning. We estimate the total number of potential users for family planning software at over 400,000.
We currently have the strategic alliances described below:
We are a licensed "Microsoft(R) OEM System Builder", which allows us to make bundled sales of the Microsoft Windows and SQL Server software products together with our own products. As an authorized member of the "Microsoft(R) dealer coalition," we can also sell other Microsoft software products on a stand-alone basis. Our Housing Accumulation Fund software received a Windows(R) Server 2003 product certification, which grants us the right to use the "Windows(R) 2003" logo in conjunction with sales of our own products. We believe that this significantly increases the value of our products. During the year ended September 30, 2010 and September 30, 2009, there were no sales of our products bundled with Microsoft products.
On November 12, 2002, we signed a cooperative development agreement with the Shenzhen SME Credit Guarantee Center for the purpose of developing a credit guarantee information system for SMEs. Under the agreement, both parties jointly own the copyright of the cooperative product and share the post-tax profits from sales of the product such that 20% go to the Center and 80% to HTF until the expiration of the copyright. The term of the contract is from August 1, 2003 to December 31, 2052. During the year ended September 30, 2010 and the year ended September 30, 2009, sales relating to our cooperation with Shenzhen SME Credit Guarantee Center were both $0. Up to date, the contract still is in effective, however, there is no revenue generated from this contract in both 2010 and 2009.
Research and Development Activities
Most of our products were originally developed according to specifications supplied by a particular customer, who also typically provides funding for the projects. If we determine that certain products have long-term market promotion value, we may invest additional time and our own resources in order to improve and prepare them for the marketplace. During the year ended September 30, 2010, we invested an aggregate of $608,388 in research and development activities, 80% of which was used for the improvement of our Housing Accumulation Fund and property management software and 20% of which was used to develop our credit guarantee and 0% for our family-planning software.
The market for software products is highly competitive, with a large number of new companies entering the Chinese market each year. Although competition is largely on the basis of technological innovation, functional design and price, competition conditions vary according to the type of software involved. Foreign companies currently have a clear advantage over Chinese companies in system software; however, in the field of applications software, where there is a great need for specialization, we believe that local Chinese software enterprises have unique advantages.
The first such advantage comes from product localization; the design of applications software requires an in-depth understanding of local business customs, management systems, culture and traditions. A second advantage enjoyed by local Chinese companies comes from service localization; because of the logistical barriers involved, it is more difficult for foreign companies to establish a national service network to support their products within China in a short time period.
HTF develops industry-specialized applications software and principally serves domestic Chinese customers. Our software products are, to a large extent, based on Chinese platforms and interfaces; we believe that it is more difficult for foreign businesses to develop and sell specialized applications software in China because they do not have the depth of understanding of local business customs.
At present, the domestic Chinese applications software market is very fragmented. There are many identified subsectors, such as accounting software, translation software, commercial software and Chinese system-based management software. We do not directly compete with companies producing products in other subsectors. In addition, many of our competitors and potential competitors are small companies with limited resources and undiversified product lines.
Competition in the Housing Accumulation Fund Software Market
Because Housing Accumulation Fund software is a very specialized market, there are only a small number of companies that compete in this market. Our three major competitors in this market are:
Competition in the Credit Guarantee Software Market
We are not aware of any other commercial software company that offers a product in direct competition with our credit guarantee software in China. Some credit guarantee centers have begun to use software platforms similar to ours; however, we believe that such platforms do not have the technical function, work-flow definition and product flexibility offered by our product.
Competition in the Family Planning Software Market
Our closest competition in the family planning software market is Shenzhen WanGuo Software, which developed the "Pregnant-age Women Pregnancy Planning Information Management System" in 1998 for customers such as Shenzhen Municipal Population Planning Commission which is part of Shenzhen municipal government and its subsidiaries. Due to the lack of post-sale service, however, Shenzhen municipal government has stated that it will change to a new system.
Another major competitor of ours is Shenzhen MaiKeLong: This company has a special relationship with the National Population Planning Commission. Their products are currently in use throughout Guangdong province as well as part of Beijing Municipality and Fujian Province. We believe that Shenzhen MaiKeLong is our most powerful competitor.
There are also a number of companies whose products are marketed only on a local or regional basis. These include: Luzhou HongSheng Technology, whose software products are only promoted in the 52 counties of Luzhou Municipality; Guizhou XinTian PC, which is located in Zunyi Municipality and its 13 counties; Zhengzhou YueTai Software, which is a local company whose products are sold in Henan Province; and Hunan JinQiao Software, which is a subsidiary of the Hunan Province Population Planning Commission.
All of our products are protected under the PRC Copyright Law, which was enacted by the General Committee of the PRC National People's Representative Committee in 1991, and the PRC Computer Software Protection Regulations ("Software Regulations") promulgated by the PRC State Counsel in 2001.
Under PRC Copyright Law, a copyright protects both the design of a software product and the name of the product. Copyrights are granted for a term of 50 years from the date of first publication or, if there is no publication, from the date of development. Publication is not necessary to obtain copyright protection in the PRC.
Under PRC Copyright Law, a copyright entitles its owners to obtain various injunctions against infringers. These include an injunction against further infringement, an injunction to preserve evidence of infringement and an injunction freezing the infringer's bank accounts. In addition, an aggrieved copyright owner can also seek monetary damages, either by means of a lawsuit or through arbitration. There are many uncertainties in China's legal system, and enforcement of intellectual property rights has been difficult. In the event that we are unable to enforce our copyrights, we might not be able to obtain one or more of the foregoing forms of relief.
