Attached files
file | filename |
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EX-1.1 - NIVS IntelliMedia Technology Group, Inc. | v181479_ex1-1.htm |
EX-5.1 - NIVS IntelliMedia Technology Group, Inc. | v181479_ex5-1.htm |
EX-4.7 - NIVS IntelliMedia Technology Group, Inc. | v181479_ex4-7.htm |
EX-23.3 - NIVS IntelliMedia Technology Group, Inc. | v181479_ex23-3.htm |
EX-23.4 - NIVS IntelliMedia Technology Group, Inc. | v181479_ex23-4.htm |
EX-23.1 - NIVS IntelliMedia Technology Group, Inc. | v181479_ex23-1.htm |
As
Filed with the Securities and Exchange Commission on April 19,
2010
|
Registration
No. 333-165222
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 2 ON
FORM
S-1/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
NIVS
IntelliMedia Technology Group, Inc.
(Name
of Registrant As Specified in its Charter)
Delaware
|
3651
|
20-8057809
|
||
(State
or Other Jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer Identification No.)
|
||
Incorporation
|
Classification
Code Number)
|
|||
or
Organization)
|
NIVS
Industry Park
No.
29-31, Shuikou Road, Huizhou, Guangdong
People’s
Republic of China 516006
86-752-3125862
(Address
and Telephone Number of Principal Executive Offices)
Corporation
Service Company
2711
Centerville Road
Suite
400
Wilmington,
DE 19808
800-222-2122
(Name,
Address and Telephone Number of Agent for Service)
Copies
to
Thomas
J. Poletti, Esq.
Anh
Q. Tran, Esq.
K&L
Gates LLP
10100
Santa Monica Blvd., 7th Floor
Los
Angeles, CA 90067
Telephone
(310) 552-5000
Facsimile
(310) 552-5001
|
V.
Joseph Stubbs, Esq.
Scott
Galer, Esq.
Stubbs
Alderton & Markiles, LLP
15260
Ventura Boulevard, 20th Floor
Sherman
Oaks, California 91403
Telephone
(818) 444-4500
Facsimile
(818) 444-4520
|
Approximate Date of Proposed Sale to
the Public: As soon as practicable after the effective date of this
Registration Statement.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. o
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. 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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller
reporting company o
|
CALCULATION
OF REGISTRATION FEE
Proposed
|
||||||||
Maximum
|
Amount of
|
|||||||
Title of Each Class of
|
Aggregate
|
Registration
|
||||||
Securities To Be Registered
|
Offering Price(1)
|
Fee
|
||||||
Common
Stock, $0.0001 par value per share
|
$ | 23,000,000 | (2) | $ | 1,639.90 | |||
Underwriters’
Warrants to Purchase Common Stock(3)
|
n/a | n/a | ||||||
Common
Stock Underlying Underwriters’ Warrants, $0.0001 par value per
share(3)
|
$ | 750,000 | $ | 53.48 | ||||
Total
Registration Fee
|
$ | 1,693.38 | (4) |
|
(1)
|
Pursuant
to Rule 416 under the Securities Act of 1933, this registration statement
shall be deemed to cover the additional securities (i) to be offered or
issued in connection with any provision of any securities purported to be
registered hereby to be offered pursuant to terms which provide for a
change in the amount of securities being offered or issued to prevent
dilution resulting from stock splits, stock dividends, or similar
transactions and (ii) of the same class as the securities covered by this
registration statement issued or issuable prior to completion of the
distribution of the securities covered by this registration statement as a
result of a split of, or a stock dividend on, the registered
securities.
|
|
(2)
|
Estimated
solely for the purpose of calculating the amount of the registration in
accordance with Rule 457(o) under the Securities Act of 1933, as
amended. Includes an estimated $3,000,000 proposed maximum
aggregate offering price from the sale of shares of common stock which may
be issued pursuant to the exercise of a 45-day option granted by the
registrant to the underwriters to cover over-allotments, if
any.
|
|
(3)
|
The
Registrant will sell to the underwriters for this public offering warrants
to purchase a number of shares of common stock that is equal to 3% the
aggregate number of shares sold in this offering excluding the
over-allotment option. The warrants will be exercisable at a
per share exercise price equal to 125% of the public offering
price. As estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(g) under the Securities Act, the
proposed maximum aggregate offering price of the underwriters’ warrants is
$750,000, which is equal to 125% of $600,000 (3% of
$20,000,000). In accordance with Rule 457(g) under the
Securities Act, because the shares of the Registrant’s common stock
underlying the underwriters’ warrants are registered hereby, no separate
registration fee is required with respect to the warrants registered
hereby.
|
|
(4)
|
Previously
paid.
|
The
Registrant amends this registration statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933, or until the registration statement shall become effective on such date
as the Commission, acting pursuant to Section 8(a), may determine.
The
information in this prospectus is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and we are not
soliciting offers to buy these securities
in any state where the offer or sale is not
permitted.
PRELIMINARY
PROSPECTUS
|
SUBJECT
TO COMPLETION, DATED APRIL 19,
2010
|
$20,000,000
of Common Stock
NIVS
IntelliMedia Technology Group, Inc.
NIVS
IntelliMedia Technology Group, Inc. is offering $20,000,000 of shares of its
common stock. The number of shares that we will offer will be
determined based on the public offering price per share.
Our
shares of common stock are traded on the NYSE Amex under the ticker symbol
“NIV.” On April 16, 2010, the closing sales price for our common stock on the
NYSE Amex was $3.42 per share.
The purchase of the securities
involves a high degree
of risk. See section entitled “Risk Factors” beginning on page
6.
Per Share
|
Total
|
|||||||
Public
offering price
|
$ | $ | ||||||
Underwriting
discounts and commissions(1)
|
$ | $ | ||||||
Proceeds,
before expenses, to NIVS IntelliMedia Technology Group,
Inc.
|
$ | $ |
(1) The
underwriters will receive compensation in addition to the discounts and
commissions as set forth under “Underwriting.”
The
underwriters have a 45-day option to purchase up
to additional
shares of common stock from us solely to cover over-allotments, if
any. If the underwriters exercise this option in full, the total
underwriting discounts and commissions will be
$ ,
and our total proceeds, before expenses, will be
$ . The
underwriters will also receive warrants to
purchase shares
of our common stock in connection with this offering.
The
underwriters are offering the common stock as set forth under “Underwriting.”
The underwriters expect to deliver the shares of common stock to purchasers on
or
about ,
2010.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Rodman
& Renshaw, LLC
|
WestPark
Capital, Inc.
|
The Date
of this Prospectus
is: ,
2010
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
1
|
|
SUMMARY
CONSOLIDATED FINANCIAL DATA
|
5
|
|
RISK
FACTORS
|
6
|
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
29
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|
USE
OF PROCEEDS
|
30
|
|
PRICE
RANGE OF OUR COMMON STOCK
|
30
|
|
DIVIDEND
POLICY
|
31
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CAPITALIZATION
|
32
|
|
DILUTION
|
33
|
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
35
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
36
|
|
DESCRIPTION
OF BUSINESS
|
52
|
|
MANAGEMENT
|
66
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
74
|
|
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
77
|
|
CHANGE
IN ACCOUNTANTS
|
79
|
|
DESCRIPTION
OF SECURITIES
|
79
|
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
82
|
|
UNDERWRITING
|
84
|
|
LEGAL
MATTERS
|
86
|
|
EXPERTS
|
86
|
|
ADDITIONAL
INFORMATION
|
86
|
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
|
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
II-1
|
|
SIGNATURES
|
II-7
|
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell,
nor is it seeking an offer to buy, these securities in any state where the offer
or sale is not permitted. The information in this prospectus is
complete and accurate as of the date on the front cover, but the information may
have changed since that date.
i
PROSPECTUS
SUMMARY
Because this is only a summary, it
does not contain all of
the information that may be important to you. You should carefully read the more
detailed information contained in this prospectus, including our financial
statements and related notes. Our business involves significant risks. You
should carefully consider the information under
the heading "Risk Factors" beginning on page 6.
As
used in this prospectus, unless otherwise indicated, the terms “we,” “our,”
“us,” “Company” and “NIVS” refer to NIVS IntelliMedia Technology Group, Inc., a
Delaware corporation. We conduct our business through our subsidiaries, which
include our wholly-owned subsidiary, NIVS Holding Company Limited, a British
Virgin Islands corporation (“NIVS BVI”), and NIVS (Huizhou) Audio & Video
Tech. Co., Ltd., a company organized under the laws of the PRC (“NIVS PRC”),
which is 97.5% owned by NIVS BVI and 2.5% owned by Tianfu Li, our Chief
Executive Officer and Chairman of the Board. “China” or “PRC” refers
to the People’s Republic of China. “RMB” or “Renminbi” refers to the legal
currency of China and “$” or “U.S. Dollars” refers to the legal currency of the
United States.
Our
Company
We are
engaged in the design, manufacture, marketing and sale of consumer electronic
products. Our products primarily consist of audio and video products, including
digital audio systems, televisions, digital video broadcasting (“DVB”) set-top
boxes, DVD players, as well as audio/video peripheral and accessory
products. We have invested substantial resources in the research and
development of our intelligent audio and video consumer products, most of which
utilize our Chinese speech interactive technology to permit users to control our
products through their spoken commands. We recently added mobile
phones and other 3G communication devices to our product
portfolio. In January 2010, we acquired Dongri, a mobile phone
product manufacturer, for a purchase price of up to $23 million. Our
products are distributed worldwide, including markets in Europe, Southeast Asia
and North America.
Our
Industry
We
compete within certain categories in the wholesale consumer electronics
industry, primarily focused on standard and intelligent audio and video
equipment, in addition to the mobile phone industry. Our products in
the standard audio and video equipment category include mid and high-end home
audio products, including premium home theater systems, speakers, shelf-stereo
systems, televisions, DVD players, DVB set-top boxes, portable digital players,
and related products. Growth of this market segment has been driven
primarily due to the increase in consumer demand for flat screen digital
televisions and for audio and visual products that complement flat screen
televisions to create a home theater experience.
The
market for intelligent audio and video products consists of traditional video
and audio products combined with speech-based interface. Our products
that compete in the intelligent audio and video equipment category are based on
the Chinese language and include many of the types of products that we offer in
our line of standard audio and video products, except these products are
equipped with our speech interactive technology. The market for
intelligent audio and video products is less developed than the market for
standard audio and video equipment, and the market for products in this market
based on Chinese language is less developed than products based on Western
languages. The intelligent audio and video electronics market has
experienced growth in part due to consumer demand for simple, convenient
interfaces.
The
mobile phone market in China has experienced rapid growth over the past several
years, driven in part by the country’s strong overall economic
development. China maintains a relatively low mobile phone
penetration rate, which we believe may lead to additional substantial growth in
the sector. The Chinese government has adopted 3G standards, and in
May 2008, it announced a restructuring plan to increase competition in the
telecommunications market by permitting two additional wireless carriers, China
Telecom and China Unicom, to enter the market that was previously dominated by
China Mobile. We believe that increased competition in the mobile
telecom market will stimulate demand for 3G mobile phones and related
accessories in China.
1
Our
Competitive Strengths
We
believe the following strengths contribute to our competitive advantages and
differentiate us from our competitors:
|
·
|
Design and manufacturing
capabilities. We utilize an experienced senior design
team, 2.7 million square foot factory, and over 1,600 production employees
to improve the quality of our products, reduce costs, and keep pace with
current standards of the rapidly evolving consumer electronics
industry.
|
|
·
|
Market
position. Since the inception of NIVS PRC in 1998, we
have strengthened our ability to bring to the market well-differentiated
products that perform well against competitive offerings based on price,
style, and brand recognition, and our specific Mandarin-speech interaction
technology has broad application to consumer products and has allowed us
to distinguish our products from those of our
competitors.
|
|
·
|
Experienced management
team. Led by our CEO, Tianfu Li, with his 20 years of
experience in the consumer electronics industry, our senior management
team has extensive business and industry experience, including an
understanding of changing market trends, consumer needs, technologies and
our ability to capitalize on the opportunities resulting from these market
changes.
|
|
·
|
Well-established distribution
channels. Our products are sold domestically in China at
over 8,000 points of sale and internationally through numerous channels,
including independent specialty retailers, international and regional
chains, mass merchants, and
distributors.
|
|
·
|
Brand
awareness. Our consumer electronic products marketed
under the NIVS brand, have become a recognized brand name in
China. In September 2009, we were granted a license by the
China Ministry of Industry and Information Technology to manufacture and
market mobile phones under our NIVS
brand.
|
|
·
|
Customer service
expertise. We work closely with our major customers in
order to ensure high levels of customer satisfaction by offering flexible
delivery methods and product feedback opportunities. For our OEM
customers, we provide a complete range of services, allowing us to take
customer products from initial design through production to testing,
distribution and after-market
support.
|
Our
Strategy
Our goal
is to become a global leader in the development and manufacture of consumer
electronic products. We intend to achieve this goal by implementing the
following strategies.
|
·
|
Expand offering of mobile
phone and speech-controlled products. We plan to continue to
leverage our expertise in product design and development, our intellectual
property platform, and our diverse distribution network by continuing to
develop and introduce mobile phones. We also plan to strengthen
the performance of our Mandarin speech technology to provide users with an
easy-to-use, speech-enabled interaction with consumer audio/visual
products.
|
|
·
|
Build partnerships with new
and existing clients. We intend to leverage our Mandarin-speech
interactive technology to develop relationships and strategic alliances
with third-party developers, vendors and manufacturers of mobile phones,
entertainment devices and GPS navigation devices for use in their
products.
|
|
·
|
Expand global presence.
We intend to expand our international resources to better serve our
global customers and business associates and to leverage opportunities in
markets such as Hong Kong, the Middle East, India, Great Britain, Germany,
the United States and Argentina.
|
|
·
|
Augment marketing and
promotion efforts to increase brand awareness. We
continue to devote our efforts towards brand development and utilize
marketing concepts in an attempt to strengthen the marketability of our
products.
|
|
·
|
Expand sales network and
distribution channels. We
intend to expand our sales network in China and develop relationships with
a broader set of wholesalers, distributors and resellers, all in order to
expand the market availability of our products in
China.
|
2
Corporate
Information
We were
incorporated in the State of Delaware on December 7, 2006. On July
25, 2008, we closed a share exchange transaction pursuant to which we became the
100% parent of NIVS BVI, assumed to the operations of NIVS BVI and its
subsidiaries, and changed our corporate name to NIVS IntelliMedia Technology
Group, Inc. NIVS BVI is primarily a holding company. NIVS
PRC was founded in 1998 in Huizhou, Guangdong.
Our
principal executive offices and our manufacturing and product development
facilities are located in Huizhou, Guangdong, People’s Republic of
China. Our corporate offices are located at NIVS Industry Park, No.
29-31, Shuikou Road, Huizhou, Guangdong, People’s Republic of China
516006.
Our
corporate website is located at www.nivsgroup.com/english/.
Information contained on, or that can be accessed through, our corporate website
is not part of this prospectus.
Our
shares of common stock are traded on the NYSE Amex under the ticker symbol
“NIV.”
3
The
Offering
Common
stock we are offering
|
shares (1)
|
|
Common
stock outstanding after the offering
|
shares (2)
|
|
Offering
price
|
$ per
share
|
|
Use
of proceeds
|
We
intend to use the net proceeds of this offering for general corporate
purposes. See "Use of Proceeds" on page 30 for more information on the use
of proceeds.
|
|
Risk
factors
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 6.
|
|
NYSE
Amex symbol
|
NIV
|
The
number of shares of our common stock to be outstanding after the closing of this
offering is based on 40,675,347 shares outstanding as of April 16, 2010 and
excludes the following shares potentially issuable as of that
date:
|
·
|
4,000,000
shares of common stock reserved for issuance under our 2009 Omnibus
Incentive Plan;
|
|
·
|
55,000
shares of common stock issuable upon the exercise of outstanding warrants
with a weighted average exercise price of $4.20 per share;
and
|
|
·
|
shares
of common stock available for issuance by us pursuant to the underwriters’
over-allotment option related to this
offering.
|
Except as
otherwise indicated, all information in this prospectus assumes no exercise of
the underwriters’ over-allotment option.
4
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following summary financial information contains consolidated statements
of income data for the years ended December 31, 2009, 2008, 2007, 2006 and
2005 and the consolidated balance sheet data as of December 31, 2009, 2008,
2007, 2006 and 2005. The consolidated statements of income data
and balance sheet data were derived from the audited consolidated financial
statements. Such financial data should be read in conjunction with
the consolidated financial statements and the notes to the consolidated
financial statements starting on page F-1 and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Consolidated Statements of
Income
Years ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(all amounts are in thousands except share and per share amounts)
|
|||||||||||||||||||
Revenue
|
$ | 185,198 | $ | 143,631 | $ | 77,627 | $ | 37,735 | $ | 21,966 | ||||||||||
Other
Sales
|
282 | 415 | 516 | 53 | - | |||||||||||||||
Cost
of Goods Sold
|
(142,416 | ) | (109,763 | ) | (58,864 | ) | (28,072 | ) | (17,300 | ) | ||||||||||
Gross Profit
|
43,064 | 34,283 | 19,279 | 9,716 | 4,666 | |||||||||||||||
|
||||||||||||||||||||
Selling Expenses
|
6,761 | 5,376 | 3,270 | 1,792 | 837 | |||||||||||||||
|
||||||||||||||||||||
General and
administrative
|
||||||||||||||||||||
Amortization
|
79 | 69 | 62 | 59 | 137 | |||||||||||||||
Depreciation
|
331 | 337 | 328 | 300 | 198 | |||||||||||||||
Bad
debts (recovery)
|
(2,745 | ) | 2,531 | 473 | 133 | 81 | ||||||||||||||
Merger
cost
|
- | 1,786 | - | - | - | |||||||||||||||
Stock-based
compensation
|
- | 765 | - | - | - | |||||||||||||||
Other
G&A expense
|
4,850 | 3,172 | 2,548 | 1,126 | 832 | |||||||||||||||
Total General and
administrative
|
2,515 | 8,660 | 3,411 | 1,618 | 1,248 | |||||||||||||||
Research and
development
|
5,315 | 1,737 | 373 | 417 | 230 | |||||||||||||||
Total operating
expenses
|
14,591 | 15,773 | 7,054 | 3,827 | 2,315 | |||||||||||||||
Income from
operations
|
28,473 | 18,510 | 12,225 | 5,889 | 2,351 | |||||||||||||||
|
||||||||||||||||||||
Other income
(expenses)
|
||||||||||||||||||||
Government
grant
|
576 | 32 | 28 | - | 160 | |||||||||||||||
Write-down
of inventory
|
- | (132 | ) | (105 | ) | - | (5 | ) | ||||||||||||
Gain
on disposal of assets
|
- | - | - | 1,226 | - | |||||||||||||||
Interest
income
|
- | - | 235 | 19 | 11 | |||||||||||||||
Interest
expense
|
(1,567 | ) | (2,208 | ) | (1,792 | ) | (863 | ) | (319 | ) | ||||||||||
Imputed
interest
|
- | (656 | ) | (527 | ) | (125 | ) | (97 | ) | |||||||||||
Sundry
income (expense), net
|
11 | (52 | ) | (111 | ) | (56 | ) | (7 | ) | |||||||||||
Total other income
(expenses)
|
(980 | ) | (3,016 | ) | (2,272 | ) | 201 | (257 | ) | |||||||||||
|
||||||||||||||||||||
Income before Noncontrolling
interest and income taxes
|
27,493 | 15,494 | 9,953 | 6,090 | 2,094 | |||||||||||||||
Income
taxes
|
(3,406 | ) | (2,031 | ) | (1,269 | ) | (753 | ) | - | |||||||||||
Noncontrolling
interest
|
(630 | ) | (430 | ) | (217 | ) | (135 | ) | (56 | ) | ||||||||||
|
||||||||||||||||||||
Net Income
|
$ | 23,457 | $ | 13,033 | $ | 8,467 | $ | 5,202 | $ | 2,038 |
Consolidated
Balance Sheets
As of December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(in thousands)
|
|||||||||||||||||||
Total
Current Assets
|
$ | 63,122 | $ | 44,963 | $ | 25,309 | $ | 16,768 | $ | 12,287 | ||||||||||
Total
Assets
|
140,477 | 118,924 | 88,554 | 37,015 | 34,860 | |||||||||||||||
Total
Current Liabilities
|
59,786 | 63,592 | 59,528 | 28,715 | 19,415 | |||||||||||||||
Total
Liabilities
|
59,786 | 71,435 | 70,537 | 34,808 | 29,469 | |||||||||||||||
Total
Stockholders’ Equity
|
80,691 | 47,489 | 18,017 | 2,207 | 5,391 |
5
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 prospectus 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. The trading price could decline due to
any of these risks, and an investor may lose all or part of his
investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting our
company. This prospectus 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 we face as described below and
elsewhere in this prospectus.
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
year ended December 31, 2009, we had four customers that each accounted for at
least 5% of the revenues that we generated, with one customer accounting for
15.9% of our revenue. These four customers accounted for a total of
approximately 34.9% of our revenue for that period. During the years ended
December 31, 2008 and 2007, we had four and five customers that generated
revenues of at least 5% of our revenues, with one customer accounting for 12.7%
and 13.5% of our revenue, respectively. These customers accounted for a total of
approximately 33.4% and 38.4% of our revenue for the years ended December 31,
2008 and 2007, respectively. The loss of any of these customers
could have a material adverse effect upon our revenue and net
income.
In
addition, we believe that one customer will represent substantially all of our
mobile phone product sales in the foreseeable. We entered into a purchase
agreement with Kuanda (Xiamen) Communications Co., Ltd and China PTAC
Communications Services, on behalf of China Telecom, for the purchase by China
Telecom of our 3G mobile phone products. PRC law currently permits
only three wireless carriers in the China telecommunications market, China
Mobile, China Telecom and China Unicom. The purchase agreement
that we have with China Telecom is contingent on delivery of the 3G mobile
phones representing the aggregate order by March 31, 2010. Final
delivery under the agreement has been delayed as a result of China Telecom's
improvement of their 3G mobile phone application platform and is currently
anticipated to be completed in May 2010. The value of the order is
approximately $28.8 million; the dollar value of any additional orders further
to this relationship depends on the final number of delivered
products. If we fail to meet the requirements of the order or
otherwise lose China PTAC as a customer could result in a material adverse
effect upon our revenue and net income.
Our
lack of long-term purchase orders and commitments could lead to a rapid decline
in our sales and profitability.
All of
our significant customers issue purchase orders solely in their own discretion,
often only two to four weeks before the requested date of shipment. Our
customers are generally able to cancel orders or delay the delivery of products
on relatively short notice. In addition, our customers may decide not to
purchase products from us for any reason. Accordingly, we cannot assure you that
any of our current customers will continue to purchase our products in the
future. As a result, our sales volume and profitability could decline rapidly
with little or no warning whatsoever.
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
allocate 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.
6
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 52.6% and 45.3% of our total current assets as of December 31,
2009 and 2008, respectively. As of December 31, 2009, 51.3% of our accounts
receivable represented amounts owed by four customers, each of which represented
over 5% 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.
In
addition, our business is characterized by long periods for collection from our
customers and short periods for payment to our suppliers, the combination of
which may cause us to have liquidity problems. We experience an
average accounts settlement period ranging from one month to as high as four
months from the time we sell our products to the time we receive payment from
our customers. In contrast, we typically need to place certain deposits and
advances with our suppliers on a portion of the purchase price in advance and
for some suppliers we must maintain a deposit for future orders. Because our
payment cycle is considerably shorter than our receivable cycle, we may
experience working capital shortages. Working capital management, including
prompt and diligent billing and collection, is an important factor in our
results of operations and liquidity. We cannot assure you that system problems,
industry trends or other issues will not extend our collection period, adversely
impact our working capital.
The
growth of aging receivables and a deterioration in the collectability of these
accounts could adversely affect our results of operations.
We provide for bad debts principally
based upon the aging of accounts receivable, in addition to collectability of
specific customer accounts, our history of bad debts, and the general condition
of the industry. Our doubtful account allowance at December 31, 2009 was $0.6
million, compared to $3.4 million at December 31, 2008 and $0.7 million at
December 31, 2007. During 2008 and earlier portions of 2009, we have experienced
increases in doubtful account reserves in the past due to an increase in the
aging of our accounts receivable, the growth of the outstanding balance of
receivables, the general decline in the domestic and global economy, and other
factors. Our general and administrative expenses for the year ended December 31,
2009 include a bad debt reversal of approximately $(2.7) million as
compared to $2.5 million bad debt expense for the prior year. We
believe that the reversal of bad debt allowance was justified due to an
improvement in the Chinese economy in late 2009, stable collection of accounts
receivable in 2009 and our efforts to collect outstanding old accounts
receivables in 2009. Due to the difficulty in assessing future trends, we
could be required to further increase our provisions for doubtful
accounts. As our accounts receivable age and become uncollectible our
cash flow and results of operations are negatively impacted.
Our
history of negative working capital could adversely affect our ability to raise
additional capital to fund our operations and limit our ability to react to
changes in the economy or our industry.
