Last checked at 14 Sep 2010 13:11
SINOSOFT TECHNOLOGY PLC
("Sinosoft" or "the Company")
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2010, Proposed cancellation of admission to AIM and tender offer to buy back shares
Sinosoft, the China based developer and provider of e-Government software and services, announces its consolidated interim results for the Group (being the Company and its subsidiaries), for the six months ended 30 June 2010.
The Board of Sinosoft today also announces proposals ("the Proposals") to cancel the Company's admission to AIM ("Cancellation") and to give those shareholders who are not able or willing to continue to own shares in the Company following the proposed Cancellation an opportunity to dispose of their interest in the Company through a tender offer to buy-back shares at a price of 8p per ordinary share of 0.148642p ("Ordinary Share"). So as to implement the Proposals, the Company will need to effect a reduction of capital. The Proposals will be subject to both Court and shareholder approval.
Highlights
l Turnover up 4.9% to US$4.8M (2009: US$4.5M)
l Gross profit down21.1% to US$2.9M (2009: US$3.6M)
l Research & Development ("R&D") expenditure up 66.0% to US$1.5M (2009: US$0.9M)
l Operating loss of US$0.7M (2009: profit of US$0.3M)
l Foreign currency losses of US$4.6M
l Net loss of US$4.4M (2009 profit of US$0.77M)
l Cash and cash equivalents of US$8.4m (30 June 2009 $12.6M)
l Strategic review of options undertaken with a proposal to cancel the admission to AIM and for a buy-back tender offer at 8p per share
Commenting on the results, Mark Greaves, Chairman of Sinosoft said: "The uncertain economic climate has led the Company to produce mixed operating results, with a clear negative impact on certain divisions, with other divisions such as tax software having performed reasonably well. However, the financial performance in the period was seriously impacted by the losses on unauthorized foreign exchange transactions and the Board, following a detailed strategic review, has taken the decision that shareholders' interests will best be served by the Company seeking to cancel the admission to AIM and to provide those shareholders who wish to sell their shares the opportunity to do so."
For further information please contact:
| Sinosoft Technology plc | Mr. Yifa Yu | +86 025 84815959 yuyifa@sinosoft-technology.com |
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| Westhouse Securities | Tim Metcalfe / Richard Baty
| 020 7601 6100 |
| Tavistock Communications | Simon Compton | 020 7920 3150 |
Operational Review
Although the economic climate is in better shape than it was in the last quarter of 2008 and the first quarter of 2009, a lot of uncertainty still remains in the recovery. In such challenging times, we have managed to increase our turnover for the six months to 30 June 2010 by US$0.2m compared to the same period last year. However, although turnover has increased marginally, sales achieved by our E-government division and Information Integration division were lower than the same period last year.
As a result of tighter monitoring of cost that was implemented following the crisis of late 2008, we have been able to continue to bring down selling and distribution costs as well as administrative costs. However, our continued strategy of investing in research and development in previous years has meant that a higher amount of amortisation will be incurred in subsequent years. This accounts for the higher research and development cost when compared to the same period of last year.
Tax software
Our focus on the development and sale of value added software to our existing users has continued to bear fruit for the Group. While revenue has only been marginally higher than last year, there is no doubt that the strategy of diversifying away from SAT has been successful and should help this division to perform reasonably during the year. We are currently continuing our R&D programme and are looking to push out more new products in this area.
e-Government software
During the latest Chinese People's Political Consultative Conference (CPPCC) held in March 2010, the government communicated its intention to improve the level of IT services that it provides to its citizens in the coming year. However, this division has witnessed a decrease in turnover, partly due to the timing of the Chinese government calling for tenders for such projects. In addition, the complexity of some of the projects signed this year has resulted in the division not being able to recognise the associated turnover during the first half of the year. The Group is currently actively pursuing further opportunities arising from government initiatives by leveraging on our history of successfully securing and completing such projects.
Information Integration
Revenue in this division has always been derived mainly from large corporate clients that use the Group's products and services to restructure and streamline their IT infrastructure. As the Group continues to witness a slowdown in corporate IT spending that started during 2009, revenue for this division continues to register a decline.
Systems Integration
Traditionally a low margin division, the increase in turnover during this half year has resulted in a lower overall gross profit margin for the Group compared to the prior year. Although dependent on customers installing new systems and with the continued decline in corporate IT spending, this division has nevertheless performed well, primarily due to a project for the Technology Park located at Pukou, which is expected to be completed by the end of this year.