We have registered the following products with the National Copyrights Bureau of the PRC.
We are the sole owner of all of the above copyrights except as to our CGC Credit Guarantee Management Information System, which we own jointly with the Shenzhen Small-to-Medium-Sized Enterprises Credit Guarantee Center. Under the PRC Copyright Law, ownership rights to software vest in the party which develops the software unless otherwise agreed to. In the event that the two or more parties collaborate in developing software, then ownership rights to various portions of the software will vest in the respective party responsible for developing such portions or, if the portions are not severable, then jointly in all of the parties. In cases of joint ownership, rights and licensing fees are apportioned either pro rata or as otherwise agreed by the parties.
The following software products of HTF are registered with Shenzhen Software Industry Association, which is an organization approved by the PRC Ministry of Information. Registration with the Shenzhen Software Industry Association is recognized all over China.
Vendors and Suppliers
Because our products consist largely of intangible technology and data, our supply needs consist mostly of data storage media and packaging materials, are minimal, and can be easily satisfied by many different vendors. We make advances to certain of our suppliers for our purchases of materials in order to receive bulk discounts and reserve the unit cost of our supplies at a lower price. Our relationship with our vendors and suppliers is good, and we are not aware of any circumstance which would cause any of our vendors or suppliers to discontinue doing business with us.
As of September 30, 2010, we had 74 employees, all of whom were full-time employees.
ITEM 1A RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this annual report before making an investment decision regarding our common stock.
Risks Related to Our Business
We face risks associated with both the high-technology and the intellectual-property aspects of the software business.
We make and sell software, a product susceptible to numerous problems, including programming imperfections that may be discovered long after a product has been launched and viruses and other digital causes of disruption. In addition, upgrades that are necessary either to repair defects or to make improvements to our products may take longer to develop than we expect, and specific intended upgrades may prove impossible to achieve within a reasonable timeframe and budget. Bugs and viruses could harm our business not only by impairing our products, but also by harming our reputation and the reliability that our customers associate with our brand. We also face a risk that new computer hardware, with which our software is not compatible, may become popular with our customers and limit our customer base unless we are able to develop new, compatible versions of our products. If any of these risks were to materialize, they could have a material adverse effect on our business and financial results. We also face the risk that our intellectual property could be stolen and used to benefit a competitor and diminish our own competitive position.
The markets for our products could diminish or disappear if the regulations governing the industries in which our customers operate change.
We develop and market applications software for industry sectors that operate under the direct guidance of Chinese national policy. In some cases, such as our Housing Accumulation Fund software and Family Planning software, our products are designed either to implement or to be used specifically in connection with government-sponsored and -controlled programs. A change or adjustment in national policy could have a profound impact on both the programs and the industry sectors associated with them. Were the national government to terminate, scale back or make substantial alterations to any such program, it could render our software products associated with that program useless or of limited utility and severely diminish or eliminate market demand for the products. In such an event, our operating results would suffer severely and we would be forced either to alter our existing products or to design and develop new products to replace them. There is no guarantee that we would succeed under those circumstances.
We operate in a highly competitive industry.
We face increasing competition in the development and marketing of specialized software and providing systems integration and related services. A large number of new software competitors enter the Chinese software market each year. Competition is based primarily on price and quality of offered products. While we intend to maintain or improve our competitive position through constant improvements in our products and services and operational efficiencies, we cannot assure you that we will achieve these improvements or that the improvements, if achieved, will be sufficient to improve or maintain our position relative to current or future competitors. In the specific markets in which we operate, we face competition from companies that offer products similar to our own. We face risks that our competitors could anticipate the needs of a changing market with innovations sooner or more effectively than we do, as well as risks relating to unfair use of our intellectual property. If these risks materialize, they could hurt our competitive position significantly.
Our Inability to Fund Our Capital Expenditure Requirements May Adversely Affect Our Growth and Profitability.
Our future growth may depend upon our ability to raise capital from outside sources. Should financing from outside sources become necessary, we cannot guarantee that we will be able to obtain it on a timely basis and on acceptable terms, and our failure to do so may adversely affect our financial position, competitive position, growth and profitability. Our ability to obtain acceptable financing at any time may depend on a number of factors, including:
We will not receive any consideration and there will be no proceeds from the distribution of our common stock under this annual report.
We May Not Be Able to Effectively Control and Manage Our Growth.
If our business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product and service offerings and in integrating acquired businesses with our own. These eventualities would increase demands on our existing management, workforce and facilities. Failure to satisfy these increased demands could interrupt or adversely affect our operations and cause production backlogs, longer product development timeframes and administrative inefficiencies.
Furthermore, as we expand our business, our overhead for facilities, marketing and advertising costs, administrative costs and other operating expenses will increase. If such increases are not offset by corresponding increases in our revenues, our profitability could be limited and we could incur operating losses.
We Do Not Presently Maintain Fire, Theft, Liability or Any Other Insurance, Which Leaves Us With Exposure in The Event of Loss or Damage to Our Properties or Claims Filed Against Us.
