10QSB 1 fm10qsb_63005.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 [ ] 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. 0-27929 ETERNAL TECHNOLOGIES GROUP, INC. ----------------------------------------- (Exact name of registrant as specified in its charter) Nevada 62-1655508 ----------------------- -------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Sect. D, 5/F, Block A. Innotech Tower, 235 Nanjing Rd. Heping District, Tianjin 300052 ---------------------------------------- (Address of principal executive offices) 011-86-22-2721-7020 ------------------ (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _ As of August 5, 2005, 30,679,630 shares of Common Stock of the issuer were outstanding. TABLE OF CONTENTS ETERNAL TECHNOLOGIES GROUP, INC. Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets at June 30, 2005 (Unaudited ) and 3 December 31, 2005 Unaudited Consolidated Statements of Operations for the three and six Months ended June 30, 2005 and 2004 4 Unaudited Consolidated Statements of Cash Flows for the nine months ended June 30, 2005 and 2004 5 Notes to the Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Controls and Procedures 12 Part II. Other Information Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits 13 Signatures 14
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements ETERNAL TECHNOLOGIES GROUP, INC. CONSOLIDATED BALANCE SHEETS June 30, 2005 and December 31, 2004 (Amounts in United States Dollars) June 30, December 31, 2005 2004 ------------------ ------------------ ------------------ ------------------ ASSETS (Unaudited) CURRENT ASSETS Cash and Cash equivalents $ 21,329,840 $ 27,473,354 Accounts receivable 10,561,981 1,583,313 Inventories 1,193,041 621,307 Prepayments and deposits 620 620 ------------------ ------------------ Total current assets 33,085,482 29,678,594 FIXED ASSETS, net of accumulated depreciation of $2,712,256 and $2,456,122 at June 30, 2005 and 5,647,915 5,904,050 December 31, 2004, respectively LAND USE RIGHTS, net of accumulated amortization of $1,179,561 and $1,055,361at June 30, 2005 and December 31, 2004, respectively 4,820,439 4,944,639 ------------------ ------------------ Total assets $ 43,553,836 $ 40,527,283 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes Payable and convertible debt $ 776,064 $ 443,366 Accounts payable and accrued liabilities 1,846,155 1,526,595 Amounts due to related parties 377,344 272,465 ------------------ ------------------ Total current liabilities 2,999,563 2,242,426 ------------------ ------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred shares - $0.001 par value, 5,000,000 authorized, none issued or outstanding - - Common shares - $0.001 par value; 95,000,000 authorized; 30,679,630 shares issued and outstanding 30,679 30,679 Additional paid - in capital 10,107,903 9,740,830 Subscription receivable (10,176) (10,176) Retained earnings 30,425,849 28,478,506 ------------------ ------------------ Total stockholders' equity 40,554,255 38,239,839 ------------------ ------------------ Total liabilities and stockholders' equity $ 43,553,818 $ 40,482,265 ================== ==================
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements 3 ETERNAL TECHNOLOGIES GROUP, INC. UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS For the three months and six months ended June 30, 2005 and 2004 (Amounts in United States Dollars) Three Months Ended Six Months Ended -------------------------------------- -------------------------------------- -------------------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ------------------ ------------------ ------------------ ------------------ SALES $ 10,123,668 $ 4,096,253 $ 12,232,415 $ 6,140,831 COST OF SALES 7,471,350 2,500,561 9,037,784 3,950,498 ------------------ ------------------ ------------------ ------------------ GROSS PROFIT 2,652,318 1,595,692 3,194,631 2,190,333 DEPRECIATION AND AMORTIZATION 190,168 190,167 380,335 380,355 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 475,655 421,809 908,887 789,963 ------------------ ------------------ ------------------ ------------------ -------------------------------------------------------------------------------- INCOME FROM OPERATIONS 1,986,495 983,716 1,905,409 1,020,015 ------------------ ------------------ ------------------ ------------------ OTHER INCOME (EXPENSE) Interest Income 47,853 28,470 96,695 54,850 Interest expense (54,761) - (54,761) - Impairment Loss - - - (53,517) ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ OTHER INCOME (EXPENSE), NET (6,908) 28,470 41,934 1,333 ------------------ ------------------ ------------------ ------------------ NET INCOME $ 1,979,587 $ 1,012,186 $ 1,947,343 $ 1,021,348 ================== ================== ================== ================== NET INCOME PER COMMON SHARE Basic and diluted $ 0.06 $ 0.03 $ 0.06 $ 0.03 ================== ================== ================== ================== ================== ================== ================== ================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted 30,679,630 29,337,381 30,679,630 29,362,380 ================== ================== ================== ================== ================== ================== ================== ==================
