Attached files
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EX-31.2 - CHINA ELECTRIC MOTOR, INC. | v163553_ex31-2.htm |
EX-31.1 - CHINA ELECTRIC MOTOR, INC. | v163553_ex31-1.htm |
EX-32.1 - CHINA ELECTRIC MOTOR, INC. | v163553_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q/A
Amendment
No. 1
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the Quarterly Period Ended June 30, 2009
OR
o
|
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.: 000-53017
CHINA
ELECTRIC MOTOR, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
26-1357787
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
Sunna
Motor Industry Park, Jian’an, Fuyong Hi-Tech Park, Baoan District, Shenzhen,
Guangdong,
People’s
Republic of China
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
86-0755-8149969
(COMPANY’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
The
registrant had 14,542,364 shares of common stock, par value $0.0001 per share,
outstanding as of October 22, 2009 (taking into account the reverse stock split,
as described below).
EXPLANATORY
NOTE
This
Amendment No. 1 (this “Amendment”) on Form 10-Q/A amends and in its entirety the
Quarterly Report on Form 10-Q filed by China Electric Motor, Inc. (“we” or the
“Company) with the Securities and Exchange Commission (the “SEC”) on August 21,
2009 (the “Original Filing). This Amendment reflects changes made in
response to comments we received from the Staff of the SEC in connection with
the Staff’s review of the Original Filing. As a result of this
Amendment, the certifications pursuant to Section 302 and Section 906 of the
Sarbanes-Oxley Act of 2002, filed as exhibits to our Original Filing have been
revised, re-executed and re-filed as of the date of this Amendment. Except as
stated in this Amendment, this Amendment continues to describe conditions as of
the date of the Original Filing, and the disclosures contained herein have not
been updated to reflect events, results or developments that have occurred after
the Original Filing, or to modify or update those disclosures affected by
subsequent events unless otherwise indicated in this report. This Amendment
should be read in conjunction with the Company’s filings made with the SEC
subsequent to the Original Filing, including any amendments to those
filings.
On
October 8, 2009, the Company’s Board of Directors and stockholders approved an
amendment to its Certificate of Incorporation to effect a 1-for-1.53846153846154
reverse stock split of all of its issued and outstanding shares of common stock
(the “Reverse Stock Split”). To effect the Reverse Stock Split, the Company will
file the amendment to the Certificate of Incorporation with the Secretary of the
State of Delaware, which will not be done sooner than 20 days after the Company
mails a definitive information statement on Schedule 14C to the Company’s
stockholders. The Reverse Stock Split will occur immediately prior to the
closing of the public offering that the Company proposes to complete in
accordance with the registration statement on Form S-1 as filed with the
SEC. The par value and number of authorized shares of the Company’s
common stock will remain unchanged. All references to number of shares and per
share amounts included in this Amendment No. 1 on Form 10-Q/A gives effect to
the Reverse Stock Split. The number of shares and per share amounts included in
the consolidated financial statements and the accompanying notes, included in
the F- section have been adjusted to reflect the Reverse Stock Split
retroactively. Unless otherwise indicated, all outstanding shares and earnings
per share information contained in this report gives effect to the Reverse Stock
Split.
CHINA
ELECTRIC MOTOR, INC.
FORM 10-Q
For
the Quarterly Period Ended June 30, 2009
INDEX
Page
|
||||
Part I
|
Financial
Information
|
|||
Item
1.
|
Financial
Statements
|
2
|
||
(a)
|
Consolidated
Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
2008
|
2
|
||
(b)
|
Consolidated
Statements of Operations for the Three and Six Months Ended June 30, 2009
and 2008 (Unaudited)
|
3
|
||
(c)
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
(Unaudited)
|
4
|
||
(d)
|
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Income for
the Six Months Ended June 30, 2009 (Unaudited)
|
5
|
||
(e)
|
Notes
to Financial Statements (Unaudited)
|
6
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
||
Item
4.
|
Controls
and Procedures
|
33
|
||
Part II
|
Other
Information
|
|||
Item
1.
|
Legal
Proceedings
|
34
|
||
Item
1A.
|
Risk
Factors
|
34
|
||
Item
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
48
|
||
Item
3.
|
Default
Upon Senior Securities
|
48
|
||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
48
|
||
Item
5.
|
Other
Information
|
49
|
||
Item
6.
|
Exhibits
|
49
|
||
Signatures
|
50
|
1
Part I.
Financial Information
Item
1. Financial Statements
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Balance Sheets
(In US
Dollars)
June 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
|
(unaudited)
|
|||||||
ASSETS:
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 5,957,277 | $ | 2,655,808 | ||||
Trade
receivables, net (Note 3)
|
7,962,398 | 5,239,785 | ||||||
Inventories,
net (Note 4)
|
7,552,615 | 7,293,544 | ||||||
Other
receivables and prepaid expense
|
— | 15,103 | ||||||
Total
current assets
|
21,472,290 | 15,204,240 | ||||||
Property
and equipment, net (Note 5)
|
3,995,521 | 2,770,782 | ||||||
Total
Assets
|
$ | 25,467,811 | $ | 17,975,022 | ||||
LIABILITIES
& STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 2,130,204 | $ | 2,309,026 | ||||
Accrued
merger costs
|
625,000 | — | ||||||
Short-term
note payable (Note 15)
|
500,000 | — | ||||||
Accrued
liabilities and other payable
|
237,439 | 240,130 | ||||||
Various
taxes payable
|
137,002 | 39,972 | ||||||
Wages
payable
|
373,260 | 295,367 | ||||||
Corporate
tax payable (Note 8)
|
774,194 | 469,435 | ||||||
Total
Current Liabilities
|
4,777,099 | 3,353,930 | ||||||
Due
to director (Note 6)
|
1,281,794 | 1,339,337 | ||||||
Total
Liabilities
|
6,058,893 | 4,693,267 | ||||||
Commitments
and Contingencies (Note 9)
|
— | — | ||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
issued
|
— | — | ||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 12,950,317 and
11,069,260 shares issued and
outstanding at June 30, 2009 and December 31, 2008, respectively.
(Note 1 and Note 13)
|
1,295 | 1,107 | ||||||
Additional
paid-in capital
|
1,137,203 | 158,232 | ||||||
Accumulated
other comprehensive income
|
1,093,444 | 1,089,032 | ||||||
Statutory
surplus reserve fund (Note 7)
|
1,177,075 | 1,177,075 | ||||||
Retained
earnings (unrestricted)
|
15,999,901 | 10,856,309 | ||||||
Total
Stockholders' Equity
|
19,408,918 | 13,281,755 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 25,467,811 | $ | 17,975,022 |
The
accompanying notes are an integral part of these financial
statements.
2
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Statements of Operations
(In
US Dollars)
(unaudited)
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Sales
|
$ | 22,319,384 | $ | 13,209,556 | $ | 41,212,530 | $ | 24,886,665 | ||||||||
Cost
of Goods Sold
|
16,323,353 | 9,570,934 | 29,862,858 | 17,897,558 | ||||||||||||
Gross
Profit
|
5,996,031 | 3,638,622 | 11,349,672 | 6,989,107 | ||||||||||||
Operating
Costs and Expenses:
|
||||||||||||||||
Selling
expenses
|
1,157,084 | 633,600 | 2,040,954 | 1,302,038 | ||||||||||||
Merger
cost
|
938,152 | — | 938,152 | — | ||||||||||||
General
and administrative expenses
|
559,626 | 263,731 | 874,889 | 539,703 | ||||||||||||
Research
and development
|
419,415 | 227,589 | 787,995 | 427,722 | ||||||||||||
Depreciation
|
5,383 | 5,718 | 10,804 | 11,632 | ||||||||||||
Total
operating costs and expenses
|
3,079,660 | 1,130,638 | 4,652,794 | 2,281,095 | ||||||||||||
Income
From Operations
|
2,916,371 | 2,507,984 | 6,696,878 | 4,708,012 | ||||||||||||
Other
income (expenses)
|
||||||||||||||||
Interest
income
|
6,844 | 736 | 12,880 | 1,707 | ||||||||||||
Imputed
interest (Note 6)
|
(17,016 | ) | (4,887 | ) | (34,032 | ) | (9,449 | ) | ||||||||
Sundry
income (expenses), net
|
(110 | ) | (2,837 | ) | (110 | ) | (2,837 | ) | ||||||||
Total
other income (expenses)
|
(10,282 | ) | (6,988 | ) | (21,262 | ) | (10,579 | ) | ||||||||
Income
before income taxes
|
2,906,089 | 2,500,996 | 6,675,616 | 4,697,433 | ||||||||||||
Income
taxes (Note 8)
|
(774,715 | ) | (451,381 | ) | (1,532,024 | ) | (847,561 | ) | ||||||||
Net
income
|
$ | 2,131,374 | $ | 2,049,615 | $ | 5,143,592 | $ | 3,849,872 | ||||||||
Basic
earnings per share
|
$ | 0.18 | $ | 0.19 | $ | 0.44 | $ | 0.35 | ||||||||
Weighted
average shares outstanding-basic
|
12,125,842 | 11,069,260 | 11,600,470 | 11,069,260 | ||||||||||||
Diluted
earnings per share
|
$ | 0.17 | $ | 0.19 | $ | 0.44 | $ | 0.35 | ||||||||
Weighted
average shares outstanding-diluted
|
12,511,623 | 11,069,260 | 11,794,426 | 11,069,260 |
The
accompanying notes are an integral part of these financial
statements.
3
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(In
US Dollars)
(unaudited)
For the Six Months Ended
|
||||||||
June 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income
|
$ | 5,143,592 | $ | 3,849,872 | ||||
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
||||||||
Depreciation
|
305,405 | 250,782 | ||||||
Imputed
interest
|
34,032 | 9,449 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable-trade
|
(2,722,613 | ) | (1,620,239 | ) | ||||
Accrued
merger costs
|
625,000 | — | ||||||
Other
receivable and prepaid expenses
|
15,103 | 86,075 | ||||||
Inventories,
net
|
(259,071 | ) | (464,750 | ) | ||||
Accounts
payable and accrued liabilities
|
(181,513 | ) | 901,952 | |||||
Various
taxes payable
|
97,030 | 14,966 | ||||||
Wages
payable
|
77,893 | 88,021 | ||||||
Corporate
tax payable
|
304,759 | 345,428 | ||||||
Net
cash provided by operating activities
|
3,439,617 | 3,461,556 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Purchases
of property and equipment
|
(1,533,415 | ) | (299,338 | ) | ||||
Net
cash used by investing activities
|
(1,533,415 | ) | (299,338 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from (repayment of) short-term loans
|
500,000 | (164,520 | ) | |||||
Net
proceeds from sale of common shares
|
945,127 | — | ||||||
Dividends
paid
|
— | (2,088,600 | ) | |||||
Proceeds
from (repayment of) Due to related parties
|
(57,543 | ) | 268,040 | |||||
Net
cash provided (used) by financing activities
|
1,387,584 | (1,985,080 | ) | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
7,683 | 365,292 | ||||||
Increase
in cash and cash equivalents
|
3,301,469 | 1,542,430 | ||||||
Cash
and cash equivalents, beginning of period
|
2,655,808 | 1,588,778 | ||||||
Cash
and cash equivalents, end of period
|
$ | 5,957,277 | $ | 3,131,208 | ||||
Supplemental
disclosure information:
|
||||||||
Income
taxes paid
|
$ | 1,226,684 | $ | 519,327 |
The
accompanying notes are an integral part of these financial
statements.
4
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive
Income
(In US
Dollars)
(unaudited)
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
Other
|
Statutory
|
Retained
|
Total
|
||||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Comprehensive
|
Reserve
|
Earnings
|
Stockholders'
|
Comprehensive
|
||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Fund
|
(Unrestricted)
|
Equity
|
Income
|
|||||||||||||||||||||||||
Balance
December 31, 2008
|
11,069,260 | $ | 1,107 | $ | 158,232 | $ | 1,089,032 | $ | 1,177,075 | $ | 10,856,309 | $ | 13,281,755 | |||||||||||||||||||
Reverse
merger adjustment
|
1,352,003 | 135 | (135 | ) | — | — | — | — | ||||||||||||||||||||||||
Sale
of common shares
|
529,054 | 53 | 945,074 | — | — | — | 945,127 | |||||||||||||||||||||||||
Imputed
interest
|
— | — | 34,032 | — | — | — | 34,032 | |||||||||||||||||||||||||
Net
income
|
— | — | — | — | — | 5,143,592 | 5,143,592 | $ | 5,143,592 | |||||||||||||||||||||||
Foreign
currency translation adjustments
|
— | — | — | 4,412 | — | — | 4,412 | 4,412 | ||||||||||||||||||||||||
Comprehensive
income
|
— | — | — | — | — | — | — | $ | 5,148,004 | |||||||||||||||||||||||
Balance
June 30, 2009 (unaudited)
|
12,950,317 | $ | 1,295 | $ | 1,137,203 | $ | 1,093,444 | $ | 1,177,075 | $ | 15,999,901 | $ | 19,408,918 |
The
accompanying notes are an integral part of these financial
statements.
5
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China
Electric Motor, Inc. (“China Electric”, formerly SRKP 21, Inc.) was incorporated
in the State of Delaware on October 11, 2007. China Electric was originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On May 6, 2009, China Electric (i) closed a share exchange
transaction pursuant to which SRKP 21 became the 100% parent of Attainment
Holdings Limited (“Attainment”), (ii) assumed the operations of Attainment and
its subsidiaries, including Luck Loyal International Investment Limited ("Luck
Loyal") and Shenzhen YuePengCheng Motor Co., Ltd (“YuePengCheng”), and (iii)
changed its name from SRKP 21, Inc. to China Electric Motor, Inc.
Attainment
is a holding company incorporated in the British Virgin Islands (“BVI”) on July
28, 2008. Attainment had 50,000 capital shares authorized with $1.00
par value and one share issued and outstanding. The sole shareholder
of Attainment was Excel Profit Global Group Limited (“Excel Profit”), which in
turn solely owned by Mr. To Chau Sum, a Hong Kong citizen.
Luck
Loyal is a holding company incorporated in Hong Kong (“HK”) on October 15,
2004. Luck Loyal had 10,000 shares authorized with one Hong Kong
Dollar (“HKD”) par value and one share issued and outstanding. The
sole shareholder of Luck Loyal is Attainment.
YuePengCheng
was incorporated in the City of Shenzhen of the People’s Republic of China
(“PRC”) on November 19, 1999. YuePengCheng mainly engages in
production, marketing, sales and research and development of specialized
micro-motor products for the domestic and international market.
Shenzhen
YuePengDa Development Enterprises (“YuePengDa”), a company owned by the son of
YuePengCheng and Luck Loyal’s Director, Ms. Jianrong Li (the “Director”); and
Taiwan Qiling Shashi Enterprises (“Qiling”), a company owned by a relative of
the director; were the original owners of YuePengCheng and held 75% and 25% of
the total interest of YuePengCheng, respectively.
In
November 2007, the Director caused Luck Loyal to enter into an ownership
transfer agreement with Qiling. Pursuant to the agreement, Qiling transferred
its 25% interest in YuePengCheng to Luck Loyal at a price of Chinese Renminbi
(“RMB”) 2.5 million. In September 2008, in order to implement a capital
restructuring program, the Director had Luck Loyal to acquire the remaining 75%
ownership of YuePengCheng from YuePengDa under an ownership transfer agreement.
Pursuant to the agreement, Luck Loyal paid YuePengDa RMB 7.5 million for the
ownership transfer. Thereafter, Luck Loyal became the sole owner of
YuePengCheng. Since these transactions were effected by parties under
common control, the Company accounted for them as similar to a pooling of
interest transaction, with a retroactive reduction in additional paid-in capital
for the payments to the former owner, and the recording of a corresponding
liability.
The
Director agreed to convert the debt owed to her of RMB 7.5 million and RMB 2.5
million (approximately $1.3 million) into shares of the Company’s common stock
on the effective date of the public offering, with the conversion price to be
equal to the per share price of the shares sold in the Company’s public
offering.
For
accounting purpose, this transaction is being accounted as business combination
of entities under common control and the historical financial statements include
the operations of YuePengCheng for all periods presented.
China
Electric and its subsidiaries – Attainment, Luck Loyal and YuePengCheng shall be
collectively referred throughout as the “Company.”