We do not maintain fire, theft, liability or other insurance of any kind. We bear the economic risk with respect to loss of or damage or destruction to our property and to the interruption of our business as well as liability to third parties for damage or destruction to them or their property that may be caused by our personnel or products. Such liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business, financial condition and prospects. While product liability lawsuits in the PRC are rare and HTF has never experienced significant failures of its software, there can be no assurance that HTF would not face liability in the event of the failure of any of its products.
We Are Dependent Upon Certain Key Personnel, the Loss of Which Could Leave Us Without Adequate Human Resources.
We depend, to a large extent, on the expertise and efforts of a small number of individuals with experience in the software industry, ties to international capital markets and existing relationships with Chinese government agencies. Due to the specialized nature of their backgrounds, we might not be able to find suitable replacements were we to lose their services. This could adversely affect certain of our existing customer relationships and our ability to build new relationships with certain government agencies. We do not carry key man life insurance for any key personnel.
Risks Related to Operating Our Business in China
Changes in the Policies of the PRC Government Could Affect the Business We Are Able to Conduct in China and the Profitability of Such Business.
China is making a transition from a planned economy to a market-oriented economy. This transition is subject to five-year and annual plans adopted by the national government, which lay out national economic development goals. Government policies have historically had a substantial effect on economic conditions in China. The Chinese government has confirmed that economic development will follow a model of "market economy under socialism." We believe that under this model China will continue to strengthen its economic and trading relationships with foreign countries, and that business development in China will be subject to market forces. However, there can be no assurance that this trend will actually continue. A change in policies by the Chinese government could adversely affect our interests by resulting in, among other things: changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports or sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades, there is no assurance that the government will continue to pursue such policies or that such policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China's political, economic and social life.
We Face the Risk of Piracy of Our Intellectual Property; the Enforcement of Laws to Protect Intellectual Property Rights in the PRC May Not be Sufficient to Protect Against Such Risks.
For many years, piracy has negatively affected Chinese and foreign software companies doing business in China. Although the PRC government has strengthened its copyright laws and increased its efforts to enforce such laws, we believe that copyright laws and their enforcement in the PRC are still in need of improvement. In order to deter piracy, we use certain security measures to protect our products, such as embedding special check codes in our software. We also deter piracy by frequently upgrading our software products so as to make pirated versions soon obsolete. Finally, we believe that by operating in specialized application software markets with fewer potential customers and competitors than the general software market, we also lessen the risk of piracy to a certain extent. We believe that such markets, because of their smaller size and sophisticated business and government consumers, are less attractive to potential pirates. Furthermore, the requirements for specialized technical knowledge may also make the software more difficult to obtain and replicate. However, there is no guarantee that the measures we take to deter piracy of our intellectual property are sufficient, or that our business operations and financial results will not suffer significant harm due to piracy we do not succeed in preventing.
The PRC Laws and Legal System Governing Our Business Operations and Contractual Arrangements Are Uncertain, and If We Are Found To Be in Violation, We Could Be Subject To Sanctions.
There are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations to which we are subject. The PRC has not yet developed a fully integrated legal system, and the existing array of laws and regulations may not be sufficient to cover all aspects of economic activities in the PRC relevant to our business. In addition, published government policies and internal rules in the PRC may have retroactive effects, and in some cases policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until some time later.
PRC authorities retain broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions necessary for compliance. In particular, licenses, permits and beneficial treatments issued or granted to us by relevant governmental bodies may be revoked at a later time based on contrary findings of higher regulatory bodies. Therefore we cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses, and we cannot rule out the possibility that we will be subject to sanctions, including fines, or that we could be required to restructure our operations. We cannot assure you that we will not be found in violation of PRC laws or regulations or that such a finding will not have a material adverse effect on our business.
Some areas of the law applicable to us are subject to heightened uncertainty. We and our subsidiary, HTF, are considered "foreign persons" or "foreign funded enterprises" under PRC laws and, as a result, we are required to comply with specific PRC laws and regulations, including laws governing our contractual relationships with our affiliated entities. These laws and regulations are relatively new, and the published decisions informing their interpretation are few and non-binding. These laws may therefore be especially susceptible to future change, including a delay in their effectiveness, which could result in detrimental reliance by foreign investors, and their official interpretation and enforcement may involve substantial uncertainty. Other laws and regulations subject to substantial uncertainty include those governing the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, the commencement of bankruptcy or criminal proceedings, or the death of a party.
A Slowdown or Other Adverse Development in the PRC Economy May Adversely Affect Our Customers, Demand for Our Services and Our Business.
All of our operations are conducted in the PRC and all of our revenues are generated from sales in the PRC to businesses operating in the PRC. Although the Chinese economy has grown significantly in recent years, there is no guarantee that such growth will continue. The computer software industry in the PRC is relatively new and rapidly growing, but we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the economy that could affect demand for specialized computer software. A slowdown in overall economic growth, an economic downturn or recession, or other adverse economic developments in the PRC could substantially reduce the demand for our products and significantly reduce our revenues and profits.
Governmental Control of Currency Conversion Will Affect the Value of Your Investment.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from a transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange (SAFE) by complying with certain procedural requirements. However, payment of capital expenses, such as the repayment of bank loans denominated in foreign currencies, does require approval from SAFE where Renminbi will be converted into foreign currency and remitted out of China.