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements. 4 ETERNAL TECHNOLOGIES GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2005 and 2004 (Amounts in United States Dollars) June 30, June 30, 2005 2004 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,947,343 $ 1,021,348 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 380,335 380,355 Amortization of beneficial conversion feature 54,761 - Common stock issued for service 134,261 90,000 Impairment loss - 53,517 Changes in operating assets and liabilities: - Inventories (571,734) 517,245 Accounts receivable (9,023,668) - Other receivable - 120,482 Prepayments and deposits - 1,214 Accounts payable and accrued expenses 597,497 371,162 Account payable to related parties 104,879 (7,655) Account payable to related company - (102,584) ----------------- ------------------ Net cash provided by operating activities (6,376,326) 2,445,084 ----------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from property held for sale - 240,967 ----------------- ------------------ Net cash provided by investing activities - 240,967 ----------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Capital contributed 232,812 78,670 ----------------- ------------------ Net cash provided by financing activities 232,812 78,670 ----------------- ------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS (6,143,514) 2,764,721 Cash and cash equivalents, beginning of period 27,473,354 16,302,464 ----------------- ------------------ Cash and cash equivalents, end of period $ 21,329,840 $ 19,067,185 ================= ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Interest Paid $ - $ - Tax paid - -
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements 5 ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Background and Critical Accounting Policies Pursuant to an exchange agreement, Eternal Technologies Group, Inc., ("Company") formerly known as Waterford Sterling Corporation, completed its acquisition of 100% interest of Eternal Group Limited and Subsidiaries on December 12, 2002. The Company has treated the transaction as a reverse merger for accounting purposes. Following the acquisition, the former shareholders of Eternal Technology Group Limited, a British Virgin Islands limited liability company, now owns approximately 85% of the issued and outstanding common shares of Eternal Technologies Group Inc. Eternal Phoenix Company Limited was incorporated in the British Virgin Islands with limited liability on March 3, 2000. Pursuant to a resolution passed on June 17, 2000 Eternal Phoenix Company Limited changed its name to ETERNAL TECHNOLOGY GROUP LTD., ("Eternal"). Eternal is a holding company for investments in operating companies. Eternal acquired 100% of Willsley Company Limited ("Willsley"), a company incorporated in the British Virgin Island with limited liability on May 16, 2000. Willsley's principal activity is investments and owns 100% interest in Inner Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd ("Aershan"). Aershan was incorporated in the People's Republic of China ("the PRC") with limited liability on July 11, 2000 and its principal activities are to run a breeding center, transplant embryos, and to propagate quality meat sheep and other livestock breeds in Inner Mongolia. Inventory Livestock inventories that are purchased for embryo transplanting, resale, or meat processing are recorded at historical cost. Estimated costs of raised livestock prior to use for embryo transplanting, sale, or meat processing are accumulated and capitalized as inventory at the balance sheet date. Embryo inventories are recorded at historical cost. Inventories are measured at lower of cost and net realizable value using the first-in first-out ("FIFO") or weighted average cost formulas. The Company reviews its inventory quarterly to identify slow moving, obsolete or otherwise impaired inventory. The identification process includes historical performance of the inventory, current operational plans for the inventory, as well as industry and customer specific trends. If actual results differ from management expectations with respect to the selling of inventories at amounts equal to or greater than their carrying amounts, an adjustment to inventories would be made. Land lease rights and amortization Land lease rights in Mainland China were stated at the amount of the prepayment less accumulated amortization. Amortization of land lease rights was calculated on the straight-line basis over the term of the lease of approximately 25 years. The land lease rights with respect to the Company's farm were originally purchased from the Chinese government for $6,000,000 and such rights extend through 2025. The farm is located in Wulagai Development Area in Inner Mongolia. Foreign currency translation The Company's reporting currency is the US$. The Company maintains no material accounts in currency of the United States of America. One of the subsidiaries maintain their books and accounts in the People's Republic of China currency, which is called Renminbi ("RMB"). Translation of the financial statements of amounts from RMB into US$ has been made at the single rate of exchange on December 31, 2004 and 2003 of US 1.00: RMB 8.30. No representation is made the RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2004 or 2003 or at any other date. 6 On January 1, 1994, the PRC government introduced a single rate of exchange as quoted daily by the People's Bank of China (the "Unified Exchange Rate"). The quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires submitting a payment application form together with invoices, shipping