China Architectural Engineering Announces Third Quarter 2010 Financial Results

CHANGZHOU, China, Nov. 23, 2010 /PRNewswire-Asia/ -- China Architectural Engineering, Inc. (Nasdaq: CAEI or the Company), a self-developer of online games and a provider of high-end building envelope architectural systems, today announced its financial results for the third quarter ended September 30, 2010.

Mr. Alan Leung, Chief Executive Officer of China Architectural Engineering, commented, "The third quarter is a transitional period for CAE, as we continue with our corporate restructuring and shift our focus towards online game developments and opportunities, and increasingly diversify away from unprofitable international construction projects."

Mr. Leung continued, "In the architecture construction and engineering segment, we remained disciplined and selective, as we contracted only quality projects in China that offer higher profits and pose lower risks. In the online gaming segment, we are marching closer towards our first commercial launch. We recently completed a fourth closed beta test of our highly-anticipated "Warring State" MMORPG game, and based on testers' and experts' positive feedback, we are excited about its eventual commercialization in China. We are also thrilled that we were able to successfully utilize our proprietary "Apocalypse" game-engine to create a training simulation used by a local government to help make driving safer in China, which not only generated approximately $0.2 million in revenue during the third quarter but also created goodwill with the local community."

Third Quarter 2010 Results

Revenues from contracts for the third quarter of 2010 were $4.4 million, a decrease of $21.2 million, or 83%, from $25.6 million for the comparable period in 2009, mainly as a result of fewer projects, due to the declining global economy and construction industry, and the Company's cessation of international projects. Out of the total contract revenues earned, approximately $0.2 million was generated from operations through ConnGame.

Gross loss was $1.0 million, compared to a gross profit $0.5 million for the third quarter of 2009. Gross margin for the three months ended September 30, 2010 was -23 %, compared with 2% for the three months ended September 30, 2009. The decrease in gross profit was primarily a result of increases in raw material, labor and administrative costs in China, as well as adjustments made in accordance to the percentage-of-completion method of accounting because of increases in estimated costs of current projects.

Selling, general and administrative expenses were $5.6 million for the third quarter of 2010, versus $5.5 million a year ago. The change was due to a combination of a decrease in revenue earned and a $3.3 million bad debts expenses for PRC projects. Among the selling, general and administrative expenses, payroll and social securities accounted for approximately 33%, while depreciation and rental expenses accounted for 5% and 3%, respectively.

Interest and financing expenses were $1.8 million for the third quarter ended September 30, 2010, an increase of $0.1 million from $1.7 million a year ago. The expenses mainly represented interests on the convertible bonds, and the increase was primarily due to the additional interest expense related to borrowing by short-term bank loans.

Income tax expenses were nil for the three months ended September 30, 2010 as compared to $114,000 for the comparable period of 2009.

Net loss in the third quarter of 2010 was $8.7 million, compared with a net loss of $8.4 million for the comparable period in 2009 mainly due to the decrease in contract revenues earned.

Liquidity and Capital Resources

As of September 30, 2010, the Company had cash and cash equivalents of $3.0 million, as compared with $0.6 million as of June 30, 2010. Net cash provided by operating activities was $5.6 million for the nine months ended September 30, 2010, as compared to $11.2 million net cash used in the same period in 2009.

Other business update

In July 2010, the Company met the master contractor of the Dubai Railway Project to discuss resolution of the ongoing dispute, and the master contractor agreed to arrange a further meeting to explore the possibility of settlement; however, no such meeting was arranged. On November 8, 2010 the Company issued a notice informing the master contractor that the Company would seek resolution through arbitration with 56 day waiting period for the master contractor to respond. The Company intends to commence arbitration proceedings after expiration of the 56 day waiting period in the event that no positive responses are received from the master contractor.

About China Architectural Engineering

China Architectural Engineering, Inc. is a self-developer of online games and provider of high-end building envelope architectural systems. Through its subsidiary, Shanghai ConnGame Network, the Company leverages its innovative game engines, scalable development platforms, and accomplished production teams to develop and operate MMORPGs. The first game "Warring State" focuses on China's historic themes and the second game "Revolution" focuses at Western fantasy style. The Company also provides design, engineering, fabrication and installation services of high-end curtain wall systems, roofing systems, steel construction systems, and eco-energy systems. For further information on China Architectural Engineering, Inc., please visit www.caebuilding.com.

Forward-Looking Statements

In addition to historical information, the statements set forth above may include forward-looking statements that may involve risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Actual results could differ materially from the expectations contained in forward-looking statements as a result of risks and uncertainties, including, but not limited to, the proposed acquisition of ConnGame; difficulties in moving into the online gaming market; the Company's ability to integrate the personnel and operations of the Company and ConnGame; required Company payments under the waiver agreement and ability to maintain the conditions of the bondholder extension; identification and remediation of the Company's deficiencies and weaknesses in its internal controls over financial reporting, potential claims or litigation that may result from the occurrence of restatements, ability to identify and secure debt, equity, and/or other financing required to continue the operations of the Company; difficulties related to integration and management of the combined operations; reduction or reversal of the Company's recorded revenue or profits due to "percentage of completion" method of accounting and expenses; increasing provisions for bad debt related to the Company's accounts receivable; fluctuation and unpredictability of costs related to our products and services; adverse capital and credit market conditions; fluctuation and unpredictability of costs related to the Company's products and services; expenses and costs associated with its convertible bonds, regulatory approval requirements and competitive conditions; and various other matters, many of which are beyond our control. These and other factors that may result in differences are discussed in greater detail in the Company's reports and other filings with the Securities and Exchange Commission.