The Chinese government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The Fluctuation of the Renminbi May Reduce the Value of Your Investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. As we rely entirely on revenues earned in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could significantly reduce the value to us of the amounts we receive and increase our capital requirements to continue our business or force us to scale back our operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making dividend payments on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. To date, we have not engaged in transactions of either type, but there is no guarantee that we will not engage in such transactions in the future. In addition, the depreciation of significant U.S. dollar denominated assets could result in a reduction in the value of those assets and a charge to our income statement.
All of our directors and officers reside outside of the United States. In addition, HTF, our operating subsidiary, is located in China and substantially all of its assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.
ITEM 1B UNRESOLVED STAFF COMMENTS
ITEM 2. DESCRIPTION OF PROPERTY
HTF leases approximately 510 square meters of space used for its executive offices and operations in Shenzhen, China from Shenzhen Zhongze Shiji Co., Ltd. The lease is for a term of five year from October 1, 2007 to September 30, 2012. The monthly rent expenses are $5,046 (excluding property management and area condition maintenance fees).
HTF also owns approximately 170 square meters of office space at Room 202 and 702 of Xu Yuan #27, Unit 4 of Sunny Garden, Dian Chi Rd, Kunming, China. The property is used as a sales office. HTF purchased the property for $25,227 (RMB 209,027.73) on January 15, 2001. On November 5, 2003, HTF paid another $3,560 (RMB 29,461) to cover the shortfall between the commercial property price and governmental subsidized property price, as local real property policy requires.
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. REMOVED AND RESERVED
There is no public market for any of our securities.
Recent Sales of Unregistered Securities
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Interwest Transfer Company
Equity Compensation Plan Information
The Company has no equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion and analysis discusses trends in the Company’s financial condition and results of operations for the years ended September 30, 2010 and 2009.
You should read this section together with our consolidated financial statements and related notes appearing elsewhere in this annual report. This discussion contains predictive statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these predictive statements as a result of many factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this annual report.
Results of Operations
Total net sales for the year ended September 30, 2010 were $1,559,440 compared to $1,242,250 for the year ended September 30, 2009, representing an increase of $317,190 or 26%. The increase was due to an increase of $326,298 in sales of our Housing Accumulation Fund software, and a decrease of $9,109 in sales of our Credit Guarantee software.
The increase of sales of our Housing Accumulation Fund software (which increased by $326,298, or 34%, from $959,824 in the year ended September 30, 2009) was due to the increase in completed contracts.
For the years ended September 30, 2010 and 2009, we did not generate any revenue from our Systems Integration Services. This was due to the fact that we did not sign a new cooperation agreement with Lenovo after the expiration of our old cooperation agreement on March 31, 2008. We do not expect to have significant revenue from systems integration services for the indefinite future.
Cost of sales
Cost of sales for the year ended September 30, 2010 were $397,215, representing a decrease of 9% from $434,940 for the year ended September 30, 2009, primarily due to the decrease of $20,084 in cost of sales of our Housing Accumulation Fund software and a decrease of $10,050 in cost of sales of our Credit Guarantee software.
The cost of sales of our Housing Accumulation Fund software decreased by $20,084, or 5%, to approximately $387,585 for the year ended September 30, 2010 from approximately $407,669 for the year ended September 30, 2009.
The cost of sales of our Credit Guarantee software decreased by $10,050, or 99%, to approximately $98 for the year ended September 30, 2010 from approximately $10,148 for the year ended September 30, 2009. The decrease due to that most of the completed contracts this year did not involve new cost in research and development, and no additional cost for external purchases incurred.
Gross profit for the year ended September 30, 2010 was $1,162,225, compared to $807,310 for the year ended September 30, 2009, representing an increase of $354,915 or approximately 44%. The increase was primarily due to the increase in sales of our Housing Accumulation Fund software and the decrease in cost of our Credit Guarantee software described above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,095,746 for the year ended September 30, 2010, or approximately 70% of net sales, compared to $1,323,231 or approximately 107% of net sales, for the year ended September 30, 2009.
The changes in selling, general and administrative expenses are attributable to a $198,998 decrease in general and administrative expenses, a $54,728 decrease in selling expense and a $26,866 increase in research and development expense.
General and administrative expenses decreased by $198,998 or 50% to $199,404 for the year ended September 30, 2010 from $398,402 for the year ended September 30, 2009. The decrease occurred because in fiscal year 2009 we accrued a $68,000 bad debt reserve and a $53,262 inventory reserve, compared to a bad debt recovery of $42,652 and inventory reserve of $1,608 in fiscal year 2010.
Selling expenses decreased by $54,728, or 16% to $287,954 for the year ended September 30, 2010 from approximately $342,682 for the year ended September 30, 2009 because of a decrease for Publicity and Promotion expense.
Research and development expenses increased by $26,866, or 5% to $608,388 for the year ended September 30, 2010 from approximately $581,521 for the year ended September 30, 2009.
From 2005 to 2007, we were exempt from 50% of our income taxes under relevant tax guidance, including the Provisional Regulations of the People's Republic of China on Income Tax and the Document of Reductions and Exemptions of Income Tax, as interpreted by the Shenzhen Tax Bureau. Under applicable tax regulations, our taxable income for the nine month periods ended June 30, 2010 and 2009 are negative, so no income tax was incurred for those periods.