6
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)
To
summarize the paragraphs above, the organization and ownership structure of the
Company is currently as follows:
Share
Exchange
On March
3, 2009, SRKP 21, Inc. (“SRKP, 21”) entered into a Share Exchange Agreement with
Attainment Holdings, Excel Profit as the sole shareholder of Attainment
Holdings, and as to certain portions of the agreement, certain designees.
Pursuant to the Share Exchange Agreement, as it was amended on May 6, 2009 (the
“Exchange Agreement”), SRKP 21 agreed to issue an aggregate of 11,069,260 shares
of its common stock in exchange for all of the issued and outstanding securities
of Attainment Holdings (the “Share Exchange”). The Share Exchange closed
on May 6, 2009. The 11,069,260 shares of common stock issued to the stock
holders of Attainment in conjunction with the share exchange transaction have
been presented as outstanding for all periods.
Upon the
closing of the Share Exchange, SRKP 21 issued an aggregate of 11,069,260 shares
of its common stock to the Excel Profit and the designees in exchange for all of
the issued and outstanding securities of Attainment Holdings. Prior to the
closing of the Share Exchange, the stockholders of SRKP 21 canceled an
aggregate of 3,260,659 shares held by them such that there were 1,352,003 shares
of common stock outstanding immediately prior to the Share Exchange. SRKP
21 stockholders also canceled an aggregate of 3,985,768 warrants to purchase
shares of common stock such that the stockholders held an aggregate of 626,894
warrants immediately after the Share Exchange. Immediately after the
closing of the Share Exchange, the Company had 12,421,263 outstanding shares of
common stock, no shares of Preferred Stock, no options, and warrants to purchase
626,894 shares of common stock.
For
accounting purposes, this transaction is being accounted for as a reverse
merger. The transaction has been treated as a recapitalization of Attainment
Holdings and its subsidiaries, with China Electric Motor (the legal
acquirer of Attainment and its subsidiaries including YuePengCheng) considered
the accounting acquiree and YuePengCheng , the only operating company, and whose
management took control of China Electric Motor (the legal acquiree of
YuePengCheng) is considered the accounting acquirer. The Company did
not recognize goodwill or any intangible assets in connection with the
transaction. The historical consolidated financial statements include the
operations of the accounting acquirer for all periods presented.
On
October 8, 2009, the Company’s Board of Directors authorized a 1-for-1.5384615
reverse stock split of the Company's outstanding shares of common stock (the
“Reverse Stock Split”). All references to shares in the consolidated financial
statements and the accompanying notes, including, but not limited to, the number
of shares and per share amounts, have been adjusted to reflect the Reverse Stock
Split on a retroactive basis.
7
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of
Preparation
The
consolidated financial statements have been prepared in accordance with U.S.
GAAP for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation SX. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These consolidated financial statements
should be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 2008 and notes thereto contained in the
Report on Form S-1 of the Company as filed with the United States Securities and
Exchange Commission (the “SEC”). Interim results are not necessarily indicative
of the results for the full year.
b. Basis of
Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions have been eliminated in
consolidation.
c. Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting year. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
d. Fair
Values of Financial Instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, other current assets, taxes payable, accounts payable, accrued
expenses and other payables. Management has estimated that the carrying amount
approximates their fair value due to their short-term nature.
e. Cash and
Cash Equivalents
Cash and
cash equivalents include cash on hand, demand deposits with banks and liquid
investments with an original maturity of three months or less.
f. Accounts
Receivable
Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
Company uses the aging method to estimate the valuation allowance for
anticipated uncollectible receivable balances. Under the aging method, bad debts
percentages determined by management based on historical experience as well as
current economic climate are applied to customers’ balances categorized by the
number of months the underlying invoices have remained outstanding. The
valuation allowance balance is adjusted to the amount computed as a result of
the aging method. When facts subsequently become available to indicate that the
amount provided as the allowance was incorrect, an adjustment, classified as a
change in estimate, is made.
g. Inventories
Inventories
are stated at the lower of cost, as determined on a weighted average basis, or
market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
writes down the inventories to market value if it is below cost. The management
also regularly evaluates the composition of its inventories to identify
slow-moving and obsolete inventories to determine if valuation allowance is
required.
8
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Property and
Equipment
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of plant and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets at cost less 5% for salvage
value:
Machinery
and Equipment
|
5
~ 25 years
|
Office
and Other Equipment
|
5
~ 10 years
|
i. Impairment
of Long-Lived Assets
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with SFAS No. 144, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of,” which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
j. Comprehensive
Income
The
Company has adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive
income, its components, and accumulated balances in a full-set of
general-purpose financial statements. Accumulated other comprehensive income
represents the accumulated balance of foreign currency translation
adjustments.
k. Revenue
Recognition
The
Company generates revenues from the sales of micro-motor
products. The Company recognizes revenue net of value added tax (VAT)
when the earnings process is complete, as evidenced by an agreement with the
customer, transfer of title, acceptance of ownership and assumption of risk of
loss by the customer, as well as predetermined fixed pricing, persuasive
evidence of an arrangement exists, and collection of the relevant receivable is
probable. The Company includes shipping charges billed to customers in net
revenue, and includes the related shipping costs in cost of sales. No return
allowance is made as products returns are insignificant based on historical
experience.
The
Company does not provide different policies in terms warranties, credits,
discounts, rebates, price protection, or similar privileges among customers.
Orders are placed by both the distributors and OEMs and the products are
delivered to the customers within 30-45 days of order, the Company does not
provide price protection or right of return to the customers. The price of the
products are predetermined and fixed based on contractual agreements, therefore
the customers would be responsible for any loss if the customers are faced with
sales price reductions and rapid technology obsolescence in the industry. The
Company does not allow any discounts, credits, rebates or similar
privileges.
The
Company warrants the products sold to all customers for up to 1 year from the
date the products leave the Company’s factory, under which the Company will pay
for labor and parts, or offer a new or similar unit in exchange for a
non-performing unit due to defects in material or workmanship. The
customers may also return products for a variety of reasons, such as damage to
goods in transit, cosmetic imperfections and mechanical failures, if within the
warranty period. There is no allowance for warranty on the products sales as
historical costs incurred for warranty replacements and repairs have been
insignificant.
l. Research
and Development Costs
Research
and development costs are expensed to operations as incurred. The Company spent
$419,415, $227,589, $787,995 and $427,722, on direct research and development
(“R&D”) efforts in the three and six months ended June 30, 2009 and 2008,
respectively.
9
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
m. Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires an asset and liability
approach for financial accounting and reporting for income taxes and allows
recognition and measurement of deferred tax assets based upon the likelihood of
realization of tax benefits in future years. Under the asset and liability
approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain.
The
Company adopted FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
in Income Taxes,” which prescribes a comprehensive model for how a
company should recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or expects to take
on a tax return (including a decision whether to file or not file to file a
return in a particular jurisdiction).
n. Advertising
Costs
The
Company expenses advertising costs as incurred. The Company incurred
$135,051, $99,478, $283,510 and $179,303 on advertising expenses for the three
and six months ended June 30, 2009 and 2008, respectively.
o. Foreign
Currency Translation
The
functional currency of Attainment and Luck Loyal is the Hong Kong Dollar
(“HKD”). They maintain their financial statements using the functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
The
functional currency of YuePengCheng is the Renminbi (“RMB”), the PRC’s currency.
It maintains its financial statements using its own functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
For
financial reporting purposes, the financial statements of Attainment and Luck
Loyal, which are prepared in HKD, are translated into the Company’s reporting
currency, United States Dollars (“USD”); the financial statements of
YuePengCheng, which are prepared in RMB, are translated into the Company’s
reporting currency, USD. Balance sheet accounts are translated using the closing
exchange rate in effect at the balance sheet date and income and expense
accounts are translated using the average exchange rate prevailing during the
reporting period. Adjustments resulting from the translation, if any, are
included in accumulated other comprehensive income (loss) in stockholder’s
equity.
10
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
o. Foreign
Currency Translation (continued)
The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||||||
Six
Months Ended June 30, 2009
|
6.82476
|
6.82270
|
||||||
Six
Months Ended June 30, 2008
|
6.85180
|
7.05020
|
The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||||||
Six
Months Ended June 30, 2009
|
7.74979
|
7.75250
|
||||||
Six
Months Ended June 30, 2008
|
7.80092
|
7.81678
|
p. Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial
Assets-an amendment of FASB Statement No. 140," amending the guidance on
transfers of financial assets to, among other things, eliminate the qualifying
special purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. For
the Company, this standard is effective for new transfers of financial assets
beginning January 1, 2010. Because the Company historically does not have
significant transfers of financial assets, the adoption of this standard is not
expected to have a material impact on the Company's consolidated results of
operations or financial condition.
In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)," which revised the consolidation guidance for variable-interest entities.
The modifications include the elimination of the exemption for qualifying
special purpose entities, a new approach for determining who should consolidate
a variable-interest entity, and changes to when it is necessary to reassess who
should consolidate a variable-interest entity. For the Company, this standard is
effective January 1, 2010. The Company is currently evaluating the impact of
this standard, but would not expect it to have a material impact on the
Company's consolidated results of operations or financial
condition.
In June
2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162," and approved—the FASB Accounting Standards CodificationTM
(Codification) as the single source of authoritative nongovernmental US GAAP.
The Codification does not change current US GAAP, but is intended to simplify
user access to all authoritative US GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing accounting
standard documents will be superseded and all other accounting literature not
included in the Codification will be considered non-authoritative. For the
Company, the Codification is effective July 1, 2009 and will require future
references to authoritative US GAAP to coincide with the appropriate section of
the Codification. Accordingly, this standard will not have an impact on the
Company's consolidated results of operations or financial
condition.
11
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
q. Recently
adopted accounting pronouncements
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. The adoption of this statement did not have a material
impact on the Company’s consolidated financial position or results of
operations.
In June
2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. EITF
03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1
concludes that unvested share-based payment awards that contain rights to
receive non-forfeitable dividends or dividend equivalents are participating
securities, and thus, should be included in the two-class method of computing
earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years. Early
application of EITF 03-6-1 is prohibited. It also requires that all prior-period
EPS data be adjusted retrospectively. The adoption of this
statement did not have a material impact on the Company’s consolidated financial
position or results of operations.
In April
2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life
of Intangible Assets (“FSP FAS 142-3”) which amends the factors an entity should
consider in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FAS No. 142, Goodwill and
Other Intangible Assets (“FAS No. 142”). FSP FAS 142-3 applies to intangible
assets that are acquired individually or with a group of assets and intangible
assets acquired in both business combinations and asset acquisitions. It removes
a provision under FAS No. 142, requiring an entity to consider whether a
contractual renewal or extension clause can be accomplished without substantial
cost or material modifications of the existing terms and conditions associated
with the asset. Instead, FSP FAS 142-3 requires that an entity consider its own
experience in renewing similar arrangements. An entity would consider market
participant assumptions regarding renewal if no such relevant experience exists.
FSP FAS 142-3 is effective for year ends beginning after December 15, 2008 with
early adoption prohibited. The adoption of this
statement did not have a material impact on the Company’s consolidated financial
position or results of operations.
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities”. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
adoption of SPAS 161 did not have a material impact on the Company’s
consolidated financial position or results of operations.
On
December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling interest in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 requires all
entities to report noncontrolling (minority) interests in subsidiaries as equity
in the consolidated financial statements. The statement establishes a single
method of accounting for changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation and expands disclosures in the
consolidated financial statements. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years.
The adoption of this
statement did not have a material impact on the Company’s consolidated financial
position or results of operations.
On
December 4, 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No.
141R). SFAS No. 141R requires the acquiring entity in a business combination to
recognize all the assets acquired and liabilities assumed, establishes the
acquisition date fair value as the measurement objective for all assets acquired
and liabilities assumed, and requires the acquirer to expand disclosures about
the nature and financial effect of the business combination. SFAS No. 141R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted SFAS
No. 141R for its business combination during the period ended June 30,
2009.
12
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
q. Recently
adopted accounting pronouncements (continued)
In April
2009, the FASB issued FSP No. FAS 157-4, "Determining Fair Values When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly." This FSP provides
guidance on (1) estimating the fair value of an asset or liability when the
volume and level of activity for the asset or liability have significantly
declined and (2) identifying transactions that are not orderly. The FSP also
amends certain disclosure provisions of SFAS No. 157 to require, among other
things, disclosures in interim periods of the inputs and valuation techniques
used to measure fair value as well as disclosure of the hierarchy of the source
of underlying fair value information on a disaggregated basis by specific major
category of investment. For the Company, this FSP was effective prospectively
beginning April 1, 2009. The adoption of this standard did not have a material
impact on the Company's consolidated results of operations or financial
condition.
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments" (FSP 115-2). This FSP modifies
the requirements for recognizing other-than-temporarily impaired debt securities
and changes the existing impairment model for such securities. The FSP also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the FSP, impairment of debt securities
will be considered other-than-temporary if an entity (1) intends to sell the
security, (2) more likely than not will be required to sell the security before
recovering its cost, or (3) does not expect to recover the security's entire
amortized cost basis (even if the entity does not intend to sell). The FSP
further indicates that, depending on which of the above factor(s) causes the
impairment to be considered other-than-temporary, (1) the entire shortfall of
the security's fair value versus its amortized cost basis or (2) only the credit
loss portion would be recognized in earnings while the remaining shortfall (if
any) would be recorded in other comprehensive income. FSP 115-2 requires
entities to initially apply the provisions of the standard to previously
other-than-temporarily impaired debt securities existing as of the date of
initial adoption by making a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. The cumulative-effect adjustment
potentially reclassifies the noncredit portion of a previously
other-than-temporarily impaired debt security held as of the date of initial
adoption from retained earnings to accumulated other comprehensive income. For
the Company, this FSP was effective beginning April 1, 2009. The adoption of
this standard did not have a material impact on the Company's consolidated
results of operations or financial condition.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments." This FSP essentially expands the
disclosure about fair value of financial instruments that were previously
required only annually to also be required for interim period reporting. In
addition, the FSP requires certain additional disclosures regarding the methods
and significant assumptions used to estimate the fair value of financial
instruments. This FSP was effective for the Company beginning April 1, 2009 on a
prospective basis. The adoption of this standard did not have a
material impact on the Company's consolidated results of operations or financial
condition.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events." This standard
incorporates into authoritative accounting literature certain guidance that
already existed within generally accepted auditing standards, with the
requirements concerning recognition and disclosure of subsequent events
remaining essentially unchanged. This guidance addresses events which occur
after the balance sheet date but before the issuance of financial statements.
Under SFAS No.165, as under previous practice, an entity must record the effects
of subsequent events that provide evidence about conditions that existed at the
balance sheet date and must disclose but not record the effects of subsequent
events which provide evidence about conditions that did not exist at the balance
sheet date. This standard added an additional required disclosure relative to
the date through which subsequent events have been evaluated and whether that is
the date on which the financial statements were issued. For the Company, this standard was effective
beginning April 1, 2009.
13
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
q.
|
Recently
adopted accounting pronouncements
(continued)
|
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. In February 2008, the FASB issued FASB Staff
Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13" ("FSP
157-1") and FASB Staff Position 157-2, "Effective Date of FASB Statement No.
157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain leasing
transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for
all non-financial assets and non-financial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after November
15, 2008. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company adopted SFAS 157 effective January 1, 2008 for all financial
assets and liabilities as required. The adoption of SFAS No. 157 for
non-financial assets and non-financial liabilities that are not measured at fair
value on a recurring basis did not have a significant impact on the Company’s
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning
after November 15, 2007. SFAS 159 is an elective standard which permits an
entity to choose to measure many financial instruments and certain other items
at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings. The Company has not elected the fair value
option for any assets or liabilities under SFAS 159.
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
June 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Accounts
receivable-trade
|
$ | 7,965,642 | $ | 5,243,033 | ||||
Allowance
for doubtful accounts
|
(3,244 | ) | (3,248 | ) | ||||
Accounts
receivable-trade, net
|
$ | 7,962,398 | $ | 5,239,785 |
The
change in the allowance for doubtful accounts between the reporting periods, as
of June 30, 2009, and December 31, 2008 is displayed as follows:
June 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Beginning
|
$ | (3,248 | ) | $ | (3,036 | ) | ||
Effect
of exchange rate changes
|
4 | (212 | ) | |||||
Ending
|
$ | (3,244 | ) | $ | (3,248 | ) |
There
were no bad debts written off for the three and six months ended June 30, 2009
and 2008 as there were no accounts receivable outstanding in excess of 60 days
at June 30, 2009 and 2008. The aging of the accounts receivable (in thousands)
is as follows:
June 30,
|
||||||||
2009
|
2008
|
|||||||
1-30
days
|
$ | 7,966 | $ | 4,255 | ||||
31-60
days
|
— | 14 | ||||||
$ | 7,966 | $ | 4,269 |
14
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
4 – INVENTORY
Inventory
includes raw materials, work-in-process (“WIP”), and finished
goods. Finished goods contain direct material, direct labor and
manufacturing overhead and do not contain general and administrative
costs.