We
had working capital of approximately $3.3 million and negative working
capital of approximately, $18.6 million and $34 million as of December 31, 2009,
2008 and 2007, respectively. The negative working capital was largely caused by
the substantial increase in financing from bank loans and notes. Our
substantial leverage could adversely affect our ability to raise additional
capital to fund our operations, limit our ability to react to changes in the
economy or our industry, expose us to interest rate risk to the extent of our
variable rate debt and prevent us from meeting our obligations under the Notes
and Credit Facility. Our high degree of leverage could have important
consequences for you, including:
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increasing
our vulnerability to adverse economic, industry or competitive
developments;
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requiring
a substantial portion of cash flow from operations to be dedicated to the
payment of principal and interest on our indebtedness, therefore reducing
our ability to use our cash flow to fund our operations, capital
expenditures and future business
opportunities;
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exposing
us to the risk of increased interest
rates;
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making
it more difficult for us to satisfy our obligations with respect to our
indebtedness and any failure to comply with the obligations of any of our
debt instruments that we may have or obtain, including restrictive
covenants and borrowing conditions, could result in an event of default
the agreements governing such other
indebtedness;
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restricting
us from making strategic acquisitions or causing us to make non-strategic
divestitures;
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7
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limiting
our ability to obtain additional financing for working capital, capital
expenditures, product development, debt service requirements, acquisitions
and general corporate or other purposes;
and
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limiting
our flexibility in planning for, or reacting to, changes in our business
or market conditions and placing us at a competitive disadvantage compared
to our competitors who are less highly leveraged and who therefore, may be
able to take advantage of opportunities that our leverage prevents us from
exploiting.
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Our
acquisition of Dongri in January 2010 may not result in the benefits and revenue
growth we expect.
In
January 2010, our wholly-owned subsidiary, NIVS Holding Company Limited,
acquired 100% of the equity interest in Huizhou Dongri Digital Co., Ltd., a
company organized under the laws of the People’s Republic of China (“Dongri”)
for a purchase price of up $23 million. Our acquisition of Dongri and
its manufacturing facility could expose us to potential liabilities, some of
which may not be disclosed by the seller, and there are no assurances that our
acquisition of Dongri will enhance our future financial condition. We
may continue to acquire additional businesses in the future. This acquisition
and future acquisitions involve substantial risks, including:
·
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integration and management of the
operations;
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retention of key
personnel;
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integration of information
systems, internal procedures, accounts receivable and management,
financial and operational
controls;
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diversion of management’s
attention from other ongoing business concerns; and exposure to
unanticipated liabilities of acquired
companies;
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uncertainty as to whether PRC
governmental authorities will question the structure of the acquisition
and require approval of PRC authorities that would have the ability to
seek to void the
transaction;
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unforeseen tax liability in
connection with our possession and operation of the Dongri;
and
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failure to realize anticipated
financial results or
benefits.
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These and
other factors could harm our ability to achieve anticipated levels of
profitability or realize other anticipated benefits of an acquisition and could
adversely affect our business and operating results.
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.
8
We
have significant outstanding short-term borrowings, and we may not be able to
obtain extensions when they mature.
Our notes payable to banks for
short-term borrowings for the years ended December 31, 2009 and 2008 were
approximately $51.7 million and $54.7 million, respectively. Generally, these
short-term bank loans mature in one year or less and contain no specific renewal
terms. However, in China it is customary practice for banks and borrowers to
negotiate roll-overs or renewals of short-term borrowings on an on-going
basis shortly before they mature. Although we have renewed our short-term
borrowings in the past, we cannot assure you that we will be able to renew these
loans in the future as they mature. In January 2010, the Chinese government took
steps to tighten the availability of credit including ordering banks to increase
the amount of reserves they hold and to reduce or limit their lending. If we are
unable to obtain renewals of these loans or sufficient alternative funding on
reasonable terms from banks or other parties, we will have to repay these
borrowings with the cash on our balance sheet or cash generated by our future
operations, if any. We cannot assure you that our business will generate
sufficient cash flow from operations to repay these borrowings.
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 bank loans and net revenues to meet our short-term cash
requirements. In order to grow revenues and sustain profitability, we will need
additional capital. In addition to this offering, we completed a
public offering of shares of common stock in March 2009, and we may conduct
additional financing transactions in the future. 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.
Consumer
electronics products, mobile phones in particular, 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.
Consumer
electronics products are subject to rapid technological changes which often
cause product obsolescence. Companies within the consumer electronics 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 extremely 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.
Moreover,
changes in mobile phone industry standards and technologies, customer
preferences and government regulation could limit our ability to sell our mobile
phone products. The mobile phone market is particularly characterized
by changing consumer demands for cellular telephone functions and applications,
rapid product obsolescence and price erosion, intense competition, evolving
industry standards, and wide fluctuations in product supply and demand. These
factors require us to continuously develop new products and enhance our existing
products to stay competitive. The market has recently experience
rapid transitions from widespread market adoption of 2G, 2.5G, 2.75G and 3G
technologies, and continued changes in industry standards may make our existing
products obsolete or negate the cost advantages we believe we have in our
products.
Mobile
communications, information technology, media and consumer electronics
industries are also converging in some areas into one broader industry leading
to the creation of new mobile devices, services and ways to use mobile devices.
As a result, new market segments within the mobile communications industry have
begun to emerge and we have made significant investments in new business
opportunities in certain of these market segments, such as our acquisition of
Dongri, a mobile phone manufacturer. However, a number of the new market
segments in the mobile communications industry are still in early stages of
their development, and it may be difficult for us to accurately predict which
new market segments are the most advantageous for us to focus on. As a result,
if the segments on which we have chosen to focus grow less than expected, we may
not receive a return on our investment as soon as we expect, or at all. We may
also forego growth opportunities in new market segments of the mobile
communications industry on which we do not focus.
9
In
addition, we form alliances or business relationships with, and make strategic
partnerships with, other companies to introduce new
technologies. This is particularly important to the development and
enhancement of our Chinese interactive speech technology. In some cases, such
relationships are crucial to our goal of introducing new products and services,
but we may not be able to successfully collaborate or achieve expected synergies
with our partners. We do not, however, control these partners, who may make
decisions regarding their business undertakings with us that may be contrary to
our interests. In addition, if these partners change their business strategies,
we may fail to maintain these relationships.
Our
expansion into the mobile phone industry will depend on the continued growth of
the mobile communications industry, and if the mobile communications industry
does not grow as we expect, our sales and profitability may be adversely
affected.
We have
recently made significant investments to enter into the mobile phone industry,
and sales of our mobile phone products depend on continued growth in mobile
communications in terms of the number of existing mobile subscribers who upgrade
or simply replace their existing mobile devices, the number of new subscribers
and increased usage. As well, our sales and profitability are affected by the
extent to which there is increasing demand for, and development of, value-added
services, leading to opportunities for us to successfully market mobile devices
that feature these services. These developments are outside of our control. For
example, we are dependent on operators in highly penetrated markets to
successfully introduce services that cause a substantial increase in usage of
voice and data. If operators are not successful in their attempts to increase
subscriber numbers, stimulate increased usage or drive replacement sales, our
business and results of operations could be materially adversely
affected.
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 except for property insurance policies with limited
coverage. 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 additional insurance coverage in the future, and
even if we are able to obtain additional 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.
We
may be exposed to monetary fines by the local housing authority and claims from
our employees in connection with NIVS PRC Light’s non-compliance with
regulations with respect to contribution of housing provident funds for
employees.
According
to the relevant PRC regulations on housing provident funds, PRC enterprises are
required to contribute housing provident funds for their employees. The monthly
contributions must beat least 5% of each employee’s average monthly income in
the previous year. NIVS PRC has not paid such funds for its employees since its
establishment and the accumulated unpaid amount is approximately $870,000. Under
local regulations on collection of housing provident funds in Huizhou City where
NIVS PRC is located, the local housing authority may require NIVS PRC to rectify
its non-compliance by setting up bank accounts and making payment and relevant
filings for the unpaid housing funds for its employees within a specified time
period. If NIVS PRC fails to do so within the specified time period, the local
housing authority may impose a monetary fine on it and may also apply to the
local people’s court for enforcement. NIVS PRC employees may also be entitled to
claim payment of such funds individually. We accrued the entire $870,000 amount
in our financial statements as of December 31, 2009. If we receive
any notice from the local housing authority or any claim from our current and
former employees regarding our non-compliance with the regulations, we will be
required respond to the notice and pay all amounts due to the government,
including any administrative penalties imposed, which would require us to divert
our financial resources and/or impact our cash reserves, if any, to make such
payments. Additionally, any administrative costs in excess of the payments, if
material, may impact our operating results.
10
We
could be liable for damages for defects in our products pursuant to the Tort
Liability Law and Product Liability Law of the PRC.
The Tort
Liability Law of the People’s Republic of China, which was passed during the
12th Session of the Standing Committee of the 11th National People’s Congress on
December 26, 2009, states that manufacturers are liable for damages caused by
defects in their products and sellers are liable for damages attributable to
their fault. If the defects are caused by the fault of third parties such as the
transporter or storekeeper, manufacturers and sellers are entitled to claim for
compensation from these third parties after paying the compensation
amount.
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.
Allegations
of health risks from the electromagnetic fields generated by mobile devices, and
the lawsuits and publicity relating to them, regardless of merit, could affect
our operations negatively by leading consumers to reduce their use of mobile
devices or by causing us to allocate monetary and personnel resources to these
issues.
There has
been public speculation about possible health risks to individuals from exposure
to electromagnetic fields from the use of mobile devices such as mobile phones,
which we manufacture and sell. While a substantial amount of
scientific research conducted to date by various independent research bodies has
indicated that these radio signals, at levels within the limits prescribed by
public health authority safety standards and recommendations, present no adverse
effect to human health, we cannot be certain that future studies,
irrespective of their scientific basis, will not suggest a link between
electromagnetic fields and adverse health effects that would adversely affect
our sales and share price. Research into these issues is ongoing by government
agencies, international health organizations and other scientific bodies in
order to develop a better scientific and public understanding of these
issues.
Although
our products and solutions are designed to meet all relevant safety standards
and recommendations globally, no more than a perceived risk of adverse health
effects of mobile communications devices could adversely affect us through a
reduction in sales of mobile devices or increased difficulty in obtaining sites
for base stations, and could have a negative effect on our reputation and brand
value as well as harm our share price.
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 Europe,
Southeast Asia, and North America. These operations are subject to risks that
are inherent in operating in foreign countries, including the
following:
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foreign
countries could change regulations or impose currency restrictions and
other restraints;
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changes
in foreign currency exchange rates and hyperinflation or deflation in the
foreign countries in which we
operate;
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exchange
controls;
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some
countries impose burdensome tariffs and
quotas;
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political
changes and economic crises may lead to changes in the business
environment in which we operate;
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international
conflict, including terrorist acts, could significantly impact our
financial condition and results of operations;
and
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11
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economic
downturns, political instability and war or civil disturbances may disrupt
distribution logistics or limit sales in individual
markets.
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In
addition, we utilize third-party distributors to act as our representative for
the geographic region that they have been assigned. Sales through distributors
represent approximately 70% of total revenue. 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. Since the product transfers
title to the distributor at the time of shipment by us, the products are not
considered inventory on consignment. Our success is dependent on these
distributors finding new customers and receiving new orders from existing
customers.
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 our fiscal years ended December 31, 2009, 2008 and 2007, these
organizations were responsible for approximately 15%, 17% and 18%, respectively,
of our domestic net revenues during such periods. 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
speech-controlled products may not achieve widespread acceptance or may have
bugs, which could result in delayed or lost revenue, expensive correction,
liability to our customers or claims against us.
We have
invested and expect to continue to invest heavily in the research, development
and marketing of our Mandarin-speech technology consumer products. The market
for these products are is relatively new and rapidly evolving. Our ability to
increase revenue in the future depends largely on acceptance of
speech-controlled consumer electronic products in general and our products in
particular. The continued development of the market for our current and future
speech solutions will also depend on:
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consumer
and business demand for speech-enabled products and
applications;
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continuous
improvement in speech interactive technology;
and
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development
by third-party vendors and manufacturers of applications using speech
technologies.
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Sales of
our speech-controlled products would be harmed if the market for such products
does not continue to develop or develops more slowly than we expect, and,
consequently, our business would be harmed and we may not recover the costs
associated with our investment in our speech interactive
technologies.
In
addition, complex software applications, such as our Chinese speech interactive
technology, often contain errors, defects or bugs. Defects in the solutions or
products that we develop and sell to our customers could require expensive
corrections and result in delayed or lost revenue, adverse customer reaction and
negative publicity about us or our products and services. Customers who are not
satisfied with any of our products may also bring claims against us for damages,
which, even if unsuccessful, would likely be time-consuming to defend, and could
result in costly litigation and payment of damages. Such claims could harm our
reputation, financial results and competitive position.
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
consumer electronics industry is highly competitive, especially with respect to
pricing and the introduction of new products and features. Our products compete
in the medium- to high- priced sector of the consumer electronics market and
compete primarily on the basis of reliability, brand recognition, quality,
price, design, consumer acceptance of our trademark, and quality service and
support to retailers and our customers.
12
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:
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significantly
longer operating histories;
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significantly
greater managerial, financial, marketing, technical and other competitive
resources; and
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greater
brand recognition.
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As a
result, our competitors may be able to:
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adapt
more quickly to new or emerging technologies and changes in customer
requirements;
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devote
greater resources to the promotion and sale of their products and
services; and
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respond
more effectively to pricing
pressures.
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These
factors could materially adversely affect our operations and financial
condition. In addition, competition could increase if:
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new
companies enter the market;
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existing
competitors expand their product mix;
or
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we
expand into new markets.
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An
increase in competition could result in material price reductions or loss of our
market share.
The
consumer electronics 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. 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. 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.
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 manufacturers, 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.
13
We
rely heavily on the founder of NIVS PRC and our current Chief Executive Officer,
Tianfu Li. The loss of his services could adversely affect our ability to source
products from our key suppliers and our ability to sell our products to our
customers.
Our
success depends, to a significant extent, upon the continued services of Tianfu
Li, who is the founder of NIVS PRC and our current Chairman of the Board and
Chief Executive Officer. Mr. Li has, among other things, developed key personal
relationships with our suppliers and customers. We greatly rely on these
relationships in the conduct of our operations and the execution of our business
strategies. The loss of Mr. Li could, therefore, result in the loss
of favorable relationships with one or more of our suppliers and/or customers.
We do not maintain "key person" life insurance covering Mr. Li or any other
executive officer. The loss of Mr. Li could significantly delay or prevent the
achievement of our business objectives and adversely affect our business,
financial condition and results of operations.
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 due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law, which became
effective on January 1, 2008, amended and formalized workers’ rights concerning
overtime hours, pensions, layoffs, employment contracts and the role of trade
unions. As a result of the new law, we have had to increase the salaries of our
employees, provide additional benefits to our employees, and revise certain
other of our labor practices. The increase in labor costs has increased our
operating costs, which increase we have not always been able to pass through to
our customers. In addition, under the new law, employees who either have worked
for us for 10 years or more or who have had two consecutive fixed-term contracts
must be given an “open-ended employment contract” that, in effect, constitutes a
lifetime, permanent contract, which is terminable only in the event the employee
materially breaches our rules and regulations or is in serious dereliction of
his or her duties. Such non-cancelable employment contracts will substantially
increase our employment related risks and limit our ability to downsize our
workforce in the event of an economic downturn. No assurance can be given that
we will not in the future be subject to labor strikes or that we will not have
to make other payments to resolve future labor issues caused by the new laws.
Furthermore, 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.
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 own a trademark related to the sale of our
products, which is materially important to our business, as well as our
licenses, other trademarks and proprietary rights that are used for certain of
our home entertainment and consumer electronics products. Our trademarks are
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 trademarks, the value of these marks 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.
|
14
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.
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:
• 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;
• 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
• 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.
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. We also operate
procurement, logistics, sales and marketing facilities in other parts of the
world. 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.
Our
quarterly results may fluctuate because of many factors and, as a result,
investors should not rely on quarterly operating results as indicative of future
results.
Fluctuations
in operating results or the failure of operating results to meet the
expectations of public market analysts and investors may negatively impact the
value of our securities. Quarterly operating results may fluctuate in the future
due to a variety of factors that could affect revenues or expenses in any
particular quarter. Fluctuations in quarterly operating results could cause the
value of our securities to decline. Investors should not rely on
quarter-to-quarter comparisons of results of operations as an indication of
future performance. As a result of the factors listed below, it is possible that
in future periods results of operations may be below the expectations of public
market analysts and investors. This could cause the market price of our
securities to decline.
15
Factors
that may affect our quarterly results include:
·
|
vulnerability of our business to
a general economic downturn in China and
globally;
|
·
|
fluctuation and unpredictability
of costs related to raw materials used to manufacture our
products;
|
·
|
seasonality of our
business;
|
·
|
changes in the laws of the PRC
that affect our operations;
|
·
|
our recent entry into the mobile
phone market;
|
·
|
competition;
|
·
|
compensation related
expenses;
|
·
|
application of accounting
standards;
|
·
|
our ability to obtain and
maintain all necessary government certifications and/or licenses to
conduct our business; and
|
·
|
development of a public trading
market for our
securities.
|
RISKS
RELATED TO 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,
labor, 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.
16
Our
principal operating subsidiary, Huizhou NIVS Audio & Video Technology
Company Limited, (“NIVS PRC”), 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
·
|
levying
fines;
|
·
|
revoking our
business license, other licenses or
authorities;
|
·
|
requiring that we
restructure our ownership or operations;
and
|
·
|
requiring that we
discontinue any portion or all of our
business.
|
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 or Hong Kong. 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, NIVS PRC, is a Sino-foreign Equity Joint
Venture, which can only conduct business within its approved business scope,
which ultimately appears on its business license. 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 business license,
it will be required to file an application with the authorities for the approval
to expand the scope of our business and have our business license re-issued to
incorporate such expanded business scope. We cannot assure investors that NIVS
PRC 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, and we may become subject to forthcoming environmental
regulations enacted in response to climate change. 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 that require us to obtain
environmental permits for our electronics manufacturing operations. Our
environmental permit from the Huizhou Environmental Protection Bureau covering
our manufacturing operations will expire in December 2010. The permit
only covers of the existing premises at our manufacturing facility, and if we
expand our operations, we will have to obtain further certification from the
Bureau. In addition, we are required to renew some of our environmental
certificates each year. If we do not receive the renewed permit or we fail to
comply with the provisions of the renewed permit, we could be subject to fines,
criminal charges or other sanctions by regulators, including the suspension or
termination of our manufacturing operations. We cannot assure you
that at all times we will be in compliance with environmental laws and
regulations or our environmental permits or that we will not be required to
expend significant funds to comply with, or discharge liabilities arising under,
environmental laws, regulations and permits.
17
In
addition, future environmental regulations that are enacted in response to
global and regional climate change could place additional burdens on our
manufacturing operations. Public attention has focused on the
environmental impact of electronics manufacturing and the risk to neighbors of
chemical releases from such operations and to the materials contained in
electronic products. Complying with existing and possible future environmental
laws and regulations, including laws and regulations relating to climate change,
may impose upon us the need for additional capital equipment or other process
requirements, restrict our ability to expand our operations, disrupt our
operations, increase costs, subject us to liability or cause us to curtail our
operations.
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 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, and may also create
uncertainties in the future.
The PRC
State Administration of Foreign Exchange, or “SAFE,” issued a public notice in
November 2005, known as Circular 75, concerning the use of offshore holding
companies in mergers and acquisitions in China. The public notice provides that
if an offshore company controlled by PRC residents intends to acquire a PRC
company, such acquisition will be subject to registration with the relevant
foreign exchange authorities. The public notice also suggests that registration
with the relevant foreign exchange authorities is required for any sale or
transfer by the PRC residents of shares in an offshore holding company that owns
an onshore company. The PRC residents must each submit a registration form to
the local SAFE branch with respect to their ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in
China to guarantee offshore obligations. On May 29, 2007, SAFE released
implementation rules for Circular 75, known as Circular 106. Under
Circular 106, the acquired PRC company may be prohibited from distributing
dividends to its offshore acquirer if the PRC residents fail to register with
SAFE in accordance with the requirement under Circular 75.
On August
8, 2006, the PRC Ministry of Commerce (“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 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 on
September 8, 2006 and was further amended on June 22, 2009. These new rules
significantly revised China’s regulatory framework governing onshore-to-offshore
restructurings and foreign acquisitions of domestic enterprises. 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. Our PRC
counsel, Guangdong Laowei Law Firm, has advised us that because we completed our
onshore-to-offshore restructuring before September 8, 2006, the effective date
of the Revised M&A Regulations, it is not necessary for us to submit the
application to the CSRC for its approval, and the listing and trading of our
common stock does not require CSRC approval.
If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required for our restructuring, 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, 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.
18
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.
It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of Circular 75 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 MOFCOM, SAFE, CSRC 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.
If
our land use rights are revoked, we would have no operational
capabilities.
Under
Chinese law land is owned by the state or rural collective economic
organizations. The state issues to the land users the land use right
certificate. Land use rights can be revoked and the land users forced
to vacate at any time when redevelopment of the land is in the public
interest. The public interest rationale is interpreted quite broadly
and the process of land appropriation may be less than transparent. Each of our
facilities relies on these land use rights as the cornerstone of their
operations, and the loss of such rights would have a material adverse effect on
our company.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to foreign exchange control regulations of China.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to the foreign exchange control policies and availability of cash balance of
the Chinese operating subsidiaries. Because substantially all of our operations
are conducted in China and a substantial majority of our revenues are generated
in China, a majority of our 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, we may be unable to distribute any dividends outside
of China due to PRC exchange control regulations that restrict our ability to
convert RMB into US Dollars. Accordingly, we may not be able to access NIVS
PRC’s funds which may not be readily available to us to satisfy obligations
which have been incurred outside the PRC, which could adversely affect our
business and prospects or our ability to meet our cash obligations.
We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.
Companies
based in the PRC may not have properly kept financial books and records that may
be reconciled with U.S. generally accepted accounting principles. If we attempt
to acquire a significant PRC target company and/or its assets, we would be
required to obtain or prepare financial statements of the target that are
prepared in accordance with and reconciled to U.S. generally accepted accounting
principles. Federal securities laws require that a business combination meeting
certain financial significance tests require the public acquirer to prepare and
file historical and/or pro forma financial statement disclosure with the SEC.
These financial statements must be prepared in accordance with, or be reconciled
to U.S. generally accepted accounting principles and the historical financial
statements must be audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. If a proposed
acquisition target does not have financial statements that have been prepared in
accordance with, or that can be reconciled to, U.S. generally accepted
accounting principles and audited in accordance with the standards of the PCAOB,
we will not be able to acquire that proposed acquisition target. These financial
statement requirements may limit the pool of potential acquisition targets with
which we may acquire and hinder our ability to expand our retail operations.
Furthermore, if we consummate an acquisition and are unable to timely file
audited financial statements and/or pro forma financial information required by
the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use
the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form
S-3, the process of raising capital may be more expensive and time consuming and
the terms of any offering transaction may not be as favorable as they would have
been if we were eligible to use Form S-3.
19
We
face risks related to natural disasters, terrorist attacks or other events in
China that may affect usage of public transportation, which could have a
material adverse effect on our business and results of operations.
Our
business could be materially and adversely affected by natural disasters,
terrorist attacks or other events in China. For example, in early
2008, parts of China suffered a wave of strong snow storms that severely
impacted public transportation systems. In May 2008, Sichuan Province in China
suffered a strong earthquake measuring approximately 8.0 on the Richter scale
that caused widespread damage and casualties. The May 2008 Sichuan
earthquake has had a material adverse effect on the general economic conditions
in the areas affected by the earthquake. Any future natural
disasters, terrorist attacks or other events in China could cause a reduction in
usage of or other severe disruptions to, public transportation systems and could
have a material adverse effect on our business and results of
operations.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular
698”) that was released in December 2009 with retroactive effect from January 1,
2008.
The
Chinese State Administration of Taxation (SAT) released a circular (Guoshuihan
No. 698 – Circular 698) on December 15, 2009 that addresses the transfer of
shares by nonresident companies. Circular 698, which is effective
retroactively to January 1, 2008, may have a significant impact on many
companies that use offshore holding companies to invest in
China. Circular 698, which provides parties with a short period of
time to comply its requirements, indirectly taxes foreign companies on gains
derived from the indirect sale of a Chinese company. Where a foreign
investor indirectly transfers equity interests in a Chinese resident enterprise
by selling the shares in an offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5%
or where the offshore income of his, her, or its residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that
Chinese resident enterprise with the relevant information within 30 days of the
transfers. Moreover, where a foreign investor indirectly transfers equity
interests in a Chinese resident enterprise through an abuse of form of
organization and there are no reasonable commercial purposes such that the
corporate income tax liability is avoided, the PRC tax authority will have the
power to re-assess the nature of the equity transfer in accordance with PRC’s
“substance-over-form” principle and deny the existence of the offshore holding
company that is used for tax planning purposes.