We utilize ASC 740 (previously SFAS No. 109), "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in financial statements or tax returns. Under this method, deferred tax liabilities or assets are recognized for the estimated future tax consequences of current differences between the tax base of an asset or liability and the financial reporting amount attributed to that asset or liability at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company has recorded a 100% valuation allowance for its deferred tax assets, since there is no certainty that the Company will achieve sufficient taxable income to take advantage of the deferred tax assets.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents increased from $63,364 as of September 30, 2009 to $154,201 as of September 30, 2010. This increase was due to cash provided by operating activities of $90,428, cash used in acquisition of property & equipment of $10,620 and cash from proceed from loan-officers of $13,260.
Cash Provided in Operating Activities
Net cash provided in operating activities during the year ended September 30, 2010 was $90,428, compared to $57,236 for the year ended September 30, 2009, representing an increase of $54,331 or approximately 95%. The increase was a result of an increase in customer deposit of $70,374 and a increase in inventory of $7,780.
Net cash used in investing activities during the year ended September 30, 2010 was $10,620 and net cash used in operating activities during the year ended September 30, 2009 was $16,158. Net cash used in investing activities during the year ended September 30, 2010 was due to we purchased some property and equipment.
Net cash used in financing activities during the year ended September 30, 2010 was $13,260, and the company has $15,328 loan from the officer which is interest free and due on demand in the financing activities in 2009.
The decrease in accounts receivable from $100,399 as of September 30, 2009 to $210,984 as of September 30, 2010 is primarily attributable to a decrease of $74,314 in bad debt reserve that we accrued during the year ended September 30, 2010.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful debts amounted to $212,729 as of September 30, 2010.
For the year ended September 30, 2010, inventory decreased from $14,135 to $6,479.
Reserves are recorded primarily on a specific identification basis. Allowance for inventory amounted to $56,049 as of September 30, 2010.
The increase in Other receivables from $54,520 as of September 30, 2009 to $96,149 as of September 30, 2010 is primarily attributable to an increase of $26,553 in Advances to employees and an increase of $25,887 in Value added tax receivable. These advances are unsecured, interest free, and due on demand.
The Company maintains reserves for other receivable. Reserves are recorded primarily on a specific identification basis. Allowance for other receivable amounted to $287,989 as of September 30, 2010.
Accounts payable and accrued expenses decreased from $95,585 as of September 30, 2009 to $88,826 as of September 30, 2010.
Payroll payable decreased from $52,376 as of September 30, 2009 to $41,587 as of September 30, 2010, primarily as a result of a payment to our employees.
The Company's revenue recognition policies are in compliance with ASC 605 (previously Staff Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to customers or when services have been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. As of September 30, 2010, unearned revenue is $537,619, and it includes $472,594 of customer deposits and $65,025 of unearned software service revenue. Software service revenue was approximately $168,683 and $93,730 during the year ended September 30, 2010 and 2009, respectively. Unearned revenue as of September 30, 2010 and 2009 was $537,619 and $456,423, respectively.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
HXT HOLDINGS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of the HXT Holdings, Inc. and Subsidiaries as of September 30, 2010 and 2009 and the related statements of operations, stockholders’ deficit and cash flows for the years ended September 30, 2010 and 2009, respectively. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HXT Holdings, Inc. and Subsidiaries as of September 30, 2010 and 2009 and the results of its operations and its cash flows for years ended September 30, 2010 and 2009, respectively, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's significant operating losses and insufficient capital raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Kabani & Company, Inc.
Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
January 10, 2011
HXT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
HXT Holdings, Inc. (formally China International Enterprises Corp.) (“the Company”, “HXT”, “We”, “Us”, “Our”) was incorporated in Delaware on January 13, 2005. On January 31, 2005, the Company entered into a Share Exchange Agreement, pursuant to which HXT acquired 100% of the outstanding stock of Heng Xing Technology Group Development Limited (XHT) from its three shareholders. XHT's only asset is 100% of the stock of Shenzhen Hengtaifeng Technology Co., Ltd., a PRC corporation hereinafter is referred to as “HTC”. The acquisition has been recorded as a recapitalization of XHT, with XHT being treated as the continuing entity. Effective August 16, 2006, the Company changed its name to HXT Holdings, Inc.
Heng Xing Technology Group Development Limited (“XHT”) is a British Virgin Islands Corporation, incorporated on May 28, 2004. The company is authorized to issue 50,000 shares of common stock of $1 par value. The company is a non-operative holding company of Shenzhen Hengtaifeng Technology Co. Ltd. (“HTC”). On December 14, 2004, XHT entered in to an agreement with all the shareholders of HTC to acquire all of the outstanding stock of HTC. The acquisition has been recorded as a recapitalization of HTC, with HTC being treated as the continuing entity.
HTC was founded in Hi-tech Technology Industrial Park in the city of Shenzhen, Guangdong Province of People’s Republic of China in July 1995, under the name Shenzhen Guangba Trade Development Co., Ltd. HTC amended its name to Shenzhen Hengtaifeng Technology Co. Ltd. on May 12, 2000. HTC is primarily engaged in developing and distributing software and hardware systems on housing fund, guarantee information management, and home plan management in the People’s Republic of China.
On August 15, 2005, the Company became a wholly owned subsidiary of American Wenshen Steel Group, Inc.
Effective July 30, 2007, the Company changed its fiscal year from December 31 to September 30.
As of March 31, 2009, American Wenshen Steel Group, Inc. distributed all of the 29,910,000 currently outstanding common stock of HXT Holdings to its stockholders. There were no proceeds from the distribution and neither American Wenshen nor HXT Holdings received any consideration in exchange for the shares distributed.