Inventory
consists of the following:
June 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 2,487,343 | $ | 2,524,124 | ||||
Finished
goods
|
2,501,577 | 2,544,534 | ||||||
Work-in-process
|
2,563,695 | 2,224,886 | ||||||
Inventory,
net
|
$ | 7,552,615 | $ | 7,293,544 |
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and Equipment consist of the following:
June 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Machinery
and equipment
|
$ | 5,842,854 | $ | 4,314,429 | ||||
Electronic,
office and other equipment
|
182,770 | 182,963 | ||||||
Accumulated
depreciation
|
(2,030,103 | ) | (1,726,610 | ) | ||||
Property
and equipment, net
|
$ | 3,995,521 | $ | 2,770,782 |
The
depreciation expense for the three and six months ended June 30, 2009 and 2008
is as follows:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of goods sold
|
$ | 151,196 | $ | 120,530 | $ | 294,601 | $ | 239,150 | ||||||||
Operating
expenses
|
5,383 | 5,718 | 10,804 | 11,632 | ||||||||||||
Total
|
$ | 156,579 | $ | 126,248 | $ | 305,405 | $ | 250,782 |
NOTE
6 – DUE TO DIRECTOR
Due to
director consists of the following:
June 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Due
to director - Li, Jianrong: Luck Loyal loans
|
$ | 1,281,794 | $ | 1,339,337 |
In
November 2007, Luck Loyal acquired a 25% ownership interest in YuePengCheng from
Qiling; and in September 2008 acquired the remaining 75% ownership interest of
YuePengCheng from YuePengDa Investment. Pursuant to the agreements, Luck Loyal
paid Qiling and YuePengDa Investment RMB 2.5 million and RMB 7.5 million,
respectively. These amounts were paid out by a director of Luck Loyal, Ms. Li,
Jianrong, in 2007 and 2008.
15
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
6 – DUE TO DIRECTOR (continued)
On March
25, 2009, Ms. Li, Jianrong entered into an agreement to convert the debt above
into corresponding equity of China Electric Motor, Inc. at the time of China
Electric Motor, Inc.’s anticipated public offering of its common stock based on
the per share offering price.
The
imputed interest is as follows:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Imputed
interest
|
$ | 17,016 | $ | 4,887 | $ | 34,032 | $ | 9,449 |
NOTE
7 – STATUTORY RESERVES
As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the Company is required to make annual appropriations to a statutory
surplus reserve fund. Specifically, the Company is required to allocate 10% of
its profits after taxes, as determined in accordance with the PRC accounting
standards applicable to the Company, to a statutory surplus reserve until such
reserve reaches 50% of the registered capital of the Company.
NOTE
8 – INCOME TAX
The
Company is registered and entitled as a “Hi-Tech Corporation” in
PRC. The Company has tax advantages granted by the local government
for corporate income taxes and sales taxes. The Company is
entitled to have a 50% reduction on the normal tax rate of 15% commencing year
2005 for the following three consecutive years. The Company’s tax
advantages were abolished after the Enterprise Income Tax Law that took effect
on January 1, 2008. The Company’s prior tax rate of 15% was changed to a rate of
18% in 2008.
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities.
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
Current
income tax expense:
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
PRC
Enterprises Income Tax
|
$ | 774,715 | $ | 451,381 | $ | 1,532,024 | $ | 847,561 |
A
reconciliation between the income tax computed at the PRC statutory rate and the
Group’s provision for income tax is as follows:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Preferential
PRC income tax rate
|
$ | 20 | % | $ | 18 | % | $ | 20 | % | $ | 18 | % |
Effective
January 1, 2008, the new "Law of the People's Republic of China on Enterprise
Income Tax" was implemented. The new law requires that:
|
(i)
|
For
all resident enterprises, domestic or foreign, the Enterprise Income Tax
rate is unified 25%.
|
|
(ii)
|
Enterprises
that are categorized as the "High Tech Enterprise" will have a reduced tax
rate of 15%.
|
|
(iii)
|
From
January 1, 2008 onwards, enterprises that enjoyed a preferential tax rate
before, will need to adopt the new law within the next five years.
Specifically; enterprises with a current preferential tax rate of 15% for
2007, the tax rate will be 18%, 20%, 22%, 24%, and 25% for the years ended
December 31 2008, 2009, 2010, 2011, and 2012,
respectively.
|
16
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
8 – INCOME TAX (continued)
Accounting for Uncertainty
in Income Taxes
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN
48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event it receives an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
The
Company leases its factory premises and staff quarters for approximately
$300,000 per year. These operating leases expire on December 31,
2010.
Rent
expense for these leases was $76,730, $73,716, $153,397 and $148,447 for the
three and six months ended June 30, 2009 and 2008, respectively.
NOTE
10 – OPERATING RISK
Country
Risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Concentration of Credit
Risk
A
significant portion of the Company’s cash is maintained at various financial
institutions in the PRC which do not provide insurance for amounts on
deposit. The Company has not experienced any losses in such accounts
and believes it is not exposed to significant credit risk in this
area.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
For the
six months ended June 30, 2009, two customers accounted for 11% and 10% of total
sales, respectively. At June 30, 2009 those two customers accounted for
16%, and 11% of trade receivables, respectively.
For the
year ended December 31, 2008, three customers accounted for 11%, 10% and 10% of
total sales, respectively. At December 31, 2008 those three customers accounted
for 11%, 9%, and 10% of trade receivables, respectively.
17
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
11– SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
The
Company has not segregated business units for managing different products and
services that the Company has been carrying and selling on the
market. The assets and resources of the Company have been utilized,
on a corporate basis, for overall operations of the Company. The
Company has not segregated its operating assets by segments as it is
impracticable to do so since the same assets are used to produce products as one
segment.
The
Company uses the “management approach” in determining reportable operating
segments. The management approach considers the internal organization and
reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Company’s reportable segments. Management, including the chief operating
decision maker, reviews operating results solely by monthly revenue (but not by
sub-product type or geographic area) and operating results of the Company and,
as such, the Company has determined that the Company has one operating segment
as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information.”
The
geographic information for revenue is as follows:
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
China
Mainland
|
$ | 14,256,100 | 63.9 | % | $ | 7,520,934 | 56.9 | % | $ | 24,485,919 | 59.4 | % | $ | 14,084,442 | 56.6 | % | ||||||||||||||||
Korea
|
4,373,874 | 19.6 | % | 3,402,249 | 25.8 | % | 9,092,984 | 22.1 | % | 6,391,540 | 25.7 | % | ||||||||||||||||||||
Hong
Kong
|
3,689,410 | 16.5 | % | 2,286,373 | 17.3 | % | 7,633,627 | 18.5 | % | 4,410,683 | 17.7 | % | ||||||||||||||||||||
Total
|
$ | 22,319,384 | $ | 13,209,556 | $ | 41,212,530 | $ | 24,886,665 |
The
geographic information for accounts receivables which are classified based on
the customers is as follows:
June 30,
|
||||||||
2009
|
2008
|
|||||||
China
Mainland
|
$ | 5,231,116 | $ | 2,266,477 | ||||
Korea
|
1,591,006 | 1,255,332 | ||||||
Hong
Kong
|
1,140,276 | 743,553 | ||||||
Total
|
$ | 7,962,398 | $ | 4,265,362 |
NOTE
12 – SUBSIDIARY DIVIDENDS PAID PRIOR TO SHARE EXCHANGE
In
January 31, 2007, the Company declared dividends of $1,287,700. The
dividends were paid out in May 2007 to its current owners.
In
January 31, 2008, the Company declared dividends of $2,088,600. The
dividends were paid out in May 2008 to its current owners.
NOTE
13 – COMMON STOCK
On May 6,
2009, concurrently with the close of the Share Exchange, the
Company conducted an initial closing of a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered
into with the investors, the Company sold an aggregate of 320,186 shares of
common stock at $2.08 per share, for gross proceeds of approximately
$665,000.
On June
19, 2009, the Company conducted a second closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 208,868 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $433,800.
18
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
14 – WARRANTS
Warrants remaining from
Share Exchange
Prior to
the Share Exchange and Private Placement, the shareholders of SRKP 21 held an
aggregate of 4,612,662 warrants to purchase shares of the Company’s common
stock, and an aggregate of 3,985,768 warrants were cancelled in conjunction with
the closing of the Share Exchange. Immediately after the closing of
the Share Exchange and Private Placement, the shareholders held an aggregate of
626,894 warrants with an exercise price of $0.000154. The warrant has a 5 year
term and is not exercisable until at least one year from the date of Share
Exchange.
The
summary of the status of the Company’s outstanding warrants and changes during
the period ended June 30, 2009 is as follows:
June 30, 2009
|
||||||||
Number of
|
Average
|
|||||||
Warrants
|
Exercise Price
|
|||||||
Warrants
remaining from Share Exchange
|
626,894 | $ | 0.000154 | |||||
Exercised
|
— | $ | — | |||||
Forfeited/canceled
|
— | $ | — | |||||
End
of the Period
|
626,894 |
NOTE
15 – BRIDGE LOANS
In
connection with the initial closing of the Private Placement on May 6, 2009, the
Company issued promissory notes in the principal amounts of $335,000 and
$165,000, respectively, bearing no interest, to Chen Dong (the
“Notes”). The principal shall be due and payable by the Company on or
before the earlier of (a) six months from the date of issuance of this Note or
(b) upon the receipt by the Company after the date of the Note of at least $1
million in additional proceeds in a Private Placement.
NOTE
16 – REGISTRATION PAYMENT ARRANGEMENT
The
Registration Rights Agreement (“Agreement”) was entered into on May 6, 2009
between the Company; Attainment; and various shareholders of the Company (each a
“Holder” and together the “Holders”). Pursuant to the Agreement, the
Company agreed to file, within thirty days after the closing of the Share
Exchange transaction with the SEC a registration statement (the “Registration
Statement”) covering the resale of shares issued in connection with the
Company’s private offering that closed concurrently with the Share Exchange and
covering the resale of shares of Common Stock held by those persons that are
stockholders of the Company immediately prior to the Closing Date, except for
the Common Stock held by such shareholders who are affiliates of WestPark
Capital, Inc. (“WestPark Affiliates”).
19
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
16 – REGISTRATION PAYMENT ARRANGEMENT (continued)
Subject
to the terms and limitations of the Agreement, the parties agreed that the
Company would prepare and file a registration statement on Form S-1 or other
appropriate registration document under the Securities Act of 1933, as amended
(the “Act”) for resale of certain of the shares held by the Holders (the
“Registrable Securities”) and the Company would use its reasonable best efforts
to maintain the Registration Statement effective for a period of twelve months
at the Company’s expense (the “Effectiveness Period”). The Company
agreed to file such Registration Statement no later than the tenth day after the
end of the six month period that immediately follows the filing date of the
Initial Registration Statement (the “Required Filing Date”). The
Company agreed to use its reasonable best efforts to cause such Registration
Statement to become effective within one hundred fifty days after the Required
Filing Date or the actual filing date, whichever is earlier, or one hundred
eighty days after the Required Filing Date or the actual filing date, whichever
is earlier, if the Registration Statement is subject to a full review by the SEC
(the “Required Effectiveness Date”). If the Company fails to file the
Registration Statement by the Required Filing Date or if the Registration
Statement does not become effective on or before the Required Effectiveness Date
due to the failure of the Company to fulfill its obligations under the
Agreement, the Company would be required to issue, as liquidated damages, to
each of the Holders shares (the “Penalty Shares”) equal to a total of 0.0333% of
their respective shares for each calendar day that the Registration Statement
has not been filed or declared effective by the SEC (and until the Registration
Statement is filed with or declared effective by the SEC), as
applicable.
Notwithstanding
the foregoing, no Penalty Shares would be due to the Holders if the Company is
using its best efforts to cause the Registration Statement to be filed and
declared effective in a timely manner. In addition, the Company would
not be obligated to effect any registration of the Registrable Securities: (i)
in any particular jurisdiction in which the Company would be required to execute
a general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Act; or (ii) during any
period in which the Company suspends the rights of a Holder after giving the
Holder written notification of a potential material event.
In
accordance with the Agreement, the Company has used its best effort to file the
required registration statement and believes these holders agreed that the
Company has used its best effort based on the continuing dialogue between the
Company and the holders. The Company does not believe it has incurred any
liability to date and as long as the Company keeps using its best efforts it
will not incur a liability.
NOTE
17 – RECONCILIATION OF EARNINGS PER SHARE (EPS)
Three
months ended June 30,
|
Six
months ended June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator
|
||||||||||||||||
Net
income available to common stockholders
|
$ | 2,131,374 | $ | 2,049,615 | $ | 5,143,592 | $ | 3,849,872 | ||||||||
Denominator
|
||||||||||||||||
Weighted-average
shares outstanding for earnings per share, basic
|
12,125,842 | 11,062,260 | 11,600,470 | 11,069,260 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Warrants
|
384,781 | — | 193,956 | — | ||||||||||||
Convertible
preferred stock
|
— | — | — | — | ||||||||||||
Weighted-average
shares outstanding for earnings per share, diluted
|
12,510,623 | 11,062,260 | 11,794,426 | 11,069,260 | ||||||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | 0.18 | $ | 0.19 | $ | 0.44 | $ | 0.35 | ||||||||
Diluted
|
$ | 0.17 | $ | 0.19 | $ | 0.44 | $ | 0.35 |
20
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three and six months ended June 30, 2009 and 2008
are unaudited)
NOTE
18 – SUBSEQUENT EVENTS
On July
17, 2009, the Company conducted a third closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 272,342 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $565,625.
On
September 4, 2009, the Company conducted a fourth closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 481,383 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $999,775.
On
October 6, 2009, the Company conducted a final closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 838,322 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $1,741,095.
21
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the six months ended June 30, 2009 and 2008 are
unaudited)
NOTE
19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Basis of
Presentation
The
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of
the subsidiaries of China Electric Motor, Inc. exceed 25% of the consolidated
net assets of China Electric Motor, Inc. The ability of the Company’s Chinese
operating subsidiaries to pay dividends may be restricted due to the foreign
exchange control policies and availability of cash balances of the Chinese
operating subsidiaries. Because substantially all of the Company’s operations
are conducted in China and a substantial majority of the Company’s revenues are
generated in China, a majority of the Company’s revenue being earned and
currency received are denominated in Renminbi (“RMB”). RMB is subject to the
exchange control regulation in China, and, as a result, the Company may be
unable to distribute any dividends outside of China due to PRC exchange control
regulations that restrict the Company’s ability to convert RMB into US
Dollars.
The
condensed parent company financial statements have been prepared using the same
accounting principles and policies described in the notes to the consolidated
financial statements, with the only exception being that the parent company
accounts for its subsidiaries using the equity method. Refer to the consolidated
financial statements and notes presented above for additional information and
disclosures with respect to these financial statements.
China
Electric Motor, Inc.
(Formerly
SRKP 21, Inc.)
Condensed
Parent Company Balance Sheets
(US
Dollars in Thousands)
June
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Investment
in subsidiaries, at equity in net assets
|
$ | 20,188 | $ | 13,281 | ||||
Total
assets
|
20,188 | 13,281 | ||||||
Liabilities
& Stockholders' Equity
|
||||||||
Current
liabilities
|
||||||||
Accrued merger costs
|
625 | — | ||||||
Accrued liabilities and other payables
|
155 | — | ||||||
Total
current liabilities
|
780 | — | ||||||
Commitments
and contingencies
|
— | — | ||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
issued
|
— | — | ||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 12,950,317 and
11,069,260 shares issued and outstanding as of June 30, 2009, and December
31, 2008, respectively
|
1 | 1 | ||||||
Additional
paid-in capital
|
1,137 | 158 | ||||||
Accumulated
other comprehensive income
|
1,093 | 1,089 | ||||||
Statutory
surplus reserve fund
|
1,177 | 1,177 | ||||||
Retained
earnings (unrestricted)
|
16,000 | 10,856 | ||||||
Total
Stockholders' Equity
|
19,408 | 13,281 | ||||||
Total
Liabilities & Stockholders' Equity
|
$ | 20,188 | $ | 13,281 |
22
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the six months ended June 30, 2009 and 2008 are
unaudited)
NOTE
19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
China
Electric Motor, Inc.