documents and signed contracts. Revenue recognition In accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenue from the sale of livestock, embryos, and raw materials is recognized when persuasive evidence of an arrangement exists; the price to the buyer is fixed or determinable; the merchandise is delivered to the customer and title passes; and collectibility is reasonably assured. Stock-based compensation Stock compensation expense for stock granted to non-employees has been determined in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in conjunction with Selling Goods or Services ("EITF 96-18"), as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Stock compensation expense for stock granted to employees has been determined in accordance with SFAS 123. Use of estimates The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Recent accounting pronouncements In November 2004, FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS No. 151 will have on its consolidated financial position, results of operations and cash flows but do not expect SFAS No. 151 to have a material impact 2. Condensed Financial Statements and Footnotes The interim consolidated financial statements presented herein have been prepared by the Company and include the unaudited accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidation. These condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB and Item 310 (b) Regulation S-B. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2004 and notes thereto included in the Company's Form 10-KSB. 7 In the opinion of management, the unaudited consolidated condensed financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2005, the results of operations for the three and six months ended June 30, 2005 and 2004, respectively. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations. 3. Cash and Cash Equivalents At June 30, 2005, the Company maintains bank accounts in the PRC of approximately $21,329,840, and substantially the entire amount is to be exclusively used for operations in the PRC. 4. Public Relations Agreement On February 1, 2005, the Company entered into a six-month public relations agreement with Empire Relations Group, Inc. (ERG). As consideration for public relations services, the Company compensated ERG with 150,000 shares subject to Rule 144. For the three-month period ended June 30, 2005, the Company expensed $79,500 associated with this agreement. 5. Notes Payable The Company's promissory notes payable are in default at June 30, 2005 and the holder of the notes has filed suit for payment of the notes. The Company believes it has meritorious defenses to the lawsuit related to the notes. 6. Income Taxes The companies operate in several jurisdictions and may be subject to taxation in those jurisdictions. It is management's intention to reinvest all the income attributable to the Company earned by its operations outside of the United States of America. Accordingly, no United States corporate taxes have been provided in these consolidated financial statements. The Company has a U.S. net operating loss carry forward of approximately $2,285,000 expire in years between 2022 and 2025. However a valuation allowance has been provided as management does not expect the tax benefits to be realized. No other significant deferred assets or liabilities existed at December 31, 2004. The Company's net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in section 382 of the Internal Revenue Code. Under current law of the British Virgin Islands (BVI), any dividends and capital gains arising from the Company's investments are not subject to income tax in the British Virgin Islands. Companies with operations in the Peoples Republic of China may be subject to taxes for income therein. The Income Tax Law of the Peoples Republic of China for Enterprises with Foreign Investment and Foreign Enterprises provide certain exemptions from taxation. Under current PRC law, Aershan is exempt from taxation as Aershan's operations currently benefit from a tax holiday. The tax holiday, granted by Xilingol League, which is the local government, and the central PRC government, commenced on the incorporation of Inner Mongolia Aershan Agriculture and Husbandry Technology Co., Ltd., in July 2000. The Company has benefited from this holiday since inception and anticipates that the holiday will extend through July 2008. The tax holiday resulted in tax savings that account for substantially the entire difference between the income tax provision that would be expected using United States federal statutory tax rates and the tax provision of zero for the three and six months ended June 30, 2005 and 2004. 8 7. Contingencies In conjunction with certain subscription agreements entered into during 2003, the Company has agreed to register the shares issued under a Form SB-2 registration statement. There were penalties for not timely meeting filing and effectiveness deadlines, and the Company received claims related to these penalties. On May 24, 2005 the Company issued convertible notes, allowing for conversion of the penalty to the Company's common stock, to the holders of the subscription agreements who accepted settlement. One subscription agreement holder elected to not accept a convertible note and is pursuing legal action as discussed in Part II, Item 1. The Company's operations are conducted 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 economy. The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in 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 the political and social conditions in the PRC, and 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. 8. Related Party Transactions During the three and six months ended the Company engaged in various transactions with related parties as follows: Three Months Ended Six Months Ended ------------------------------------ -------------------------------- ------------------------------------ June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ---------------- ----------------- ------------------ ------------- Common stock sold by officers/ directors directors with proceeds contributed to the company for payment of operating expenses $ 232,812 $ 78,670 $ 50,435 $ 78,670