After the distribution, the Company is no longer a subsidiary of American Wenshen. The Company continues to be engaged indirectly in the specialized software industry in the People’s Republic of China through its indirectly wholly owned subsidiary, Shenzhen Hengtaifeng Technology Co., Ltd.
Certain of the holders of shares of American Wenshen Steel Group had previously agreed that they would surrender to the Company any shares of the Company’s common stock that were distributed to them by American Wenshen Steel Group. Accordingly, 29,243,759 shares were immediately surrendered to the treasury of the Company, leaving 666,241 shares outstanding at the close of business on March 31, 2009.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. Through September 30, 2009, the Company had incurred cumulative losses of $1,693,035 including net losses from operations of $215,065 for the year ended September 30, 2009. However, the company had net incomes from operations of $125,073 for the year ended September 30, 2010.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management plans related to the company’s ability to continue as a going concern are as follows: Management has taken steps in the year ending September 30, 2009 to increase revenue and control expenses which it will continue for the fiscal year ending September 30, 2010. In addition, if it is determined that the additional capital is needed, the company will consider additional debt and equity financing where appropriate to meet such needs.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries XHT and HTC. All significant inter-company accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalent consist of cash on deposit in banks and cash on hand. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents, for cash flow statement purposes. Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC. Balances at financial institutions or state owned banks within the PRC are not insured.
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful debts amounted to $212,729 and $287,043 as of September 30, 2010 and 2009, respectively.
Inventories comprised of software compact disk, computer server and macro-storage equipment. Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower.
Property & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
Software development costs
The Company capitalizes certain computer software development costs in accordance with ASC 985 (previously SFAS No. 86), “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis over three years, whichever method results in a higher level of amortization.
The Company applies ASC 360 (previously the Statement of Financial Accounting Standard No. 144.) “Accounting for the Impairment or Disposal of Long-Lived Assets" ASC 360 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets for year ended September 30, 2010.
The Company's revenue recognition policies are in compliance with ASC 605 (previously Staff Accounting Bulletin 104). Sales revenue is recognized at the date of shipment to customers or services has been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
License Revenue. The Company recognizes revenue from license contracts when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exists surrounding product acceptance, fees from the agreement are fixed and determinable and collection is probable. Any revenues from software arrangements with multiple elements are allocated to each element of the arrangement based on the relative fair values using specific objective evidence as defined in the SOPs. If no such objective evidence exists, revenues from the arrangements are not recognized until the entire arrangement is completed and accepted by the customer. Once the amount of the revenue for each element is determined, the Company recognizes revenues as each element is completed and accepted by the customer. For arrangements that require significant production, modification or customization of software, the entire arrangement is accounted for by the percentage of completion method, in conformity with ASC 605.
Services Revenue. Revenue from consulting services is recognized as the services are performed for time-and-materials contracts and contract accounting is utilized for fixed-price contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year. Revenue from software services is recognized ratably over the service period. Payment received in advance is recorded on the balance sheet as unearned revenue.
As of September 30, 2010, unearned revenue is $537,619, and it includes $472,594 of customer deposit and $65,025 of unearned software service revenue.
Research and development costs
Research and development costs are charged to operations as incurred and amounted to $608,388 and $581,521 for the years ended September 30, 2010 and 2009, respectively.
The Company applies the accounting standard regarding accounting for stock compensation, which defines a fair-value-based method of accounting for stock based employee compensation and transactions in which an entity issues its equity instruments to acquire goods and services from employees and non-employees. The Company did not issue any stock based compensation during the years ended September 30, 2010 and September 30, 2009.
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
The Company records a valuation allowance for deferred tax assets, if any, based on its estimates of its future taxable income as well as its tax planning strategies when it is more likely than not that a portion or all of its deferred tax assets will not be realized. If the Company is able to utilize more of its deferred tax assets than the net amount previously recorded when unanticipated events occur, an adjustment to deferred tax assets would increase the Company net income when those events occur.
Foreign currency transactions and comprehensive income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of HTC is the Chinese Yuan or Renminbi (“RMB”). Foreign currency translation gain (loss) amounted to $(1,884) and $(237) for the years ended September 30, 2010 and 2009, respectively. Accumulated other comprehensive income amounted to $318,917 and $320,801 as of September 30, 2010 and 2009, respectively.
Earnings per share
Earnings per share is calculated in accordance with ASC 260 (previously the Statement of financial accounting standards No. 128). Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Statement of cash flows
In accordance with ASC 230 (previously the Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,") cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Certain prior period amounts have been reclassified to conform to the current period presentation. These classifications have no effect on net income/loss.
In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU. However, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In April 2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of ASU 2010-17 to have a significant impact on its consolidated financial statements.
In July 2010, the FASB issued Accounting Standards Update 2010-20 which amends “Receivables” (Topic 310). ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company does not expect the adoption of ASU 2010-20 to have a significant impact on its consolidated financial statements.
Inventories as of September 30, 2010 and 2009 consisted of the following:
The allowance for inventories is made when the aging of inventory is over one year. The allowances for inventories were $56,049 and $324, 198 for the years ended September 30, 2010 and 2009, respectively.
4. PROPERTY AND EQUIPMENT
Net property and equipment as of September 30, 2010 and 2009 were as follows:
Depreciation expenses for the years ended September 30, 2010 and 2009 were $63,878 and $69,587, respectively.