(Formerly
SRKP 21, Inc.)
Condensed
Parent Company Statements of Operations
(US
Dollars in Thousands)
(unaudited)
For Three Months Ended
|
For Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Merger
cost
|
938 | — | 938 | — | ||||||||||||
Total
expenses
|
938 | — | 938 | — | ||||||||||||
Equity
in undistributed income of subsidiaries
|
2,131 | 2,050 | 5,144 | 3,850 | ||||||||||||
Income
before income taxes
|
1,193 | 2,050 | 4,206 | 3,850 | ||||||||||||
Provision
for income taxes
|
— | — | — | — | ||||||||||||
Net
Income
|
$ | 1,193 | $ | 2,050 | $ | 4,206 | $ | 3,850 |
23
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the six months ended June 30, 2009 and 2008 are
unaudited)
NOTE
19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
China
Electric Motor, Inc.
(Formerly
SRKP 21, Inc.)
Condensed
Parent Company Statements of Cash Flows
(US
Dollars in Thousands)
(unaudited)
For The Six Months Ended
|
||||||||
June 30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
Income
|
$ | 4,206 | $ | 3,850 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Accrued
merger costs
|
625 | — | ||||||
Accrued
liabilities and other payables
|
155 | — | ||||||
Equity
in undistributed income of subsidiaries
|
||||||||
Net
cash provided by operating activities
|
4,986 | 3,850 | ||||||
Cash
Flows From Investing Activities
|
||||||||
Capital
contribution to subsidiaries
|
(5,931 | ) | (3,850 | ) | ||||
Net
cash used in investing activities
|
(5,931 | ) | (3,850 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Proceeds
from sale of common stock
|
945 | — | ||||||
Net
cash provided by financing activities
|
945 | — | ||||||
Net
increase in cash and cash equivalents
|
— | — | ||||||
Cash
and cash equivalents, beginning of period
|
— | — | ||||||
Cash
and cash equivalents, end of period
|
$ | — | $ | — |
24
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion relates to a discussion of the financial condition and
results of operations of China Electric Motor, Inc. (“China Electric”), China
Electric’s wholly-owned subsidiary Attainment Holdings Limited (“Attainment
Holdings”), and Attainment Holdings’ wholly-owned subsidiary Shenzhen
YuePengCheng Motor Co., Ltd. (“Shenzhen YPC”) (collectively referred to
throughout as the “Company,” “we,” “our,” and “us”).
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with its financial statements and the
related notes, and the other financial information included in this
report.
Forward-Looking
Statements
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and the related notes, and the other financial information
included in this Quarterly Report.
The
information contained in this report includes some statements that are not
purely historical and that are “forward-looking statements” as defined by the
Private Securities Litigation Reform Act of 1995. This Quarterly Report contains
forward-looking statements that involve substantial risks and uncertainties. All
statements other than historical facts contained in this report, including
statements regarding our future financial position, capital expenditures, cash
flows, business strategy and plans and objectives of management for future
operations, are forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
similar expressions are intended to identify forward-looking statements. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation, the current economic downturn adversely affecting demand for
the our products; our reliance on our major customers for a large portion of our
net sales; our ability to develop and market new products; our ability to raise
additional capital to fund our operations; our ability to accurately forecast
amounts of supplies needed to meet customer demand; market acceptance of our
products; exposure to product liability and defect claims; fluctuations in the
availability of raw materials and components needed for our products; protection
of our intellectual property rights; changes in the laws of the PRC that affect
our operations; inflation and fluctuations in foreign currency rates and various
other matters, many of which are beyond our control. Actual results may vary
materially and adversely from those anticipated, believed, estimated or
otherwise indicated should one or more of these risks or uncertainties occur or
if any of the risks or uncertainties described in elsewhere in this report
occur. Consequently, all of the forward-looking statements made in this filing
are qualified by these cautionary statements and there can be no assurance of
the actual results or developments.
Overview
Through
Shenzhen YPC, we engage in the design, production, marketing and sale of
micro-motor products. Our products, which are incorporated into household
appliances, vehicles and other consumer devices are sold under our “Sunna” brand
name.
We sell
our products directly to original equipment manufacturers and to distributors
and resellers. We do not have any long-term sales contract with any of our
customers. As a result it is necessary for us to estimate, based in part on
non-binding estimates by our customers and potential customers, the requirements
for our products. In addition, in some instances, we develop products based on
anticipated customer demand with no assurance that we will receive the
anticipated orders. To the extent that we do not receive the anticipated orders
or that our customers require products in greater quantities than anticipated,
our revenue and margins will be affected.
Recent
Events
On March
3, 2009, SRKP 21, Inc., a Delaware corporation (“SRKP 21”), entered into a share
exchange agreement, with Attainment Holdings, Attainment Holdings’ sole
shareholder Excel Profit Global Group Limited, a British Virgin Islands
corporation (“Excel Profit”), and as to certain portions of the agreement,
certain designees, pursuant to which Excel Profit would transfer all of the
issued and outstanding securities of Attainment Holdings to SRKP 21 in exchange
for 11,069,260 shares of SRKP 21’s common stock. The parties amended the share
exchange agreement on May 6, 2009. On May 6, 2009, the Share Exchange closed and
we became a wholly-owned subsidiary of SRKP 21, which immediately changed its
name to “China Electric Motor, Inc.” A total of 11,069,260 shares were issued to
the former sole shareholder of Attainment Holdings and the designees. We also
agreed to pay an aggregate of $600,000 in connection with the Share Exchange,
which includes $350,000 to the placement agent and $250,000 to a third party
unaffiliated with the Company, SRKP 21 or the placement agent. Approximately
$315,000 of the $600,000 has been paid, which includes $255,000 to the placement
agent and $60,000 to the unaffiliated third party.
25
In
addition, on May 6, 2009, concurrently with the close of the Share Exchange, we
conducted an initial closing of a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with the
investors, we sold an aggregate of 320,186 shares of common stock at $2.08 per
share. As a result, we received gross proceeds in the amount of approximately
$665,000. In connection with the initial closing of the Private Placement, the
Company issued a promissory note in the principal amount of $335,000, bearing no
interest, to Chen Dong (the “Note”). The principal shall be due and payable by
the Company on or before the earlier of (a) six months from the date of issuance
of this Note or (b) upon the receipt by the Company after the date of the Note
of at least $1 million in additional proceeds in the Private Placement. The
placement agent was paid a commission of 8.5% of the gross proceeds from the
Private Placement and was paid a due diligence fee of $40,000.
On June
19, 2009, we conducted a second closing of the private placement in which we
sold an aggregate of 208,868 shares of common stock, at $2.08 per share, for
gross proceeds of approximately $433,800. The placement agent was paid a
commission of 8.5% of the gross proceeds from the second closing of the private
placement, in addition to a success fee of approximately $8,200.
On July
17, 2009, we conducted a third closing of the private placement in which we sold
an aggregate of 272,342 shares of common stock at $2.08 per share, for gross
proceeds of approximately $565,625. The placement agent was paid a commission of
8.5% of the gross proceeds from the second closing of the private placement, in
addition to a success fee of approximately $25,000.
Jianrong
Li, one of our directors, shall convert approximately $1.3 million owed to her
by Attainment Holdings into shares of the Company’s common stock on the
effective date of the Company’s proposed firm commitment public offering (the
“Public Offering”) which will occur concurrently with the Company’s proposed
listing on the NYSE Amex, the conversion price of such to be equal to the per
share price of the shares sold in the Public Offering (the conversion shall be
known has the “Li Conversion”).
On
October 8, 2009, our Board of Directors and our stockholders approved an
amendment to our Certificate of Incorporation to effect a 1-for-1.53846153846154
reverse stock split of all of our issued and outstanding shares of common stock
(the “Reverse Stock Split”). To effect the Reverse Stock Split, we will file the
amendment to the Certificate of Incorporation with the Secretary of the State of
Delaware, which will not be done sooner than 20 days after we mail an
information statement on Schedule 14C to our stockholders. The Reverse Stock
Split will occur immediately prior to the closing of the public offering that we
propose to complete in accordance with the registration statement on Form S-1 as
filed with the SEC, as the holders of a majority of the outstanding shares of
our common stock have provided their consent to such corporate action. The par
value and number of authorized shares of our common stock will remain unchanged.
All references to number of shares and per share amounts included in this Form
10-Q/A gives effect to the Reverse Stock Split. The number of shares and per
share amounts included in the consolidated financial statements and the
accompanying notes, included in the F- section have been adjusted to reflect the
Reverse Stock Split retroactively. Unless otherwise indicated, all outstanding
shares and earnings per share information contained in this Form 10-Q/A gives
effect to the Reverse Stock Split.
Critical
Accounting Policies and Estimates
The SEC
defines critical accounting policies as those that are, in management's view,
most important to the portrayal of our financial condition and results of
operations and those that require significant judgments and
estimates.
The
preparation of the condensed consolidated financial statements in this Report
requires our management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, as well as the
disclosure of contingent assets and liabilities at the date of our financial
statements. We base our estimates on historical experience, actuarial valuations
and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
our management there may be other estimates or assumptions that are reasonable,
we believe that, given the current facts and circumstances, it is unlikely that
applying any such other reasonable estimate or assumption would materially
impact the financial statements. The accounting principles we utilized in
preparing our consolidated financial statements conform in all material respects
to generally accepted accounting principles in the United States of
America.
26
Accounts
Receivable
We
typically provide payment terms ranging from 30 to 45 days. We examine the
creditworthiness of our customers prior to any transaction to limit our
collection risk. We use estimates in determining our allowance for bad
debts that are based on our historical collection experience, current trends,
credit policy and a percentage of our accounts receivable by aging category. In
determining these percentages, we review historical write-offs in our
receivables. In determining the appropriate reserve percentages, we also review
current trends in the credit quality of our customers, as well as changes in our
internal credit policies.
We
maintain reserves for potential credit losses on accounts receivable. Management
review the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patters to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis. Additional
allowances for doubtful accounts may be required if there is deterioration in
past due balances, if economic conditions are less favorable than anticipated,
or for customer-specific circumstances, such as financial
difficulty.
There
were no bad debts written off for the three and six months ended June 30, 2009
and 2008, respectively, as there were no accounts receivable outstanding in
excess of 90 days at June 30, 2009 and 2008 and December 31, 2008 and 2007. The
aging of the accounts receivable (in thousands) is as follows:
June 30,
|
||||||||
2009
|
2008
|
|||||||
1-30
days
|
$ | 7,966 | $ | 4,255 | ||||
31-60
days
|
— | 14 | ||||||
60-90
days
|
— | — | ||||||
Total
|
$ | 7,966 | $ | 4,269 |
Inventories
Inventory
levels are based on projections of future demand and market
conditions. Inventories are stated at cost, no in excess of market,
using the weighted average cost method. Any sudden decline in demand
and/or rapid product improvements and technological changes can result in excess
and/or obsolete inventories. Because most of our products are
customized and unique to a particular customer, there is a risk that we will
forecast inventory needs incorrectly and purchase or produce excess
inventory. As a result, actual demand may differ from forecasts, and
such differences, if not managed, may have a material adverse effect on future
results of operations due to required write-offs of excess or obsolete
inventory. To mitigate such exposure, we require a binding purchase
order or a signed agreement by our customer agreeing to pay for and take
possession of finished goods inventory parts for the duration of the
agreement.
On an
ongoing basis, inventories are reviewed for potential write-down for estimated
obsolescence or unmarketable inventories equal to the difference between the
costs of inventories and the estimated net realizable value based upon forecasts
for future demand and market conditions. To the extent that we
increase our reserves for future period, operating income will be
reduced.
Revenue
Recognition
Our
revenue recognition policies comply with Staff Accounting Bulletin (SAB)
104. SAB 104 requires that revenue be recognized net of value added
tax (VAT) when the earnings process is complete, as evidenced by an agreement
with the customer, transfer of title, and acceptance of ownership and assumption
of risk of loss by the customer, as well as predetermined fixed pricing,
persuasive evidence of an arrangement exists, and collection of the relevant
receivables is probable. We include shipping charges billed to customers in net
revenue, and include the related shipping costs in cost of sales. No
return allowance is made as products returns are insignificant based on
historical experience.
We do not
provide different policies in terms, warranties, credits, discounts, rebates,
price protection, or similar privileges among customers. Orders are
placed by both the distributors and OEMs and the products are delivered to the
customers within 30-45 days of order; we do not provide price protection or
right of return to customers. Product prices are predetermined and fixed based
on contractual agreements and, therefore, customers would be responsible for any
loss if they are faced with sales price reductions and technology obsolescence.
We do not allow any discounts, credits, rebates or similar
privileges.
27
We
warrant our products for up to 1 year from the date the products leave our
factory, under which we will pay for labor and parts, or offer a new or similar
unit in exchange for a non-performing unit due to defects in material or
workmanship. Customers may also return products for a variety of
reasons, such as damage to goods in transit, cosmetic imperfections and
mechanical failures, if within the warranty period. There is no
allowance for warranty on the products sales as historical costs incurred for
warranty replacements and repairs have been insignificant.
We
warrant our products for up to 1 year, under which the Company will pay for
labor and parts, or offer a new or similar unit in exchange for a non-performing
unit due to defects in material or workmanship. Customers may also
return products for a variety of reasons, such as damage to goods in transit,
cosmetic imperfections and mechanical failures, if within the warranty
period.
Results
of Operations
The
following table sets forth information from our statements of operations for the
three and six months ended June 30, 2009 and 2008, in dollars and as a
percentage of revenue (unaudited):
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
In Dollars
|
Percent of
Revenues
|
In Dollars
|
Percent of
Revenues
|
In Dollars
|
Percent of
Revenues
|
In Dollars
|
Percent of
Revenues
|
|||||||||||||||||||||
(in
thousands, except earnings per share)
|
||||||||||||||||||||||||||||
Revenue
|
$ | 22,319 | 100.00 | % | $ | 13,210 | 100.00 | % | $ | 41,213 | 100.00 | % | $ | 24,887 | 100.00 | % | ||||||||||||
Cost
of goods sold
|
(16,323 | ) | 73.1 | % | (9,571 | ) | 72.5 | % | (29,863 | ) | 72.5 | % | (17,898 | ) | 71.9 | % | ||||||||||||
Gross
profit
|
5,996 | 26.9 | % | 3,639 | 27.5 | % | 11,350 | 27.5 | % | 6,989 | 28.1 | % | ||||||||||||||||
Operating
Costs and Expenses:
|
||||||||||||||||||||||||||||
Selling
expenses
|
1,157 | 5.2 | % | 634 | 4.8 | % | 2,041 | 5.0 | % | 1,302 | 5.2 | % | ||||||||||||||||
Depreciation
|
5 | * | 6 | * | 11 | * | 12 | * | ||||||||||||||||||||
General
and administrative
|
560 | 2.5 | % | 264 | 2.0 | % | 875 | 2.1 | % | 540 | 2.2 | % | ||||||||||||||||
Merger
cost
|
938 | 4.2 | % | — | — | 938 | 2.3 | % | — | — | ||||||||||||||||||
Research
and development
|
419 | 1.9 | % | 228 | 1.7 | % | 788 | 1.9 | % | 428 | 1.7 | % | ||||||||||||||||
Total
operating costs and expenses
|
3,080 | 13.8 | % | 1,131 | 8.6 | % | 4,653 | 11.3 | % | 2,281 | 9.2 | % | ||||||||||||||||
Income
from operations
|
2,916 | 13.1 | % | 2,508 | 19.0 | % | 6,697 | 16.2 | % | 4,708 | 18.9 | % | ||||||||||||||||
Interest
income
|
7 | * | 1 | * | 13 | * | 2 | * | ||||||||||||||||||||
Imputed
interest
|
(17 | ) | * | (5 | ) | * | (34 | ) | * | (9 | ) | * | ||||||||||||||||
Sundry
income (expenses), net
|
* | * | (3 | ) | * | * | * | (3 | ) | * | ||||||||||||||||||
Income
before income taxes
|
2,906 | 15.0 | % | 2,501 | 18.9 | % | 6,676 | 16.2 | % | 4,697 | 18.9 | |||||||||||||||||
Income
taxes
|
(775 | ) | 3.5 | % | (451 | ) | 3.4 | % | (1,532 | ) | 3.7 | % | (848 | ) | 3.4 | % | ||||||||||||
Net
income
|
$ | 2,131 | 9.5 | % | $ | 2,050 | 15.5 | % | 5,144 | 12.5 | % | 3,850 | 15.5 | % | ||||||||||||||
Basic
earnings per share
|
$ | 0.18 | $ | 0.19 | $ | 0.44 | $ | 0.35 | ||||||||||||||||||||
Diluted
earnings per share
|
$ | 0.17 | $ | 0.19 | $ | 0.44 | $ | 0.35 |
* Less
than $1,000 or 1%.