There is
uncertainty as to the application of Circular 698. For example, while
the term "indirectly transfer" is not defined, it is understood that the
relevant PRC tax authorities have jurisdiction regarding requests for
information over a wide range of foreign entities having no direct contact with
China. Moreover, the relevant authority has not yet promulgated any formal
provisions or formally declared or stated how to calculate the effective tax in
the country or jurisdiction and to what extent and the process of the disclosure
to the tax authority in charge of that Chinese resident
enterprise. In addition, there are not any formal declarations with
regard to how to decide “abuse of form of organization” and “reasonable
commercial purpose,” which can be utilized by us to balance if our company
complies with the Circular 698. As a result, we may become at risk of
being taxed under Circular 698 and we may be required to expend valuable
resources to comply with Circular 698 or to establish that we should not be
taxed under Circular 698, which could have a material adverse effect on our
financial condition and results of operations.
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.
20
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 change in China’s Consumer Price Index increased to 8.5% in April
2008. 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. In January 2010, the Chinese government took
steps to tighten the availability of credit including ordering banks to increase
the amount of reserves they hold and to reduce or limit their
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, in addition to tighter credit and lending restrictions on
banks, 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
have adopted an equity compensation plan in the future and intend to make
securities 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.
21
NIVS
PRC has 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 the PRC, NIVS PRC has had tax advantages granted by local government
for enterprise income taxes commencing April 6, 2004. NIVS PRC has been entitled
to have a full tax exemption for the first two profitable years, followed by a
50% reduction on normal tax rate of 24% 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 (“New EIT 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, 2007
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.
Under
the New EIT Law, we and NIVS BVI may be classified as “resident enterprises” of
China for tax purpose, which may subject us and NIVS BVI to PRC income tax on
taxable global income.
Under the
new PRC Enterprise Income Tax Law (the “New EIT Law”) and its implementing
rules, both of which became effective on January 1, 2008. Under the New EIT Law,
enterprises are classified as resident enterprises and non-resident
enterprises. An enterprise established outside of China with its “de
facto management bodies” located within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
domestic enterprise for enterprise income tax purposes. The
implementing rules of the New EIT Law define de facto management body as a
managing body that in practice exercises “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of the enterprise. Due to the short history of the New
EIT law and lack of applicable legal precedents, it remains unclear how the PRC
tax authorities will determine the PRC tax resident treatment of a foreign
company such as us and NIVS BVI. Both us and NIVS BVI have all members of
management team located in China. If the PRC tax authorities determine that we
or NIVS BVI is a “resident enterprise” for PRC enterprise income tax purposes, a
number of PRC tax consequences could follow. First, we may be subject to the
enterprise income tax at a rate of 25% on our worldwide taxable income,
including interest income on the proceeds from this offering, as well as PRC
enterprise income tax reporting obligations. Second, the New EIT Law provides
that dividend paid between “qualified resident enterprises” is exempted from
enterprise income tax. A recent circular issued by the State Administration of
Taxation regarding the standards used to classify certain Chinese-invested
enterprises controlled by Chinese enterprises or Chinese group enterprises and
established outside of China as “resident enterprises” clarified that dividends
and other income paid by such “resident enterprises” will be considered to be
PRC source income, subject to PRC withholding tax, currently at a rate of 10%,
when recognized by non-PRC shareholders. It is unclear whether the dividends
that we or NIVS BVI receives from NIVS PRC will constitute dividends between
“qualified resident enterprises” and would therefore qualify for tax exemption,
because the definition of qualified resident enterprises is unclear and the
relevant PRC government authorities have not yet issued guidance with respect to
the processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. We are actively monitoring
the possibility of “resident enterprise” treatment for the applicable tax years
and are evaluating appropriate organizational changes to avoid this treatment,
to the extent possible. As a result of the New EIT Law, our historical operating
results will not be indicative of our operating results for future periods and
the value of our common stock may be adversely affected.
Dividends
payable by us to our foreign investors and any gain on the sale of our shares
may be subject to taxes under PRC tax laws.
If
dividends payable to our shareholders are treated as income derived from sources
within China, then the dividends that shareholders receive from us, and any gain
on the sale or transfer of our shares, may be subject to taxes under PRC tax
laws.
Under the
New EIT Law and its implementing rules, PRC enterprise income tax at the rate of
10% is applicable to dividends payable by us to our investors that are
non-resident enterprises so long as such non-resident enterprise investors do
not have an establishment or place of business in China or, despite the
existence of such establishment of place of business in China, the relevant
income is not effectively connected with such establishment or place of business
in China, to the extent that such dividends have their sources within the
PRC. Similarly, any gain realized on the transfer of our shares by
such investors is also subject to a 10% PRC income tax if such gain is regarded
as income derived from sources within China and we are considered as a resident
enterprise which is domiciled in China for tax purpose. Additionally,
there is a possibility that the relevant PRC tax authorities may take the view
that the purpose of us and NIVS BVI is holding NIVS PRC, and the capital gain
derived by our overseas shareholders or investors from the share transfer is
deemed China-sourced income, in which case such capital gain may be subject to a
PRC withholding tax at the rate of up to 10%. If we are required
under the New EIT Law to withhold PRC income tax on our dividends payable to our
foreign shareholders or investors who are non-resident enterprises, or if you
are required to pay PRC income tax on the transfer or our shares under the
circumstances mentioned above, the value of your investment in our shares may be
materially and adversely affected.
22
In
January 2009, the State Administration of Taxation promulgated the Provisional
Measures for the Administration of Withholding of Enterprise Income Tax for
Non-resident Enterprises (“Measures”), pursuant to which, the entities which
have the direct obligation to make the following payment to a non-resident
enterprise shall be the relevant tax withholders for such non-resident
enterprise, and such payment includes: incomes from equity investment (including
dividends and other return on investment), interests, rents, royalties, and
incomes from assignment of property as well as other incomes subject to
enterprise income tax received by non-resident enterprises in
China. Further, the Measures provides that in case of equity transfer
between two non-resident enterprises which occurs outside China, the
non-resident enterprise which receives the equity transfer payment shall, by
itself or engage an agent to, file tax declaration with the PRC tax authority
located at place of the PRC company whose equity has been transferred, and the
PRC company whose equity has been transferred shall assist the tax authorities
to collect taxes from the relevant non-resident enterprise. However,
it is unclear whether the Measures refer to the equity transfer by a
non-resident enterprise which is a direct or an indirect shareholder of the said
PRC company. Given these Measures, there is a possibility that we may
have an obligation to withhold income tax in respect of the dividends paid to
non-resident enterprise investors.
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:
·
|
quarantines or
closures of some of our manufacturing facilities, which would severely
disrupt our operations,
|
·
|
the
sickness or death of our key officers and employees,
and
|
·
|
a
general slowdown in the Chinese
economy.
|
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.
23
RISKS
RELATED TO OUR OWNERSHIP OF OUR COMMON STOCK AND THIS OFFERING
Our
management will have broad discretion over the use of the proceeds we receive in
this offering and might not apply the proceeds in ways that increase the value
of your investment.
Our
management will have broad discretion to use the net proceeds from this
offering, and you will be relying on the judgment of our management regarding
the application of these proceeds. Our management might not apply the net
proceeds of this offering in ways that increase the value of your investment. We
expect to use the net proceeds from this offering for general corporate
purposes, including working capital and capital expenditures, which may in the
future include investments in, or acquisitions of, complementary businesses,
services or technologies. We have not allocated these net proceeds for any
specific purposes. You will not have the opportunity to influence our decisions
on how to use the net proceeds from this offering.
Our
stock price is volatile and you might not be able to resell your securities at
or above the price you have paid.
Prior
to the listing of our Common Stock on the NYSE Amex in March 2009, there was no
public market for our securities. Since our listing, the price at
which our Common Stock has traded has been highly volatile. From our
date of listing on NYSE Amex until April 16, 2010, the low and high sale prices
of our common stock on the NYSE Amex ranged from $2.03 to $5.50 per
share. Accordingly, we cannot assure you that an active trading
market will develop or be sustained or that the market price of our common stock
will not decline. You might not be able to sell the shares of our
common stock at or above the price you have paid. The stock market has
experienced extreme volatility that often has been unrelated to the performance
of its listed companies. Moreover, only a limited number of our shares are
traded each day, which could increase the volatility of the price of our stock.
These market fluctuations might cause our stock price to fall regardless of our
performance. The market price of our common stock might fluctuate significantly
in response to many factors, some of which are beyond our control, including the
following:
·
|
actual or anticipated
fluctuations in our annual and quarterly results of
operations;
|
·
|
changes in securities analysts’
expectations;
|
·
|
variations in our operating
results, which could cause us to fail to meet analysts’ or investors’
expectations;
|
·
|
announcements by our competitors
or us of significant new products, contracts, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
·
|
conditions and trends in our
industry;
|
·
|
general market, economic,
industry and political
conditions;
|
·
|
changes in market values of
comparable companies;
|
·
|
additions or departures of key
personnel;
|
·
|
stock market price and volume
fluctuations attributable to inconsistent trading volume levels;
and
|
·
|
future sales of equity or debt
securities, including sales which dilute existing
investors.
|
Holders
of our common stock may be diluted in the future.
We
are authorized to issue up to 100,000,000 shares of common stock and 10,000,000
shares of preferred stock. Our Board of Directors will have the ability, without
seeking stockholder approval, to issue additional shares of common stock and/or
preferred stock in the future for such consideration as our Board of Directors
may consider sufficient. The issuance of additional common stock and/or
preferred stock in the future will reduce the proportionate ownership and voting
power of our common stock held by existing stockholders. At April 16, 2010 there
were 40,675,347 shares of common stock outstanding and warrants to purchase
55,000 shares of common stock. In addition, we have an authorized
reserve of 4,000,000 shares of common stock that we may grant as stock options
or other equity awards pursuant to our stock option plan. Any future
issuances of our common stock would similarly dilute the relative ownership
interest of our current stockholders, and could also cause the trading price of
our common stock to decline.
24
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.
The
market price of our Common Stock could decline as a result of sales of a large
number of shares of our Common Stock in the market or the perception that these
sales could occur. These sales, or the possibility that these sales may occur,
also might make it more difficult for us to sell equity securities in the future
at a time and at a price that we deem appropriate.
As of
April 16, 2010, we had approximately 40.7 million shares of Common Stock
outstanding. In March 2009, we conducted a registered public offering
of 550,000 shares of common stock and registered for additional 7.6 million
shares of common stock for resale by selling shareholders. All of
these shares are now freely tradable, except for approximately 2.2 million
shares that remain subject to lock up restrictions.
Additionally,
in connection with our public offering in March 2009, the former stockholders of
NIVS BVI and their designees, which collectively hold 27,546,667 shares of our
common stock, entered into a lock-up agreement pursuant to which they agreed not
to sell or transfer any of their shares until March 2011, subject to release
from the underwriter, after which the shares may be sold subject to Rule 144.
Under Rule 144, an affiliate stockholder who has satisfied a 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 April 16,
2010, 1% of our issued and outstanding shares of common stock was approximately
406,753 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.
The
interests of the existing minority shareholder in NIVS PRC may diverge from our
own interests and this may adversely affect our ability to manage NIVS
PRC.
NIVS PRC,
our principal operating subsidiary, is an equity joint venture in which we,
through NIVS BVI, directly own a 97.5% interest and the founder of NIVS PRC and
our current Chief Executive Office and Chairman of the Board, Tianfu Li, owns
the remaining 2.5% interest. Mr. Li’s interest may not be aligned
with our interest at all times. If our interests diverge, Mr. Li may exercise
his rights, as dictated under PRC laws, to protect his own interest, which may
be adverse to us and our investors. For example, should we wish to transfer our
equity interest in NIVS PRC, in whole or in part, to a third-party, Mr. Li, if
he dissents to such a transfer, will have a right to have his interests
purchased under general company regulations. If Mr. Li exercises his
rights, any proposed sale and transfer of our interests in NIVS PRC may be
delayed and our financial condition and results of operations may
suffer.
The
former principal shareholders of NIVS BVI and their designees have significant
influence over us.
The
former shareholders of NIVS BVI and their designees beneficially own or control
approximately 75% of our outstanding shares. If these shareholders were to act
as a group, they would have 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. Such shareholders may also have the power to prevent or cause a change
in control. In addition, without the consent of the former NIVS BVI shareholders
and their designees, we could be prevented from entering into transactions that
could be beneficial to us. The interests of the former NIVS BVI shareholders and
their designees may differ from the interests of our other
stockholders.
We
will sell broker-dealer warrants to our underwriters in connection with this
public offering.
We
will sell to Rodman and WestPark, the underwriters for this public offering, as
additional compensation, warrants to purchase a number of shares of common stock
that is equal to 3% the aggregate number of shares sold in this offering,
excluding the over-allotment option (the “Underwriter’s Warrants”). The
Underwriters’ Warrants may be exercised at any time commencing one year from
the
effective date of the registration statement of which this prospectus forms a
part and continuing for five years thereafter to purchase shares of
common stock at an exercise price equal to 125% of the offering price of the
shares in this offering.
25
During
the term of the Underwriters’ Warrants, their holders will have the opportunity
to profit from an increase in the price of the shares. The existence of the
Underwriters’ Warrants may adversely affect the market price of the shares if
they become publicly traded and the terms on which we can obtain additional
financing. The holders of the Underwriters’ Warrants can be expected to be
exercise them at a time when we would, in all likelihood, be able to obtain
additional capital on terms more favorable than those contained in the
Underwriters’ Warrants. Please see “Underwriting” and “Description of
Securities” for additional information regarding the Underwriters’ Warrants and
our common stock.
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 annual
assessment of our internal controls requirement first applied to our annual
report for the 2008 fiscal year and the attestation requirement of management’s
assessment by our independent registered public accountants will first apply to
our annual report for the 2010 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. In October 2008, our independent
registered public accounting firm Kempisty & Company Certified Public
Accountants, P.C. (“Kempisty”), informed us that our financial statements for
the years ended 2007, 2006, and 2005 and the quarter ended June 30, 2008 and
2007 contained an error in the accounting treatment of imputed interest on due
to shareholders loan, resulting in an understatement of our expenses for those
periods. Furthermore, in November 2008, our management identified a material
weakness in our controls and procedures regarding our failure to timely disclose
and prevent loan transactions made to entities owned and controlled by our CEO
and related parties in violation of Section 402 of the Sarbanes-Oxley Act of
2002. In February 2010, we conducted a restatement related to an accounting
error that resulted in an overstatement of selling expenses in the amount of
approximately $618,000 for the three months ended September 30, 2009 and
approximately $870,000 of unrecorded liabilities related to the Company’s
non-payment of contributions to PRC housing provident funds for its employees as
required under PRC regulations. We may encounter additional problems or delays
in completing activities necessary to improve 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 for fiscal year 2010, 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 our 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
provided loans to certain entities owned and controlled by our chief executive
officer in violation of Section 402 of the Sarbanes-Oxley Act of 2002 and we
and/or our chief executive officer could become subject to criminal, civil or
administrative sanctions, penalties, or investigations and may also face
potential private securities litigation.
Section
402 of the Sarbanes-Oxley Act of 2002 (“Section 402”) prohibits us from directly
or indirectly, including through any subsidiary, extending or maintaining
credit, arranging for the extension of credit, or renewing an extension of
credit, in the form of a personal loan to or for any of our directors or
executive officers. Prior to the Share Exchange, our subsidiaries entered into
loan transactions with NIVS PRC’s founder and our principal shareholder and
current Chief Executive Officer and Chairman of the Board, Tianfu Li. In these
transactions, our subsidiaries would borrow funds from Mr. Li. In
addition, our subsidiaries would lend funds to entities that were owned and
controlled by Mr. Li. These entities are NIVS Investment (SZ) Co., Ltd.;
Zhongkena Technology Development; Xentsan Technology (SZ) Co., Ltd.; Korea
Hyundai Light & Electric (Int’l) Holding; NIVS Information & Technology
(HZ) Co., Ltd.; and Hyundai Light & Electric (HZ) Co., Ltd. (collectively,
the “Related Companies”). The loans, which were unsecured with no
fixed repayment date, were for temporary funding of each of the Related
Companies’ business.
26
It was
intended that all loans from the Company to the entities owned by our CEO and
related parties be repaid prior to the closing of the Share Exchange, and no
further loans would be made after the closing of the Share
Exchange. In November 2008, it was discovered that the loans to
entities owned by our CEO and related parties continued after the closing of the
Share Exchange, as more fully described in the notes to the financial statements
contained in this prospectus. Although we have attempted to take
remedial steps to address the violation of Section 402 by requiring immediate
and full repayment of all outstanding loan balances, the violation of Section
402 may cause governmental authorities, such as the United States Securities and
Exchange Commission, to subject us to criminal, civil, or administrative
sanctions, penalties, or investigations, which may not be resolved favorably and
will require significant management time and attention, and we could incur costs
which could materially and negatively affect our business, results of operations
and cash flows. There are no assurances that an investigation or litigation will
not commence, and if commenced, that such investigation or litigation will
result in a favorable outcome for us. Similarly, private parties may also
initiate civil litigation against us for such violations.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On July
25, 2008, the Share Exchange closed and NIVS BVI became our 100%-owned
subsidiary, and our sole business operations became that of NIVS BVI. We also
appointed a new Board of Directors and management consisting of persons from
NIVS BVI and changed our corporate name from SRKP 19, Inc. to NIVS IntelliMedia
Technology Group, 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;
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·
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the
ability to use registered securities to make acquisition of assets or
businesses;
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·
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increased
visibility in the financial
community;
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·
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enhanced
access to the capital markets;
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·
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improved
transparency of operations; and
|
·
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
|
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. For example, on January 30, 2009, the SEC adopted rules
requiring companies to provide their financial statements in interactive data
format using the eXtensible Business Reporting Language, or XBRL. We will have
to comply with these rules by June 15th, 2011. NIVS’ 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.
27
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 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”). 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 at or above the price they paid for them.
28
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this prospectus, including in the documents
incorporated by reference into this prospectus, includes some statements that
are not purely historical and that are “forward-looking
statements.” Such forward-looking statements include, but are not
limited to, statements regarding our company’s and our management’s
expectations, hopes, beliefs, intentions or strategies regarding the future,
including our financial condition and, results of operations. In
addition, any statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. The words “anticipates,”
“believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,”
“might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,”
“should,” “will,” “would” and similar expressions, or the negatives of such
terms, may identify forward-looking statements, but the absence of these words
does not mean that a statement is not forward-looking.
The
forward-looking statements contained in this prospectus are based on current
expectations and beliefs concerning future developments and the potential
effects on the Company. There can be no assurance that future
developments actually affecting us will be those anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed or
implied by these forward-looking statements, including the
following:
|
·
|
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 continue to borrow and raise additional capital to fund our
operations;
|
|
·
|
Our
expansion into the competitive mobile phone
industry;
|
|
·
|
Our
ability to collect aging trade receivables, which represent a substantial
portion of our assets;
|
|
·
|
Our
ability to effectively integrate the operations of Dongri, which we
acquired in January 2010;
|
|
·
|
Our
ability to accurately forecast amounts of supplies needed to meet customer
demand;
|
|
·
|
Our
ability to obtain extension to our significant outstanding short-term
borrowings when they mature;
|
|
·
|
The
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 exchange
rates;
|
|
·
|
Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
|
|
·
|
Management’s
broad discretion over the use of the proceeds from this
offering;
|
|
·
|
Development
of a public trading market for our
securities;
|
|
·
|
The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
|
|
·
|
The
other factors referenced in this prospectus, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Business.”
|
29
The risks
included above are not exhaustive. Other sections of this prospectus may include
additional factors that could adversely impact our business and operating
results. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and
we cannot predict all such risk factors, nor can we assess the impact of all
such risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
You
should not rely upon forward-looking statements as predictions of future events.
We cannot assure you that the events and circumstances reflected in the
forward-looking statements will be achieved or occur. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the forward-looking
statements. Except as required by law, we undertake no obligation to
update publicly any forward-looking statements for any reason after the date of
this prospectus to conform these statements to actual results or to changes in
our expectations.
You
should read this prospectus, and the documents that we reference in this
prospectus and have filed as exhibits to this prospectus with the Securities and
Exchange Commission, completely and with the understanding that our actual
future results, levels of activity, performance and achievements may materially
differ from what we expect. We qualify all of our forward-looking statements by
these cautionary statements.
USE
OF PROCEEDS
We
estimate that our net proceeds from the sale of common stock in this offering
will be
$ million
after deducting estimated offering expenses of
$ and
underwriting discounts and commissions and assuming a public offering price of
$ per
share. If the over-allotment option is exercised in full, we
estimate that our net proceeds will be
$ million.
We intend
to use the net proceeds of the offering for general corporate and working
capital purposes, such as sales and marketing, research and development, working
capital and other general corporate purposes. We cannot specify with
certainty the particular uses for the net proceeds. The amounts and timing of
our actual expenditures will depend on numerous factors, including the status of
our development efforts, sales and marketing activities, the amount of cash
generated or used by our operations and competition. We may find it necessary or
advisable to use portions of the proceeds for other purposes, and we will have
broad discretion in the application of the net proceeds. We have no current
intentions to acquire any other businesses. Pending these uses, the proceeds
will be invested in short-term, investment grade, interest-bearing
securities.
PRICE
RANGE OF OUR COMMON STOCK
Prices
|
||||||||
Year
ended December 31, 2010
|
Low
|
High
|
||||||
First
Quarter (through April 16, 2010)
|
$ | 2.48 | $ | 4.38 |
Prices
|
||||||||
Year
ended December 31, 2009
|
Low
|
High
|
||||||
Fourth
Quarter
|
$ | 2.17 | $ | 3.00 | ||||
Third
Quarter
|
2.03 | 3.26 | ||||||
Second
Quarter
|
2.14 | 4.58 | ||||||
First
Quarter (from March 13, 2009)
|
3.24 | 5.50 |
The
last reported sale price for our common stock on NYSE Amex was $3.42 per share
on April 16, 2010. We have approximately 211 registered holders of our common
stock as of April 16, 2010.
30
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant. We did not pay cash dividends for the years ended
December 31, 2009, 2008, and 2007.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reaches 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in the PRC and a substantial majority of our revenues
are generated in the PRC, a majority of our revenue being earned and currency
received are denominated in Renminbi (RMB). RMB is subject to the exchange
control regulation in the PRC, and, as a result, we may unable to distribute any
dividends outside of the PRC due to PRC exchange control regulations that
restrict our ability to convert RMB into US Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
subsidiary could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. NIVS PRC’s funds may not be readily
available to us to satisfy obligations which have been incurred outside the PRC,
which could adversely affect our business and prospects or our ability to meet
our cash obligations. Accordingly, if we do not receive dividends from our
Chinese operating subsidiary, our liquidity, financial condition and ability to
make dividend distributions to our stockholders will be materially and adversely
affected.
31
CAPITALIZATION
The
following table sets forth our capitalization as of December 31, 2009
(unaudited) on:
·
|
an actual
basis;
and
|
·
|
on
an as-adjusted
basis to give effect to the sale of 5,847,953 shares of common
stock that is assumed to be sold by us in this offering at an assumed
offering price of $3.42 per share, after deducting estimated underwriting
discounts and commissions of 6% and estimated offering costs and expenses
of $700,000 to be paid by us. For the purposes of this
Capitalization section, the assumed number of shares has been determined
by dividing (i) the aggregate offering amount of $20,000,000 that we
anticipate to raise in this offering, excluding any shares that may be
sold upon the Underwriters exercise of the over-allotment option, by (ii)
an assumed per share offering price of $3.42 per share, which is the
closing price of one share of our common stock on April 16,
2010. The actual number of shares sold in this offering will be
determined by dividing the aggregate offering price by the per share
public offering price as mutually determined by us and the
Underwriters.
|
You
should read this table in conjunction with “Use of Proceeds,” “Summary Financial
Information,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related
notes included elsewhere in this prospectus.
December 31, 2009
|
||||||||
Actual
|
As-Adjusted
|
|||||||
(amounts
in thousands)
|
||||||||
Stockholders'
equity:
|
$
|
$
|
||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued
and outstanding at December 31, 2009
|
-
|
-
|
||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 40,675,347 issued
and outstanding on an actual basis and 46,523,300 issued and outstanding
on an as-adjusted basis
|
4
|
5
|
||||||
Additional
paid-in capital
|
21,717
|
39,816
|
||||||
Accumulated
other comprehensive income
|
3,980
|
3,980
|
||||||
Statutory
reserve fund
|
5,722
|
5,722
|
||||||
Retained
earnings (unrestricted)
|
47,497
|
47,497
|
||||||
Total
NIVS stockholders' equity
|
$
|
78,920
|
$
|
97,020
|
||||
Non-Controlling interest
|
$
|
1,770
|
$
|
1,770
|
||||
Total
capitalization
|
$
|
80,690
|
$
|
98,790
|
The
outstanding share information in the table above excludes:
|
·
|
4,000,000
shares of common stock reserved for issuance under our 2009 Omnibus
Incentive Plan;
|
|
·
|
55,000
shares of common stock issuable upon the exercise of outstanding warrants
with a weighted average exercise price of $4.20 per share;
and
|
|
·
|
shares
of common stock available for issuance by us pursuant to the underwriters’
over-allotment option related to this
offering.
|
32
DILUTION
If you
invest in our shares of common stock, your interest will be diluted immediately
to the extent of the difference between the public offering price per share you
will pay in this offering and the net tangible book value per share of common
stock immediately after this offering.
