Zst Digital Networks (PINK:ZSTN)

GeoTeam® September 2010 Rodman & Renshaw notes:

ZSTN Zhengzhou Shenyang Technology Co., Ltd. (NASDAQ:ZSTN)

• Management had targeted GPS to contribute 20% of revenue by year end. They are already there.
• GPS generates revenues from hardware sales, installation and the service center. GPS will provide recurring revenues and drive margin expansion.
• Growth area is in GPS division
• GPS to be 20% of revenue by end of year
• Too early to determine how fast and how much GPS could grow. (was very bullish)
• Cap ex and cost of revenues one in the same. Manufacturing all outsourced to OEM suppliers.
• Strong commitment to internal controls. Management working with BDO to achieve full SOX compliance, although they are not yet required to do so.
• CFO stated he is aware of SAIC, SAT and SEC filings issues and that companies should be cognizant of this issue. He said the companies that get in trouble with local filings do so because they are being too aggressive limiting their liabilities.

GeoInvesting questions on recent 10Q excerpts

Excerpt 1:

"Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our management, including our CEO and CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective as of June 30, 2010."

This seems like a downgrade from just one qtr ago, when controls were effective. What happened?

Company Response:

Internal Control: We have retained UHY as our internal control consultant and we look to be SOX compliant by year-end. The original assessment was based on our previous auditor's recommendation. However, we do not believe it would be reasonable for us to make the same assessment while retaining a SOX consultant to improve our internal control policies at the same time. Therefore, we are actively communicating to investors our continued effort to be as transparent as possible to the highest standard required by a Nasdaq listed company.

Excerpt 2:

"The cash and cash equivalents is enough to meet our day-to-day requirements at current operating level. We may need to seek for external financing resources to supplement operating cash flows if we successfully expand our GPS related business rapidly

Is there a reason to be concerned with respect to above statement?

Company Response:

The language is for disclosure purpose. The management currently do not have plan to access the capital market for a equity financing