Three
Months Ended June 30, 2009 and 2008
Revenues
for the three months ended June 30, 2009 were $22,319,384, an increase of 69%,
compared to revenues of $13,209,556 for the three months ended June 30,
2008. The increase in revenues was primarily attributable to a 83%
increase in the number of micro-motor units sold during the three months ended
June 30, 2009, which was attributable to increased orders from new and existing
customers. Our increase in revenues was partially offset by the mix
of the types of products sold during the period. During the three
months ended June 30, 2009, we sold more of our lower priced-products than our
higher-priced products, which include our numerical control motor products.
Sales of our higher-profit products increased $972,094 in the three months ended
June 30, 2009 from the comparable period in 2008.
Cost of
goods sold consists of the cost of motor sales and other
materials. Cost of goods sold was $16,323,353 for the three months
ended June 30, 2009, an increase of $6,752,419, or 70%, compared to $9,570,934
for the three months ended June 30, 2008. This increase was
primarily due to an increase in the prices of raw materials, particularly
lacquered wire. As a percentage of revenues, cost of goods sold
increased to 73% for the three months ended June 30, 2009 compared to 72.5% for
the comparable period in 2008. This increase was attributable to an
increase in revenues.
28
Gross
profit for the three months ended June 30, 2009, was $5,996,031, or 26.9% of
revenues, compared to $3,638,622, or 27.5% of revenues, for the comparable
period in 2008. Management considers gross profit to be a key
performance indicator in managing our business. Gross profit margins
are usually a factor of cost of sales, product mix and demand for
product. The decrease in our gross profit margin for the three months
ended June 30, 2009 is primarily due to an increase in the prices of raw
materials, particularly lacquered wire. Additionally, sales of our
lower-profit products increased slightly faster than sales of our higher-profit
products.
Selling
expenses were $1,157,084 for the three months ended June 30, 2009, compared to
$633,600 for the comparable period in 2008. The increase was due to
our expansion of our team of sales representatives and an 83% increase in our
sales volume.
We
incurred merger costs of $938,152 in the three months ended June 30, 2009
related to the share exchange transaction which closed on May 6,
2009.
General
and administrative expenses for the three months ended June 30, 2009 were
$559,626, or 2.5% of revenues, compared to $263,731, or 2.0% of revenues, for
the comparable period in 2008. Other general and administrative
expenses include office expenses, salary and benefits, rent and utilities and
other expense. The increase in general and administrative expenses
for the three months ended June 30, 2009 as compared to the comparable period in
2008 was primarily due to an increase of $82,750 in office expenses, an increase
of $54,687 in salary and benefit expenses, an increase of $1,324 in rent and
utilities expenses and an increase of $157,134 in other expenses. We
expect our general and administrative expenses to increase as a result of
professional fees incurred as a result of being a publicly reporting company in
the United States.
Research
and development (“R&D”) costs were $419,415 or 1.9% of revenues in the three
months ended June 30, 2009, compared to $227,589 or 1.7% of revenues in the
comparable period in 2008, representing a 0.2% increase The increased
spending on R&D in 2009 was primarily due to our increased research and
development efforts on new products. In the future, our R&D
spending could increase to support the future growth of the
company. As a percent of revenues, we expect the R&D spending to
be in the 2% to 3% range.
Interest
income for the three months ended June 30, 2009 was $6,844 compared to interest
income of $736 for the comparable period in 2008. The increase in
interest income is primarily due to an increased deposit balance in our bank
account.
Income
tax expenses for the three months ended June 30, 2009 were $774,715 as compared
to income tax expenses of $451,381, for the comparable period in
2008. The increase in income tax expense for the three months ended
June 30, 2009 was primarily due to an increase in our taxable income in the
three months ended June 30, 2009 and an increase in our tax rate to 20% for the
three months ended June 30, 2009 from 18% in the comparable period in
2008. Shenzhen YPC is registered in PRC and has had tax advantages
granted by local government for corporate income taxes and sales
taxes. On March 16, 2007, the National People’s Congress of China
enacted a new PRC Enterprise Income Tax Law, under which foreign invested
enterprises and domestic companies will be subject to enterprise income tax at a
uniform rate of 25%. The new law became effective on January 1,
2008. During the transition period for enterprises established before
March 16, the tax rate will be gradually increased starting in 2008 and be equal
to the new tax rate in 2012. We believe that our profitability will
be negatively affected in the near future as a result of the new EIT
Law.
Net
Income for the three months ended June 30, 2009 was $2,131,374 compared to
$2,049,615 for the three months ended June 30, 2008.
Six
Months Ended June 30, 2009 and 2008
Revenues
for the six months ended June 30, 2009 were $41,212,530, an increase of 65.6%,
compared to revenues of $24,886,665 for the six months ended June 30,
2008. The increase in revenues was largely due to an 83.4% increase in the
number of units sold during the six months ended June 30, 2009, which was
attributable to increased orders from new and existing customers. Our
increase in revenues was partially offset by the mix of the types of products
sold during the period. During the six months ended June 30, 2009, we
sold more of our lower priced-products than our higher-priced products, which
include our numerical control motor products. Sales of our
higher-priced products increased $1,842,265 in the six months ended June 30,
2009 from the comparable period in 2008.
29
Revenues
from sales of our Home Appliance Series of products were $28.4 million, or 68.8%
of total revenues, for the six months ended June 30, 2009, a 99.2% increase from
revenues of $14.2 million, or 57.2% of total revenues, for the six months ended
June 30, 2008 for products in our Home Appliance Series. Revenues
from sales of our Auto Parts Series of products were $8.0 million, or 19.4% of
total revenues, for the six months ended June 30, 2009, a 13.2% increase from
revenues of $7.1 million, or 28.4% of total revenues, for the six months ended
June 30, 2008 for products in our Auto Parts Series. Revenues from
sales of our Digital Motor Series of products were $4.9 million, or 11.8% of
total revenues, for the six months ended June 30, 2009, a 35.3% increase from
revenues of $3.6 million, or 14.4% of total revenues, for the six months ended
June 30, 2008 for products in our Digital Motor Series.
Cost of
goods sold consists of the cost of motor sales and other
materials. Cost of goods sold was $29,862,858 for the six months
ended June 30, 2009, an increase of $11,965,300, or 66.8%, compared to
$17,897,558 for the six months ended June 30, 2008. This increase was
primarily due to an increase in the prices of raw materials, particularly
lacquered wire. As a percentage of revenues, cost of goods sold
increased to 72.5% for the six months ended June 30, 2009 compared to 71.9% for
the comparable period in 2008. This increase was attributable to an
increase in production.
Gross
profit for the six months ended June 30, 2009, was $11,349,672, or 27.5% of
revenues, compared to $6,989,107, or 28.1% of revenues, for the comparable
period in 2008. Management considers gross profit to be a key
performance indicator in managing our business. Gross profit margins
are usually a factor of cost of sales, product mix and demand for
product. The decrease in our gross profit margin for the six months ended
June 30, 2009 is primarily due to an increase in the prices of raw materials,
particularly lacquered wire. Additionally, sales of our lower-profit
products increased slightly faster than sales of our higher-profit
products.
Selling
expenses were $2,040,954 for the six months ended June 30, 2009, compared to
$1,302,038 for the comparable period in 2008. The increase was due to
our expansion of our team of sales representatives and a 77.5% increase in our
sales volume.
We
incurred merger costs of $938,152 in the six months ended June 30, 2009 related
to the share exchange transaction which closed on May 6, 2009.
General
and administrative expenses for the six months ended June 30, 2009 were
$874,889, or 2.1% of revenues, compared to $539,703, or 2.2% of revenues, for
the comparable period in 2008. General and administrative expenses
include office expenses, salary and benefits, rent and utilities and other
expense. The increase in general and administrative expenses for the
six months ended June 30, 2009 as compared to the comparable period in 2008 was
primarily due to an increase of $107,286 in office expenses, an increase of
$124,981 in salary and benefit expenses, an increase of $2,619 in rent and
utilities expenses and an increase of $100,300 in other expenses. We
expect our general and administrative expenses to increase as a result of
professional fees incurred as a result of being a publicly reporting company in
the United States.
Research
and development (“R&D”) costs were $787,995 or 1.9% of revenues in the six
months ended June 30, 2009, compared to $427,722 or 1.7% of revenues in the
comparable period in 2008, representing a 0.2% increase. The
increased spending on R&D in 2009 was primarily due to our increased
research and development efforts on new products.
Interest
income for the six months ended June 30, 2009 was $12,880 compared to interest
income of $1,707 for the comparable period in 2008. The increase in
interest income is primarily due to an increased deposit balance in our bank
account.
Income
tax expenses for the six months ended June 30, 2009 were $1,532,024, as compared
to income tax expenses of $847,561 for the comparable period in
2008. The increase in income tax expense for the six months ended
June 30, 2009 was primarily due to an increase in our taxable income in the six
months ended June 30, 2009 and an increase in our tax rate to 20% for the six
months ended June 30, 2009 from 17% in the comparable period in
2008.
Net
Income for the six months ended June 30, 2009 was $5,143,592 compared to
$3,849,872 for the six months ended June 30, 2008.
Liquidity
and Capital Resources
We had
cash and cash equivalents of $5,957,277 as of June 30, 2009, as compared to $2.7
million as of December 31, 2008. Our funds are kept in financial
institutions located in China, and these funds are not insured. We
have historically funded our operations from revenues.
We agreed
to pay an aggregate of $600,000 in connection with the Share Exchange, including
$350,000 to the placement agent and $250,000 to a third party
unaffiliated with the Company, SRKP 21 or the placement agent. Approximately
$380,000 of the $600,000 has been paid.
30
Jianrong
Li, one of our directors, shall convert approximately $1.3 million owed to her
by Attainment Holdings into shares of the Company’s common stock on the
effective date of the Company’s proposed firm commitment public offering (the
“Public Offering”) which will occur concurrently with the Company’s listing on
the NYSE Amex, the conversion price of such to be equal to the per share price
of the shares sold in the Public Offering (the conversion shall be known has the
“Li Conversion”).
We are
subject to the regulations of the PRC which restricts the transfer of cash from
China, except under certain specific circumstances. Accordingly, such
funds may not be readily available to us to satisfy obligations which have been
incurred outside the PRC.
Our
accounts receivable has been an increasingly significant portion of our current
assets, representing $7.96 million as of June 30, 2009 and $5.2 million as of
December 31, 2008. If customers responsible for a significant amount
of accounts receivable were to become insolvent or otherwise unable to pay for
our products, or to make payments in a timely manner, our liquidity and results
of operations could be materially adversely affected. An economic or
industry downturn could materially adversely affect the servicing of these
accounts receivable, which could result in longer payment cycles, increased
collections costs and defaults in excess of management’s
expectations. A significant deterioration in our ability to collect
on accounts receivable could affect our cash flow and working capital position
and could also impact the cost or availability of financing available to
us.
We
provide our major customers with payment terms ranging from 30 to 45
days. Additionally, our production lead time is approximately three
weeks, from the inspection of incoming materials, to production, testing and
packaging. We need to keep a large supply of raw materials and work
in process and finished goods inventory on hand to ensure timely delivery of our
products to our customers. We typically offer certain of our
customers 30 to 90 days credit terms for payment. We maintain an
allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. Allowance for
doubtful accounts is based on our assessment of the collectability of specific
customer accounts, the aging of accounts receivable, our history of bad debts,
and the general condition of the industry. If a major customer’s
credit worthiness deteriorates, or our customers’ actual defaults exceed
historical experience, our estimates could change and impact our reported
results. We have not experienced any significant amount of bad debt
since the inception of our operation.
As of
June 30, 2009, inventories amounted to $7.6 million, as compared to $7.3 million
as of December 31, 2008.
On May 6,
2009, we received gross proceeds of approximately $665,000 in an initial closing
of a private placement transaction (the “Private
Placement”). Pursuant to Subscription Agreements entered into with
the investors, we sold an aggregate of 320,186 shares of Common Stock at $2.08
per share. In connection with the initial closing of the Private
Placement, the Company issued a promissory note in the principal amount of
$335,000, bearing no interest, to Chen Dong (the “Note”). The principal
shall be due and payable by the Company on or before the earlier of (a) six
months from the date of issuance of this Note or (b) upon the receipt by the
Company after the date of the Note of at least $1 million in additional proceeds
in the Private Placement. We agreed to file a registration statement
covering the common stock sold in the Private Placement within 30 days of the
closing of the Share Exchange and to pay for all costs related to the
registration of the shares. The placement agent received an aggregate
commission equal to 8.5% of the gross proceeds from the Private Placement, in
addition a due diligence fee of $40,000.
On June
19, 2009, we conducted a second closing of the Private
Placement. Pursuant to Subscription Agreements entered into
with the investors, we sold an aggregate of 208,868 shares of Common Stock at
$2.08 per share for gross proceeds of approximately $433,800. On July
17, 2009, we conducted a third closing of the Private
Placement. Pursuant to Subscription Agreements entered into with the
investors, we sold an aggregate of 272,342 shares of common stock at $2.08
per share, for gross proceeds of approximately $565,625.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total
contributions to the funds were approximately $2,857 and $8,056 for the three
and six months ended June 30, 2009 and $6,179 and $11,985 for the three and six
months ended June 30, 2008. We expect that the amount of our
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations and commence contributions to
an employee housing fund.
Net cash
provided by operating activities was $3,439,617 for the six months ended June
30, 2009, compared to net cash provided by operations of $3,461,556 for the six
months ended June 30, 2008. The $21,939 decrease was primarily
due to an increase in operating profit and our collection of
receivables.
31
Net cash
used in investing activities amounted to approximately $1,533,415 for the six
months ended June 30, 2009, compared to net cash used in investing activities of
$299,338 for the six months ended June 30, 2008. The change was due
to an increase in our investment in fixed assets.
Net cash
provided by financing activities amounted to $1,387,584 for the six months ended
June 30, 2009, compared to net cash used by financing activities of $1,985,080
for the six months ended June 30, 2008. The increase of
cash provided by financing activities was primarily a result of the receipt
of cash proceeds from the Private Placement.
Our
ability to maintain sufficient liquidity depends partially on our ability to
achieve anticipated levels of revenue, while continuing to control
costs. If we did not have sufficient available cash, we would have to
seek debt or equity financing through other external sources, which may not be
available on acceptable terms, or at all. Failure to maintain
financing arrangements on acceptable terms would have a material adverse effect
on our business, results of operations and financial condition.
Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. In February 2008, the FASB issued FASB Staff
Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13" ("FSP
157-1") and FASB Staff Position 157-2, "Effective Date of FASB Statement No.
157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain leasing
transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for
all non-financial assets and non-financial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after November
15, 2008. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company adopted SFAS 157 effective January 1, 2008 for all financial
assets and liabilities as required. The adoption of SFAS No. 157 for
non-financial assets and non-financial liabilities that are not measured at fair
value on a recurring basis did not have a significant impact on the Company’s
financial statements.
FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date of FASB
Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain
leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS
157 for all non-financial assets and non-financial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after November
15, 2008. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company adopted SFAS 157 effective January 1, 2008 for all
financial assets and liabilities as required. The adoption of SFAS 157 was not
material to the Company's financial statements or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning
after November 15, 2007. SFAS 159 is an elective standard which permits an
entity to choose to measure many financial instruments and certain other items
at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings. The Company has not elected the fair value
option for any assets or liabilities under SFAS 159.
SFAS No.