Item 2. Management's Discussion and Analysis or Plan of Operation The Company's business is seasonal. Accordingly, the results of operations for the three and six month periods ended June 30, 2005 are not indicative of the results for any other quarter, period or for the fiscal year. The following is derived from, and should be read in conjunction with, our unaudited condensed consolidated financial statements, and related notes, as of and for the three and six months ended June 30, 2005 and 2004. Three Months Ended June 30, 2005 Compared to Three months Ended June 30, 2004 Revenues - Revenues for the three months ended June 30, 2005 increased by $6,027,415 or 147% to $10,123,668 from $4,096,253 for the corresponding period of the prior year. This increase resulted from an increase in cattle embryo transfer revenue of $3,204,819, an increase in the sale of mutton of $2,591,169 and an increase of $231,427 in sheep sales. The company had no lamb meat sales during the first two quarters of 2005. Cost of Sales - Cost of sales for the three months ended June 30, 2005 increased by $4,970,789 to $7,471,350 from $2,500,561 for the corresponding period of the prior year. This increase resulted from an increase in the costs incurred in the transfer of cattle embryos of $2,667,018, an increase in the cost of mutton sold of $2,014,614, and an increase in the cost of sheep sold of $289,157. The gross profit margin from the sale of mutton was 24.2%, the gross profit (loss) margin from the sale of sheep was (24.9%) and the gross profit margin on embryo transfers was 29.56%. Depreciation and Amortization - Depreciation and amortization expenses were essentially unchanged compared with the corresponding period of the prior year. Selling and Administrative Expenses - 9 Selling and administrative expenses increased by $53,846 or 12.8% to $475,655 from $421,809 for the corresponding period of the prior year. This increase resulted from an increase in salaries of $55,735 related to board approved changes in employees salaries, an increase in professional services of $75,827 which resulted from increased audit and legal expense related to the filing of a registration statement and related services, and an increase in miscellaneous expenses of $36,746 which were partially offset by a decrease in penalty expense of $66,045 because of the conversion of subscription agreements to convertible notes and a decrease in marketing expense of $39,550 due to the Company retaining one marketing firm instead of the two in the comparable period of 2004. Other Income (Expense) For the three months ended June 30, 2005 the company experienced an increase of other income (interest) of $19,383 or 68% to $47,853 from $28,470. The increase is attributable to an increase in interest rates and the Company keeping a larger percentage of it's cash in interest bearing accounts. Interest expense was 54,761 during the quarter ended June 30, 2005, due to the Company issuing convertible debentures with a beneficial conversion feature to settle penalties for not timely meeting filing and effectiveness deadlines for a registration statement. The interest expense relates to the amortization of the beneficial conversion feature. As a result of the foregoing, the company had net income of $1,979,587 or $.06 per share for the three months ended June 30, 2005 compared to net income of $1,012,186 or $.03 per share for the corresponding period of the prior year. 10 Six Months Ended June 30, 2005 As Compared to Six Months Ended June 30, 2004. Revenues Revenues for the six months ended June 30, 2005 increased by $6,091,584 or 99.2% to $12,232,415 from $6,140,831 for the corresponding period of the prior year. This increase is attributable to an increase in cattle embryo transfer fees of $3,204,819, an increase in the sale of mutton of $2,661,362 and an increase in sale of sheep of $231,427. The increases were partially offset by a decrease in the sale of embryos of $6,024. Cost of Sales - Cost of sales for the six months ended June 30, 2005 increased to $9,037,784 from $3,950,498 for the corresponding period of the prior year. This increase resulted from an increase in the costs of cattle embryo transfers of $2,667,018, an increase in costs of mutton sold of $2,136,711, and an increase in the cost of sheep sold of $289,157. The increase was partially offset by a corresponding decrease in cost of embryos of $5,600. The gross profit margin on the transfer of cattle embryos was 29.5%, the gross profit margin from the sale of mutton was 28.6% and the gross profit margin from the sale of sheep was 24.9%. Depreciation and Amortization - Depreciation and amortization expenses were essentially unchanged