Trading outlook
Traditionally, the Group's revenues are weighted towards the latter half of the year, although Information Integration and System Integration may continue to witness difficult conditions as a result of reduced corporate spending. The Board does, however, believe, the Company is well positioned to achieve further growth in the areas of e-Government and tax software and the strategy remains to focus on these growth areas to help mitigate the negative effects brought about by continued difficult trading in the other two divisions.
Financial Review
As announced on 9 July 2010 and further updated on 16 July 2010 the Company incurred a net loss of US$3.8M in the first half of the year arising from a number of foreign exchange contracts in respect of which the Company's internal stop loss limits were not complied with. As stated on 16 July 2010 all remaining foreign exchange positions have been closed out. In closing out these positions a further loss of US$1.2m was incurred post 30 June, which will further negatively impact on the Company's full year results. The net loss on investment of US$3.8m is the sum of the total loss on investments of US$4.6 million and finance costs of US$0.2 million less finance income of US$1 million.
Although revenues in 2010 are expected to be higher than in 2009, the Company expects to book a net loss for the full year as a result of the US$5m foreign exchange contract losses.
Proposed cancellation of admission to AIM, tender offer to buy back shares in the Company and associated reduction of capital ("the Proposals")
Under the Proposals, which will be subject to both shareholder and Court approval, a tender offer ("Tender Offer") will be made pursuant to which shareholders will be able to tender all of their Ordinary Shares to be purchased by the Company at a price of 8p per Ordinary Share. It is also proposed that the Company's admission to AIM will be cancelled.
The proposed Tender Offer price of 8p per Ordinary Share represents a premium of 56.0% to the closing mid-price on 13 September 2010, the last trading day prior to release of this announcement and a premium of 8.5% to the closing mid price on 8 July 2010, the day immediately preceding the trading update announced on 9 July detailing the foreign exchange losses.
It is intended that the Company will shortly publish a circular setting out further details of the Proposals. The circular will also contain a notice convening a general meeting at which the approval of shareholders will be sought.
Implementation of the Proposals
The Board has concluded that it would be in the best interests of the Company to cancel trading in the Company's shares on AIM and continue its growth strategy away from the public market, at least in the near term. In particular such cancellation should allow the Company to grow without the pressure a quoted company may face to deliver short term performance over long term positioning and growth. The cancellation should also save the Company costs associated with being quoted and, importantly, will allow executive management more time to focus on driving the business forward. Ultimately, the Board believes that greater shareholder value will be derived by operating the Company's business off-market in the immediate future.
As the Group has funds above those required to meet its near term operational objectives, the Board believes that it is appropriate to give those shareholders who are not able or willing to continue to own shares in the Company following the Cancellation an opportunity to dispose of their interest in the Company through the Tender Offer. As shareholders holding about 69.1% of the issued share capital of the Company have indicated that they would provide irrevocable undertakings not to accept the Tender Offer, the Board have calculated that a maximum of about £4.30m would payable under the Tender Offer, including stamp duty and costs. This figure is subject to further detailed analysis and professional advice.
In considering the maximum level of cash which would be returned to Shareholders under the Tender Offer, the Board has taken account of the levels of funding remaining in the group to enable it to meet its current working capital requirements. The Tender Offer is intended to be funded out of the cash resources of the Company and by the Company or its subsidiaries obtaining additional bank funding. The Tender Offer will be conditional on the additional bank funding being available.
The aggregate buy-back price for the shares under the Tender Offer can only be paid out of the distributable reserves of the Company. As the distributable reserves of the Company are not sufficient to support the maximum amount payable under the Tender Offer, the Company will have to undergo a Court approved capital reduction ("Capital Reduction"). In order to implement the Tender Offer and Capital Reduction, the Company will have to obtain the approval of shareholders in general meeting as well as Court approval. The Tender Offer will accordingly be conditional on such approvals being obtained. The Company will seek to cancel the admission of the Company's Ordinary Shares to AIM whether or not the Tender Offer becomes unconditional.
Those shareholders who want to continue to own shares in the Company after the cancellation of admission to AIM may do so, although they should understand that as the shares will no longer be traded on a market and they may not be able to dispose of their shareholding in the Company easily or at all.
Cancellation of Admission
If the required resolution is passed at a general meeting of shareholders, the Directors intend to cancel the admission of the Company's shares to trading on AIM. In accordance with the AIM Rules for Companies, cancellation of admission is conditional upon consent of not less than 75 per cent. of votes cast by shareholders at a general meeting. Such consent will be sought at a general meeting of shareholders. The time of the general meeting and the principal effects and timing of the cancellation will be set out in the circular to be sent to shareholders.