123R, Share-Based
Payment, an Amendment of SFAS No. 123, was issued in December 2004 and
was effective as of the beginning of the Group’s 2006 fiscal year. SFAS No. 123R
requires all share-based payments to qualified individuals, including grants of
employee stock options, to be recognized as compensation expense in the
financial statements based on their grant date fair values.
Contractual
obligations
The
following table describes our contractual commitments and obligations as of June
30, 2009:
32
|
Payments due by Period (in $)
|
|||||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1 - 3
Years
|
3 - 5
Years
|
More
Than
5 Years
|
|||||||||||||||
Operating
lease obligations
|
$
|
462,756
|
$
|
293,206
|
$
|
169,550
|
$
|
—
|
$
|
—
|
Seasonality
Our
business is not seasonal in nature. The seasonal effect does not have
material impact on our sales.
Off-Balance
Sheet Arrangements
We have
no material off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Concentration of Credit
Risk
A
significant portion of our cash is maintained at various financial institutions
in the PRC which do not provide insurance for amounts on deposit. We have not
experienced any losses in such accounts and believes it is not exposed to
significant credit risk in this area.
Interest
Rate Risk
We may
face some risk from potential fluctuations in interest rates, although our debt
obligations are primarily short-term in nature, but some bank loans have
variable rates. If interest rates have great fluctuations, our
financing cost may be significantly affected.
Foreign
Currency Risk
Substantially
all of our operations are conducted in the PRC and our primary operational
currency in Chinese Renminbi (“RMB”). As a result, currently the
effect of the fluctuations of RMB exchange rates only has minimum impact on our
business operations, but will be increasingly material as we introduce our
products widely into new international markets. Substantially all of
our revenues and expenses are denominated in RMB. However, we use the
United States dollar for financial reporting purposes. Conversion of
RMB into foreign currencies is regulated by the People’s Bank of China through a
unified floating exchange rate system. Although the PRC government
has stated our intention to support the value of the RMB, there can be no
assurance that such exchange rate will not again become volatile or that the RMB
will not devalue significantly against the U.S. dollar. Exchange rate
fluctuations may adversely affect the value, in U.S. dollar terms, of our net
assets and income derived from our operations in the PRC.
Country
Risk
The
substantial portion of our assets and operations are located and conducted in
China. While the PRC economy has experienced significant growth in
the past twenty years, growth has been uneven, both geographically and among
various sectors of the economy. The Chinese government has
implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall
economy of China, but may also have a negative effect on us. For
example, our operating results and financial condition may be adversely affected
by government control over capital investments or changes in tax regulations
applicable to us. If there are any changes in any policies by the
Chinese government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits, will
also be negatively affected.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, which are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, as appropriate to allow timely decisions
regarding required disclosure.
33
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) under the Securities Exchange Act of 1934) were
effective as of June 30, 2009.
Changes
in Internal Control Over Financial Reporting
Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 of
the Exchange Act, there were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Part II.
Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this report before deciding whether to purchase our common stock.
Our business, financial condition or results of operations could be materially
adversely affected by these risks if any of them actually occur. Our shares of
common stock are not currently listed or quoted for trading on any national
securities exchange or national quotation system. If and when our common stock
is traded, the trading price could decline due to any of these risks, and an
investor may lose all or part of his or her investment. Some of these factors
have affected our financial condition and operating results in the past or are
currently affecting us. This Report also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks described below and elsewhere in this
report.
On May 6,
2009, we (i) closed a share exchange transaction, described above, pursuant
to which we became the 100% parent of Attainment Holdings Limited, (ii) assumed
the operations of Attainment Holdings and its subsidiaries, including Shenzhen
YPC, and (iii) changed our name from SRKP 21, Inc. to China Electric Motor,
Inc. As a result of the closing of the share exchange transaction,
there have been no material changes from the risk factors disclosed in the “Risk
Factors” section of our annual report on Form 10-K for the year ended December
31, 2008 and we set forth our risk factors below:
RISKS
RELATED TO OUR OPERATIONS
We
depend on a small number of customers for the vast majority of our
sales. A reduction in business from any of these customers could
cause a significant decline in our sales and profitability.
The vast
majority of our sales are generated from a small number of
customers. For the six months ended June 30, 2009 we had 6 customers
that each accounted for at least 5% of the revenues that we generated, with 2 of
those customers accounting for at least 10% of our revenue. Those 6
customers accounted for 50.7% of our net revenue for the six months ended June
30, 2009. For the year ended December 30, 2008, we had eight
customers that each accounted for at least 5% of the revenues that we generated,
with three of those customers accounting for at least 10% of our
revenue. These eight customers accounted for a total of approximately
59.5% of our revenue for that period. During the year ended December
31, 2007, we had seven customers that generated revenues of at least 5% of our
revenues, with one of those customers accounting for at least 10% of our revenue
in 2007. These seven customers accounted for a total of approximately
54.0% of our revenue for the year ended December 31, 2007. We expect
that we will continue to depend upon a small number of customers for a
significant majority of our sales for the foreseeable future.
Because
we do not have long-term contracts with our customers, our customers can
terminate their relationship with us at any time, which could cause a material
adverse effect on our results of operations.
We do not
have written long term agreements with our customers. As a result,
our customers may, without notice or penalty, terminate their relationship with
us at any time or delay the delivery of products on relatively short
notice. We cannot assure you that any of our current customers will
continue to purchase our products in the future. Additionally, even
if customers decide to continue their relationship with us, there can be no
guarantee that they will purchase the same amounts of products as in the
past. Any loss of a customer, or decrease in the volume of products
purchased by a customer could have a material adverse effect on our business,
operating results and financial condition.
34
We cannot
rely on long-term purchase orders or commitments to protect us from the negative
financial effects of a decline in demand for our products. The
limited certainty of product orders can make it difficult for us to forecast our
sales and allocation our resources in a manner consistent with our actual
sales. Moreover, our expense levels are based in part on our
expectations of future sales and, if our expectations regarding future sales are
inaccurate, we may be unable to reduce costs in a timely manner to adjust for
sales shortfalls. Furthermore, because we depend on a small number of
customers for the vast majority of our sales, the magnitude of the ramifications
of these risks is greater than if our sales were less concentrated with a small
number of customers. As a result of our lack of long-term purchase
orders and purchase commitments we may experience a rapid decline in our sales
and profitability.
Historically,
a substantial portion of our assets has been comprised of accounts receivable
representing amounts owed by a small number of customers. If any of
these customers fails to timely pay us amounts owed, we could suffer a
significant decline in cash flow and liquidity which, in turn, could cause us to
be unable pay our liabilities and purchase an adequate amount of inventory to
sustain or expand our sales volume.
Our
accounts receivable represented approximately 37.1%, 34.6% and 32.1% of our
total current assets as of June 30, 2009, December 31, 2008, and December 31,
2007, respectively. As of June 30, 2009, 27% of our accounts
receivable represented amounts owed by two customers, each of whom represented
over 10% of the total amount of our accounts receivable. As of
December 31, 2008, 30% of our accounts receivable represented amounts owed by
three customers, each of which represented over 10% of the total amount of our
accounts receivable. As a result of the substantial amount and
concentration of our accounts receivable, if any of our major customers fails to
timely pay us amounts owed, we could suffer a significant decline in cash flow
and liquidity which could adversely affect our ability to borrow funds to pay
our liabilities and to purchase inventory to sustain or expand our current sales
volume.
Micro-motors
for electronics products are subject to rapid technological
changes. If we fail to accurately anticipate and adapt to these
changes, the products we sell will become obsolete, causing a decline in our
sales and profitability.
Micro-motors
for electronics products are subject to rapid technological changes which often
cause product obsolescence. Companies within our industry are
continuously developing new products with heightened performance and
functionality. This puts pricing pressure on existing products and
constantly threatens to make them, or causes them to be,
obsolete. Our typical product's life cycle is short, generating lower
average selling prices as the cycle matures. If we fail to accurately
anticipate the introduction of new technologies, we may possess significant
amounts of obsolete inventory that can only be sold at substantially lower
prices and profit margins than we anticipated. In addition, if we
fail to accurately anticipate the introduction of new technologies, we may be
unable to compete effectively due to our failure to offer products most demanded
by the marketplace. If any of these failures occur, our sales, profit
margins and profitability will be adversely affected.
We
may incur design and development expenses and purchase inventory in anticipation
of orders which are not placed.
In order
to transact business, we assess the integrity and creditworthiness of our
customers and suppliers and we may, based on this assessment, incur design and
development costs that we expect to recoup over a number of orders produced for
the customer. Such assessments are not always accurate and expose us
to potential costs, including the write off of costs incurred and inventory
obsolescence if the orders anticipated do not materialize. We may
also occasionally place orders with suppliers based on a customer’s forecast or
in anticipation of an order that is not realized. Additionally, from
time to time, we may purchase quantities of supplies and materials greater than
required by customer orders to secure more favorable pricing, delivery or credit
terms. These purchases can expose us to losses from cancellation
costs, inventory carrying costs or inventory obsolescence, and hence adversely
affect our business and operating results.
35
The
micro-motor industry is subject to significant fluctuations in the availability
of raw materials and components. If we do not properly anticipate the
need for critical raw materials and components, we may be unable to meet the
demands of our customers and end-users, which could reduce our competitiveness,
cause a decline in our market share and have a material adverse effect on our
results of operations.
As the
availability of raw materials and components decreases, the cost of acquiring
those raw materials and components ordinarily increases. The prices
of such materials are volatile, with price fluctuations due to supply and
demand, market fluctuations, currency fluctuations, and changes in governmental
regulation. If we fail to procure adequate supplies of raw materials
and components in anticipation of our customers' orders or end-users’ demand,
our gross margins may be negatively impacted due to higher prices that we are
required to pay for raw materials and components in short supply. We
currently do not engage in hedging activities to reduce our risk to price
increases in our raw materials. High growth product categories have
experienced chronic shortages of raw materials and components during periods of
exceptionally high demand. If we do not properly anticipate the need
for critical raw materials and components, we may pay higher prices for the raw
materials and components, we may not be unable to meet the demands of our
customers and end-users, which could reduce our competitiveness, cause a decline
in our market share and have a material adverse effect on our results of
operations. Price increases for our raw materials will result in
increases in cost of sales and we may not be able to pass on the increased
production costs to our customers in the form of higher prices for our
products. Increases in the prices for our products may result in
reduced sales volume and profitability. Any increase in operating
costs that we cannot pass on to our customers or any decrease in sales due to
higher product prices may result in reduced profitability and a material adverse
effect on our results of operations.
Adverse
capital and credit market conditions may significantly affect our ability to
meet liquidity needs, access to capital and cost of capital.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than twelve months. In recent weeks, the volatility and
disruption have reached unprecedented levels. In some cases, the
markets have exerted downward pressure on availability of liquidity and credit
capacity for certain issuers. We have historically relied on credit
to fund our business and we need liquidity to pay our operating
expenses. Without sufficient liquidity, we will be forced to curtail
our operations, and our business will suffer. Disruptions,
uncertainty or volatility in the capital and credit markets may also limit our
access to capital required to operate our business. Such market
conditions may limit our ability to replace, in a timely manner, maturing
liabilities and access the capital necessary to operate and grow our
business. As such, we may be forced to delay raising capital or bear
an unattractive cost of capital which could decrease our profitability and
significantly reduce our financial flexibility. Our results of
operations, financial condition, cash flows and capital position could be
materially adversely affected by disruptions in the financial
markets.
We
derive the majority of our revenues from sales in the PRC and any downturn in
the Chinese economy could have a material adverse effect on our business and
financial condition.
A
substantial portion of our revenues are generated from sales in the
PRC. We anticipate that revenues from sales of our products in the
PRC will continue to represent a substantial portion of our total revenues in
the near future. Our sales and earnings can also be affected by
changes in the general economy since purchases of most household appliances and
tools are generally discretionary for consumers. Our success is
influenced by a number of economic factors which affect disposable consumer
income, such as employment levels, business conditions, interest rates, oil and
gas prices and taxation rates. Adverse changes in these economic
factors, among others, may restrict consumer spending, thereby negatively
affecting our sales and profitability.
We
do not carry any business interruption insurance, products liability insurance
or any other insurance policy except for a limited property insurance
policy. As a result, we may incur uninsured losses, increasing the
possibility that you would lose your entire investment in our
company.
We could
be exposed to liabilities or other claims for which we would have no insurance
protection. We do not currently maintain any business interruption
insurance, products liability insurance, or any other comprehensive insurance
policy. As a result, we may incur uninsured liabilities and losses as
a result of the conduct of our business. There can be no guarantee
that we will be able to obtain insurance coverage in the future, and even if we
are able to obtain coverage, we may not carry sufficient insurance coverage to
satisfy potential claims. Should uninsured losses occur, any
purchasers of our common stock could lose their entire investment.
Because
we do not carry products liability insurance, a failure of any of the products
marketed by us may subject us to the risk of product liability claims and
litigation arising from injuries allegedly caused by the improper functioning or
design of our products. We cannot assure that we will have enough
funds to defend or pay for liabilities arising out of a products liability
claim. To the extent we incur any product liability or other
litigation losses, our expenses could materially increase
substantially. There can be no assurance that we will have sufficient
funds to pay for such expenses, which could end our operations and you would
lose your entire investment.
36
We
are subject to market risk through our sales to international
markets.
A growing
percentage of our sales are being derived from international
markets. These international sales are primarily focused in
Korea. These operations are subject to risks that are inherent in
operating in foreign countries, including the following:
|
·
|
foreign
countries could change regulations or impose currency restrictions and
other restraints;
|
|
·
|
changes
in foreign currency exchange rates and hyperinflation or deflation in the
foreign countries in which we
operate;
|
|
·
|
exchange
controls;
|
|
·
|
some
countries impose burdensome tariffs and
quotas;
|
|
·
|
political
changes and economic crises may lead to changes in the business
environment in which we operate;
|
|
·
|
international
conflict, including terrorist acts, could significantly impact our
financial condition and results of operations;
and
|
|
·
|
Economic
downturns, political instability and war or civil disturbances may disrupt
distribution logistics or limit sales in individual
markets.
|
If
our third party sales representatives and distributors fail to adequately
promote, market and sell our products, our revenues could significantly
decrease.
A
significant portion of our product sales are made through third party sales
representative organizations, whose members are not our
employees. Our level of sales depends on the effectiveness of these
organizations, as well as the effectiveness of our own
employees. Some of these third party representatives may sell (and do
sell), with our permission, competitive products of third parties as well as our
products. During the six months ended June 30, 2009 and our fiscal
years ended December 31, 2008 and 2007, these organizations were responsible for
approximately 0%, 42% and 35%, respectively, of our net revenues during such
periods. Significant terms and conditions of distributor agreements
include FOB source, net 30 days payment terms, with no return or exchange
rights, and no price protection. If any of the third party sales
representative organizations engaged by us fails to adequately promote, market
and sell our products, our revenues could be significantly decreased until a
replacement organization or distributor can be retained by
us. Finding replacement organizations and distributors can be a time
consuming process during which our revenues could be negatively
impacted. Our success is dependent on these distributors finding new
customers and receiving new orders from existing customers.
Unanticipated
disruptions in our operations or slowdowns by our suppliers and shipping
companies could adversely affect our ability to deliver our products and service
our customers which could materially and adversely affect our revenues and our
relationships with our customers.
Our
ability to provide high quality customer service, process and fulfill orders and
manage inventory depends on:
|
·
|
the
efficient and uninterrupted operation of our distribution centers;
and
|
|
·
|
the
timely and uninterrupted performance of third party suppliers, shipping
companies, and dock workers.
|
Any
material disruption or slowdown in the operation of our distribution centers,
manufacturing facilities or management information systems, or comparable
disruptions or slowdowns suffered by our principal suppliers and shippers could
cause delays in our ability to receive, process and fulfill customer orders and
may cause orders to be canceled, lost or delivered late, goods to be returned or
receipt of goods to be refused. As a result, our revenues and
operating results could be materially and adversely affected.
We
are subject to intense competition in the industry in which we operate, which
could cause material reductions in the selling price of our products or losses
of our market share.
