Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. ZST Digital Networks, Inc. (1403794) 10-Q published on Nov 14, 2011 at 7:00 am
Reporting Period: Sep 29, 2011
In September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment; under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
On March 12, 2010, the Company paid RMB11.13 million (approximately $1.7 million) for purchasing an office space of 2,100 square meters, which is located in Zhengzhou City, Henan Province, PRC. On December 30, 2010, the Company paid RMB51.84 million (approximately $8.1 million) for purchasing office space of 2,880 square meters in the same building. Total amount spent for the office spaces were $9,873,001 as of September 30, 2011. The Company completed decoration on one floor of the building (approximately 1,440 square meters) and moved into the newly decorated office in October 2011. The decoration of other floors is expected to be complete in the near future.
The decrease in gross margin on GPS service was mainly attributable to subscription fees we paid to China Unicom. We subscribe with China Unicom to use its wireless network as an information transmission channel in providing GPS location services to our customers. For each GPS device we deliver and install for our customer, China Unicom issues one SIM (Subscriber Identification Module) card to us. Pursuant to our agreement with China Unicom, China Unicom charges us a fixed amount of annual subscription fee for each SIM card issued, but considering the long-term nature of this cooperation, China Unicom agrees to waive the first year’s service fee and charges from the second year of service. We do not pay any fees to China Unicom on behalf of our customers, nor do we have an obligation to do so.
The overall gross margin for the nine months ended September 30, 2011 was 25%, the same as the comparable period of 2010; while gross margin on sales of product and sales of service both decreased in the nine months ended September 30, 2011, compared with gross margin for the same period of 2010. Gross margin on sales of product was 19% in the nine months ended September 30, 2011, representing a decrease of 3%, compared to 22% for the comparable period in 2010; and gross margin on sales of service was 94%, representing a decrease of 3%, compared to 97% for the same period of prior year. The high-gross-margin GPS service accounted for a higher sales proportion of 8% for the nine months ended September 30, 2011, compared to 5% for the same period of 2010. Consequently, the overall gross margin remained unchanged while gross margin of each of two business segments decreased.
For the nine months ended September 30, 2011, net cash provided by operating activities was $30.5 million, which represented an increase of $9.4 million as compared to $21.1 million for the same period of the prior year. Of the $9.4 million increase in cash provided by operating activities, increase in net income contributed $6.2 million, which was the result of increase in sales revenue; changes in deferred revenue contributed $2.6 million increase in cash, as our GPS customers are required to pay one year’s service fee in advance, deferred revenue increased when the number of our GPS customers increased; changes in income tax payable contributed $1.8 million increase in cash, but this type of cash increase is only temporary since the taxation is to be paid in the near future; partially offset by changes in advance to suppliers in an amount equal to $1.1 million of net cash used.