compared with the corresponding period of the prior year. Selling and Administrative Expenses - Selling and administrative expenses increased by $118,924 or 15.1% to $908,887 from $789,963 for the corresponding period of the prior year. This increase resulted from an increase in salaries of $114,412 related to board approved changes in employees salaries, an increase in professional services of $145,863 which resulted from increased audit and legal expense related to the annual audit, the change in auditors, and the filing of a registration statement and related services and an increase in miscellaneous expenses of $39,181 which were partially offset by a decrease in penalty expense of $87,965 related to the conversion of subscription agreements to convertible notes and a decrease in marketing expense of $92,567 due to the Company retaining one marketing firm instead of the two in the comparable period of 2004. Other Income (Expense) For the six months ended June 30, 2005 the company experienced an increase of other income (interest) of $41,845 or 76% to $96,695. The increase is attributable to an increase in interest rates and the Company keeping a larger percentage of it's cash in interest bearing accounts. Interest expense was 54,761 during the six months ended June 30, 2005, due to the Company issuing convertible debentures with a beneficial conversion feature to settle penalties for not timely meeting filing and effectiveness deadlines for a registration statement. The interest expense relates to the amortization of the beneficial conversion feature. The Company recorded an impairment loss for the six month period ended June 30, 2004 of $53,517. There was no impairment loss recorded for the six month period ended June 30, 2005. As a result of the foregoing, the Company had net income of $1,947,343 or $.06 per share for the six months ended June 30, 2005 compared to net income of $1,021,348 or $.03 per share for the corresponding period of the prior year. Liquidity and Capital Resources As of June 30, 2005, the Company had cash and cash equivalents of $21,329,840 and working capital of $30,085,919. This compares with cash and cash equivalents of $27,473,354 and working capital of $27,436,168 as of December 31, 2004. 11 Cash used in operating activities totaled $6,376,326 for the six months ended June 30, 2005. This compares with cash provided from operating activities of $2,445,087 for the corresponding period of the prior year. This decrease resulted from an increase in net income of $925,995 and non-cash expense of $514,596 consisting of $134,261 of stock issued for services, a $44,261 increase from the corresponding period of the prior year, and depreciation and amortization of $380,335 a $23 decrease from the corresponding period of the prior year and an increase in current liabilities of $757,137 attributable to 332,698 in convertible notes from the conversion of penalties, $319,560 in accounts payable and accrued expenses, and $104,879 of accounts payable to a related company. These amounts were more than offset by changes in current assets of $9,595,402 of which 9,023,668 is attributable to an increase in receivables and $571,734 is attributable to an increase in inventories. Cash from investing activities was $0 during the six months ended June 30,2005 compared to $240,967 for the six months ended June 30, 2004. All of the cash from investing activities during the six months ended June 30, 2004 was from the sale of property. Cash provided from financing activities for the six months ended June 30, 2005, totaled $232,812 all from contributed capital. This compares with cash provided from financing activities of $78,670 for the six months ended June 30, 2004. At June 30, 2005, the Company lists notes payable of $443,366. These notes are currently the subject of litigation where the Company is challenging their validity. Although the Company has a cash and bank balance of $21,329,840 it has all been designated to be exclusively used by management for operations within the People's Republic of China. Therefore, if the Company is to expand outside the PRC, as it anticipates doing, or pay its non-PRC obligation, it will have to sell additional shares of its stock or borrow funds from third parties. Unless it is able to either borrow funds or sell additional shares, it will have insufficient resources to carry out is business objectives outside the PRC for the next twelve (12) months. Item 3. Controls and Procedures We strive to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designated and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls. Our former independent accountants, Thomas Leger & Co. LLP conducted audits of our financial statements for 2002, 2003 and 2004. In connection with the issuance of its report of the independent registered public accounting firm, Thomas Leger & Co. LLP reported to our Board of Directors two material weaknesses under standards established by the Public Company Accounting Oversight Board regarding some elements of our system of internal controls. They noted the following material deficiencies: (i) The Company lacked certain procedures and required expertise needed to properly account for non-routine transactions (such as acquisitions of other businesses) and preparation of its required financial statement disclosure in accordance with U.S. G.A.A.P. and SEC rules and regulations. (ii) The Company has restated its consolidated financial statements for the year ended December 31, 2002 to reflect merger costs of $867,411 as post-acquisition activity. This restatement adjustment is considered a material weakness over financial reporting as defined by the PCAOB. We have conducted a review of the errors requiring restatement, including a separate review by our board of directors to determine what remedial measures were necessary. We believe our management has taken or is in the process of taking the steps necessary to correct the errors and avoid similar errors in the future. 