5. INTANGIBLE ASSETS
Amortization expense was $39,231 and $42,465 for September 30, 2010 and 2009, respectively.
6. OTHER RECEIVABLES
Other receivables as of September 30, 2010 and 2009 consisted of the following:
Advances to other companies amounted to $4,678 as of September 30, 2010 and $15,489 as of September 30, 2009. It includes advances to other unrelated parties, which are unsecured, interest free, and due on demand.
Advances to employees amounted to $57,832 and $31,279 as of September 30, 2010 and September 30, 2009, respectively. These advances are unsecured, interest free, and due on demand.
Loan receivable amounted to $0 as of September 30, 2010 and 2010. The loan was first signed for a term from May 2005 to Mary 2006 and has been renewed from terms from May 2006 to May 2007 and from May 2007 to May 2008. No renewed loan agreement was signed after May 2008. This loan is unsecured, to an unrelated party, with interest rates of 7.02% for the year ended September 30, 2008. The interest incomes were $0 for the twelve month periods ended September 30, 20010 and 2009, respectively. In the last quarter of 2010, the unrelated party paid back $29,940 principal. The Allowance for the doubtful debts amounted to $287,989 and $306,261 as of September 30, 2010 and 2009, respectively.
Value added tax receivable is the 14% VAT tax refunded by the Company. VAT receivable amounted to $33,639 and $7,752 as of September 30, 2010 and September 30, 2009, respectively.
7. ACCOUNTS PAYABLE & ACCRUED EXPENSES
The Company had accounts payable and accrued expenses amounting to $88,826 and $95,585 as of September 30, 2010 and 2009, respectively. Accounts payable includes payable to vendors, and accrued expenses include accrued professional expenses.
8. REALTED PARTY TRANSACTIONS
Due to related party
The amount due to officer as of September 30, 2010 and 2009 were $2,172 and $15,398 respectively. The loan was unsecured, interest free and due on demand.
9. OTHER INCOME
Other income amounted to $62,823 and $248,579 for the years ended September 30, 2010 and 2009, respectively. Other income mainly consisted of recovery of bad debt for the year ended September 30, 2010 and 2009.
10. TAX PAYABLE
The Company utilizes ASC 740 (previously SFAS No. 109), "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for taxes on earnings for the years ended September 30, 2010 and 2009 consisted of:
Deferred tax assets:
The Company had a net operating loss (“NOL”) carry forwards of approximately $1,430,339 and $1,555,412 for the years ended September 30, 2010 and 2009, respectively. A 100% valuation allowance has been recorded for the deferred tax asset due to the uncertainty of its realization.
11. EMPLOYEE WELFARE PLAN
The Company has established its own employee welfare plan in accordance with Chinese law and regulations. The Company makes annual pre-tax contributions of 14% of all employees' salaries.
HTC is classified as a wholly-owned foreign enterprise under PRC law by virtue of its ownership by XHT. HTC has changed its employee welfare plan in accordance with Chinese law and regulations and does not make annual pre-tax contributions of 14% of all employees' salaries. The total expense amounted to $39,922 and $26,404 for the years ended September, 2010 and 2009, respectively.
12. STATUTORY RESERVE
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
i) Making up cumulative prior years' losses, if any;
ii) Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
iii) Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and Statutory common welfare fund is no longer required per the new cooperation law executed in 2006.
iv) Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
In accordance with the Chinese Company Law, the Company has allocated 10% of its net income to surplus. The amount allocated to the surplus reserve were $18,761 and $0 for the years ended September 30, 2010 and 2009, respectively.
13. SHAREHOLDERS’ EQUITY
The Company has authorized (a) Sixty Million (60,000,000) shares of common stock, par value .001 per share and (b) One Million (1,000,000) shares of Preferred Stock, par value .001 per share.
As of September 30, 2009, 29,910,000 common shares were issued and 666,241 shares were outstanding, and no preferred stock was issued and outstanding.
On April 7, 2009 the Company’s Board of Directors declared a three-for-one forward split of the outstanding shares.
14. EARNINGS/LOSSES PER SHARE
FASB requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. The following is a reconciliation of the basic and diluted earnings per share computations:
HTC has leased approximately 510 square meters of space used for its executive offices and operations in Shenzhen, China from Shenzhen Zhongze Shiji Co., Ltd. The lease is for a term of five year from October 1, 2007 to September 30, 2012. The monthly rent expense is $5,240 (excluding property management and area condition maintenance fees).
The rent expenses are $62,875 and $62,939, for the years ended September 30, 2010 and 2009, respectively.
Future lease commitments for the periods after September 30, 2010 are as follows:
16. SUPPLEMENT DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as defined under the ASC 230 (previously the Financial Accounting Standard No. 95).
The interest expenses paid was $0 for the years ended September 30, 2010 and 2009, respectively.
The Company did not paid income tax for the years ended September 30, 2010 and 2009, respectively.
17. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out 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's economy.
The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the 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 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.
The Company does not maintain fire, theft or liability insurance. The Company is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; error and omissions and natural disasters.
18. MAJOR CUSTOMERS AND VENDORS
Major customers and vendors represent those who accounted for 10% or over of the Company’s total net revenue or purchase, respectively.
No customer accounted for 10% of the revenue for the year ended September 30, 2010. Two major customers accounted for 29% of the revenue for the years ended September 30, 2009. The Company has receivables of $49,878 to these customers on September 30, 2009.