Takeover Code
Although the Company is incorporated in England and Wales and the Ordinary Shares are admitted to trading on AIM, as the Company's central place of management is in China the Company is not considered to be resident in the UK for the purposes of the City Code on Takeovers and Mergers (the "City Code") which for the time being does not apply to the Company. Accordingly, the Company is not subject to takeover regulation in the UK under the City Code until such time as the position changes. Investors should be aware that the protections afforded to shareholders by the City Code which are designed to regulate the way in which takeovers and the purchase by a company of its own shares are conducted will not be available.
Other matters
Further information including details of any proposed amendments to the articles of association of the Company will be set out in the circular to be sent to shareholders.
CONSOLIDATED INCOME STATEMENT
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| 6 months | 6 months | 12 months ended |
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| ended 30 June | ended 30 June | 31 December |
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| 2010 | 2009 | 2009 |
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| US$ | US$ | US$ |
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| (reviewed) | (reviewed) | (audited) |
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| Revenue | 4,764,320 | 4,543,113 | 14,513,309 |
| Cost of sales | (1,904,323) | (916,897) | (4,919,180) |
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| Gross profit | 2,859,997 | 3,626,216 | 9,594,129 |
| Other income | 346,157 | 209,627 | 866,233 |
| Research and development cost | (1,549,678) | (933,514) | (2,206,895) |
| Selling and distribution expenses | (905,092) | (1,012,707) | (2,152,110) |
| Administrative expenses | (1,425,773) | (1,427,171) | (3,242,317) |
| Other operating expenses | (22,418) | (177,572) | 439,524 |
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| Profit from operations | (696,807) | 284,879 | 3,298,564 |
| Finance cost | (234,948) | (16,014) | (1,147,509) |
| Finance income | 1,078,654 | 653,051 | 2,256,244 |
| Loss on investment | (4,647,645) | 55,769 |
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| Profit before tax | (4,500,746) | 977,685 | 4,407,299 |
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| Taxation | 57,277 | (210,747) | (752,486) |
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| Profit for the period | (4,443,469) | 766,938 | 3,654,813 |
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| Earnings per ordinary share |
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| Basic (US$ per share) | (0.0268) | 0.0046 | 0.0207 |
| Diluted ( US$ per share) | (0.0268) | 0.0046 | 0.0207 |
| CONSOLIDATED BALANCE SHEET | |||
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| 30 June | 30 June | 31 December |
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| 2010 | 2009 | 2009 |
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| US$ | US$ | US$ |
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| (reviewed) | (reviewed) | (audited) |
| ASSETS |
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| Non-current assets |
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| Property, plant and equipment | 792,345 | 883,632 | 802,919 |
| Intangible assets | 6,876,963 | 6,733,100 | 7,524,899 |
| Long term investment | - | 4,403,363 | 4,406,969 |
| Total non-current assets | 7,669,308 | 12,020,095 | 12,737,787 |
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| Current assets |
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| Inventories | 1,055,231 | 334,655 | 716,392 |
| Trade receivables | 10,363,923 | 7,202,347 | 10,561,671 |
| Other receivables | 3,757,828 | 1,360,925 | 1,815,086 |
| Investments | 4,452,419 | 86,945 | 29,775 |
| Cash deposits | - | - |
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| Cash and cash equivalents | 8,429,480 | 12,577,728 | 14,935,073 |
| Total current assets | 28,058,881 | 21,562,600 | 28,057,997 |
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| Total assets | 35,728,189 | 33,582,695 | 40,792,784 |
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| LIABILITIES & EQUITY |
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| Current liabilities |
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| Short term loan | 1,178,047 | - | 1,171,612 |
| Trade payables | 3,269,978 | 566,632 | 3,412,871 |
| Other payables | 1,739,216 | 156,229 | 1,584,884 |
| Total current liabilities | 6,187,241 | 722,861 | 6,169,367 |
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| Non-current liabilities |
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| Deferred tax | 1,249,334 | 837,689 | 1,299,631 |
| Total non-current liabilities | 1,249,334 | 837,689 | 1,299,631 |
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| Total liabilities | 7,436,575 | 1,560,550 | 7,468,998 |
| Net assets | 28,291,614 | 32,022,145 | 33,323,786 |
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| Equity |
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| Share capital | 424,023 | 424,023 | 424,023 |
| Share premium | 11,283,551 | 11,283,551 | 11,283,551 |
| Merger reserve | (1,118,051) | (1,118,051) | (1,118,051) |
| Other reserves | 7,061,210 | 8,118,637 | 7,649,913 |
| Retained earnings | 10,640,881 | 13,313,985 | 15,084,350 |
| Total Equity | 28,291,614 | 32,022,145 | 33,323,786 |