Investors
participating in this offering will incur immediate, substantial dilution. Our
net tangible book value as of December 31, 2009 was $78.4 million, or $1.93 per
share based on 40,675,347 shares of common stock
outstanding. Assuming the sale by us of 5,847,953 shares of common
stock offered in this offering at a public offering price of $3.42 per share,
and after deducting the estimated underwriting discount and commissions of 6%
and estimated offering costs and expenses of $700,000, our as-adjusted net
tangible book value as of December 31, 2009 would have been $96.5 million, or
$2.67 per share. This represents an immediate increase in net
tangible book value of $0.15 per share to our existing stockholders and an
immediate dilution of $1.35 per share to the new investors purchasing shares of
common stock in this offering, based on the assumed offering price of
$3.42. For the purposes of this Dilution section, the assumed number
of shares has been determined by dividing (i) the aggregate offering amount of
$20,000,000 that we anticipate to raise in this offering, excluding any shares
that may be sold upon the Underwriters exercise of the over-allotment option, by
(ii) an assumed per share offering price of $3.42 per share, which is the
closing price of one share of our common stock on April 16, 2010. The
actual number of shares sold in this offering will be determined by dividing the
aggregate offering price by the per share public offering price as mutually
determined by us and the Underwriters.
The
following table illustrates this per share dilution based on the assumptions
indicated above:
Assumed
public offering price per share
|
$ | 3.42 | ||||||
Net
tangible book value per share as of December 31, 2009
|
$ | 1.93 | ||||||
Increase
per share attributable to new public investors
|
0.15 | |||||||
Net
tangible book value per share after this offering
|
2.07 | |||||||
Dilution
per share to new public investors
|
1.35 |
The
following table sets forth, on an as adjusted basis as of December 31, 2009, the
difference between the number of shares of common stock purchased from us, the
total cash consideration paid, and the average price per share paid by our
existing stockholders and by new public investors before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, using an assumed public offering price of $3.42 per share of common
stock, which is the closing price of one share of our common stock on April 16,
2010:
Shares Purchased
|
Total Cash Consideration
|
|||||||||||||||||||
Number
|
Percent
|
Amount
(in thousands)
|
Percent
|
Average Price Per
Share |
||||||||||||||||
Existing
stockholders
|
40,675,347 | 87.4 | % | $ | 21,835 | 52.2 | % | $ | 0.54 | |||||||||||
New
investors from public offering
|
5,847,953 | 12.6 | % | $ | 20,000 | 47.8 | % | $ | 3.42 | |||||||||||
Total
|
46,523,300 | 100 | % | $ | 41,835 | 100 | % |
The total
consideration amount for shares of common stock held by our existing
stockholders includes total cash paid for our outstanding shares of common stock
as of December 31, 2009 and excludes the value of securities that we have issued
for services. The information in the tables above is based on
40,675,347 shares outstanding as of December 31, 2009 and excludes the following
shares potentially issuable as of that date:
|
·
|
4,000,000
shares of common stock reserved for issuance under our 2009 Omnibus
Incentive Plan;
|
|
·
|
55,000
shares of common stock issuable upon the exercise of outstanding warrants
with a weighted average exercise price of $4.20 per share;
and
|
|
·
|
the
shares of common stock available for issuance by us pursuant to the
underwriters’ over-allotment option related to this
offering.
|
33
The
underwriters have a 45-day option to purchase up to a number of shares of common
stock that is equal to $3,000,000 divided by the per share offering
price. Based on the assumptions indicated above, and using an assumed
per share offering price of $3.42, the underwriters would have the right to
purchase up to 877,193 shares of common stock if it elected to
exercise the over-allotment option in full. If such additional number
of shares were sold, the number of shares held by existing stockholders will be
reduced to 85.8% of the total number of shares to be outstanding after this
offering; and the number of shares held by the new investors will be increased
to 6,725,146 shares, or 14.2%, of the total number of shares of common stock
outstanding after this offering.
In
addition, we may choose to raise additional capital due to market conditions or
strategic considerations even if we believe we have sufficient funds for our
current or future operating plans. To the extent that additional capital is
raised through the sale of equity or convertible debt securities, the issuance
of these securities could result in further dilution to our
stockholders.
34
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following summary financial information contains consolidated statement
of income data for the years ended December 31, 2009, 2008, 2007, 2006 and
2005 and the consolidated balance sheet data as of December 31, 2009, 2008,
2007, 2006 and 2005. The consolidated statement of income data
and balance sheet data were derived from the audited consolidated financial
statements. Such financial data should be read in conjunction with
the consolidated financial statements and the notes to the consolidated
financial statements starting on page F-1 and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Consolidated Statements of
Income
Years ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(all amounts are in thousands except share and per share amounts)
|
|||||||||||||||||||
Revenue
|
$ | 185,198 | $ | 143,631 | $ | 77,627 | $ | 37,735 | $ | 21,966 | ||||||||||
Other
Sales
|
282 | 415 | 516 | 53 | - | |||||||||||||||
Cost
of Goods Sold
|
(142,416 | ) | (109,763 | ) | (58,864 | ) | (28,072 | ) | (17,300 | ) | ||||||||||
Gross Profit
|
43,064 | 34,283 | 19,279 | 9,716 | 4,666 | |||||||||||||||
|
||||||||||||||||||||
Selling Expenses
|
6,761 | 5,376 | 3,270 | 1,792 | 837 | |||||||||||||||
|
||||||||||||||||||||
General and
administrative
|
||||||||||||||||||||
Amortization
|
79 | 69 | 62 | 59 | 137 | |||||||||||||||
Depreciation
|
331 | 337 | 328 | 300 | 198 | |||||||||||||||
Bad
debts (recovery)
|
(2,745 | ) | 2,531 | 473 | 133 | 81 | ||||||||||||||
Merger
cost
|
- | 1,786 | - | - | - | |||||||||||||||
Stock-based
compensation
|
- | 765 | - | - | - | |||||||||||||||
Other
G&A expense
|
4,850 | 3,172 | 2,548 | 1,126 | 832 | |||||||||||||||
Total General and
administrative
|
2,515 | 8,660 | 3,411 | 1,618 | 1,248 | |||||||||||||||
Research and
development
|
5,315 | 1,737 | 373 | 417 | 230 | |||||||||||||||
Total operating
expenses
|
14,591 | 15,773 | 7,054 | 3,827 | 2,315 | |||||||||||||||
Income from
operations
|
28,473 | 18,510 | 12,225 | 5,889 | 2,351 | |||||||||||||||
|
||||||||||||||||||||
Other income
(expenses)
|
||||||||||||||||||||
Government
grant
|
576 | 32 | 28 | - | 160 | |||||||||||||||
Write-down
of inventory
|
- | (132 | ) | (105 | ) | - | (5 | ) | ||||||||||||
Gain
on disposal of assets
|
- | - | - | 1,226 | - | |||||||||||||||
Interest
income
|
- | - | 235 | 19 | 11 | |||||||||||||||
Interest
expense
|
(1,567 | ) | (2,208 | ) | (1,792 | ) | (863 | ) | (319 | ) | ||||||||||
Imputed
interest
|
- | (656 | ) | (527 | ) | (125 | ) | (97 | ) | |||||||||||
Sundry
income (expense), net
|
11 | (52 | ) | (111 | ) | (56 | ) | (7 | ) | |||||||||||
Total other income
(expenses)
|
(980 | ) | (3,016 | ) | (2,272 | ) | 201 | (257 | ) | |||||||||||
|
||||||||||||||||||||
Income before Noncontrolling
interest and income taxes
|
27,493 | 15,494 | 9,953 | 6,090 | 2,094 | |||||||||||||||
Income
taxes
|
(3,406 | ) | (2,031 | ) | (1,269 | ) | (753 | ) | - | |||||||||||
Noncontrolling
interest
|
(630 | ) | (430 | ) | (217 | ) | (135 | ) | (56 | ) | ||||||||||
|
||||||||||||||||||||
Net Income
|
$ | 23,457 | $ | 13,033 | $ | 8,467 | $ | 5,202 | $ | 2,038 |
Consolidated
Balance Sheets
As of December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(in thousands)
|
|||||||||||||||||||
Total
Current Assets
|
$ | 63,122 | $ | 44,963 | $ | 25,309 | $ | 16,768 | $ | 12,287 | ||||||||||
Total
Assets
|
140,477 | 118,924 | 88,554 | 37,015 | 34,860 | |||||||||||||||
Total
Current Liabilities
|
59,786 | 63,592 | 59,528 | 28,715 | 19,415 | |||||||||||||||
Total
Liabilities
|
59,786 | 71,435 | 70,537 | 34,808 | 29,469 | |||||||||||||||
Total
Stockholders’ Equity
|
80,691 | 47,489 | 18,017 | 2,207 | 5,391 |
35
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes, and
the other financial information included in this prospectus.
This
prospectus contains 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. These statements include, among others,
information regarding future operations, future capital expenditures, and future
net cash flow. Such statements reflect our management’s current views
with respect to future events and financial performance and involve risks and
uncertainties, including, without limitation, general economic and business
conditions, changes in foreign, political, social, and economic conditions,
regulatory initiatives and compliance with governmental regulations, the ability
to achieve further market penetration and additional customers, and various
other matters, many of which are beyond our control. Should one or
more of these risks or uncertainties occur, or should underlying assumptions
prove to be incorrect, actual results may vary materially and adversely from
those anticipated, believed, estimated or otherwise
indicated. Consequently, all of the forward-looking statements made
in this prospectus are qualified by these cautionary statements and there can be
no assurance of the actual results or developments.
OVERVIEW
Through NIVS PRC, we engage in the
development, production and sales of consumer electronic
products. Our products primarily consist of audio and video products,
including digital audio systems, televisions, digital video broadcasting (“DVB”)
set-top boxes, DVD players, as well as audio/video peripheral and accessory
products. We have invested substantial resources in the research and
development of our intelligent audio and video consumer products, most of which
utilize our Chinese speech interactive technology to permit users to control our
products through their spoken commands. We recently added mobile
phones and other 3G communication devices to our product
portfolio. In January 2010, we acquired Dongri, a mobile phone
product manufacturer, for a purchase price of up to $23 million.
Through
wholesalers and distributors of electronic products, our products are
distributed worldwide, including markets in Europe, Southeast Asia and North
America. For export sales and OEM production, we produce based on
customer demand and orders. For products with our own brand names, customers
generally do not provide us with any long-term commitments. 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.
A small number of customers account for
a very significant percentage of our revenue. For the year ended December 31,
2009, we had four customers that each accounted for at least 5% of the revenues
that we generated. These four customers accounted for a total of
approximately 34.9% of our revenue for that period. During the
year ended December 31, 2009, we had one customer—Shenzhen Zhanhui (15.9%)—that
accounted for more than 10% of our sales. During the year ended December 31,
2008, we had four customers that generated revenues of at least 5% of our
revenues. These four customers accounted for a total of approximately 33.3% of
our revenue for the year ended December 31, 2008. For the same period, we had
one customer—Shenzhen Zhanhui (12.7%)—that accounted for more than 10% of our
sales. During the year ended December 31, 2007, we had five customers that
generated revenues of at least 5% of our revenues. These five customers
accounted for a total of approximately 38.4% of our revenue for the year ended
December 31, 2007. For the same period, we had one customer—HongKong Huian
(13.5%)—that accounted for more than 10% of our sales. Unless we replace a
customer, the loss of any of these customers could have a material adverse
effect upon our revenue and net income.
We have
longstanding business relationships with certain suppliers with stable supply
sources, and we believe this practice helps us reduce our risk on shortage of
raw material supply. We also enter into one-year agreements with some
of our suppliers that provide our forecast of the quantity that we believe that
we will need for the upcoming year. These agreements typically result
in obtaining a discount on our purchases from our suppliers during the year as
we submit purchase orders further to the agreements. Notwithstanding
our practices to reduce the cost of our materials, price fluctuations of
materials will still affect our production cost and gross margin.
36
Various
factors may impact our company’s performance in different ways. Our ability to
compete effectively in light of the short life cycle of many of our products is
related to the amount of resources we invest in research and development and how
quickly we are able to produce new product models to replace products with older
functionality. By upgrading our products, adding functionality, and
improving technological specifications, we can increase the value of such
products and the resulting product price, which can help compensate for losses
associated with the short life cycle of many of our products and can help
increase our revenue. For example, the average selling price for
certain of our existing speaker and CRT TV has been declining. By
adding functionality and developing new design to our speaker to form new
intelligent audio and video equipment and shift CRT TV to LCDTV production, we
believe we increased the value of such products and the resulting product
price.
In
addition, we have shifted our focus from one product to another product that we
believe would increase our profitability. During 2009, our sales revenue for new
intelligent audio and video equipment was approximately $83.9 million, which
represented an increase of approximately 363.5% compared to revenue of $18.1
million from the sale of intelligent audio and video equipment in 2008. The
increase in revenue for new intelligent audio and video equipment resulted from
an increase in sales volume. In 2009, our sales volume for home theater
increased approximately 15.5% as compared to sales volume in 2008. We believe
the increase in sales revenue and volume is a result of our investment of
resources into the research and development of new products and design, our
focus on the promotion of our brand, and expansion of our sales channels. In
year ended December 31, 2009, our sales revenue for LCDTV decreased
approximately 5.9%, respectively, compared to our sales revenue for the year
ended December 31, 2008.
Furthermore, we have recently entered
into the mobile phone and communication device market. In January 2010, we
agreed to pay up to $23 million in our acquisition of Huizhou Dongri Digital
Co., Ltd., a mobile phone product manufacturer. We intend to devote additional
management time and resources to penetrating the mobile phone and communication
device market. We expect that Dongri will replace a significant portion of
outsourced manufacturing services as it relates to mobile phone products that we
previously utilized. Because we have our own factory and capabilities to produce
a large number of the important components needed for our mobile phone products,
we believe that the acquisition will ultimately be the most cost-effective
manner to provide mobile phones to the market. We expect that the margins on our
mobile phone products will be lower than our audio and video equipment; however,
with the acquisition of Dongri, we believe that we will be able to increase the
sales volume of our mobile phone products, which will increase our
revenues.
In the past, we have relied more
heavily on sales to original equipment manufacturers (OEMs) for a significant
portion of our revenues; however, we have increased our focus on and investment
of resources in sales of our own brand, which we believe will permit us to
decrease our reliance on OEM sales. OEM sales accounted for approximately 55% of
our revenues for the year ended December 31, 2009, as compared to 60% for the
year ended December 31, 2008, and 77% for the year ended December 31, 2007, and
sales of products with our own brand accounted for approximately 45% of our
revenues for the year ended December 31, 2009, as compared to 40% for the year
ended December 31, 2008, and 23% for the year ended December 31,
2007.
Corporate
History
We were
incorporated in the State of Delaware on December 7, 2006 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
June 27, 2008, we entered into a share exchange agreement with Niveous Holding
Company Limited, a British Virgin Islands company (“NIVS BVI”) and all of the
shareholders of NIVS BVI. Pursuant to the exchange agreement, as it
was amended on July 25, 2008, we agreed to issue an aggregate of 27,546,667
shares of our common stock in exchange for all of the issued and outstanding
securities of NIVS BVI. The share exchange closed on July 25, 2008 and we (i)
closed a share exchange transaction pursuant to which we became the 100% parent
of NIVS BVI (ii) assumed the operations of NIVS BVI and its subsidiaries, and
(iii) changed or name from SRKP 19, Inc. to NIVS IntelliMedia Technology Group,
Inc. After the closing of the share exchange and private placement,
as described below, we had 36,855,714 outstanding shares of common stock, no
shares of preferred stock, no options, and warrants to purchase 946,667 shares
of common stock.
The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a “tax-free” contribution and/or reorganization pursuant to the provisions
of Sections 351 and/or 368(a) of the Internal Revenue Code of 1986, as
amended. Because the shares issued that we issued in share exchange
represented a controlling interest, the transaction has been accounted for as a
recapitalization or reverse merger with NIVS BVI being considered the acquirer.
The accompanying consolidated financial statements have been restated on a
retroactive basis to present the capital structure of NIVS BVI as though it were
the reporting entity.
37
Recent
Events
January
2010 Acquisition of Dongri
In
January 2010, we, through NIVS BVI, acquired 100% of the equity interest of
Huizhou Dongri Digital Co., Ltd., ("Dongri"), a mobile phone product
manufacturer located in the Huizhou Zhongkai Hi-tech Zone area. The
aggregate purchase price that we agreed to pay is up to $23 million, with $13
million being paid within one month of closing and up to an additional $10
million that may become payable at future dates if Dongri meets after-tax income
targets, as more fully described below. With the acquisition of
Dongri, we augmented our manufacturing capabilities for mobile
phones.
If
Dongri's after-tax income for the first half of 2010 exceeds approximately $1.91
million, then an additional $3 million will be paid to the former shareholder of
Dongri. If Dongri's after-tax income is between $955,000 and $1.91 million, then
a pro-rata amount will be payable, and no percentage of the $3 million will be
paid if the after-tax income is less than approximately $955,000. For
the third quarter of 2010, if Dongri's after-tax income exceeds approximately
$1.03 million, then an additional $3 million will be paid to the former Dongri
shareholder. If Dongri's after-tax income is between approximately $514,000 and
$1.03 million, then a pro-rata amount will be paid, and no amount will be paid
if the after-tax income is less than $514,000. Similarly, for the
fourth quarter of 2010, we will pay Dongri an additional $4 million if its
after-tax income exceeds $1.18 million, and a pro rata portion if it falls
between approximately $590,000 and $1.18 million. No amount will be
paid for the fourth quarter if Dongri's after-tax income is less than
$590,000.
All
after-tax income amounts will be calculated by us in accordance with U.S. GAAP,
as confirmed by our independent auditors. We will make additional
payments owed to Dongri, if any, no later than the 30 days after the filing of
our quarterly or annual report, as applicable, with the SEC for the respective
period.
September
2009 Entry into Mobile Phone Market
In
September 2009, we were granted a license to manufacture mobile phones by the
Ministry of Industry and Information Technology. With our new license, we are
authorized to operate mobile phone manufacturing business in mainland China
under the “NIVS” brand name. We have capabilities and
intellectual property rights to manufacture 3G mobile phones and have already
introduced a dual-mode EVDO/GSM 3G handset to the market. Also
in 2009, we reached an agreement to manufacture mobile phones for China Telecom
Corp. Ltd. to be used with China Telecom’s 3G network, e-Surfing. We currently
manufacture two CDMA 3G mobile phone models, the NE16 and NE20.
March
2009 Public Offering
In March
2009, we completed a public offering consisting of 550,000 shares of our common
stock. WestPark Capital, Inc. acted as underwriter in the public
offering. Our shares of common stock were sold to the public at a
price of $3.50 per share, for gross proceeds of approximately $1.9
million. In April 2009, WestPark Capital exercised its over-allotment
option to purchase an additional of 82,500 shares of common stock. The shares
were sold at a price of $3.50 per share for a gross proceed of
$288,750.
December
2008 Agreement to Convert Debt to Shares
On
December 24, 2008, we and three of our subsidiaries (NIVS BVI, NIVS HK, and NIVS
PRC) entered into an agreement with Mr. Li pursuant to which the outstanding
debt that we owed to Mr. Li would be converted into shares of our common
stock. According to the agreement, the shares would be issued upon
the closing of our public offering. The public offering closed on
March 18, 2009 and we issued 2,240,493 shares of common stock to Mr. Li, which
is equal to the debt amount of approximately $7.8 million divided by the
offering price of our public offering, which was $3.50 per share. As
a result of the conversion of the debt into equity, the debt is no longer
outstanding, and we do not have any outstanding debt owed to Mr.
Li.
November
2008 Debt Repayment and Set-Off Agreement
From June
2005 to November 2008, our subsidiaries entered into hundreds of loan
transactions with NIVS PRC’s founder and our principal shareholder and current
Chief Executive Officer and Chairman of the Board, Tianfu Li. In
these loan transactions, we would borrow funds from Mr. Li. In addition, our
subsidiaries, primarily through NIVS PRC and NIVS International (H.K.) Limited
(“NIVS HK”), would lend funds to the entities that were owned and controlled by
Mr. Li. These entities owned and controlled by Mr. Li are NIVS
Investment (SZ) Co., Ltd.; Zhongkena Technology Development; Xentsan
Technology (SZ) Co., Ltd.; Korea Hyundai Light & Electric (Int'l) Holding;
NIVS Information & Technology (HZ) Co., Ltd.; and Hyundai Light &
Electric (HZ) Co., Ltd. (collectively, the “Related Companies”). Our
loans to related parties also include a loan to a supplier of Hyundai Light and
Electric (HZ) Co. Ltd. in the amount of 38,474,900RMB, which is equal to
approximately U.S. $5.5 million. The note carried an interest rate of 1.5% per
month and was guaranteed by Hyundai Light and Electric (HZ) Co Ltd.
38
The loans
to the Related Companies were for temporary funding of each of the Related
Companies’ business, and the amount of the loans made by our subsidiaries to the
Related Companies ranged in amount. The aggregate amount loaned from
our subsidiaries to the Related Companies was approximately $13 million and $10
million during the years ended December 31, 2008 and 2007,
respectively. The loan amounts owed to our subsidiaries by the
Related Companies as of December 31, 2008 and 2007 were $0 and $2.2 million,
respectively. As of December 31, 2008, our subsidiaries had an
aggregate outstanding loan balance due to Mr. Li of $7.8 million, which was
converted into equity upon the closing of our public offering in March 2009. All
of the loans to and from our subsidiaries were unsecured with no fixed repayment
date. The loans were borrowed and repaid
frequently. Normally, it was agreed that the loan amounts were to be
paid back to our subsidiaries within three to six months from the date of the
loan transaction.
Upon the
closing of the Share Exchange, we, a public reporting company under U.S.
securities laws, gained ownership of the subsidiaries. As a result,
our subsidiaries became subject to the Sarbanes-Oxley Act of 2002, including
Section 402’s prohibition against personal loans to directors and executive
officers, either directly or indirectly. Because the loans did not
have a purpose directly related to the business operations of our company or our
subsidiaries, we believe that the loans made and outstanding after the closing
of the Share Exchange may violate Section 402 of Sarbanes-Oxley, which would
subject us and our chief executive officer to possible criminal, civil or
administrative sanctions, penalties, or investigations, in addition to potential
private securities litigation. It was intended that all loans from
our subsidiaries to our officers and directors, whether directly or indirectly,
be repaid in full prior to the closing of the Share Exchange, and no further
loans were to be made to such related parties after the closing of the Share
Exchange, which occurred on July 25, 2008. In November 2008, it was
discovered that the loans to the entities owned by Mr. Li continued after the
closing of the Share Exchange, as more fully described in the notes to the
financial statements contained in this prospectus. We made a total of
47 loans, with a total loan amount of $3,221,915, to the Related Companies after
the closing of the Share Exchange.
On
November 28, 2008, we and our subsidiaries entered into a Debt Repayment and
Set-Off Agreement (the “Agreement”) with Mr. Li and the Related
Companies. Pursuant to the Agreement, as it was amended on December
22, 2008, each of the Related Companies agreed to completely and immediately
repay all outstanding loan amounts that it owed to us and our subsidiaries and
we and our subsidiaries agreed to repay approximately $1.0 million of the debt
that we and our subsidiaries owed to Mr. Li. As inducement for the
Related Companies for entering into the Agreement, we and our subsidiaries
agreed to, among other things, permit the amounts owed to us by the Related
Companies to be off-set by amounts that we owed to Mr. Li and acknowledge that
the Related Companies no longer owed any loan amounts to us or our
subsidiaries.
Immediately
prior to the repayments under the Agreement, our subsidiaries had an aggregate
outstanding loan amount of approximately $8.8 million owed to Mr. Li (the “Li
Debt”). On the same date, Mr. Li, through the Related Companies, had
an aggregate outstanding loan amount of approximately $1.0 million owed to our
subsidiaries (the “Related Companies’ Debt”), which consisted of approximately
$1.0 million owed by Korea Hyundai Light & Electric (Int'l)
Holding. Pursuant to the Agreement, the Related Companies’ Debt of
approximately $1.0 million was repaid by set off against the Li Debt of
approximately $8.8 million. As a result of the transactions
contemplated by the Agreement, the Related Companies’ Debt was no longer
outstanding and neither Mr. Li nor any of the Related Companies owed us or our
subsidiaries any loan amount. Moreover, after the repayments under
the Agreement, our subsidiaries’ remaining debt owed to Mr. Li was approximately
$7.8 million. The parties to the Repayment Agreement also
acknowledged that there were no remaining debt obligations owed to the us or our
subsidiaries, either directly or indirectly, by Mr. Li, any other executive
officer or director, or any related family member, of our company or
subsidiaries, or any entity owned or controlled by such persons, including the
Related Companies, and that no loans or similar arrangements will be made by us
or our subsidiaries to such persons or entities in the future.