Three major vendors provided 83% of the Company’s purchases for the year ended September 30, 2010. The Company has payables of $22,455 to these vendors on September 30, 2010. Two major vendors provided 58% of the Company’s purchases for the years ended September 30, 2009. The Company has payables of $36,497 to these vendors on September 30, 2009.
The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.
(b) Changes in internal controls.
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed 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. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of September 30, 2010, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified one material weakness in our internal control over financial reporting. This material weakness consisted of:
Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters.
Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in Shenzhen in the People’s Republic of China. Few of our employees have experience or familiarity with U.S accounting principles. The lack of personnel in our headquarter office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.
Management is currently reviewing its staffing and their training in order to remedy the weaknesses identified in this assessment. To date, we are not aware of significant accounting problems resulting from these weaknesses; so we have to weigh the cost of improvement against the benefit of strengthened controls. However, because of the above conditions, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of September 30, 2010.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following are our executive officers and directors as of September 30, 2010. All of our current executive officers and directors are residents of China and/or Hong Kong. As a result, it may be difficult for investors to affect service of process within the United States upon them or to enforce judgments obtained against them in United States courts.
All our directors hold office until the next annual meeting of our shareholders, and until their successors have been qualified after being elected or appointed. Officers serve at the discretion of our board of directors.
The following sets forth the name, age and position of each of our directors and officers:
Mr. Yuan Qing Li has been the Chairman, President and a director of HXT Holdings since January 2005 and was the Chairman, President and a director of China Software (now called American Wenshen) from August 19, 2005 to July 30, 2007. He has been the Executive Director of HXT since 2004 and the Chairman of HTF since 2003. He has been a director of HTF for more than five years and was the CEO of HTF from 2000 to 2004. Mr. Li has also served as a director of Jiangsu Qi Hang Digital Control Engine Bed Co., Ltd. and Jiangsu Zhenjiang Xinzhou Mechanics Factory, and as the Executive Director of Hengtaifeng International Holdings Co., Ltd. He graduated from Shenzhen University in 1989 and earned an Executive MBA degree from Zhongshan University in 2003.
Ms. Ding Hong Shen has been our CFO and Chief Accounting Officer and a director since January 2005. She was also the CFO and Chief Accounting Officer of China Software (now called American Wenshen) from August 19, 2005 to July 30, 2007. She has been Financial Manager of HTF since 2003. From 1999 to 2002 she served as Manager of He Zhong Heng Software Co., Ltd.
Mr. Qing Biao Yu has been the secretary of HXT Holdings since January 2005 and was the secretary of China Software (now called American Wenshen) from August 19, 2005 to July 30, 2007. During the past five years, he has worked for HTF serving as Assistant Manager of the Technology Department from June 1, 2001 to December 31, 2001, Administrative Manager of Human Resources Administration from January 1, 2002 to December 31, 2002, Vice President of HTF and manager of the HTF IT resource department from January 1, 2003 to December 31, 2003; Executive Vice President of HTF and manager of the HTF IT resource department from January 1, 2004 to December 31, 2004 and vice president of HTF since January 1, 2005. Prior to his joining HTF, he worked for Jing Zhong Daily as Editor and Director of the Computer Center for over 11 years.
There are no family relationships between or among any of our executive officers or directors except that Yuan Qing Li, our Chairman and President, is the husband of Ling Chen, who is a director of our subsidiary, HXT.
Involvement in certain legal proceedings
To our knowledge, during the last five years, none of our directors and executive officers (including those of our subsidiaries) has:
We have not yet appointed an audit committee, and our board of directors currently acts as our audit committee. None of the members of our board qualifies as an audit committee financial expert. At the present time, we believe that the members of board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.
Code of Ethics
The Board of Directors has not adopted a code of ethics applicable to the Company’s executive officers. The Board believes that the small number of individuals involved in the Company’s management makes such a code unnecessary.
ITEM 11. EXECUTIVE COMPENSATION
The following is a summary of the compensation paid by us to the individuals who have served as our CEO and any executive officers who have received compensation in excess of $100,000 for the two years ended September 30, 2010 and 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The table below sets forth information relating to ownership of our common stock by (i) any person or group owning more than 5% of our common stock, (ii) any officer or director of the Company,
We do not believe that any of our directors meet the standard of independent director set forth in the NASDAQ rules.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Kabani & Company, Inc.billed $50,000 to the Company for professional services rendered for the audit of fiscal 2010 financial statements and review of the financial statements included in the 10-Q filings for fiscal 2010. Kabani & Company, Inc. billed $50,000 to the Company for professional services rendered for the audit of fiscal 2009 financial statements and review of the financial statements included in the 10-Q filings.
Kabani & Company, Inc. billed $0 to the Company during fiscal 2010 for assurance and related services that are reasonably related to the performance of the fiscal 2010 audit or review of the quarterly financial statements. Kabani & Company, Inc. billed $0 to the Company during fiscal 2009 for assurance and related services that are reasonably related to the performance of the fiscal 2009 audit or review of the quarterly financial statements.
Kabani & Company, Inc. billed $0 to the Company during fiscal 2010 and fiscal 2009 for professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees
Kabani & Company, Inc. billed $0 to the Company in fiscal 2010 and fiscal 2009 for services not described above.
It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors. No such services have been performed by Kabani & Company, Inc.
ITEM 15. EXHIBITS
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.