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| Total liabilities & equity | 35,728,189 | 33,582,695 | 40,792,784 |
| CASH FLOW STATEMENT
| 6 months | 6 months | 12 months ended |
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| ended 30 June | ended 30 June | 31 December |
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| 2010 | 2009 | 2009 |
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| US$ | US$ | US$ |
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| (reviewed) | (reviewed) | (audited) |
| Operating activities |
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| Income before taxation from continuing operations | (4,500,746) | 977,685 | 4,407,299 |
| Adjustments for: |
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| Interest income | - | (653,051) | (422,972) |
| Interest expense | - | 16,014 | 19,567 |
| Exchange difference | 4,643,927 | (55,769) | 1,127,941 |
| Excess on acquisition of fair value net assets of subsidiary over cost |
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| (445,573) |
| Investment income | (1,057,926) | (209,627) | - |
| Share based payment | - | 143,589 | 23,142 |
| Impairment loss in receivables | 7,978 | (156,990) | (119,345) |
| Depreciation of property, plant and equipment | 97,033 | 96,518 | 115,120 |
| Impairment of property, plant and equipment |
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| 6,049 |
| Amortisation for intangible assets | 1,728,780 | 1,293,370 | 2,957,106 |
| Income taxes deferred | 57,277 | - | - |
| Operating cash generated before working capital changes | 976,323 | 1,451,739 | 7,668,334 |
| Decrease in inventories | (338,839) | 309,222 | (72,515) |
| Decrease/ (increase) in trade and other receivables | (1,744,995) | 1,713,434 | (2,265,667) |
| Decrease/(Increase) in trade and other payables | 14,162 | (3,750,846) | 1,873,203 |
| (Decrease) in deferred income | (50,297) | - |
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| Cash generated by operations | (1,143,646) | (276,451) | 7,203,355 |
| Income taxes paid | - | (141,310) | (158,474) |
| Interest paid | - | (16,014) | (19,567) |
| NET CASH (USED IN) / GENERATED FROM OPERATING ACTIVITIES | (1,143,646) | (433,775) | 7,025,314 |
| Investing activities |
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| Interest received | - | 653,051 | 422,972 |
| Gain on disposal of investment | - | 209,627 | - |
| Proceeds on disposal of trading investment | 1,445,254 | 1,376,198 |
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| Purchase of property, plant and equipment | (1,129,904) | (1,063) | (55,201) |
| Proceeds on disposal of property, plant and equipment |
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| 111,471 |
| Purchase of intangible assets | - | (1,177,504) | (4,202,061) |
| Acquisition of subsidiary |
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| (308,581) |
| Entrust loan made | - | - | 1,433,369 |
| Decrease/(increase) in pledged bank deposits | - | 460,276 | 460,276 |
| NET CASH USED IN INVESTING ACTIVITIES | 315,350 | 1,520,585 | (2,137,755) |
| Financing activities |
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| Repayment of borrowing | - | (1,170,515) | - |
| Dividend paid | - |
| (953,653) |
| NET CASH USED IN FINANCING ACTIVITIES | - | (1,170,515) | (953,653) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (828,296) | (83,705) | 3,933,906 |
| Effect of exchange rate changes | (5,677,297) | 209,046 | (1,451,220) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 14,935,073 | 12,452,387 | 12,452,387 |
| CASH AND CASH EQUIVALENTS AT THE END OF PERIOD | 8,429,480 | 12,577,728 | 14,935,073 |
STATEMENT OF CHANGES IN EQUITY
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| Share capital | Share premium | Merger reserve | Other reserves | Retained earnings | Total |
| US$ | US$ | US$ | US$ | US$ | US$ | |
| Reviewed | Reviewed | Reviewed | Reviewed | Reviewed | Reviewed | |
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| Balance as at 1 January 2009 | 424,023 | 11,283,551 | (1,118,051) | 7,785,172 | 12,547,047 | 30,921,742 |
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| Profit for the period | - | - | - | - | 766,938 | 766,938 |
| Appropriation of reserve funds | - | - | - | 143,589 | - | 143,589 |
| Effect of exchange rates | - | - | - | 189,876 | - | 189,876 |
| Dividend paid | - | - | - | - |
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| Balance as at 30 June 2009 | 424,023 | 11,283,551 | (1,118,051) | 8,118,637 | 13,313,985 | 32,022,145 |
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| Profit for the period | - | - | - | - | 1,770,364 | 1,770,364 |
| Transfer to statutory reserve | - | - | - | (468,722) |
| (468,722) |
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| Balance as at 31 December 2009 | 424,023 | 11,283,551 | (1,118,051) | 7,649,915 | 15,084,349 | 33,323,787 |
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| Profit for the period | - | - | - | - | (4,443,469) | (4,443,469) |
| Effect of exchange rates | - | - | - | (588,705) | - | (588,705) |
| Balance as at 30 June 2010 | 424,023 | 11,283,551 | (1,118,051) | 7,061,210 | 10,640,881 | 28,291,614 |
NOTES TO THE INTERIM REPORT
1. The consolidated interim financial information has been reviewed, not audited. The figures for the year ended 31 December 2009 have been extracted from the financial statements which have been filed with the Registrar of Companies. The auditors' report on those financial statements was unqualified and did not contain a statement under section 498(2) of the Companies Act 2006.