39
Critical
Accounting Policies, Estimates, and Assumptions
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
discussion and analysis of our financial condition and results of operations is
based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities. On an on-going basis, we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of inventory, income taxes and contingencies. We
base our estimates on historical experience and on other assumptions that we
believe to be reasonable under the circumstances, the results of which form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
Revenue
recognition. We recognize revenue from the sales of products. Sales
are recognized when the following four revenue criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is
fixed or determinable, and collectivity is reasonably assured. Sales revenue is
presented net of value added tax (VAT), sales rebates and returns. No return
allowance is made as product returns are insignificant based on historical
experience.
Allowance for
doubtful accounts. In estimating the collectability of accounts
receivable we analyze historical write-offs, changes in our internal credit
policies and customer concentrations when evaluating the adequacy of our
allowance for doubtful accounts. Differences may result in the amount and timing
of expenses for any period if we make different judgments or use different
estimates. Our accounts receivable represent a significant portion of our
current assets and total assets. Our realization on accounts receivable,
expressed in terms of United States dollars may be affected by fluctuations in
currency rates since the customer’s currency is frequently a currency other than
United States dollars.
Inventories.
Inventories comprise raw materials and finished goods are stated at the
lower of cost or market. Substantially all inventory costs are determined using
the weighted average basis. Costs of finished goods include direct labor, direct
materials, and production overhead before the goods are ready for sale.
Inventory costs do not exceed net realizable value.
Taxation.
Under the tax laws of PRC, NIVS PRC has had tax advantages granted by
local government for corporate income taxes and sales taxes commencing April 6,
2004. NIVS PRC has been entitled to have a full tax exemption for the first two
profitable years, followed by a 50% reduction on normal tax rate of 24% 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%, except for High Tech companies
that pay a reduced rate of 15%. The new law became effective on January 1, 2008.
During the transition period for enterprises established before March 16, 2007
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.
40
Results
of Operations
The
following table sets forth information from our statements of income for the
years ended December 31, 2009, 2008, and 2007 in dollars and as a percentage of
revenue:
Years Ended December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
|
(in thousands)
|
|||||||||||||||||||||||
Revenue
|
$
|
185,198
|
99.8
|
%
|
$
|
143,631
|
99.7
|
%
|
$
|
77,627
|
99.3
|
%
|
||||||||||||
Other
Sales
|
282
|
0.2
|
%
|
415
|
0.3
|
%
|
516
|
0.7
|
%
|
|||||||||||||||
Cost
of Goods Sold
|
(142,416
|
)
|
-76.8
|
%
|
(109,763
|
)
|
-76.2
|
%
|
(58,864
|
)
|
-75.3
|
%
|
||||||||||||
Gross
Profit
|
43,064
|
23.2
|
%
|
34,283
|
23.8
|
%
|
19,279
|
24.7
|
%
|
|||||||||||||||
Selling
Expenses
|
6,761
|
3.6
|
%
|
5,376
|
3.7
|
%
|
3,270
|
4.2
|
%
|
|||||||||||||||
General
and administrative
|
||||||||||||||||||||||||
Amortization
|
79
|
0.0
|
%
|
69
|
0.0
|
%
|
62
|
0.1
|
%
|
|||||||||||||||
Depreciation
|
331
|
0.2
|
%
|
337
|
0.2
|
%
|
328
|
0.4
|
%
|
|||||||||||||||
Bad
debts (recovery)
|
(2,745
|
)
|
-1.5
|
%
|
2,531
|
1.8
|
%
|
473
|
0.6
|
%
|
||||||||||||||
Merger
cost
|
-
|
0.0
|
%
|
1,786
|
1.2
|
%
|
-
|
0.0
|
%
|
|||||||||||||||
Stock-based
compensation
|
-
|
0.0
|
%
|
765
|
0.5
|
%
|
-
|
0.0
|
%
|
|||||||||||||||
Other
G&A expense
|
4,850
|
2.6
|
%
|
3,172
|
2.2
|
%
|
2,548
|
3.3
|
%
|
|||||||||||||||
Total
General and administrative
|
2,515
|
1.3
|
%
|
8,660
|
5.9
|
%
|
3,411
|
4.4
|
%
|
|||||||||||||||
Research
and development
|
5,315
|
2.9
|
%
|
1,737
|
1.2
|
%
|
373
|
0.5
|
%
|
|||||||||||||||
Total
operating expenses
|
14,591
|
7.8
|
%
|
15,773
|
10.8
|
%
|
7,054
|
9.1
|
%
|
|||||||||||||||
Income
from operations
|
28,473
|
15.4
|
%
|
18,510
|
13.0
|
%
|
12,225
|
15.6
|
%
|
|||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||
Government
grant
|
576
|
0.3
|
%
|
32
|
0.0
|
%
|
28
|
0.0
|
%
|
|||||||||||||||
Write-down
of inventory
|
-
|
0.0
|
%
|
(132
|
)
|
-0.1
|
%
|
(105
|
)
|
-0.1
|
%
|
|||||||||||||
Gain
on disposal of assets
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
|||||||||||||||
Interest
income
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
235
|
0.3
|
%
|
|||||||||||||||
Interest
expense
|
(1,567
|
)
|
-0.8
|
%
|
(2,208
|
)
|
-1.5
|
%
|
(1,792
|
)
|
-2.3
|
%
|
||||||||||||
Imputed
interest
|
-
|
0.0
|
%
|
(656
|
)
|
-0.5
|
%
|
(527
|
)
|
-0.7
|
%
|
|||||||||||||
Sundry
income (expense), net
|
11
|
0.0
|
%
|
(52
|
)
|
0.0
|
%
|
(111
|
)
|
-0.1
|
%
|
|||||||||||||
Total
other income (expenses)
|
(980
|
)
|
-0.5
|
%
|
(3,016
|
)
|
-2.1
|
%
|
(2,272
|
)
|
-2.9
|
%
|
||||||||||||
Income
before Noncontrolling interest and income taxes
|
27,493
|
14.9
|
%
|
15,494
|
10.9
|
%
|
9,953
|
12.7
|
%
|
|||||||||||||||
Income
taxes
|
(3,406
|
)
|
-1.8
|
%
|
(2,031
|
)
|
-1.4
|
%
|
(1,269
|
)
|
-1.6
|
%
|
||||||||||||
Noncontrolling
interest
|
(630
|
)
|
-0.3
|
%
|
(430
|
)
|
-0.2
|
%
|
(217
|
)
|
-0.3
|
%
|
||||||||||||
Net
Income
|
$
|
23,457
|
12.8
|
%
|
$
|
13,033
|
9.3
|
%
|
$
|
8,467
|
10.8
|
%
|
Years
ended December 31, 2009 and 2008
Revenues, which consist of sales of our
products, were $185.2 million for the year ended December 31, 2009, an increase
of $41.6 million, or 29.0%, compared to $143.6 million for the year ended
December 31, 2008. The increase in revenue was attributed mainly to the
increased demand for and sales of intelligent audio and video products, which we
believe is a result of our market expansion efforts. The increase of revenue was
also due to the sales of digital equipment and other products, as well as
price increases of some of our audio system products. Sales revenue for our
intelligent audio and video equipment increased to $83.9 million for the year
ended December 31, 2009, an increase of 363.5% as compared to $18.1 million for
the year ended December 31, 2008. For the year ended December 31,
2009, our sales revenue for standard audio equipment decreased to $90.5 million,
a decrease of 21.6 % compared to $115.5 million for the same period in 2008.
Sales revenue for televisions decreased to $19.4 million, a decrease of 6.3%
compared to $20.7 million for the same period in 2008. For the year
ended December 31, 2009, our sales volume for standard audio equipment decreased
by 25.3% to 3.48 million pieces as compared to 4.66 million pieces for
2008. For the year ended December 31, 2009, our sales volume for
televisions increased by 5.6% to 0.19 million pieces as compared to 0.18 million
pieces for the same period in 2008. Our sales volume for intelligent
audio and video equipment increased by 66.7% to 0.85 million pieces as compared
to 0.51 million pieces for the same period in 2008. We believe the increases in
sales revenue and volume of intelligent audio and video products are a result of
our investment of resources into the research and development of new products
and design to meet the requirements of the market, our focus on the promotion of
our brand, and expansion of our sales channels.
41
Cost of sales, which include raw
material, labor and manufacturing overhead, were $142.4 million for the year
ended December 31, 2009, an increase of $32.6 million, or 29.7%, compared to
$109.8 million for the year ended December 31, 2008. The increase was primarily
a result of the increase in sales and was relatively consistent with the
increase in our net revenue. As a percentage of net revenue, cost of sales for
the years ended December 31, 2009 and 2008 were 76.8% and 76.2%,
respectively.
Gross profit for the year ended
December 31, 2009 was $ 43.1 million, or 23.3 % of revenues, compared to $34.3
million, or 23.9% of revenues, for the year ended December 31, 2008. Gross
profit margins are a factor of cost of sales, product mix and product demand.
For the year ended December 31, 2009, the price of standard audio equipments
which are large percentage of our sales decreased and some of the costs involved
in production increased; however, its effect is partially offset by increase in
the new intelligent products. These factors caused the small decrease in gross
margin.
Selling expenses, which mainly include
marketing, shipping, insurance, wage and other expenses, were $6.8 million for
the year ended December 31, 2009, an increase of $1.4 million, or 25.9%,
compared to $5.4 million for the year ended December 31, 2008. The increase was
primarily due to an increase in television advertising (on CCTV), internet
advertising, and marketing activities.
Research and development expenses were
approximately $5.3 million for the year ended December 31, 2009, an increase of
approximately $3.6 million, or 211.8% compared to approximately $1.7 million for
the year ended December 31, 2008. We believe that our focus on research and
development contributed to the increase in our total sales. In the future,
we expect to continue to increase our research and development efforts and to
enable us to manufacture wider lines of products, such as mobile phones and
other 3G communication products.
General and administrative expenses
were $2.5 million for the year ended December 31, 2009, a decrease of $6.2
million, or 71.3%, compared to $8.7 million for the year ended December 31,
2008. General and administrative expenses include amortization, depreciation,
bad debt(recovery), merger costs, professional fees, office expenses, salary and
wages, utilities, employee housing fund and other expenses. The substantial
portion of the decrease for the year ended December 31, 2009 was due to the $2.7
million reversal of bad debt allowance in 2009 and the $2.5 million bad debt
expense recorded in 2008, and we had merger cost in 2008. We expect our general
and administrative expenses to increase as a result of professional fees
incurred as a result of being a public reporting company in the United
States, in addition to the increased general administrative expense that
will be involved with the operation of Dongri.
Interest expenses were $1.6 million and
$2.2 million for the years ended December 31, 2009 and 2008, respectively. The
decrease was due to the decrease in the interest rate during the year ended
December 31, 2009.
Income tax provisions for years ended
December 31, 2009 and 2008 were approximately $3.4 million and $2.0 million,
respectively. The increase is mainly due to an increase in the taxable income
for the year ended December 31, 2009. NIVS PRC is registered in PRC and has had
tax advantages granted by local government for corporate income taxes and sales
taxes commencing April 6, 2004. NIVS PRC has been entitled to have a full tax
exemption for the first two profitable years, followed by a 50% reduction on
normal tax rate of 24% for the following three consecutive years. Our effective
income tax rates for the years ended December 31, 2009 and 2008 were 12.4% and
13.1%, respectively. 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 as a result
of the new EIT Law.
Net income was $23.5 million for the
year ended December 31, 2009, an increase of $10.5 million, or 80.8%, compared
to $13.0 million for the year ended December 31, 2008.
42
Years
ended December 31, 2008 and 2007
Revenues, which consist of sales of our
products, were $143.6 million for the year ended December 31, 2008, an increase
of $66.0 million, or 85.1%, compared to $77.6 million for the year ended
December 31, 2007. The increase in revenue was attributed mainly to the
increased demand for our products, which we believe is a result of our market
expansion efforts. The increase of revenue was also due to the new sales of
digital equipment and LCD products, as well as price increases of some of our
audio system products. For the year ended December 31, 2008, our sales revenue
for standard audio equipment increased to $52 million, an increase of 2%
compared to $51 million for the same period in 2007. Sales revenue for
televisions increased to $15.18 million, an increase of 299.5% compared to $3.8
million for the same period in 2007. Sales revenue for our intelligent audio and
video equipment increased to $25.31 million for the year ended December 31,
2008, an increase of 481.8% as compared to $4.35 million for the year ended
December 31, 2007. For the year ended December 31, 2008, our sales volume for
standard audio equipment increased by 17.1% to 4.66 million pieces as compared
to 3.98 million pieces for 2007. The increase was due to product upgrades as we
upgraded most of our standard audio equipment to intelligent audio equipment.
For the year ended December 31, 2008, our sales volume for televisions increased
by 380.6% to 76.32 million pieces as compared to 0.2 million pieces for the same
period in 2007. Our sales volume for intelligent audio and video equipment
increased by 755% to 0.513 million pieces as compared to 0.06 million pieces for
the same period in 2007. We believe the increases in sales revenue and volume
are a result of our investment of resources into the research and development of
new products and design to meet the requirements of the market, our focus on the
promotion of our brand, and expansion of our sales channels.
Cost of sales, which include raw
material, labor and manufacturing overhead, were $109.8 million for the year
ended December 31, 2008, an increase of $50.9 million, or 86.4%, compared to
$58.9 million for the year ended December 31, 2007. The increase was primarily a
result of the increase in sales and was consistent with the increase in our net
revenue. As a percentage of net revenue, cost of sales for the years ended
December 31, 2008 and 2007 were 76.2% and 75.3%, respectively.
Gross profit for the year ended
December 31, 2008 was $34.3 million, or 23.8% of revenues, compared to $19.3
million, or 24.7% of revenues, for the year ended December 31, 2007. The
increase in our gross profit margin for the year ended December 31, 2008 was
primarily due to the increase of sales price of our audio system products.
Management considers gross profit to be a key performance indicator in managing
our business. Gross profit margins are a factor of cost of sales, product mix
and product demand.
Selling expenses, which mainly include
marketing, shipping, insurance, wage and other expenses, were $5.4 million for
the year ended December 31, 2008, an increase of $2.1, million, or 63.6%,
compared to $3.3 million for the year ended December 31, 2007. The increase in
selling expenses was primarily attributable to the increase in advertising and
marketing activities.
Research and development expenses were
approximately $1.7 million for the year ended December 31, 2008, a increase of
approximately $1.3 million, or 325.0% compared to approximately $0.4 million for
the year ended December 31, 2007. The increase was caused by increased new
product research and development and the upgrading of old products to meet the
market need. We believe that our focus on research and development contributed
to the increase in our total sales. In the future, we expect to continue to
increase our research and development efforts and to enable us to manufacture
wider lines of products, such as mobile phones and other 3G communication
products.
General and administrative expenses,
which include wage, benefit, bad debts, utility, consulting, professional fee,
various taxes and levies and other expenses, were $8.7 million for the year
ended December 31, 2008, an increase of $5.3 million, or 155.9%, compared to
$3.4 million for the year ended December 31, 2007. The increase was primarily a
result of the cost of merger. We expect our general and administrative expenses
to increase as a result of professional fees incurred as a result of being a
public reporting company in the United States, in addition to the increased
general administrative expense that will be involved with the operation of
Dongri.
Interest expenses were $2.2 million and
$1.8 million for the years ended December 31, 2008 and 2007, respectively. The
increase was due to new short-term and long-term bank loans during the year
ended December 31, 2008.
Income tax provisions for years ended
December 31, 2008 and 2007 were approximately $2.0 million and $1.3 million,
respectively. The increase is mainly due to an increase in the taxable income
for the year ended December 31, 2008. NIVS PRC is registered in PRC and has had
tax advantages granted by local government for corporate income taxes and sales
taxes commencing April 6, 2004. NIVS PRC has been entitled to have a full tax
exemption for the first two profitable years, followed by a 50% reduction on
normal tax rate of 24% for the following three consecutive years. Our
effective income tax rates for the years ended December 31, 2008 and 2007 were
13.1% and 12.7%, respectively. 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, 2007,
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.
43
Net income was $13.0 million for the
year ended December 31, 2008, an increase of $4.5 million, or 52.9%, compared to
$8.5 million for the year ended December 31, 2007.
Liquidity
and Capital Resources
We had an unrestricted cash balance of
approximately $5.9 million as of December 31, 2009, as compared to $0.5 million
as of December 31, 2008. In addition, we also had approximately $4.8 million in
restricted cash as of December 31, 2009, as compared to $11.7 million as
of December 31, 2008. Our restricted cash is held as a security deposit for
our recurring, short-term bank notes and short-term loans. Our funds are kept in
financial institutions located in China, and banks and other financial
institutions in the PRC do not provide insurance for funds held on deposit,
and in the event of a bank failure, we may not have access to our funds on
deposit. In addition, we are subject to the regulations of the PRC,
which restrict the transfer of cash from China, except under certain specific
circumstances. Accordingly, such funds may not be readily available to us to
satisfy obligations that have been incurred outside the PRC.
We had working capital of approximately
$3.3 million and negative working capital of $18.6 million as of December 31,
2009 and 2008, respectively. The decrease of negative working capital was
largely caused by public offering fund raising.
Our accounts receivable has been an
increasingly significant portion of our current assets, representing $33.2
million and $20.4 million, or 52.6% and 45.3% of current assets, as of December
31, 2009 and 2008, respectively. 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 90 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 finished goods inventory on hand to ensure timely delivery of our
products to our customers. 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 aging of accounts receivable, the collectability of specific customer
accounts, our history of bad debts, and the general condition of the
industry.
Our aging of accounts receivables could
result in our inability to collect receivables requiring us to increase our
doubtful accounts reserve, which would decrease our net income and working
capital. We experienced no bad debt expense during the year ended December 31,
2009 compared to $2.5 million for the same period in 2008. As of December 31,
2009, we believed it was appropriate not to recognize bad debt expense primarily
due to the subsequent collections made on our receivable balance and our
historical ability to collect our accounts receivable. Bad debt expense was $2.5
million for the year ended December 31, 2008, compared to $0.5 million for the
year ended December 31, 2007. The increase was primarily due to an increase in
the aging of our accounts caused by the financial crisis. Due to the difficulty
in assessing future trends, we could be required to further increase our
provisions for doubtful accounts. As our trade receivables age and become
uncollectible our cash flow and results of operations are negatively
impacted.
As of December 31, 2009, inventories
amounted to $9.6 million, compared to $11.3 million as of December 31, 2008. We
have experienced increased sales volume annually and, also, we launched
promotion campaign in domestic market in the first quarter of 2009; as a result,
we need to maintain certain amounts of finished goods to meet the customers’
demand when launching nationwide promotion campaign. We expect to experience
increase in our inventory levels going forward, including both of raw material
and finished goods. We maintain certain reserve amounts of raw materials in our
inventories and engage in long-term arrangements with suppliers in an attempt to
protect against any rising prices and shortages of raw materials used to
manufacture our products.
44
NIVS PRC has entered into various
revolving bank loans and bank notes to finance our operation. Most of the loans
are one year renewable. NIVS PRC had bank loans of approximately $51.7 million
and $54.7 million as of December 31, 2009 and 2008, respectively. These loans
carry annual interest rates of approximately 3.3% to 7.2% with maturity dates
ranging from 30 days to one year. These loans are either unsecured or secured by
the Company’s buildings, equipment, receivables and land use rights. In China it
is customary practice for banks and borrowers to negotiate roll-overs or
renewals of short-term borrowings on an on-going basis shortly before they
mature. Although we have renewed our short-term borrowings in the past, we
cannot assure you that we will be able to renew these loans in the future as
they mature. In January 2010, the Chinese government took steps to tighten the
availability of credit including ordering banks to increase the amount of
reserves they hold and to reduce or limit their lending. If we are unable to
obtain renewals of these loans or sufficient alternative funding on reasonable
terms from banks or other parties, we will have to repay these borrowings with
the cash on our balance sheet or cash generated by our future operations, if
any.
From June 2005 to November 2008, our
subsidiaries entered into hundreds of loan transactions with NIVS PRC’s founder
and our principal shareholder and current Chief Executive Officer and Chairman
of the Board, Tianfu Li. In these loan transactions, we would borrow funds from
Mr. Li. As of September 30, 2008, our subsidiaries had an aggregate outstanding
loan balance due to Mr. Li of $9.1 million and $568,063 owed to NIVS Investment
(SZ) Co., Ltd. In addition, our subsidiaries, primarily through NIVS PRC
and NIVS International (H.K.) Limited (“NIVS HK”), would lend funds to the
entities that were owned and controlled by Mr. Li. These entities controlled by
Mr. Li are NIVS Investment (SZ) Co., Ltd.; Zhongkena Technology Development;
Xentsan Technology (SZ) Co., Ltd.; Korea Hyundai Light & Electric (Int'l)
Holding; NIVS Information & Technology (HZ) Co., Ltd.; and Hyundai Light
& Electric (HZ) Co., Ltd. (collectively, the “Related Companies”). Our loans
to related parties also include a loan to a supplier of Hyundai Light and
Electric (HZ) Co. Ltd. in the amount of 38,474,900 RMB, which is equal to
approximately U.S. $5.5 million. The note carried an interest rate of 1.5% per
month and was guaranteed by Hyundai Light and Electric (HZ) Co Ltd. This loan
has been paid in full as of November 28, 2008. The amount of the loans made by
our subsidiaries to the Related Companies ranged in amount. The aggregate amount
loaned from our subsidiaries to the Related Companies was approximately $0 and
$13 million during the years ended December 31, 2009 and 2008,
respectively.
As presented in our statements of cash
flows in our financial statements, the cash payments directly to and from our
largest shareholder, Mr. Li, are reflected as “Due to Shareholder” and are
classified as financing activities pursuant to the standards within ASC 230,
which provides that “financing activities include obtaining resources from
owners and providing them with a return on, and a return of, their investment;
borrowing money and repaying amounts borrowed.” The loan transactions
with the related parties are classified as investing activity in accordance with
the standards within ASC 230 as the related parties are not “owners” of our
company as described in the standards within ASC 230 since the entities do not
own equity in our company. In addition, Mr. Li, from July 2008, has
not owned any part of Hyundai Light & Electric (Int’l) Holding Limited, and
Mr. Li has never had any ownership interest of the supplier of Hyundai Light
& Electric (Int’l) Holding Limited that was the holder of the
note. The loans to the related parties were not a borrowing of funds
by us, nor a repayment of funds borrowed by an owner.
Upon the closing of the Share Exchange,
we, a publicly reporting company under U.S. securities laws, gained ownership of
the subsidiaries. As a result, our subsidiaries became subject to the
Sarbanes-Oxley Act of 2002, including Section 402’s prohibition against personal
loans to directors and executive officers, either directly or indirectly.
Because the loans did not have a purpose directly related to the business
operations of our company or our subsidiaries, we believe that the loans made
and outstanding after the closing of the Share Exchange may violate Section 402
of Sarbanes-Oxley, which would subject us and our chief executive officer to
possible criminal, civil or administrative sanctions, penalties, or
investigations, in addition to potential private securities litigation. It was
intended that all loans from our subsidiaries to our officers and
directors, whether directly or indirectly, be repaid in full prior to the
closing of the Share Exchange, and no further loans were to be made to such
related parties after the closing of the Share Exchange, which occurred on July
25, 2008. In November 2008, it was discovered that the loans to the entities
owned by Mr. Li continued after the closing of the Share Exchange, as more fully
described in the notes to the financial statements contained in this prospectus.
We made a total of 47 loans, with a total loan amount of $3,221,915, to the
Related Companies after the closing of the Share Exchange.
On November 28, 2008, we and our
subsidiaries entered into a Debt Repayment and Set-Off Agreement (the
“Agreement”) with Mr. Li and the Related Companies. Pursuant to the
Agreement, as it was amended on December 22, 2008, each of the Related Companies
agreed to completely and immediately repay all outstanding loan amounts that it
owed to us and our subsidiaries and we and our subsidiaries agreed to repay
approximately $1.0 million of the debt that we and our subsidiaries owed to Mr.
Li. As inducement for the Related Companies for entering into the
Agreement, we and our subsidiaries agreed to, among other things, permit the
amounts owed to us by the Related Companies to be off-set by amounts that we
owed to Mr. Li and acknowledge that the Related Companies no longer owed any
loan amounts to us or our subsidiaries.
45
Immediately prior to the repayments
under the Agreement, our subsidiaries had an aggregate outstanding loan amount
of approximately $8.8 million owed to Mr. Li (the “Li Debt”). On the
same date, Mr. Li, through the Related Companies, had an aggregate outstanding
loan amount of approximately $1.0 million owed to our subsidiaries (the “Related
Companies’ Debt”), which consisted of approximately $1.0 million owed by Korea
Hyundai Light & Electric (Int'l) Holding. Pursuant to the Agreement, the
Related Companies’ Debt of approximately $1.0 million was repaid by set off
against the Li Debt of approximately $8.8 million. As a result of the
transactions contemplated by the Agreement, the Related Companies’ Debt is no
longer outstanding and neither Mr. Li nor any of the Related Companies owed
us or our subsidiaries any loan amount. Moreover, after the
repayments under the Agreement, our subsidiaries’ remaining debt owed to Mr. Li
was approximately $7.8 million. The parties to the Repayment
Agreement also acknowledged that there were no remaining debt obligations owed
to the us or our subsidiaries, either directly or indirectly, by Mr. Li, any
other executive officer or director, or any related family member, of our
company or subsidiaries, or any entity owned or controlled by such persons,
including the Related Companies, and that no loans or similar arrangements will
be made by us or our subsidiaries to such persons or entities in the
future.