The
micro-motor industry is highly competitive, especially with respect to pricing
and the introduction of new products and features. Our products
compete primarily on the basis of:
|
·
|
reliability;
|
37
|
·
|
brand
recognition;
|
|
·
|
quality;
|
|
·
|
price;
|
|
·
|
design;
|
|
·
|
consumer
acceptance of our trademark; and
|
|
·
|
quality service and support to
retailers and our customers.
|
In recent
years, we and many of our competitors, have regularly lowered prices, and we
expect these pricing pressures to continue. If these pricing
pressures are not mitigated by increases in volume, cost reductions from our
supplier or changes in product mix, our revenues and profits could be
substantially reduced. As compared to us, many of our competitors
have:
|
·
|
significantly
longer operating histories;
|
|
·
|
significantly
greater managerial, financial, marketing, technical and other competitive
resources; and
|
|
·
|
greater brand
recognition.
|
As a
result, our competitors may be able to:
|
·
|
adapt
more quickly to new or emerging technologies and changes in customer
requirements;
|
|
·
|
devote
greater resources to the promotion and sale of their products and
services; and
|
|
·
|
respond more effectively to
pricing pressures.
|
These
factors could materially adversely affect our operations and financial
condition. In addition, competition could increase if:
|
·
|
new
companies enter the market;
|
|
·
|
existing
competitors expand their product mix;
or
|
|
·
|
we
expand into new markets.
|
An
increase in competition could result in material price reductions or loss of our
market share.
We
may not be able to effectively recruit and retain skilled employees,
particularly scientific, technical and management professionals.
Our
ability to compete effectively depends largely on our ability to attract and
retain certain key personnel, including scientific, technical and management
professionals. We anticipate that we will need to hire additional
skilled personnel in all areas of our business. Industry demand for
such employees, however, exceeds the number of personnel available, and the
competition for attracting and retaining these employees is
intense. Because of this intense competition for skilled employees,
we may be unable to retain our existing personnel or attract additional
qualified employees to keep up with future business needs. If this
should happen, our business, operating results and financial condition could be
adversely affected.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect
to experience an increase in our cost of labor. The Labor Contract
Law of the PRC that became effective January 1, 2008 are likely to increase
costs further and impose restrictions on our relationship with our
employees. There can be no assurance that the labor laws will not
change further or that their interpretation and implementation will vary, which
may have a negative effect upon our business and results of
operations.
38
Our
business could be materially adversely affected if we cannot protect our
intellectual property rights or if we infringe on the intellectual property
rights of others.
Our
ability to compete effectively will depend on our ability to maintain and
protect our proprietary rights. We have one pending patent
application in China. We also own a trademark related to the sale of
our products, which is materially important to our business. Our
trademark is registered in China. However, third parties may seek to
challenge, invalidate, circumvent or render unenforceable any proprietary rights
owned by or licensed to us. In addition, in the event third party
licensees fail to protect the integrity of our trademark, the value of our mark
could be materially adversely affected.
Our
inability to protect our proprietary rights could materially adversely affect
the license of our trade names and trademarks to third parties as well as our
ability to sell our products. Litigation may be necessary
to:
|
·
|
enforce
our intellectual property rights;
|
|
·
|
protect
our trade secrets; and
|
|
·
|
determine
the scope and validity of such intellectual property
rights.
|
Any such
litigation, whether or not successful, could result in substantial costs and
diversion of resources and management’s attention from the operation of our
business.
We may
receive notice of claims of infringement of other parties’ proprietary
rights. Such actions could result in litigation and we could incur
significant costs and diversion of resources in defending such
claims. The party making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable
relief. Such relief could effectively block our ability to make, use,
sell, distribute or market our products and services in such
jurisdiction. We may also be required to seek licenses to such
intellectual property. We cannot predict, however, whether such
licenses would be available or, if available, that such licenses could be
obtained on terms that are commercially reasonable and acceptable to
us. The failure to obtain the necessary licenses or other rights
could delay or preclude the sale, manufacture or distribution of our products
and could result in increased costs to us.
We
may need additional capital to implement our current business strategy, which
may not be available to us, and if we raise additional capital, it may dilute
your ownership in us.
We
currently depend on net revenues to meet our short-term cash
requirements. In order to grow revenues and sustain profitability, we
will need additional capital. As of the date of this filing, we do
intend to conduct a public offering financing. Obtaining additional
financing will be subject to a number of factors, including market conditions,
our operating performance and investor sentiment. These factors may
make the timing, amount, terms and conditions of additional financing
unattractive to us. We cannot assure you that we will be able to
obtain any additional financing. If we are unable to obtain the
financing needed to implement our business strategy, our ability to increase
revenues will be impaired and we may not be able to sustain
profitability.
Our
failure to effectively manage growth could harm our business.
We have
rapidly and significantly expanded the number and types of products we sell, and
we will endeavor to further expand our product portfolio. We must
continually introduce new products and technologies, enhance existing products
in order to remain competitive, and effectively stimulate customer demand for
new products and upgraded versions of our existing products.
This
expansion of our products places a significant strain on our management,
operations and engineering resources. Specifically, the areas that
are strained most by our growth include the following:
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New
Product Launch: With the growth of our product portfolio, we experience
increased complexity in coordinating product development, manufacturing,
and shipping. As this complexity increases, it places a strain
on our ability to accurately coordinate the commercial launch of our
products with adequate supply to meet anticipated customer demand and
effective marketing to stimulate demand and market
acceptance. If we are unable to scale and improve our product
launch coordination, we could frustrate our customers and lose retail
shelf space and product sales;
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Forecasting,
Planning and Supply Chain Logistics: With the growth of our product
portfolio, we also experience increased complexity in forecasting customer
demand and in planning for production, and transportation and logistics
management. If we are unable to scale and improve our
forecasting, planning and logistics management, we could frustrate our
customers, lose product sales or accumulate excess inventory;
and
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Support
Processes: To manage the growth of our operations, we will need to
continue to improve our transaction processing, operational and financial
systems, and procedures and controls to effectively manage the increased
complexity. If we are unable to scale and improve these areas,
the consequences could include: delays in shipment of product, degradation
in levels of customer support, lost sales, decreased cash flows, and
increased inventory. These difficulties could harm or limit our
ability to expand.
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Our
facilities and information systems could be damaged as a result of disasters or
unpredictable events, which could have an adverse effect on our business
operations.
Our
headquarters and major facilities including manufacturing plants, sales offices
and research and development centers are located in China. If major
disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer
viruses, transportation disasters or other events occur, or our information
system or communications network breaks down or operates improperly as a result
of such events, our facilities may be seriously damaged, and we may have to stop
or delay production and shipment. We may incur expenses relating to
such damages.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
Substantially
all of our assets are located in the PRC and substantially all of our revenues
are derived from our operations in China, and changes in the political and
economic policies of the PRC government could have a significant impact upon the
business we may be able to conduct in the PRC and accordingly on the results of
our operations and financial condition.
Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts
substantial influence and control over the manner in which we must conduct our
business activities. Our ability to operate in China may be adversely
affected by changes in Chinese laws and regulations, including those relating to
taxation, import and export tariffs, raw materials, environmental regulations,
land use rights, property and other matters. Under the current
government leadership, the government of the PRC has been pursuing economic
reform policies that encourage private economic activity and greater economic
decentralization. There is no assurance, however, that the government
of the PRC will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without
notice.
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the
interpretations thereof, may have a material and adverse effect on our
business.
The PRC’s
legal system is a civil law system based on written statutes. Unlike
the common law system prevalent in the United States, decided legal cases have
little value as precedent in China. There are substantial
uncertainties regarding the interpretation and application of PRC laws and
regulations, including but not limited to, governmental approvals required for
conducting business and investments, laws and regulations governing the consumer
electronics business and electric product safety, national security-related laws
and regulations and export/import laws and regulations, as well as commercial,
antitrust, patent, product liability, environmental laws and regulations,
consumer protection, and financial and business taxation laws and
regulations.
The
Chinese government has been developing a comprehensive system of commercial
laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters. However, because these
laws and regulations are relatively new, and because of the limited volume of
published cases and judicial interpretation and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect
existing and proposed future businesses may also be applied
retroactively.
Our
principal operating subsidiary, Shenzhen Yuepengcheng Motor Co., Ltd.,
(“Shenzhen YPC”), is considered a foreign invested enterprise under PRC laws,
and as a result is required to comply with PRC laws and regulations, including
laws and regulations specifically governing the activities and conduct of
foreign invested enterprises. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC
laws or regulations, they would have broad discretion in dealing with such a
violation, including, without limitation:
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levying
fines;
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
Most of
our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all of our directors and
officers are nationals and residents of China. All or substantially
all of the assets of these persons are located outside the United States and in
the PRC. As a result, it may not be possible to effect service of
process within the United States or elsewhere outside China upon these
persons. In addition, uncertainty exists as to whether the courts of
China would recognize or enforce judgments of U.S. courts obtained against us or
such officers and/or directors predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof, or be competent
to hear original actions brought in China against us or such persons predicated
upon the securities laws of the United States or any state thereof.
The
scope of our business license in China is limited, and we may not expand or
continue our business without government approval and renewal,
respectively.
Our
principal operating subsidiary, Shenzhen YPC, is a wholly foreign-owned
enterprise, commonly known as a WFOE. A WFOE can only conduct
business within its approved business scope, which ultimately appears on its
business license. Our license permits us to produce and market
micro-motor products and relevant components. Any amendment to the
scope of our business requires further application and government
approval. In order for us to expand our business beyond the scope of
our license, we will be required to enter into a negotiation with the PRC
authorities for the approval to expand the scope of our business. We
cannot assure investors that Shenzhen YPC will be able to obtain the necessary
government approval for any change or expansion of its business.
We
are subject to a variety of environmental laws and regulations related to our
manufacturing operations. Our failure to comply with environmental
laws and regulations may have a material adverse effect on our business and
results of operations.
We are
subject to various environmental laws and regulations in China. We
cannot assure you that at all times we will be in compliance with the
environmental laws and regulations or that we will not be required to expend
significant funds to comply with, or discharge liabilities arising under,
environmental laws and regulations. Additionally, these regulations
may change in a manner that could have a material adverse effect on our
business, results of operations and financial condition. We have made
and will continue to make capital and other expenditures to comply with
environmental requirements.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to obtain the prior approval of the China
Securities Regulatory Commission, or the CSRC, for our proposed public offering
and the listing and trading of our common stock could have a material adverse
effect on our business, operating results, reputation and trading price of our
common stock.
On
October 21, 2005, SAFE issued a Circular on Relevant Issues
Concerning Foreign Exchange Administration on the Financing and Return
Investment by Chinese Domestic Residents through Overseas Special Purpose
Companies (“Circular 75”), which became effective on November 1,
2005. Circular 75 regulates the foreign exchange matters in relation
to the use of a “special purpose vehicle” by PRC residents to seek offshore
equity financing and conduct “round trip investment” in China. Under
Circular 75, a “special purpose vehicle” or “SPV” refers to an offshore entity
established or controlled, directly or indirectly, by PRC residents or PRC
entities for the purpose of seeking offshore equity financing using assets or
interests owned by such PRC residents or PRC entities in onshore companies,
while “round trip investment” refers to the direct investment in China by PRC
residents through the “SPV”, including without limitation establishing foreign
invested enterprises and using such foreign invested enterprises to purchase or
control (by way of contractual arrangements) onshore assets. Pursuant
to Circular 75, (1) a PRC resident shall register with a local branch of the
SAFE before he or she establishes or controls an overseas SPV, for the purpose
of overseas equity financing (including convertible debt financing); (2) when a
PRC resident contributes the assets of or his or her equity interests in a
domestic enterprise to an SPV, or engages in overseas financing after
contributing assets or equity interests to an SPV, such PRC resident must
register his or her interest in the SPV and any subsequent changes in such
interest with a local branch of the SAFE; and (3) when the SPV undergoes a
material change outside of China, such as a change in share capital or merger or
acquisition, the PRC resident shall, within 30 days from the occurrence of the
event that triggers the change, register such change with a local branch of the
SAFE. In addition, SAFE issued updated internal implementing rules,
or the Implementing Rules in relation to Circular 75. The
Implementing Rules (“Circular 106”) were promulgated and became effective on May
29, 2007. Circular 106 provides more detailed provisions and
requirements regarding the overseas investment foreign exchange registration
procedures. Under Circular 106, the PRC subsidiary of the offshore SPV are
prohibited from distributing their profits and proceeds from any reduction in
capital, share transfer or liquidation to their offshore special purpose vehicle
parent companies if the SPV shareholders who are PRC residents have not
completed foreign exchange registration pursuant to Circular
75. However, even after the promulgation of Circular 106 there still
exist uncertainties regarding the SAFE registration for PRC residents’ interests
in overseas companies. If any PRC resident stockholder of a SPV fails
to make the required SAFE registration and amended registration, the onshore PRC
subsidiaries of that offshore company may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer or
liquidation to the offshore entity. Failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. Because of uncertainty in how the SAFE circulars will
be further interpreted and enforced, we cannot be sure how it will affect our
business operations or future plans. For example, Shenzhen YPC’s
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE circulars by our PRC resident beneficial holders over
whom we have no control. In addition, we cannot assure you that such
PRC residents will be able to complete the necessary approval and registration
procedures required by the SAFE circulars. In connection with the Li
Conversion, Ms. Li will need to file a SAFE registration with respect to her
investment in the Company. We cannot assure you that such
registration will be approved. Failure by Mr. Li or any PRC resident
beneficial holder to register as required with the relevant branch of SAFE could
subject these PRC resident beneficial holders to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit Shenzhen
YPC’s ability to make distributions or pay dividends or affect our ownership
structure, which could adversely affect our business and prospects.
41
On August
8, 2006, the MOFCOM joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission (“CSRC”) and SAFE, released a substantially
amended version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect
September 8, 2006. These new rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign
acquisitions of domestic enterprises. Depending on the structure of
the transaction, the Revised M&A Regulations require the Chinese parties to
make a series of applications and supplemental applications to the
aforementioned governmental agencies, some of which must be made within strict
time limits and depend on approvals from one or the other of the aforementioned
governmental agencies. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules
establish reporting requirements for acquisition of control by foreigners of
companies in key industries, and reinforce the ability of the Chinese government
to monitor and prohibit foreign control transactions in key
industries.
Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs
seeking CSRC approval of their overseas listings. However, the
application of this PRC regulation remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement.
If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required, we may face regulatory actions or other sanctions from the CSRC or
other PRC regulatory agencies. These regulatory agencies may impose
fines and penalties on our operations in the PRC, limit our operating privileges
in the PRC, delay or restrict the repatriation of the proceeds from our proposed
public offering into the PRC, or take other actions that could have a material
adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common
stock. The CSRC or other PRC regulatory agencies also may take
actions requiring us, or making it advisable for us, to halt our proposed public
offering before settlement and delivery of the common stock offered
thereby. Consequently, if investors engage in market trading or other
activities in anticipation of and prior to settlement and delivery, they do so
at the risk that settlement and delivery may not occur.
42
According
to the M&A Regulations, a “Related Party Acquisition” is defined as having
taken place when a PRC business that is owned by PRC individual(s) is sold to a
non-PRC entity that is established or controlled, directly or indirectly, by
those same PRC individual(s). Under the M&A Regulations, any
Related Party Acquisition must be approved by MOFCOM and any indirect
arrangement or series of arrangements which achieves the same end result without
the approval of MOFCOM is a violation of PRC law.
Our BVI
subsidiary, Attainment Holdings, was owned by non-PRC
individuals. Luck Loyal International Investment Limited (“Luck
Loyal”), a company organized under the laws of Hong Kong, acquired all of the
equity interests of Shenzhen YPC pursuant to the terms of an Equity Transfer
Agreement dated October 24, 2008 by and between Luck Loyal and Shenzhen
Yuepengda Industrial Development Co., Ltd. (the “Equity Purchase
Agreement”). The Equity Purchase Agreement was approved by the
Commerce Bureau of Shenzhen Bao’an District on October 29, 2008, a Certificate
of Approval for Establishment of Enterprises with Foreign Investment in the PRC
was issued by the People’s Government of Shenzhen Municipality on October 30,
2008, and a new Business License of Shenzhen YPC was issued by the
Administration for the Industry and Commerce of Shenzhen Municipality on
November 11, 2008. Shenzhen YPC has filed all required applications
and received all appropriate SAFE approvals.
Also, if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or
negative publicity regarding this CSRC approval requirement could have a
material adverse effect on the trading price of our common
stock. Furthermore, published news reports in China recently
indicated that the CSRC may have curtailed or suspended overseas listings for
Chinese private companies. These news reports have created further
uncertainty regarding the approach that the CSRC and other PRC regulators may
take with respect to us.