2. The financial information set out in this report has been prepared in accordance with accounting policies as set out in the Group's annual report and financial statements for the year ended 31 December 2009 as described in those financial statements except for the adoption of IAS 1 Presentation of Financial Statements (Revised 2007).
3. Functional and presentation currency
Sterling is the functional currency of the Company as it is the currency of the primary economic environment in which it operates. The US Dollar ("US$") is the currency used to present the financial information in order to improve understanding of the financial position of the Company by increasing comparability with the financial information of Nanjing Skytech Co. Limited and Jiangsu Sky Information Limited, the operating subsidiaries whose functional currency is the Chinese Renminbi.
4. Segment information
The segment reporting format is determined to be business segments, as the Group's principal activity is conducted in the People's Republic of China.
The Group's operations are organized into two operating divisions namely software development and system integration.
The software segment provides export tax, e-Government and information integration software.
The system integration provides consultancy and the implementation of IT solutions, which includes provision of hardware and peripherals
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| Revenue
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| 30 June | 30 June | 31 Dec |
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| 2010 | 2009 | 2009 |
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| US$ | US$ | US$ |
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| Software development | 2,724,250 | 3,459,036 | 9,208,265 |
| System Integration | 2,040,070 | 1,084,077 | 5,305,044 |
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| 4,764,320 | 4,543,113 | 14,513,309 |
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Attributable expenses cannot be allocated on a reasonable basis to the revenue streams above. As a result, the segmental analysis is limited to the group revenue and the group is unable to show operating profit for the primary segmental analysis.
5. Earnings per share
The calculation of basic earnings per Ordinary Share and the fully diluted earnings per Ordinary Share is based on the profit attributable to the Group and the weighted average number of Ordinary Shares of each period.
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| 30 June | 30 June | 31 December |
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| 2010 | 2009 | 2009 |
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| US$ | US$ | US$ |
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| (reviewed) | (reviewed) | (audited) |
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| Profit for the period | US$(4,443,469) | US$766,938 | US$3,654,813 |
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| Number of shares - weighted average - basic | 165,582,189 | 165,582,189 | 165,582,189 |
| Basic earnings per share | US$(0.0268) | US$0.0046 | US$ 0.0221 |
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| Number of shares - weighted average - diluted | 165,582,189 | 165,582,189 | 165,582,189 |
| Diluted earnings per share | US$(0.0268) | US$0.0046 | US$0.0221 |
6. Dividend
Sinosoft Technology Plc paid a dividend amounting to £513,305 on 19 July 2010
7. Related party transactions
The group had no related party transactions in the interim period for 2010 or 2009.
8. Events after the balance sheet date
Sinosoft Technology Plc entered into certain foreign exchange contracts which have, in aggregate, resulted in a net loss to the Company of approximately US$3.8 million (comprising total loss on investment of US$4.6 million and finance cost of US$0.2 million less finance income of US$1 million) as of 30 June, 2010. The Company finally closed the foreign exchange positions on 16 July, 2010 with the total loss on the foreign exchange contracts increasing to approximately US$ 5 million.
INDEPENDENT REVIEW REPORT
TO SINOSOFT TECHNOLOGY PLC
Introduction
We have been instructed by the Company to review the financial information for the six months ended 30 June 2010, which comprises the consolidated income statement, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters that we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the Directors. Rule 18 of the AIM Rules for Companies requires that the interim report must be presented and prepared in a form consistent with that adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.
Review work performed
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquires of Group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied, unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with the International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modification that should be made to the consolidated financial information as presented for the six months ended 30 June 2010.
SRLV
Chartered Accountants & Registered Auditors DATED: 14 September 2010