On July 25, 2008, concurrently with the
close of the Share Exchange, we conducted an initial closing of a private
placement transaction pursuant to which we sold an aggregate of 5,239,460 shares
of common stock at $1.80 per share, for gross proceeds of approximately $9.4
million. On August 12, 2008, we conducted a second and final closing of the
private placement pursuant to which we sold an additional 1,304,587 shares of
common stock at $1.80 per share for gross proceeds of approximately $2.3
million. Accordingly, we sold a total of 6,544,047 shares of common stock in the
private placement for aggregate gross proceeds of approximately $11.8 million
(the “Private Placement”). WestPark Capital, Inc., the placement agent for the
Private Placement, was paid a commission equal to 6.5% of the gross proceeds
from the financing, in addition to a $130,000 success fee for the Share
Exchange, for an aggregate fee of approximately $896,000. We used the
proceeds from the Private Placement to provide working capital for
speech-controlled TV and product promotion, speech-controlled audio acoustics,
DVD, and DVB production capacity expansion, technology and product research and
development, basic research and application product development, brand building
and publicity and strengthening channel building and brand promotion in China
and to increase reserve funds as well as new production lines for LCD TV for the
expansion of business.
On December 24, 2008, we and three of
our subsidiaries (NIVS BVI, NIVS HK, and NIVS PRC) entered into an agreement
with Mr. Li pursuant to which the outstanding debt of $7.8 million that we owed
to Mr. Li would be converted into shares of our common stock based on the
closing price of our public offering that we conducted in March
2009. According to the agreement, we issued 2,240,493 shares of our
common stock to Mr. Li in March 2009 upon the closing of our public
offering. As a result of the conversion, the debt amount of $7.8
million was converted into shares of common stock at $3.50 per share, and the
debt is no longer outstanding.
In March 2009, we completed a public
offering consisting of 550,000 shares of our common stock. WestPark Capital,
Inc. acted as underwriter in the public offering. Our shares of
common stock were sold to the public at a price of $3.50 per share, for gross
proceeds of approximately $1.9 million. Compensation for
WestPark Capital’s services included discounts and commissions of $192,500,
a $57,750 non-accountable expense allowance, roadshow expenses of approximately
of $10,000, and legal counsel fees (excluding blue sky fees) of
$40,000. WestPark Capital also received a warrant to purchase 55,000
shares of our common stock at an exercise price of $4.20 per
share. The warrant, which has a term of five years, is not
exercisable until at least one-year from the date of issuance. The
warrant also carries registration rights. In April 2009, the
underwriters exercised their over-allotment option in full for the offer and
sale of 82,500 additional shares of common stock at $3.50 per share, for gross
proceeds of $288,750.
In April 2009, WestPark Capital
exercised its over-allotment option to purchase an additional of 82,500 shares
of common stock. The shares were sold a price of $3.50 per share for a gross
proceed of $288,750. Compensation incurred in the public offering included
discounts and commissions of $28,875, an $8,663 non-accountable expense
allowance, other expenses of $4,821, and legal counsel fees of
$42,500.
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 are approximately $213,650,
$217,882, and $232,655 for the years ended December 31, 2009, 2008, and 2007,
respectively. 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.
46
According to the relevant PRC
regulations on housing provident funds, PRC enterprises are required to
contribute housing provident funds for their employees. The monthly
contributions for Huizhou City must be at least 5% of each employee’s average
monthly income in the previous year. The Company has not paid such funds for its
employees since its establishment and the accumulated unpaid amount is
approximately $870,000. Under local regulations on collection of housing
provident funds in Huizhou City where the Company’s subsidiary, NIVS PRC, is
located, the local housing authority may require the Company to rectify its
non-compliance by setting up bank accounts and making payment and relevant
filings for the unpaid housing funds for its employees within a specified time
period. If the Company fails to do so within the specified time period, the
local housing authority may impose a monetary fine on it and may also apply to
the local people’s court for enforcement. The Company’s employees may also be
entitled to claim payment of such funds individually. If the Company receives
any notice from the local housing authority or any claim from our current and
former employees regarding the Company’s non-compliance with the regulations,
the Company will be required respond to the notice and pay all amounts due to
the government, including any administrative penalties imposed, which would
require the Company to divert its financial resources and/or impact its cash
reserves, if any, to make such payments. Additionally, any administrative costs
in excess of the payments, if material, may impact the Company's operating
results. As of December 31, 2009, the Company has not received any notice from
the local housing authority or any claim from our current and former
employees
In October 2009, we commenced
construction on Phase II of our factory in Huizhou (Phase II), which will
include a new manufacturing facility and dormitory. Phase II's manufacturing
facility, adjacent to Phase I, will span approximately 36,000 square meters and
will be dedicated to designing and making super thin LEDTVs, HD LCDTVs and 3G
cell phones under the NIVS brand name and intended for distribution in China's
domestic market. The expected production capacity will be 2 million TV sets
and 1.5 million phones per year. Construction is scheduled to be completed
during the second quarter of 2010, and the manufacturing facility is expected to
be operational later that same quarter. The estimate completion date is
April 30, 2010 for the manufacturing facility and June 30, 2010 for the
dormitory. Total budget of the construction is RMB 53,500,000
($7,847,380).
In January 2010, we acquired Dongri, a
mobile phone product manufacturer, for a purchase price of up to $23 million,
with $13 million being paid within one month of closing and up to an additional
$10 million that may become payable at future dates if Dongri meets after-tax
income targets for the first half of 2010, the third quarter of 2010, and the
fourth quarter of 2010. We are required to make additional payments
owed to Dongri, if the targets are met, no later than the 30 days after the
filing of our quarterly or annual report, as applicable, with the SEC for the
respective period.
In January 2010, we entered into a
purchase agreement with Kuanda (Xiamen) Communications Co., Ltd and China PTAC
Communications Services, on behalf of China Telecom, for the purchase by China
Telecom of our two 3G mobile phone products. The purchase agreement
is contingent on delivery of the 3G mobile phones representing the aggregate
order by March 31, 2010. Final
delivery under the agreement has been delayed as a result of China Telecom's
improvement of their 3G mobile phone application platform and is currently
anticipated to be completed in May 2010. The value of the order is
approximately $28.8 million, and the dollar value of any additional orders
further to this relationship depends on the final number of delivered
products. We expect that we will expend approximately $14 million in
the first quarter of 2010 to produce and deliver the mobile phone products
pursuant to the purchase order.
The ability of NIVS PRC to pay
dividends may be restricted due to the foreign exchange control policies and
availability of cash balance of the Chinese operating subsidiaries. A majority
of our revenue being earned and currency received are denominated in RMB, which
is subject to the exchange control regulation in China, and, as a result, we may
unable to distribute any dividends outside of China due to PRC exchange control
regulations that restrict our ability to convert RMB into US
Dollars. Accordingly, NIVS PRC’s funds may not be readily available
to us to satisfy obligations which have been incurred outside the PRC, which
could adversely affect our business and prospects or our ability to meet our
cash obligations.
Cash
Flow Information
Net cash provided by operating
activities was $18.6 million for the year ended December 31, 2009, compared to
net cash used in operating activities of $0.8 million for the year ended
December 31, 2008. The increase in net cash provided in operating activities was
primarily due to an increase in collection of trade receivables and an increase
in inventory turnaround. Our increase in net cash provided in operating
activities for the year ended December 31, 2009 was partially offset by an
increase in cash used in accounts receivable in response to demand of our
products. Net cash used in operating activities was $0.8 million for the year
ended December 31, 2008, compared to net cash used in operating activities of
$9.7 million for the year ended December 31, 2007. The decrease in net cash used
in operating activities was primarily due to a decrease in cash used in
inventories, raw material purchases and advance to suppliers for purchases. Our
decrease in net cash used in operating activities for the year ended December
31, 2008 was partially offset by a decrease in accounts payable and accrued
liabilities and an increase in accounts receivable, which primarily resulted
from an increase in our sales from $77.6 million in 2007 to $143.6 million in
2008.
47
Investing activity during the years
ended December 31, 2009 and 2008 included the purchasing of property and
equipment, intangible assets, and equity investment, which resulted in net cash
used in investing activities of $11.4 million for the year ended December 31,
2009, compared to net cash used in investing activities of $ 24.3 million for
the year ended December 31, 2008. The decrease in net cash used in investing
activities was primarily due to the decrease in the restricted cash and the
completion of our new plant renovation in 2008. In June 2008, we entered into an
agreement for the purchase of production equipment and a new plant renovation at
a contracted price of RMB 36,117,340 (USD $5,283,997). The plant renovation and
the equipment installation were completed in the end of 2008. The remainder
balance of RMB 24,210 (USD$3,542) was paid in January, 2009. As of December 31,
2009, we had paid $ 9.6 million for the purchase of production equipment and
construction on Phase II of the factory. Investing activity during the years
ended December 31, 2008 and 2007 included the purchasing of property and
equipment and intangible assets, which resulted in net cash used in investing
activities of $24.3 million for the year ended December 31, 2008, compared to
net cash used in investing activities of $10.8 million for the year ended
December 31, 2007. The increase in net cash used in investing activities was
primarily due to the increase of restricted cash related to bank notes
issued.
Net cash used in financing activities
amounted to $1.8 million for the year ended December 31, 2009, compared to net
cash provided by financing activities of 23.3 million for the year ended
December 31, 2008. The change in cash used in/provided by financing activities
was primarily a decrease in various notes payable financing, partially offset by
an increase in cash flow provided by bank loans and our public offering
closing in March 2009. Net cash provided by financing activities amounted
to $23.3 million for the year ended December 31, 2008, compared to net cash
provided by financing activities of $20.7 million for the year ended December
31, 2007. The increase of cash provided was primarily a result of the private
placement closing in July 2008 and various notes payable financing.
Based upon our present plans, we
believe that cash on hand, cash flow from operations and funds available to us
through a public offering that we intend to conduct in 2010 will be sufficient
to fund our current capital needs. We expect that our primary sources of funding
for our operations for this year will result from our continued use of bank
loans and bank notes and cash flow from operations to fund our operations during
this year. However, 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 additional 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.
Contractual
obligations
The
following table describes our contractual commitments and obligations as of
December 31, 2009, in thousands:
Payments due by period
|
||||||||||||||||||||
Total
|
Less than 1
year
|
1-3 years
|
3-5 years
|
More than 5
years
|
||||||||||||||||
Short
term bank loans and bank notes payable
|
$
|
51,700
|
$
|
51,700
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Total
|
$
|
51,700
|
$
|
51,700
|
$
|
-
|
$
|
-
|
$
|
-
|
Seasonality
The first
quarter is traditionally our low season due to the long Chinese New Year
Holiday, with sales gradually increasing in the second quarter. Sales are
usually highest in the fourth quarter as most of the factories in China will
ship out their stock to prepare for the Chinese New Year
Holiday.
48
Quarterly
Information
The table below presents selected
results of operations for the quarters indicated. All amounts are in
thousands, except share and per share amounts.
|
Quarter Ended
|
|||||||||||||||||||
|
December,
31 2009
|
September 30, 2009
|
June 30, 2009
|
March 31, 2009
|
Total
|
|||||||||||||||
Revenues
|
62,697
|
$
|
52,384
|
$
|
40,860
|
$
|
29,257
|
$
|
185,198
|
|||||||||||
Operating
Income
|
12,456
|
6,787
|
5,934
|
3,296
|
28,473
|
|||||||||||||||
Net
Income attributable NIVS IntelliMedia Technology Group, Inc.
shareholders
|
10,955
|
5,538
|
4,596
|
2,368
|
23,457
|
|||||||||||||||
Net
Income Per Share
|
|
|
|
|
|
|||||||||||||||
Basic
and Diluted
|
0.28
|
0.14
|
0.11
|
0.06
|
0.59
|
Quarter Ended
|
||||||||||||||||||||
|
December 31, 2008
|
September 30, 2008
|
June 30, 2008
|
March 31, 2008
|
Total
|
|||||||||||||||
Revenues
|
$
|
42,583
|
$
|
49,411
|
$
|
24,861
|
$
|
26,776
|
$
|
143,631
|
||||||||||
Operating
Income
|
3,861
|
5,830
|
4,464
|
4,355
|
18,510
|
|||||||||||||||
Net
Income attributable NIVS IntelliMedia Technology Group, Inc.
shareholders
|
1,934
|
4,563
|
3,286
|
3,250
|
13,033
|
|||||||||||||||
Net
Income Per Share
|
||||||||||||||||||||
Basic
and Diluted
|
0.04
|
0.13
|
0.12
|
0.12
|
0.41
|
Recently
issued accounting pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification (ASC)
and amended the hierarchy of generally accepted accounting principles (ASC)
and amended the hierarchy of generally accepted accounting principles (GAAP)
such that the ASC became the single source of authoritative nongovernmental U.S.
GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All previously existing
accounting standard documents were superseded and all other accounting
literature not included in the ASC is considered non-authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by
the FASB through Accounting Standards Updates (ASUs). The Company adopted the
ASC on July 1, 2009. This standard did not have an impact on the Company’s
consolidated results of operations or financial condition. However, throughout
the notes to the consolidated financial statements references that were
previously made to various former authoritative U.S. GAAP pronouncements have
been changed to coincide with the appropriate section of the ASC.
In
December 2007, the FASB issued a new standard which established the
accounting for and reporting of noncontrolling interests (NCIs) in partially
owned consolidated subsidiaries and the loss of control of subsidiaries. Certain
provisions of this standard indicate, among other things, that NCIs (previously
referred to as minority interests) be treated as a separate component of equity,
not as a liability (as was previously the case); that increases and decreases in
the parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
Company adopted the standard beginning January 1, 2009. The provisions of
the standard were applied to all NCIs prospectively, except for the presentation
and disclosure requirements, which were applied retrospectively to all periods
presented. As a result, upon adoption, the Company retroactively reclassified
the “Minority interest in subsidiaries” balance previously included in the
“Other liabilities” section of the consolidated balance sheet to a new component
of equity with respect to NCIs in consolidated subsidiaries. The adoption also
impacted certain captions previously used on the consolidated statement of
income, largely identifying net income including NCI and net income attributable
to the Company. The adoption of this standard did not have a material
impact on the Company’s consolidated financial position or results of
operations.
49
In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing 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. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The adoption of this standard did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In
June 2009, the FASB issued an accounting standard that 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. The standard is effective January 1, 2010. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 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
September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC
820 to provide guidance on measuring the fair value of certain alternative
investments such as hedge funds, private equity funds and venture capital funds.
The ASU indicates that, under certain circumstance, the fair value of such
investments may be determined using net asset value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other
than NAV. In those situations, the practical expedient cannot be used and
disclosure of the remaining actions necessary to complete the sale is required.
The ASU also requires additional disclosures of the attributes of all
investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 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
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements—a consensus of the FASB Emerging Issues Task
Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance: the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). The ASU is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on the
Company’s consolidated results of operations and financial
condition.
50
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
ASC 820 by adding required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchase, sales, issuances, and settlements relative to level 3 measurements;
and clarifying, among other things, the existing fair value disclosures about
the level of disaggregation. This ASU is effective for the first quarter of
2010, except for the requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is effective beginning
the first quarter of 2011. Since this standard impacts disclosure requirements
only, its adoption will not have a material impact on the Company’s consolidated
results of operations or financial condition.
Off-Balance
Sheet Arrangements
We have
no material off-balance sheet transactions.
Quantitative
and Qualitative Disclosure Regarding Market Risk
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 its 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.
51
DESCRIPTION
OF BUSINESS
Overview
We are
engaged in the design, manufacture, marketing and sale of consumer electronic
products. Our products primarily consist of audio and video products, including
digital audio systems, televisions, digital video broadcasting (“DVB”) set-top
boxes, DVD players, as well as audio/video peripheral and accessory
products. We have invested substantial resources in the research and
development of our intelligent audio and video consumer products, most of which
utilize our Chinese speech interactive technology to permit users to control our
products through their spoken commands. We recently added mobile
phones and other 3G communication devices to our product
portfolio. In January 2010, we acquired Dongri, a mobile phone
product manufacturer, for a purchase price of up to $23 million. Our
products are distributed worldwide, including markets in Europe, Southeast Asia
and North America.
Industry
We
compete within certain categories in the wholesale consumer electronics
industry. Our current focus is on standard and intelligent home audio
and video products, in addition to mobile phones.
Standard
audio and video equipment
Our
products that compete in the standard audio and video equipment category include
mid and high-end home audio products, including premium home theater systems,
speakers, shelf-stereo systems, televisions, DVD players, DVB set-top boxes,
portable digital players, and related products. Growth of this market
segment has been driven primarily due to the increase in consumer demand for
flat screen digital televisions and for audio and visual products that
complement flat screen televisions to create a home theater
experience. Price pressure remains a key challenge for manufacturers
of consumer electronics as the retail industry continues to evolve, with the
major emerging markets like China, Russia, and India maintaining their strong
growth, and retailers driving their expansion into new geographies as well as
into the online sector.
Intelligent
audio and video equipment
The
market for intelligent audio and video products consists of traditional video
and audio products combined with speech-based interface. Our products
that compete in the intelligent audio and video equipment category are based on
the Chinese language and include many of the types of products that we offer in
our line of standard audio and video products, except these products are
equipped with our speech interactive technology. The market for
intelligent audio and video products is less developed than the market for
standard audio and video equipment, and the market for products in this market
based on Chinese language is less developed than products based on Western
languages.
The
intelligent audio and video electronics market has experienced growth in part
due to consumer demand for simple, convenient
interfaces. Commensurate with the increase in the scope and
complexity of functions in consumer electronic products has been the unforeseen
consequence that many audio/visual products have become cumbersome and difficult
to use. Products now commonly utilize complex menu structures and
difficult to navigate user interfaces that can limit a user’s ability to fully
enjoy the functionality and convenience offered by these products. As
compared to standard equipment, intelligent audio and video products powered by
voice commands possess unique capabilities, superior convenience, and an
increased ease-of-use. Also, improvements in speech-based
technologies have enabled companies to implement these features in a broader
array of products.
Mobile
phone products
The
mobile phone market in China has experienced rapid growth over the past several
years, driven in part by the country’s strong overall economic
development. China maintains a relatively low mobile phone
penetration rate, which we believe may lead to additional substantial growth in
the sector.
The
Chinese government has adopted 3G standards, and in May 2008, it announced a
restructuring plan to increase competition in the telecommunications market by
permitting two additional wireless carriers, China Telecom and China Unicom, to
enter the market that was previously dominated by China
Mobile. We believe that the increase in competition in the
market will result in increased demand for 3G mobile phones and accessories in
China.
52
China
China is
world’s second largest electronic product consumer, after only the United
States. China’s market for home consumer electronics has been
growing, due in part to the country’s rapid economic growth. Economic growth in
China has led to greater levels of personal disposable income and increased
spending among China’s expanding middle-class consumer
base. Notwithstanding China’s economic growth, with a population of
1.3 billion people, China’s economic output and consumption rates are still
small on a per capita basis compared to developed countries. As China’s economy
develops, we believe that disposable income and consumer spending levels will
continue to become closer to that of developed countries like the United
States.
China’s
market share of manufacture of consumer electronic devices is expected to
increase. China has a number of benefits in the manufacture of home consumer
electronics, which are expected to drive this growth:
Low
costs. China continues to have a relatively low cost of labor
as well as easy access to raw materials and land.
Proximity to
electronics supply chain. Electronics manufacturing in general
continues to shift to China, giving China-based manufacturers a further cost and
cycle time advantage.
Proximity to
end-markets. China has focused in recent years on building its
research, development and engineering skill base in all aspects of higher end
manufacturing.
The
market for speech-controlled consumer products for Western languages is more
developed than the market for speech-controlled consumer products for Chinese
languages because, compared with Western languages, there are extra challenges
related to large vocabulary and continuous speech recognition systems for the
Chinese language. These challenges are primarily due to the more
complicated characteristics of Chinese language as compared to Western
languages. We expect to see the market for Chinese speech-controlled
products grow as technologies improve.
Competitive
Strengths
We
believe the following strengths contribute to our competitive advantages and
differentiate us from our competitors:
Market position
Since the
inception of NIVS PRC, we have traditionally focused on the research,
development and manufacture of standard and intelligent audio and video
products, and have more recently expanded into the mobile phone
industry. We have developed significant expertise in the key
technologies and large-scale manufacturing that enables us to improve the
quality of our products, reduce costs, and keep pace with current standards of
the rapidly evolving consumer electronics industry, in addition to leveraging
this expertise into positioning ourselves in the mobile phone
industry. We are able to bring to the market well-differentiated
products that perform well against competitive offerings based on price, style,
and brand recognition. Our specific Mandarin-speech interaction
technology has broad application to consumer products and has allowed us to
distinguish our products from those of our competitors. We
believe that our integration of solid technology, design, manufacturing,
distribution, product and marketing continues to be well-received by our
customers and end users.
Design and manufacturing
capabilities
We employ
a rigorous and systematic approach to product design and manufacturing. We
employ a senior design team with members educated by top colleges in China, with
an average of 13 to 15 years of experience. Our design team develops and tracks
new concepts and ideas from a variety of sources, including direct customer
feedback, trade shows, and industry conferences. We have, through
NIVS PRC, a 2.7 million square foot factory, which includes a large-scale, 1.1
million square-foot production area, and more than 1,886 full-time
employees, including approximately 1,469 employees in production. Our modernized
production lines include automated processing equipment and procedures that we
can rapidly modify to accommodate new customer requests, designs and
specifications. Our use of manual labor during the production process
benefits from the availability of relatively low-cost, skilled labor in China.
NIVS PRC has received several accreditations, including The International
Organization for Standardization (ISO) 9001: 2000, ISO 14000, and RoHS
certification, attesting to our quality management requirements, manufacturing
safety, controls, procedures and environmental performance. With our
acquisition Dongri and its mobile phone manufacturer capabilities in January
2010, we have established significant manufacturing capabilities for mobile
phones. We will
continue to seek to identify and implement cost cutting opportunities and
streamline operating efficiencies.
53
Experienced
management team
Our
senior management team has extensive business and industry experience, including
an understanding of changing market trends, consumer needs, technologies and our
ability to capitalize on the opportunities resulting from these market
changes. The founder of NIVS PRC and our principal stockholder and
current CEO and Chairman, Tianfu Li, has over 18 years of experience in the
consumer electronics industry, which has been a key factor in establishing
long-lasting and valuable business relationships. Other members of
our senior management team also have significant experience with respect to key
aspects of our operations, including research and development, product design,
manufacturing, and sales and marketing.
Well-established distribution
channels
We sell
our products through a well-established network of distributors and resellers
allowing us to penetrate customer markets worldwide. Our
products are sold domestically in China at over 8,000 points of sale and
internationally through numerous channels, including independent specialty
retailers, international and regional chains, mass merchants, and
distributors. We have also built strong relationships with many large
national and regional electronics retailers, and we have well-established
relationships with thousands of independent retailers.
Customer service expertise
We work
closely with our major customers in order to ensure high levels of customer
satisfaction. We constantly evaluate and identify our strongest
customers in each distribution channel and focus our sales efforts towards the
largest and fastest growing distributors and resellers. To provide
superior service and foster customer trust and loyalty, we offer flexible
delivery methods and product feedback opportunities to our customers. For
Original Equipment Manufacturer, or OEM, customers, we provide a complete range
of services, allowing us to take customer products from initial design through
production to testing, distribution and after market support. In
addition, our sales representatives and marketing personnel undergo extensive
training, providing them with the skills necessary to answer product and
service-related questions, proactively educate potential customers about our
products, and promptly resolve customer inquiries.
Brand awareness
Our consumer electronic products
marketed under the NIVS brand, have become a recognized brand name in China,
which we expect will assist us in growing our business over the course of the
next few years. Our audio products have a solid reputation and established a
brand name in the PRC, particularly in Guangdong. In September
2009, we were granted a license by the China Ministry of Industry and
Information Technology to manufacture and market mobile phones under our NIVS
brand, and we believe that our established brand in the audio/video consumer
electronics industry will launch our product in the mobile phone
industry.