We
believe that Revised M&A Regulations and CSRC approval were not required in
the context of the share exchange because (i) share exchange is a purely foreign
related transaction governed by foreign laws, not subject to the jurisdiction of
PRC laws and regulations; (ii) we are not an SPV formed or controlled by
PRC companies or PRC individuals, and (iii) we are owned or substantively
controlled by foreigners. However, we cannot assure you that the
relevant PRC government agencies, including the CSRC, would reach the same
conclusion, and we still cannot rule out the possibility that CSRC may deem that
the transactions effected by the share exchange circumvented the Revised M&A
Regulations, related clarifications and PRC Securities Law. It is
also uncertain how our business operations or future strategy will be affected
by the interpretations and implementation of Circular 75, Circular 106, and the
Revised M&A Regulations. It is anticipated that application of
the new rules will be subject to significant administrative interpretation, and
we will need to closely monitor how SAFE, MOFCOM and other ministries apply the
rules to ensure that our domestic and offshore activities continue to comply
with PRC law. Given the uncertainties regarding interpretation and
application of the new rules, we may need to expend significant time and
resources to maintain compliance.
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that
time. Conversely, if we decide to convert our Renminbi into U.S.
Dollars for the operational needs or paying dividends on our common stock, the
dollar equivalent of our earnings from our subsidiaries in China would be
reduced should the dollar appreciate against the Renminbi. We
currently do not hedge our exposure to fluctuations in currency exchange
rates.
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi
relative to the U.S. Dollar has remained stable and has appreciated slightly
against the U.S. Dollar. Countries, including the United States, have argued
that the Renminbi is artificially undervalued due to China’s current monetary
policies and have pressured China to allow the Renminbi to float freely in world
markets. In July 2005, the PRC government changed its policy of
pegging the value of the Renminbi to the dollar. Under the new policy
the Renminbi is permitted to fluctuate within a narrow and managed band against
a basket of designated foreign currencies. While the international
reaction to the Renminbi revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in further and more significant
appreciation of the Renminbi against the dollar.
43
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply
and rising inflation. According to the National Bureau of Statistics
of China, the inflation rate in China reached a high point of 4.8% in 2007 as
compared to the past several years. The inflation rate in China was
4.7% in 2008. The inflation rate is expected to continue to increase
in 2009. If prices for our products and services rise at a rate that
is insufficient to compensate for the rise in the costs of supplies such as raw
materials, it may have an adverse effect on our profitability.
Furthermore,
in order to control inflation in the past, the PRC government has imposed
controls on bank credits, limits on loans for fixed assets and restrictions on
state bank lending. The implementation of such policies may impede
economic growth. In October 2004, the People’s Bank of China, the
PRC’s central bank, raised interest rates for the first time in nearly a decade
and indicated in a statement that the measure was prompted by inflationary
concerns in the Chinese economy. In April 2006, the People’s Bank of
China raised the interest rate again. Repeated rises in interest
rates by the central bank would likely slow economic activity in China which
could, in turn, materially increase our costs and also reduce demand for our
products and services.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. A significant portion of our assets are in the form of
cash deposited with banks in the PRC, and in the event of a bank failure, we may
not have access to our funds on deposit. Depending upon the amount of
money we maintain in a bank that fails, our inability to have access to our cash
could impair our operations, and, if we are not able to access funds to pay our
suppliers, employees and other creditors, we may be unable to continue in
business.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
As our
ultimate holding company is a Delaware corporation, we are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign
companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices may occur from time-to-time in the PRC. We
can make no assurance, however, that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties and other consequences that may have a material adverse
effect on our business, financial condition and results of
operations.
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could
restrict our ability to adopt an equity compensation plan for our directors and
employees and other parties under PRC law.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which
are so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the
plan. In addition, Circular 78 also requires PRC citizens to register
with SAFE and make the necessary applications and filings if they participated
in an overseas listed company’s covered equity compensation plan prior to April
6, 2007. We intend to adopt an equity compensation plan in the future
and make option grants to our officers and directors, most of who are PRC
citizens. Circular 78 may require our officers and directors who
receive option grants and are PRC citizens to register with SAFE. We
believe that the registration and approval requirements contemplated in Circular
78 will be burdensome and time consuming. If it is determined that
any of our equity compensation plans are subject to Circular 78, failure to
comply with such provisions may subject us and participants of our equity
incentive plan who are PRC citizens to fines and legal sanctions and prevent us
from being able to grant equity compensation to our PRC employees. In
that case, our ability to compensate our employees and directors through equity
compensation would be hindered and our business operations may be adversely
affected.
44
We
have enjoyed certain preferential tax concessions and the loss of these
preferential tax concessions may cause our tax liabilities to increase and our
profitability to decline.
Under the
tax laws of PRC, we have had tax advantages granted by local government for
corporate income taxes and sales taxes commencing April 6, 2004. We
have been entitled to have a full tax exemption for the first two profitable
years, followed by a 50% reduction on normal tax rate of 15% for the following
three consecutive years. On March 16, 2007, the National People’s
Congress of China enacted a new PRC Enterprise Income Tax Law, under which
foreign invested enterprises and domestic companies will be subject to
enterprise income tax at a uniform rate of 25%. The new law became
effective on January 1, 2008. During the transition period for
enterprises established before March 16, the tax rate will be gradually
increased starting in 2008 and be equal to the new tax rate in
2012. The expiration of the preferential tax treatment will increase
our tax liabilities and reduce our profitability.
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, in the PRC could adversely affect our
operations.
A renewed
outbreak of SARS, Avian Flu or another widespread public health problem in
China, where all of our manufacturing facilities are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon its ability to continue to
manufacture products. Such an outbreak could have an impact on our
operations as a result of:
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quarantines
or closures of some of our manufacturing facilities, which would severely
disrupt our operations,
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the
sickness or death of our key officers and employees,
and
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a
general slowdown in the Chinese
economy.
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Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
A
downturn in the economy of the PRC may slow our growth and
profitability.
A
significant portion of our revenues are generated from sales in
China. The growth of the Chinese economy has been uneven across
geographic regions and economic sectors. There can be no assurance
that growth of the Chinese economy will be steady or that any downturn will not
have a negative effect on our business, especially if it results in either a
decreased use of our products or in pressure on us to lower our
prices.
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. securities laws.
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated
and trained in the Western system, and we may have difficulty hiring new
employees in the PRC with such training. In addition, we may have
difficulty in hiring and retaining a sufficient number of qualified employees to
work in the PRC. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards. Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls as required under
Section 404 of the Sarbanes-Oxley Act of 2002. This may result in
significant deficiencies or material weaknesses in our internal controls which
could impact the reliability of our financial statements and prevent us from
complying with SEC rules and regulations and the requirements of the
Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack
of compliance could have a materially adverse effect on our
business.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
There
is no current trading market for our common stock, and there is no assurance of
an established public trading market, which would adversely affect the ability
of our investors to sell their securities in the public market.
Our
common stock is not currently listed or quoted for trading on any national
securities exchange or national quotation system. We intend to apply
for the listing of our common stock on the NYSE Amex in the
future. There is no guarantee that the NYSE Amex, or any other
exchange or quotation system, will permit our shares to be listed and
traded. If we fail to obtain a listing on the NYSE Amex, we may seek
quotation on the OTC Bulletin Board. The FINRA has enacted changes
that limit quotations on the OTC Bulletin Board to securities of issuers that
are current in their reports filed with the Securities and Exchange
Commission. The effect on the OTC Bulletin Board of these rule
changes and other proposed changes cannot be determined at this
time. The OTC Bulletin Board is an inter-dealer, over-the-counter
market that provides significantly less liquidity than the NASDAQ Global Market
(the “NASDAQ Global Market”). Quotes for stocks included on the OTC
Bulletin Board are not listed in the financial sections of newspapers as are
those for the NASDAQ Global Market. Therefore, prices for securities
traded solely on the OTC Bulletin Board may be difficult to obtain and holders
of common stock may be unable to resell their securities at or near their
original offering price or at any price.
45
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
Pursuant
to the terms of the Share Exchange, we agreed to file a registration statement
with the Securities and Exchange Commission to register the shares of our common
stock issued in an equity financing that was conducted in concurrently with the
Share Exchange. The registration statement must be filed within 30
days of the closing of the Share Exchange. Each investor may sell or
transfer any shares of the common stock after the effective date of the
registration statement except that they, along with all Existing
Securityholders, entered into a lock-up agreement pursuant to which they agreed
not to conduct any sales until 120 days after the our common stock is first
listed or quoted on a national securities exchange, at which time one-twelfth of
the shares purchased may be sold, and thereafter the shares will be
automatically released from the lock-up every thirty (30) days in eleven equal
installments provided that, such person provide written confirmation (the
“Confirmation”) to placement agent and the Company that he, she or it (i) is and
has been in compliance with any and all state and federal securities and other
laws, statues and regulations regarding his, her or its ownership and/or any
sale, transfer or hypothecation of or shares of the Company’s common stock
including but not limited to those rules and regulations promulgated by the SEC,
FINRA and any exchange on which the Company’s common stock is listed, and those
of federal and state governments and other agencies such as improper short
selling of the Company’s common stock and failure to properly file all documents
required by the SEC or otherwise and (ii) does not wish to have the shares
subject to such partial release to continue to bear the Lock-Up Legend (as
defined herein), it being understand and agreed that the failure to provide such
written confirmation shall be sufficient grounds to allow the placement agent,
in its sole discretion, to disallow the automatic release of such shares until
the expiration in totality of the referenced lock-up. The placement
agent, in its sole discretion, may allow early releases under the referenced
lock-up provided however that (i) no early release shall be made with respect to
Existing Securityholders prior to the release in full of all such lock-up
restrictions on shares of the common stock acquired in the Private Placement and
(ii) any such early release shall be made pro rata with respect to all
investors’ shares acquired in this Private Placement.
We also
intend to register with the Private Placement shares 1,352,003 shares of
common stock held by our stockholders immediately prior to the Share Exchange
and all of the 626,894 shares of common stock underlying the 626,894
warrants held by our stockholders immediately prior to the Share
Exchange. Of the 1,352,003 shares and 626,894 shares
underlying warrants, 275,944 shares and 127,950 shares underlying warrants
will be covered by the registration statement filed in connection with the
Private Placement, and 1,076,059 shares and 498,944 shares underlying
warrants, which are beneficially owned by affiliates of the placement agent,
will be included in a subsequent registration statement filed by us within 10
days after the end of the six-month period that immediately follows the date on
which we file the registration statement to register the shares issued in the
Private Placement. All of the shares included in an effective
registration statement may be freely sold and transferred, subject to a lock-up
agreement.
Additionally,
following the Share Exchange, the former stockholder of Attainment Holdings, and
its designees, may be eligible to sell all or some of our shares of common stock
by means of ordinary brokerage transactions in the open market pursuant to Rule
144, promulgated under the Securities Act (“Rule 144”), subject to certain
limitations. Under Rule 144, an affiliate stockholder who has
satisfied the required holding period may, under certain circumstances, sell
within any three-month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. As of August 14, 2009, 1% of our issued and outstanding shares
of common stock was approximately 132,227 shares. Non-affiliate
stockholders are not subject to volume limitations. Any substantial
sale of common stock pursuant to any resale prospectus or Rule 144 may have an
adverse effect on the market price of our common stock by creating an excessive
supply.
Following
the Share Exchange, the former principal shareholder of Excel Profit has
significant influence over us.
The
former shareholder of Attainment Holdings, Excel Profit, beneficially owns or
controls approximately 69.8% of our outstanding shares of common stock
(excluding shares issuable upon the Li Conversion) and has a controlling
influence in determining the outcome of any corporate transaction or other
matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors, and other significant corporate actions. Excel Profit
may also have the power to prevent or cause a change in control. In
addition, without the consent of Excel Profit, we could be prevented from
entering into transactions that could be beneficial to us. The
interests Excel Profit may differ from the interests of our other
stockholders.
46
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
We are
required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of
those controls once established, could adversely impact our public disclosures
regarding our business, financial condition or results of
operations. Any failure of these controls could also prevent us from
maintaining accurate accounting records and discovering accounting errors and
financial frauds. Rules adopted by the SEC pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control
over financial reporting, and attestation of this assessment by our independent
registered public accountants. The SEC extended the compliance dates
for non-accelerated filers, as defined by the SEC. Accordingly, we
believe that the annual assessment of our internal controls requirement and the
attestation requirement of management’s assessment by our independent registered
public accountants will first apply to our annual report for the 2009 fiscal
year. The standards that must be met for management to assess the
internal control over financial reporting as effective are new and complex, and
require significant documentation, testing and possible remediation to meet the
detailed standards. We may encounter problems or delays in completing
activities necessary to make an assessment of our internal control over
financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial
reporting as effective, or our independent registered public accountants are
unable to provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
In
addition, management’s assessment of internal controls over financial reporting
may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for
investors. Any actual or perceived weaknesses and conditions that
need to be addressed in our internal control over financial reporting,
disclosure of management’s assessment of our internal controls over financial
reporting, or disclosure of our public accounting firm’s attestation to or
report on management’s assessment of our internal controls over financial
reporting may have an adverse impact on the price of our common
stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On March
3, 2009, we entered into the Exchange Agreement with Attainment Holding, the
sole shareholder of Attainment Holdings and, with respect to certain portions of
the agreement, certain designees pursuant to which we agreed to acquire 100% of
the issued and outstanding securities of Attainment Holdings in exchange for
shares of our common stock. On May 6, 2009, the Exchange Agreement
was amended, the Share Exchange closed, Attainment Holdings became our
100%-owned subsidiary, and our sole business operations became that of
Attainment Holdings and its subsidiaries. We also have a new Board of
Directors and management consisting of persons from Attainment Holdings and
changed our corporate name from SRKP 21, Inc. to China Electric Motor,
Inc.
We may
not realize the benefits that we hoped to receive as a result of the Share
Exchange, which include:
|
·
|
access
to the capital markets of the United
States;
|
|
·
|
the
increased market liquidity expected to result from exchanging stock in a
private company for securities of a public company that may eventually be
traded;
|
|
·
|
the
ability to use registered securities to make acquisition of assets or
businesses;
|
|
·
|
increased
visibility in the financial
community;
|
|
·
|
enhanced
access to the capital markets;
|
|
·
|
improved
transparency of operations; and
|
|
·
|
perceived
credibility and enhanced corporate image of being a publicly traded
company.
|
47
There can
be no assurance that any of the anticipated benefits of the Share Exchange will
be realized with respect to our new business operations. In addition,
the attention and effort devoted to achieving the benefits of the Share Exchange
and attending to the obligations of being a public company, such as reporting
requirements and securities regulations, could significantly divert management’s
attention from other important issues, which could materially and adversely
affect our operating results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant
management time and financial resources to comply with both existing and
evolving standards for public companies, which will lead to increased general
and administrative expenses and a diversion of management time and attention
from revenue generating activities to compliance activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our
common stock, which is not currently listed or quoted for trading, may be
considered to be a “penny stock” if it does not qualify for one of the
exemptions from the definition of “penny stock” under Section 3a51-1 of the
Securities Exchange Act for 1934, as amended (the “Exchange Act”) once, and if,
it starts trading. Our common stock may be a “penny stock” if it
meets one or more of the following conditions (i) the stock trades at a price
less than $5.00 per share; (ii) it is NOT traded on a “recognized” national
exchange; (iii) it is NOT quoted on the Nasdaq Capital Market, or even if so,
has a price less than $5.00 per share; or (iv) is issued by a company that has
been in business less than three years with net tangible assets less than $5
million.
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment
objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not
plan to declare or pay any cash dividends on our shares of common stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an
investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our shares may be investors’
sole source of gain for the foreseeable future. Moreover, investors
may not be able to resell their shares of our common stock at or above the price
they paid for them.
Item
2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item
3. Default Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
48
Item
5. Other Information
None.
Item
6. Exhibits
(a) Exhibits
Exhibit
Number
|
Description of Document
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.*
|
*
|
This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that section, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any
filings.
|
49
CHINA
ELECTRIC MOTOR, INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
China
Electric Motor, Inc.
|
|||
Dated:
October 23, 2009
|
/s/ Yue
Wang
|
||
By:
|
Yue
Wang
|
||
Its:
Chief Executive Officer
|
|||
/s/ Haixia
Zhang
|
|||
By:
|
Haixia
Zhang
|
||
Its:
Chief Financial
Officer
|
50