12 As required by SEC rule 13a-15(b) we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer concluded that our disclosure controls and procedures are effectively in timely alerting them to material information relating to us (including our subsidiaries) required to be included in our periodic SEC filings. Other than the foregoing initiatives, there were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect such internal controls subsequent to the date of their evaluation. While we have taken or are in the process of taking the foregoing steps in order to address the adequacy of our disclosure controls and procedures, and, in addition, to develop and implement a formal set of internal controls and procedures for financial reporting in accordance with SEC's proposed rules to adopt the internal control report requirements included in Section 404 of the Sarbanes-Oxley Act of 2002, the efficiency of the steps we have taken to date and the steps we are still in the process of completing is subject to continued management review supported by confirmation and testing by our external auditors. As a result, it is likely that additional changes will be made to our internal controls. PART II. OTHER INFORMATION Item 1. Legal Proceedings. As of March 1, 2005, we were a party to two legal proceedings. The first is a lawsuit brought by Limestreet Securities. This cause of action seeks payment of $500,942 on two outstanding promissory notes plus accrued interest since July 11, 2004, attorney's fees, cost of collection and other court costs. This cause of action was filed in Federal Court in the Eastern District of Louisiana. The Company challenged the venue of this action and was granted a motion to transfer for lack of jurisdiction/improper venue. The cause of action has now been transferred to Federal Distirict Court for the Southern District of Texas in Houston, Texas. The Company intends to challenge the validity of these notes. The second cause of action was filed in State Court in New York City by Bristol Investments Limited against the company and is seeking the payment of the penalty due under their original investment for failure to have a registration effective within a stated period of time. Bristol is currently seeking $53,000 in damages. Bristol has refused a settlement offer of a convertible promissory note and continues to pursue the litigation. As of August 10, 2005 we are not a party to any other pending litigation and were not aware of any threatened litigation. Item 2. Changes in Securities During the three month period ended June 30, 2005 there were no changes in securities. Item. 3. Defaults Upon Senior Securities None Item 4. Submissions of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits 13 EXHIBIT NO. IDENTIFICATION OF EXHIBIT 31.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1 Convertible Note-CONGREGATION MISHKAN SHOLOM 10.2 Convertible Note-STONESTREET LP 10.3 Convertible Note-GREENWICH GROWTH FUND LIMITED 10.4 Convertible Note-PLATINUM PARTNERS VALUE ARBITRAGE FUND LP Signature Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. ETERNAL TECHNOLOGIES GROUP, INC. /s/ Jiansheng Wei ------------------------------------- August 15, 2005 Jiansheng Wei, Chief Executive Officer /s/ Xingjian Ma August 15, 2005 ------------------------------------- Xingjian Ma, Chief Financial Officer 14 Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jiansheng Wei, certify that: 1. I have reviewed this Form 10-QSB of Eternal Technologies Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))** for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 15, 2005 /s/ Jiansheng Wei ---------------------- Jiansheng Wei Chief Executive Officer 14 Exhibit 31.2 CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUNAT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Xingjian Ma, certify that: 1. I have reviewed this Form 10-QSB of Eternal Technologies Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))** for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 15, 2005 /s/ Xingjian Ma ----------------------- Xingjian Ma Chief Financial Officer 15 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jiansheng Wei, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Eternal Technologies Group, Inc. on Form 10-QSB for the quarterly period ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Eternal Technologies Group, Inc. By: /s/ Jiansheng Wei ---------------------------- Name: Jiansheng Wei Title: Chief Executive Officer August 15, 2005 16 Exhibit 32.1 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Xingjian Ma, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Eternal Technologies Group, Inc. on Form 10-QSB for the quarterly period ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Eternal Technologies Group, Inc. By: /s/ Xingjian Ma ---------------------------- Name: Xingjian Ma Title: Chief Financial Officer August 15, 2005 17