Strategy
Our goal
is to become a global leader in the development and manufacture of consumer
electronic products. We intend to achieve this goal by implementing
the following strategies:
Expand offering of mobile phone and
speech-controlled products
We
plan to continue to leverage our expertise in product design and development,
our intellectual property platform, and our diverse distribution network by
continuing to develop and introduce mobile phones. We have recently
made significant investments to enter into the growing mobile phone industry,
and in September 2009, we were granted a license to manufacture mobile phones by
the Ministry of Industry and Information Technology. We have
positioned ourselves to take advantage of the market’s expansion with our new
Third Generation (“3G”) standard mobile phone and communication devices, which
resulted in a $28.8 million order to manufacture mobile phones for China Telecom
Corp. Ltd. for 3G mobile phones. We also
received an order for our Android System Smartphone as a limited edition model
for sale during the World Expo being held in Shanghai, China between May 1, 2010
and October 31, 2010. The initial value of the order is approximately
$3 million and could increase to as much as $7.5 million, depending on demand
for the product. In 2010,
we hope to continue our recently increased marketing efforts and new product
launches, such as mobile phones, in pursuing our goal of becoming China’s
preeminent integrated consumer electronics company.
We also
plan to strengthen the performance of our Chinese speech technology to provide
users with an easy-to-use, speech-enabled interaction with consumer audio/visual
products. Our goal is to continue to enhance the functionality of our
core speech interactive technology by adding new features and making our
products simpler to use. We intend to invest additional resources in
our research and development and speech-controlled technology, applications and
intellectual property to promote innovation and maintain customer preference for
our products.
54
Build partnerships with new and
existing clients
We intend
to strengthen relationships with our existing clients and explore opportunities
for product expansion with new and existing customers. Our strategy
is to establish partnerships with our current clients whereby we develop and
manufacture new products based on client needs. For example, we were
recognized as one of the approved vendors for e-Surfing, the
mobile-communication service brand for FMC services by China Telecommunications
Corporation (China Telecom, 0728.hk), a mobile-communication services provider
in China. According to China Telecom's 2010 purchasing plan, eight
suppliers have been selected as the approved vendors as its e-surfing 3G
GSM/WCDMA duo system phone suppliers: Samsung, Motorola, Sony Ericsson, LG,
Huawei, ZTE, Coolpad and NIVS. In addition, Korea HYUNDAI named NIVS
PRC as its sole brand promoter for its digital MP3/MP4 players and television
products in China. As sole brand promoter, NIVS PRC provides to the public a
uniform product image for HYUNDAI. NIVS PRC attempts to strengthen the HYUNDAI
brand as a high-end, quality brand.
We also
seek to leverage our Mandarin-speech interactive technology to develop
relationships and strategic alliances with third-party developers, vendors, and
manufacturers of mobile phones, entertainment devices, and GPS navigation
devices for use in their products. We believe OEMs of consumer
electronics devices and products, wireless operators, system integrators and
value-added resellers (“VARs”) can simplify the use and increase the
functionality of their electronic products and services by integrating our
speech interactivity technologies, resulting in broader market opportunities and
significant competitive advantages. For example, we believe that our technology
can provide users a more convenient way to enter SMS messages, mobile instant
messages, and mobile email into mobile wireless devices, significantly faster
than with the traditional keypad. We believe our technology can also
be used in navigation systems to enable voice-activated dialing, voice
destination entry, and vehicle command and control for in-vehicle entertainment
systems.
Expand global presence
A growing
percentage of our products are exported to countries outside of China, primarily
to Europe, Southeast Asia, and North America. We intend to further
expand our international resources to better serve our global customers and
business associates and to leverage opportunities in markets such as Hong Kong,
the Middle East, India, Great Britain, Germany, the United States, and
Argentina. We hope to continue to add regional sales representatives and
distributors in different geographic regions to better address demand for our
products.
Expand sales network and distribution
channels
We intend
to expand our sales network in China and develop relationships with a broader
set of wholesalers, distributors and resellers, all in order to expand the
market availability of our products in China. We feel the Chinese
markets are underserved and there exists vast opportunities to expand market
presence. We hope that these relationships will allow us to diversify
our customer base and significantly increase the availability and exposure of
our products.
Augment marketing and promotion efforts
to increase brand awareness
We
continue to devote our efforts towards brand development and utilize marketing
concepts in an attempt to strengthen the marketability of our products. During
the past several years, we have carried out a brand development strategy based
on product innovation, quality, and design excellence. We have also participated
and intend to continue to participate in various exhibitions and similar
promotional events to promote our products and brand, including Consumer
Electronics Show (CES) in the United States, the IFA Electronics Fair, and the
Hong Kong Electronics Fair.
Products
We have
traditionally offered two primary lines of home audio and video
products—standard audio and video equipment (including DVD players and DVB
set-top boxes) and intelligent audio and video equipment—and we have recently
began offer mobile phone products.
Audio
and video products
As of
December 31, 2009, our standard audio and video products include
approximately 500 different products and our intelligent audio and video
products include approximately 150 products. As of December 31, 2009, our
standard audio and video products include approximately 500 different products
and our intelligent audio and video products include approximately 150 products.
We generate over 50% of our revenues from our sales of speech-controlled
acoustics and televisions and we hope to continue to increase this portion of
revenue going forward. The sale of standard audio equipment is the second
largest, followed by sales of DVB boxes, DVD players, and televisions. A growing
portion of our revenues is generated from our sales of speech-controlled
acoustics and televisions and we hope to continue to increase this trend going
forward.
55
Our line
of standard audio and video equipment consists of mid- and high-end products,
including:
|
·
|
packaged
home theater systems,
|
|
·
|
a
wide range of tower, stand-alone and on-wall speaker
systems,
|
|
·
|
powered
subwoofers used in a complete range of products for traditional stereo and
home theater applications,
|
|
·
|
smaller
speakers designed for specific home theater and stereo
applications,
|
|
·
|
personal
shelf-stereo systems,
|
|
·
|
KTV,
Villa, and electronic tube
speakers,
|
|
·
|
LCD
televisions in sizes ranging from 17 to 52
inches,
|
|
·
|
LED
televisions, portable televisions,
|
|
·
|
DVD
players, including portable DVD players, DVD recorders and combination
DVD/audio players,
|
|
·
|
DVB
set-top boxes, DVB satellite
receivers,
|
|
·
|
hi-fi
multi-media speakers,
|
|
·
|
in-car
Bluetooth speakerphones, all-in-one PC/TV,
and
|
|
·
|
related
peripheral and accessory products.
|
Our
speech-controlled products are designed to improve people’s interaction with our
products, making their experience more enjoyable, convenient, and safe and
satisfying. Our intelligent video and audio products utilize our
Mandarin-speech interactive technology to receive, recognize, and respond to
spoken commands, permitting users to activate and control products solely
through spoken-word. We believe our technology’s recognition and
command functionality is highly accurate, particularly at home where there is
less noise and interference. Our speech interactive technology is
speaker independent, meaning that no voice training is involved. We
believe our speech-controlled audio systems, speech-controlled television sets,
and intelligent set-top boxes provide users with unique capabilities, superior
convenience, and ease of use.
Our line
of intelligent audio and video products consist of the types of our standard
products with our integrated speech-controlled interface technology, including
speech-controlled home theater systems, televisions, DVD players, set-top boxes,
and shelf stereo systems. Our intelligent consumer products can be
controlled by users’ oral commands to control all functions, including power,
channel selection, volume control, and other setting controls. We
also offer speech-controlled professional stage acoustics for use in gymnasiums,
and other plazas and performance venues.
We also
manufacture and distribute other peripheral and accessory consumer electronic
products, such as remote controls, headphones, and lighting
solutions. We have a universal speech-activated remote controller and
module that works with most televisions, set-top box products, DVD players, and
other audio/visual products.
Mobile
phone products
In
September 2009, we were granted a license to manufacture mobile phones by the
Ministry of Industry and Information Technology. With our new license, we are
authorized to operate mobile phone manufacturing business in mainland China
under the “NIVS” brand name. We have capabilities and
intellectual property rights to manufacture 3G mobile phones and have already
introduced a dual-mode EVDO/GSM 3G handset to the market.
Our
mobile phones are equipped with many advanced features such as e-mail and
multimedia messaging, touchscreen and PDA functionality, large CSTN (Color Super
Twisted Nematic) and TFT (Thin Film Transistor) dual-color displays, MP3/MP4
audio and video recording and playing, and high resolution
photography.
We also
intend to offer other 3G communication products, such as 3G netbooks, 3G web
surfing cards, 3G routers, 3G webcams. We expect to offer 3G surveillance
camera, which we expect to be available for sale by mid-February
2010. We believe that the potential applications for our new 3G
surveillance camera include security in a commercial or industrial environment
or in a home setting for baby or child monitoring, as an example. The camera can
be accessed via a mobile phone in addition to computer
access.
56
Net sales
for each of our product categories as a percentage of net sales are set forth
below:
|
Year Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Standard
Audio and Video Equipment
|
49
|
%
|
80
|
%
|
92
|
%
|
||||||
Intelligent
Audio and Video Equipment
|
45
|
%
|
13
|
%
|
6
|
%
|
||||||
Other
Audio and Video Equipment
|
6
|
%
|
7
|
%
|
2
|
%
|
Supply
of Raw Materials
The cost
of the raw materials used to produce our products is a key factor in the pricing
of our products. We currently work with over 100 supply manufacturers in attempt
to establish a rapid and stable supply of high quality raw
materials. Raw materials used in the manufacture of our products
include integrated circuits, plastic-rubber materials, hardware materials,
LCD/TFT/plasma display screens, LED, capacitors, resistors, switches, electrical
outlets, wood board materials, packaging materials, and other electrical
components. We attempt to purchase materials in volume which allows
us the ability to negotiate better pricing with our suppliers. Our purchasing
department locates eligible suppliers of raw materials and strives to use only
those suppliers who have previously demonstrated quality control and
reliability.
We
procure materials to meet forecasted customer requirements. Special products and
large orders are quoted for delivery after receipt of orders at specific lead
times. We maintain minimum levels of finished goods based on market
demand in addition to inventories of raw materials, work in process, and
sub-assemblies and components. We reserve for inventory items
determined to be either excess or obsolete.
Pricing
and availability of raw materials can be volatile, attributable to numerous
factors beyond our control, including general economic conditions, currency
exchange rates, industry cycles, production levels or a supplier’s limited
supply. To the extent that we experience cost increases we may seek to pass such
cost increases on to our customers, but cannot provide any assurance that we
will be able to do so successfully or that our business, results of operations
and financial condition would not be adversely affected by increased volatility
of the cost and availability of raw materials.
Our primary suppliers of raw materials
are located in Japan, South Korea, Taiwan, United States, and China. Our top
three suppliers accounted for an aggregate total of approximately 21.3%, 17.0%,
and 18.8% of our raw material purchases for the years ended December 31, 2009,
2008 and 2007. Other than these suppliers, no other supplier
accounted for more than 5% of our total purchases in these
periods. The increase in our use of certain suppliers during fiscal
2009 as compared to fiscal 2008 is primarily attributable to adjustments in our
purchasing strategy. Due to an increasing price of raw materials, and
because most of our production material is imported from other countries, we
arranged for a fewer number of import companies to act as our import agents to
save time and costs. Our shift to a few import companies resulted in
our top three suppliers accounting for a higher percentage of our raw material
purchases during fiscal 2009. In addition, the sales volume of our
televisions and DVB set-top boxes increased significantly in fiscal 2009 as
compared to fiscal 2008. Most of the material for these two product
categories are new model materials and are imported through our top three
suppliers, which increased the total percentage of raw materials purchased
through these suppliers. In addition, we acquired Dongri and its mobile phone
manufacturer capabilities in January 2010 to strengthen our manufacturing
capabilities for mobile phones in an attempt to reduce our reliance on
third-party supplier for mobile phones components.
Presently,
our relationships with our suppliers are good and we expect that our suppliers
will be able to meet the anticipated demand for our products in the
future. However, due to our dependence on a few suppliers for certain
raw materials, we could experience delays in development and/or the ability to
meet our customer demand for new products. In addition, we have a
number of longstanding business relationships with certain suppliers, and we
believe that alternative suppliers are available. Although we have not been
subject to shortages for any of our components, we may be subject to cutbacks
and price increases which we may not be able to pass on to our customers in the
event that the demand for components generally exceeds the capacity of our
suppliers. We believe our manufacturing facility and design center in
Huizhou, China, due to its location, provides us with flexibility in our supply
chain, to better manage inventories and to reduce delays and long-term costs for
our products.
57
Manufacturing
The
manufacture of consumer electronics requires coordinated use of machinery and
raw materials at various stages of manufacturing. Our manufacturing
operations are conducted in Huizhou, Guangdong, in our modern, 2.7 million
square-foot factory, which houses a large-scale, 1.1 million square-foot
production area. We use automated machinery to process key aspects of the
manufacturing process to ensure high uniformity and precision, while leaving the
other aspects of the manufacturing process to manual labor. Our
production facilities utilize modern machinery such as molding injectors,
mounting machinery, cutting machines, sorting devices, soldering modules, wire
cutting equipment, and other assembly machinery. We intend to further
streamline our production process and continue investing in our manufacturing
infrastructure to further increase our manufacturing capacity, helping us to
control the per unit cost of our products.
We have historically outsourced
manufacturing and customization of our mobile phone products. In an
effort to reduce our reliance on third-party manufacturers, we acquired Huizhou
Dongri Digital Co., Ltd., ("Dongri"), a mobile phone product manufacturer, in
January 2010. The aggregate purchase price that we agreed to pay is
up to $23 million, with $13 million being paid within one month of closing and
up to an additional $10 million that may become payable at future dates if
Dongri meets certain quarterly after-tax income targets during
2010. With the acquisition of Dongri, we strengthen our manufacturing
capabilities for mobile phones by increasing production capacity for mobile
phones up to one million units per month.
Quality
Control
We
consider quality control an important element of our business practices. We have
stringent quality control systems that are implemented by approximately 55
company-trained staff members to ensure quality control over each phase of the
production process, from the purchase of raw materials through each step in the
manufacturing process. Supported by advanced equipment, we utilize a scientific
management system and precision inspection measurement, capable of ensuring our
products are of high quality.
Our
quality control department executes the following functions:
|
·
|
setting
internal controls and regulations for semi-finished and finished
products;
|
|
·
|
testing
samples of raw materials from
suppliers;
|
|
·
|
implementing
sampling systems and sample files;
|
|
·
|
maintaining
quality of equipment and instruments;
and
|
|
·
|
articulating
the responsibilities of quality control
staff.
|
NIVS PRC
has obtained certifications and accreditations that we believe exhibit our
ability to efficiently manufacture quality products. NIVS PRC first obtained
ISO9001:2000 quality system accreditation in July 2001 and ISO14000
environmental management system accreditation in October 2006. The
International Organization for Standardization (ISO) defines the ISO 9000
quality management system as one of international references for quality
management requirements in business-to-business dealings. ISO
14000 is an environmental management system in which the organization being
accredited has to (i) minimize harmful effects on the environment caused by its
activities, and (ii) achieve continual improvement of its environmental
performance. In December 2005, NIVS PRC obtained certification for
compliance with the Directive on the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment, which is commonly referred to
as the Restriction of Hazardous Substances Directive, or RoHS. RoHS
restricts the use of various hazardous materials in the manufacture of
electronic and electrical equipment.
Sales
and Marketing
We have a
sales network of more than 8,000 points of sale in China, in addition to
distributors throughout more than 80 countries and regions around the world. Our
sales network spans across all major provincial-level cities and a majority of
municipal and county-level cities in China. Our distribution
network includes exclusive provincial and regional distributors, resellers,
independent vendors, value-added resellers, and hardware vendors in addition to
other marketplace points of sales.
We have
established a standard of sales procedures covering before-sales consultation,
preliminary design, final design, mold preparation, sample confirmation,
production, product testing, sales, and after-sales services and technical
support. We have approximately 300 service stations throughout China,
in addition to a 24-hour/7 days-a-week telephone hotline. We have
also set up 23 regional service centers in Europe, Southeast Asia, and North
America to better serve our international clients. The regional
service centers offer updated product information, repair service and technical
consultations for customers.
58
Most of our revenues are derived from
sales to OEMs, or Original Equipment Manufacturers, followed by sales of our
NIVS branded products. OEMs contract with us to build their products
or to obtain services related to product development and prototyping, volume
manufacturing or aftermarket support. Our services include
engineering, design, materials, management, assembly, testing, distribution, and
after-market services. We believe that we are able to provide quality
OEM services that meet unique requirements within customer timeframes, unique
styling, product simplicity, price targets, and consistent quality with low
defect rates. As a result of efficiently managing costs and assets,
we believe we are able to offer our customers an outsourcing solution that
represents a lower total cost of acquisition than that typically provided by the
OEM's own manufacturing operation. OEM sales accounted for 55%, 60%, and 77% of
our revenues for the years ended December 31, 2009, 2008 and 2007, respectively,
and sales of products with our own brand accounted for 45%, 40%, and 23% of
our revenues for the same periods, respectively.
In
addition, some of our OEM cooperation arrangements are with well-known
manufacturers, including Samsung, Hyundai, Haier, and TCL. From
February to June 2005, NIVS PRC commenced business relationships with each of
Wal-Mart, Carrefour Group, and METRO pursuant to which these large distribution
companies agreed to distribute our products. In January 2005, NIVS
PRC began a business relationship with Samsung pursuant to which it is the
exclusive authorized OEM manufacturer of Samsung’s multi-media speakers in
China.
The table
below shows our revenue categorized by geographic locations, which is based on
the geographic areas in which our customers are located.
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
China
and Hong Kong
|
43.6
|
%
|
77.1
|
%
|
58.2
|
%
|
||||||
Other
Asian Countries
|
28.5
|
16.3
|
24.0
|
|||||||||
Europe
|
16.1
|
3.1
|
11.9
|
|||||||||
South
America
|
2.2
|
2.2
|
2.6
|
|||||||||
North
America
|
1.4
|
1.1
|
3.3
|
|||||||||
Other
countries
|
8.2
|
0.2
|
-
|
|||||||||
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
In
December 2009, our Chairman of the Board and Chief Executive Officer, Tianfu Li,
was honored with a "Brand China People of the Year 2009" award from the Brand
China Industry Union. Each year, ten award winners are selected from
both private and public domestic Chinese companies. Nominees and winners are
chosen through a competitive combination of public voting and a selection
committee that evaluates individuals based on their contribution to the
promotion of the development of Chinese brands and the influence of those brands
both domestically and internationally in 2009.
NIVS PRC
has also received various governmental awards with respect to our
brand. Beginning in 2005, NIVS PRC’s brand received the “Most Popular
Brand” award in the acoustics industry for three successive
years. NIVS PRC also received the “Famous Brand in Guangdong” award
in 2007. In June 2003, NIVS PRC was honored by the Science and
Technology Bureau of Guangdong Province as a “Private High-tech Enterprise” and
“High-tech Enterprise,” which is an honor reserved for private enterprises
developing new high-technology.
A small
number of customers account for a very significant percentage of our
revenue. The table below illustrates the number of customers that
accounted for 5% or more of our sales for the periods presented. The
loss of any of these customers could have a material adverse effect upon our
revenue and net income.
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Number
of customers accounting for 5% or more
|
4
|
4
|
5
|
|||||||||
Percentage
of largest customer
|
15.9
|
%
|
12.7
|
%
|
13
|
%
|
||||||
Total
percentage of sales attributable to customers with 5% or
more
|
34.9
|
%
|
33.4
|
%
|
38
|
%
|
The loss of any of these customers
could have a material adverse effect upon our revenue and net
income.
59
In
addition, one customer represents substantially all of our mobile phone product
sales. We entered into a purchase agreement with Kuanda (Xiamen) Communications
Co., Ltd and China PTAC Communications Services, on behalf of China Telecom, for
the purchase by China Telecom of our two 3G mobile phone
products. The purchase agreement is contingent on delivery of the 3G
mobile phones representing the aggregate order by March 31, 2010. Final
delivery under the agreement has been delayed as a result of China Telecom's
improvement of their 3G mobile phone application platform and is currently
anticipated to be completed in May 2010. The value of the order is
approximately $28.8 million; the dollar value of any additional orders further
to this relationship depends on the final number of delivered
products. We also
received an order for our Android System Smartphone as a limited edition model
for sale during the World Expo being held in Shanghai, China between May 1, 2010
and October 31, 2010. The initial value of the order is approximately
$3 million and could increase to as much as $7.5 million, depending on demand
for the product. If we fail to meet the requirements of the order or
otherwise lose China PTAC as a customer could result in a material adverse
effect upon our revenue and net income.
Research
and Development
To
enhance our product quality, reduce cost, and keep pace with technological
advances and evolving market trends, we have established an advanced research
and development center. Our research and development center is focused on
enhancing our Chinese speech interactive technology by improving the performance
of our current products and developing new products, in addition to developing
related and alternative technologies. We have made investments in capital and
time to develop technology engines, intellectual property and industry expertise
in Chinese speech technologies that we believe provide us with a competitive
advantage in the markets where we compete. Our technologies are based on complex
formulas which require extensive amounts of linguistic data, acoustic models and
recognition techniques. We continue to invest in technologies to
maintain our market position and to develop new applications and
products.
We
conduct substantially all of our research and development with an in-house
staff. After establishing its modernized speech technology lab in
2002, NIVS PRC has been able to more effectively recruit qualified speech
technology researchers. We have approximately six senior technology
researchers, many holding doctorate degrees, and 15 core
researchers. The duties of our core researchers are to improve
research and development management and market analysis, in addition to
establishing and regulating the large-scale production projects. In addition,
our research and development center is currently staffed with over 100
experienced research and development technicians who oversee our techniques
department, product development department, material analysis lab, and
performance testing lab. These departments work together to research new
material and techniques, test product performance, inspect products and to test
performance of machines used in the manufacturing process.
NIVS PRC
has worked with Institute of Automation, Chinese Academy of Sciences, or IACAS,
since October 2006 to better understand and develop Mandarin speech interaction
technology. IACAS is an organization that specializes in the research
and development of smart robot and speech interactive technology. We
have focused our efforts to resolve issues caused by speaker-independent speech,
the large number of words, and continuous speech identification. We
have and continue to develop key technologies, including combined modeling for
intonation and vowel variation, large speech database management, and system
searching.
We
continue to research and develop speech performance engines and
databases. The various types of speech interactive engines include
multi-language identification engines, compositing engine, and speech evaluation
engine. Multi-language identification engines are products that can
identify multiple languages. Compositing engines can speak as humans. Speech
evaluation engines can make judgments of yes or no. In addition, our
intelligent audio and video products require input from a speech database that
we have assembled. We have generated numerous databases, including
professional speech identification, speech synthesis, speech teaching and speech
entertainment databases.
In
December 2009, we entered into a strategic partnership arrangement with China
Potevio pursuant to which we would collaborate with Potevio for the development
of a 3G mobile phone, as well as the application of China Potevio's TD-SCDMA
wireless products and solutions. We will also work with China Potevio’s research
team to develop and apply the new technologies to our NIVS branded mobile phone,
distributed in the mainland Chinese domestic market. China Potevio is
a state-owned equipment manufacturer and service provider in China’s
telecommunications industry.
For the years ended December 31, 2009,
2008 and 2007, we expended approximately $5.3 million, $1.7 million, and $0.4
million, respectively, in research and development.
In
addition to the advancement of our speech interactive and mobile phone
technologies , we believe that the future success of our business depends upon
our ability to enhance our existing products, to develop compelling new
products, to develop cost effective products, to qualify these products with our
customers, to effectively introduce these products to existing and new markets
on a timely basis, and to commence and sustain volume production to meet
customer demands. To avoid product obsolescence, we will continue to
monitor technological changes, as well as users' demands for new technologies.
Failure to keep pace with future technological changes could adversely affect
our revenues and operating results in the future. Although we have
attempted to determine the specific needs of the entertainment, mobile,
computer, and residential user markets, there can be no assurance that the
markets will, in fact, materialize or that our existing and future products
designed for these markets will gain market acceptance.
60
Backlog
Our backlog of unfilled orders was
$0.86 million as of December 31, 2009, compared to $1.32 million at December 31,
2008. We include all purchase orders scheduled for delivery over the next 12
months in backlog. As part of our commitment to customer service, our goal has
been to ship products to meet the customers' requested shipment dates. Our
backlog is occasionally subject to cancellation or rescheduling by the
customer on short notice with little or no penalty. Because of the uncertainty
of order cancellations or rescheduling, we do not believe our backlog as of any
particular date is indicative of actual sales for any future period and,
therefore, should not be used as a measure of future revenue.
Warranties
and Return Policy
We offer
limited warranties for our consumer electronics, comparable to those offered to
consumers by our competitors in China. Such warranties typically consist of a
90-day period for our audio products, under which we will pay for labor and
parts, or offer a new or similar unit in exchange for a non-performing unit. Our
customers may return products to us for a variety of reasons, such as damage to
goods in transit, cosmetic imperfections and mechanical failures, if within the
warranty period. We offer a one-year guarantee for all of our
products.
Product
Liability and Insurance
We do not
have product liability insurance. Because of the nature of the
products sold by us, we may be periodically subject to product liability claims
resulting from personal injuries. We may become involved in various lawsuits
incidental to our business. To date, we have not been subject to
products liability litigation. Product liability insurance is
expensive, restrictive and difficult to obtain. Accordingly, there can be no
assurance that we will have capital sufficient to cover any successful product
liability claims made against us in the future, which could have a material
adverse effect on our financial condition and results of
operations.
Competition
We face
competition from many other consumer electronics manufacturers, most of which
have significantly greater name recognition and financial, technical,
manufacturing, personnel, marketing, and other resources than we
have. The major geographic markets in which we compete are China and
Hong Kong, Southeast Asia and North America. The consumer electronics market is
subject to rapid technology changes, highly fragmented, and
cyclical. The industry is characterized by the short life cycle of
products, requiring continuous design and development efforts, which
necessitates large capital and time investments. Our competitors may be able to
respond more rapidly than we can to new or emerging technologies or changes in
customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do.
We
compete primarily on the basis of quality, price, design, reliability, brand
recognition, and quality service and support to our customers. We believe that
our standard audio and video consumer products are comparable in quality and
performance with competitors in our market category. Many of our competitors in
the standard audio and video consumer products market have a stronger
competitive position than we do in that they have more technical and research
and development resources, greater brand recognition and longer-standing
customer relationships. Companies that offer products similar to our standard
audio and video consumer products include SAMSUNG Electronics, Bose Corporation,
LG Electronics, Matsushita Electric Industrial Co., Ltd., and Toshiba
Corporation.
We
believe that our intelligent audio and video products are comparable in quality
and performance with competitors in our market category. Many of our competitors
in the intelligent audio and video products market have a stronger competitive
position than we do in that they have more technical and research and
development resources, greater brand recognition and longer-standing customer
relationships and began developing English intelligent speech technology earlier
than we did. We believe have a strong competitive position in our domestic
market for Mandarin-speech interactive technology as we have significant
technical and research and development resources on Mandarin-speech technology.
Companies that offer products similar to our intelligent audio and video
products include Nuance Communications, Inc., Fonix Corporation, International
Business Machines Corporation, Microsoft Corporation, Koninklijke Philips
Electronics N.V., Haier Electronics Group Co., Ltd., Anhui USTC iFLYTEK Co.,
Ltd., and Shenzhen SinoVoice Digital Technology Co., Ltd.
61
We began
to compete in the mobile phone industry in 2009 and therefore have no experience
and brand awareness in the mobile phone industry. The mobile phone
market is particularly characterized by changing consumer demands for cellular
telephone functions and applications, rapid product obsolescence and price
erosion, intense competition, evolving industry standards, and wide fluctuations
in product supply and demand. These factors require us to continuously develop
new products and enhance our existing products to stay
competitive. For example, the market has recently experience rapid
transitions from widespread market adoption of 2G, 2.5G, 2.75G and 3G
technologies. Changes in mobile phone industry standards and
technologies, customer preferences and government regulation are rapid, more so
than that of audio and video equipment, and this rapid change could limit our
ability to sell our mobile phone products. Our competitors have more
experience in the industry and may be able to respond more rapidly than we can
to new or emerging technologies or changes in customer
requirements. Our mobile phone products face intense competition from
multi-national mobile phone manufacturers such as Nokia, Samsung, and Motorola,
in addition to competition from the domestic mobile phone producers such as
Tianyu, Lenovo, and Gionee.
Intellectual
Property
We rely
on a combination of patent, trademark and trade secret protection and other
unpatented proprietary information to protect our intellectual property rights
and to maintain and enhance our competitiveness in the consumer electronics
industry. The founder of NIVS PRC and our principal shareholder and
current Chief Executive Officer, Tianfu Li, has legal ownership of the
approximately 48 patents in China, in addition to 19 patent applications, that
we use in our business operations. These patents include design,
utility, and invention patents that relate to our products. In July
2008, NIVS PRC entered into an assignment and transfer agreement with Mr. Li for
the transfer and assignment of these patents and patent applications to NIVS
PRC, in addition to other intellectual property related to our business
operations. We and Mr. Li intend to file appropriate transfer
certificates with the Bureau of Intellectual Property in the PRC, which, after
approved by the Bureau, would result in the legal transfer of the patents and
patent applications to us.
We also
rely on unpatented technologies to protect the proprietary nature of our product
and manufacturing processes. We require that our management team and key
employees enter into confidentiality agreements that require the employees to
assign the rights to any inventions developed by them during the course of their
employment with us. All of the confidentiality agreements include
non-competition and non-solicitation provisions that remain effective during the
course of employment and for periods following termination of employment, which
vary depending on position and location of the employee.
We have
four registered trademarks in China, with expiration dates between April 2011
and November 2016, and seven registered trademark applications.
Our
success will depend in part on our ability to obtain patents and preserve other
intellectual property rights covering the design and operation of our products.
We intend to continue to seek patents on our inventions when we deem it
commercially appropriate. The process of seeking patent protection can be
lengthy and expensive, and there can be no assurance that patents will be issued
for currently pending or future applications or that our existing patents or any
new patents issued will be of sufficient scope or strength or provide meaningful
protection or any commercial advantage to us. We may be subject to, or may
initiate, litigation or patent office interference proceedings, which may
require significant financial and management resources. The failure to obtain
necessary licenses or other rights or the advent of litigation arising out of
any such intellectual property claims could have a material adverse effect on
our operations.
Employees
As of December 31, 2009, we had
approximately 1,886 full-time employees, including approximately 1,469 employees
in production and approximately 79 employees in sales and marketing. All of our
employees are based inside China. Our employees are not represented by any labor
union and are not organized under a collective bargaining agreement, and we have
never experienced a work stoppage. We believe that our relationships with our
employees are generally good.
NIVS PRC is required to contribute a
portion of its 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
are approximately $213,650, $217,882, and $232,655 for the years ended December
31, 2009, 2008 and 2007, respectively. We expect that the amount of NIVS PRC’s
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations.
We also provide housing facilities for
our employees. At present, approximately 80% of our employees live in
company-provided housing facilities. Under PRC laws, we may be required to make
contributions to a housing assistance fund for employees based in Huizhou,
China. We expect that the costs and expenses of conducting our business
operations will increase, which could have a negative effect on our results of
operations.
62
According to the relevant PRC
regulations on housing provident funds, PRC enterprises are required to
contribute housing provident funds for their employees. The monthly
contributions must beat least 5% of each employee’s average monthly income in
the previous year. NIVS PRC has not paid such funds for its employees since its
establishment and the accumulated unpaid amount is approximately $870,000. For
additional information, see “ Risk Factors—We may be exposed to monetary fines
by the local housing
authority and claims from our employees in connection with NIVS PRC
Light’s non-compliance with regulations
with respect to contribution of housing provident funds for employees
.”
PRC
Government Regulations
Business
license
Any
company that conducts business in the PRC must have a business license that
covers a particular type of work. Our business license covers our present
business of to design, produce, and sell consumer electronic products, including
digital camcorders, digital video recorders, digital audio recorders, digital
audio and video coding and decoding equipments, digital audio radio equipments;
produce and sell digital products for education and entertainment (MP3, MP4 and
game box), PC equipment, and televisions, among other products. Prior
to expanding our business beyond that of our business license, we are required
to apply and receive approval from the PRC government. In September
2009, we were granted a license to manufacture mobile phones by the Ministry of
Industry and Information Technology. With our new license, we are authorized to
operate mobile phone manufacturing business in mainland China under the “NIVS”
brand name.
Sino-Foreign
Equity Joint Venture Laws
NIVS PRC,
as a Sino-Foreign Equity Joint Venture, is governed by the Law of the People's
Republic of China on Sino-Foreign Equity Joint Ventures, and its Implementation
Regulations and other related rules, regulations and administrative
orders. An equity joint venture in the PRC is an independent entity
having the form of a limited liability company, similar to a regular corporation
with limited liability organized under state laws in the United States of
America. It is a "legal person" under PRC laws and has the right to
own, use and dispose of property rights. The parties to the equity joint venture
agree to share profits, risks and losses in the same proportion as their
respective capital contributions to the equity joint venture.
The
operations of equity joint ventures are subject to an extensive body of laws and
regulations governing such matters as registration, capital contribution, profit
distribution, board of directors, accounting, taxation, foreign exchange and
labor management. The PRC joint venture law stipulates that certain
matters such as amendment to the articles of association, termination and
dissolution of the equity joint venture, increase and transfer of the registered
capital, and merger, must have the unanimous approval of the
directors. The PRC joint venture law also provides that after payment
of taxes, an equity joint venture must allocate to three funds, namely, a
reserve fund, an expansion fund and a fund for employee welfare and bonuses,
before profits may be distributed to the joint venture parties. Under current
law, the board of directors of the joint venture is entitled to determine the
percentage of net income that the joint venture will allocate to these three
funds. The board of directors has elected to allocate 10% of the net income of
the joint venture to each of these three funds each year. If the Chinese
government elects in the future to require that the joint venture allocate more
of the annual net income of the joint venture to these three funds, or if the
Chinese government enacts other legislation that restricts the ability of the
joint venture either to use its net income for business operations or to
distribute dividends to us, our business could be adversely
affected.
Employment
laws
We are
subject to laws and regulations governing our relationship with our employees,
including: wage and hour requirements, working and safety conditions,
citizenship requirements, work permits, social insurance, non-completion
obligations and travel restrictions. These include local labor laws and
regulations, which may require substantial resources for
compliance.
63
Environmental
regulations
We are
subject to various federal, state, local and foreign environmental laws and
regulations, including those governing the use, discharge and disposal of
hazardous substances in the ordinary course of our manufacturing process. The
major environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Law on the Prevention and Control of Water Pollution and
its Implementation Rules, the PRC Law on the Prevention and Control of Air
Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
of Noise Pollution. In addition, we have complied with European Union Directives
on Restrictions on certain Hazardous Substances on electrical and electronic
equipment (“RoHS”). We believe that our current manufacturing
operations comply in all material respects with applicable environmental laws
and regulations. Although we believe that our current manufacturing operations
comply in all material respects with applicable environmental laws and
regulations, it is possible that future environmental legislation may be enacted
or current environmental legislation may be interpreted to create environmental
liability with respect to our other facilities, operations, or
products.
NIVS PRC
constructed its manufacturing facilities with the PRC’s environmental laws and
requirements in mind. We currently outsource the disposal of solid waste to a
third party-contractor. We currently hold an environmental permit and Guangdong
Province Pollution Charge Certificate issued by the Huizhou Environmental
Protection Bureau covering our manufacturing operations. If we fail to comply
with the provisions of the permit and environmental laws, we could be subject to
fines, criminal charges or other sanctions by regulators, including the
suspension or termination of our manufacturing operations.
Patent
protection in China
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets.
The PRC
is also a signatory to most of the world’s major intellectual property
conventions, including:
|
—
|
Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
|
|
—
|
Paris
Convention for the Protection of Industrial Property (March 19,
1985);
|
|
—
|
Patent
Cooperation Treaty (January 1, 1994);
and
|
|
—
|
The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(November 11, 2001).
|
Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of the
China Patent Law and its Implementing Regulations came into effect in 2001 and
2003, respectively.
The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents—patents for inventions, utility models
and designs. The Chinese patent system adopts the principle of first to file;
therefore, where more than one person files a patent application for the same
invention, a patent can only be granted to the person who first filed the
application. Consistent with international practice, the PRC only allows the
patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability. For a design to be
patentable, it cannot be identical with or similar to any design which, before
the date of filing, has been publicly disclosed in publications in the country
or abroad or has been publicly used in the country, and should not be in
conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One broad exception to this rule, however, is that, where a party possesses
the means to exploit a patent but cannot obtain a license from the patent holder
on reasonable terms and in reasonable period of time, the PRC State Intellectual
Property Office, or SIPO, is authorized to grant a compulsory license. A
compulsory license can also be granted where a national emergency or any
extraordinary state of affairs occurs or where the public interest so requires.
SIPO, however, has not granted any compulsory license to date. The patent holder
may appeal such decision within three months from receiving notification by
filing a suit in a people’s court.
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. Patent holders who believe their patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Damages in the case of patent
infringement is calculated as either the loss suffered by the patent holder
arising from the infringement or the benefit gained by the infringer from the
infringement. If it is difficult to ascertain damages in this manner, damages
may be reasonably determined in an amount ranging from one to more times of the
license fee under a contractual license. The infringing party may be also fined
by Administration of Patent Management in an amount of up to three times the
unlawful income earned by such infringing party. If there is no unlawful income
so earned, the infringing party may be fined in an amount of up to RMB500,000,
or approximately $73,200.
64
Tax
Pursuant
to the Provisional Regulation of China on Value Added Tax and their implementing
rules, all entities and individuals that are engaged in the sale of goods, the
provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Further, when exporting goods, the exporter is entitled to a portion
of or all the refund of VAT that it has already paid or borne. Our imported raw
materials that are used for manufacturing export products and are deposited in
bonded warehouses are exempt from import VAT.
Foreign
currency exchange
Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission. We currently do not hedge our
exposure to fluctuations in currency exchange rates.
Dividend
distributions
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Properties
In China,
only the PRC government and peasant collectives may own land. In
2005, NIVS PRC acquired a total of approximately 2 million square feet of land
equity in Lianhelingwei Village, Shuikou Town, in Huizhou City, Guangdong, China
for approximately RMB18.8 million (equivalent to approximately USD$2.7million)
under land use right granted from the Huizhou State-Owned Land Resource
Bureau. We have the right to use the land until June
2052. In the event we wish to continue to use the land after this
expiration date, we must apply for an extension at least one year prior to the
granted land use right’s expiration.
NIVS PRC
built a modernized factory on this land property consisting of approximately 2.7
million square feet of total space, including of manufacturing plants,
dormitories, research and development, warehouse space, and office
facilities. Its production area covers approximately 1.1 million
square feet and its dormitories cover approximately 215,000 square
feet. The production area primary consists of full-product and
semi-finished products assembly workshops, in addition to offices, showrooms,
and warehouse space.
Our
registered principal corporate offices are located in the PRC at NIVS Industry
Park, No. 29-31, Shuikou Road, Huizhou, Guangdong, People’s Republic of China
516006.
Legal
Proceedings
We are
not involved in any material legal proceedings outside of the ordinary course of
our business.
65
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following individuals constitute our board of directors and executive management
as of the date of this prospectus.
Name
|
Age
|
Position
|
||
Tianfu
Li
|
41
|
Chief
Executive Officer and Chairman of the Board
|
||
Gengqiang
Yang
|
30
|
Chief
Operating Officer and Director
|
||
Simon
Zhang
|
46
|
Chief
Financial Officer and Corporate Secretary
|
||
Kwok
Fu (“Jason”) Wong
|
36
|
Vice
President of Investor Relations
|
||
Dongquan
Zhang
|
39
|
Chief
Technology Officer
|
||
Charles
Mo
|
59
|
Director
|
||
Ruxiang
Niu
|
48
|
Director
|
||
Minghui
Zhang
|
|
42
|
|
Director
|
Tianfu Li
began serving as our Chief Executive Officer and Chairman of the Board on July
25, 2008 upon the closing of the Share Exchange transaction with NIVS BVI. Prior
to the closing of the Share Exchange, Mr. Li was the Chief Executive Officer and
Chairman of the Board of NIVS BVI. As Chief Executive Officer, Mr. Li
has been responsible for formulating the operating policies and long-term
development plans for our company. From July 1989 to June 1993, Mr.
Li held a number of positions at Sino-European (Huizhou) Electronics Co., Ltd.,
a company that manufactures and sells car audio products, including Assistant
Engineer, Production Director, Quality Engineer, Research and Development
Engineer, and Director of Developing Projects, and was responsible for offering
technical support for first-line production, production management, and quality
control. Mr. Li was also responsible for the plan, exercise, and completion of
new projects. Mr. Li left Sino-European (Huizhou) Electronics Co., Ltd. in June
1993. Also, prior to January 1998 when he founded NIVS PRC, Mr. Li collaborated
with business contacts and associates on the research, development, production,
and sale of VCD and DVD players. Mr. Li received a bachelor’s degree in radio
communication from the South China University of Technology in
1989.
Gengqiang
Yang began serving as a director of our company on July 25, 2008 upon the
closing of the Share Exchange transaction with NIVS BVI. Prior to the closing of
the Share Exchange, Mr. Yang served as a director of NIVS BVI beginning in June
2007. Since July 2004, Mr. Yang has served as Chief Operating Officer of NIVS
BVI and is responsible for planning business strategy related to video and audio
products, establishing policies for video and audio industry development,
overseas business exploration, and global cooperation and planning of video and
audio products. From June 2001 to June 2004, Mr. Yang served as
Superintendent of NIVS BVI and was responsible for strategy planning related to
NIVS BVI audio and video products, formulating development policies related to
the audio and video industry, and exploring overseas business and global
planning for NIVS BVI audio and video products. From March 1999 to May 2001, Mr.
Yang served as Technician of NIVS BVI and was responsible for analyzing and
solving production problems, on-site production instruction, coordinating with
the production department to resolve technical issues, improving production
processes, maintaining production equipment, and improving production
technology. Mr. Yang received a bachelor’s degree in electronic technology from
Huizhou University in 1999.
Simon
Zhang began serving as our Chief Financial Officer and Corporate
Secretary in January 2009. Since January 2008, Mr. Zhang has
served as the CFO of Yinlips Technology, Inc., a company that designs,
manufactures and markets CRT, LCD, and portable electronic
devices. Until we name a permanent CFO, Mr. Zhang will spend
approximately half of his time performing his duties as our CFO and the other
half of his time as the CFO of Yinlips. From July 2007 to December
2007, Mr. Zhang served as Chief Financial Officer of Evergreen Investment Inc.,
a holding company which focuses on restaurant investments. From January 2006 to
June 2007, Mr. Zhang was the financial controller of Kapila Corporation, a
company primarily engaged in textile trading. From January 2003 to
December 2005, Mr. Zhang was an accountant at Flycomputer, an information
technology firm. Mr. Zhang received a diploma in Financial Management
in 2004 from the British Columbia Institute of Technology and a Master of
Science in 1989 from Wuhan University.
Kwok Fu (“Jason”)
Wong began serving as our Vice President Investor Relations since October
2008. As Vice President Investor Relations, Mr. Wong develops and
implements our investor relations strategies, in addition to assisting in the
preparation of public disclosure documents. From February 2007 to
October 2008, Mr. Wong served as Executive Vice President, Investor Relations
for China Display Technologies, Inc. (CDYT.OB), a company that designs,
manufactures and markets backlights for LCDs. From June 2005 to February 2007,
Mr. Wong worked with Suny Optoelectronics Co., Limited, a subsidiary of China
Display Technologies, Inc., serving as its Marketing and Communication Manager
and then as its Investor Relations Manager. From December 2001 to May
2005 and from August 2000 to October 2001, Mr. Wong served as an education
officer at The Conservancy Association, an environmental organization located in
Hong Kong. Mr. Wong received a Master’ Degree in Environmental
Science and Technology from City University of Hong Kong in 2005 and a
Bachelor’s Degree in Applied Biology, graduating with honors, from City
University of Hong Kong in 1998.
66
Dongquan
Zhang began serving as our Chief Technology Officer on July 25, 2008 upon
the closing of the Share Exchange transaction with NIVS BVI. Prior to the
closing of the Share Exchange, Mr. Zhang served as Chief Technology Officer of
NIVS BVI beginning in March 2002. As Chief Technology Officer, Mr. Zhang is
responsible for product development, project management, market analysis, and
market exploration. Mr. Zhang received a master’s degree in computer science
from Qing Hua University in 2000.
Charles Mo
began serving as a director of our company in January 2009. Mr. Mo is a
Certified Public Accountant with over twenty-five years of experience in public
and corporate accounting and finance and has held his CPA license since
1980. Since June 2005, Mr. Mo has served as the General Manager of
Charles Mo & Co., a corporate consulting company, and focuses on general
management duties. From October 1999 to May 2005, Mr. Mo served as Chief
Operating Officer and Chief Financial Officer of Coca-Cola Shanghai, a beverage
company, and was responsible for sales, finance, logistics, production, and
general management. From December 1998 to September 1999, Mr. Mo served as
Finance Director of Fisher Rosemount Shanghai. From August 1996 to November
1998, Mr. Mo served as Chief Financial Officer of Nike China, an athletic goods
company, and was responsible for overseeing finance, human resources, and
logistics. From January 1995 to August 1996, Mr. Mo served as Controller and
Acting General Manager for Polaroid China, a camera and consumer electronics
company. From August 1982 to December 1994, Mr. Mo served as Audit Manager and
held various financial management positions for Wang Laboratories, a computer
company. From 1978 to 1982, Mr. Mo served as an Accountant and Auditor for the
accounting businesses of Ernst & Young and Thomas Allen, CPA. Mr.
Mo has served as an independent director of China Ritar Power Corp.
(OTCBB:CRTP), a manufacturer of lead-acid batteries in China, since August 2008,
and OmniaLuo, Inc. (OTCBB:OLOU), a manufacturer and seller of women’s clothing
in China, since January 2008. Mr. Mo received a Bachelor of Arts
degree in Business Administration in 1974 from HK Baptist College and an MBA in
accounting in 1976 from California State University-Fullerton. We
believe that Mr. Mo’s long and varied career exhibit his qualifications to sit
on our Board, including his more than 25 years of experience, expertise and
background with respect to accounting matters, his experience as a CPA and chief
financial officer of large corporations in China, and his understanding of U.S.
GAAP and financial statements.
Ruxiang
Niu began serving as a director of our company in December
2008. From January 2007 to October 2008, Mr. Niu served as the Vice
General Manager of Shanghai Pudong Real Estate Trust Investment Company Limited,
a real estate investment company, and was responsible for real estate
investments. From December 2005 to December 2006, Mr. Niu served as the Chief
Executive Officer of Beijing Bangsheng Investment Company Limited, a financial
investment company, and was responsible for investments, mergers and
acquisitions and company financing, and also served as the Chief Capital
Consultant of Shirong (Shenzhen) International Financial Group, a financial
investment company, and was responsible for investments, mergers and
acquisitions and company financing. From March 2003 to November 2005, Mr. Niu
served as the Chief Executive Officer of Beijing Dovon Net Company Limited, a
financial investment company, and was responsible for financing and investment
communications. From March 2000 to December 2002, Mr. Niu served as the
Assistant to the Chief Executive Officer of Shidean (Shenzhen) Technologies
Company Limited, an electronic intelligent security company, and was responsible
for managing the company’s Electronic Research Center and building intelligent
electronic systems. From September 1999 to July 2000, Mr. Niu served as an
Associate Professor at Macau University. From March 1995 to August 1996, Mr. Niu
served as the Vice General Manager of China Golden Net Investment Company
Limited, a financial investment company, and was responsible for website
operation and investment. Mr. Niu received a PhD in international finance from
the Hong Kong Polytechnic University in 2008. We believe that Mr.
Niu’s deep knowledge the electronics and financial investment industries, as
well as his extensive professional and academic experience, well qualifies Mr.
Niu to serve on our Board.
Minghui
Zhang began serving as a director of our company in December
2008. Since April 2006, Mr. Zhang has served as the Deputy Governor
of Shanghai Pudong Development Bank and is responsible for the management and
improvement of its bank credit business, international business, and settlement
of accounts. From November 2002 to April 2006, Mr. Zhang served as the Product
Manager and Assistant Branch Governor of Shenzhen Pingan Bank and was
responsible for the development and marketing of credit and financing products.
From July 1991 to November 2002, Mr. Zhang served as the Investment Manager of
Jilin Provence Trust and Investment Company Limited, a financial investment and
trust company, and was responsible for mergers and acquisitions and financing
projects. Mr. Zhang received a master’s degree in business from Jilin University
in 2007 and has been a Chartered Certified Public Accountant in China since
1996. We believe that Mr. Zhang’s broad knowledge the banking and
financing industry, as well as his experience in mergers and acquisitions, well
qualifies Mr. Zhang to serve on our Board.
67
Family
Relationships
There are
no family relationships among any of the officers and directors.
The
Board of Directors and Committees
Subject
to certain exceptions, under the listing standards of the NYSE Amex, a listed
company’s board of directors must consist of a majority of independent
directors. Currently, our board of directors has determined that each of the
non-management directors, Ruxiang Niu, Minghui Zhang, and Charles Mo is an
“independent” director as defined by the listing standards of NYSE Amex
currently in effect and approved by the U.S. Securities and Exchange Commission
(“SEC”) and all applicable rules and regulations of the SEC. All members of the
Audit, Compensation and Nominating Committees satisfy the “independence”
standards applicable to members of each such committee. The board of directors
made this affirmative determination regarding these directors’ independence
based on discussions with the directors and on its review of the directors’
responses to a standard questionnaire regarding employment and compensation
history; affiliations, family and other relationships; and transactions with the
Company. The board of directors considered relationships and transactions
between each director or any member of his immediate family and the Company and
its subsidiaries and affiliates. The purpose of the board of director’s review
with respect to each director was to determine whether any such relationships or
transactions were inconsistent with a determination that the director is
independent under the NYSE Amex rules.
Audit
Committee
We
established our Audit Committee in August 2008. The Audit Committee consists of
Ruxiang Niu, Minghui Zhang, and Charles Mo, each of whom is an independent
director. Charles Mo, Chairman of the Audit Committee, is an “audit committee
financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of
the Audit Committee is to represent and assist our board of directors in its
general oversight of our accounting and financial reporting processes, audits of
the financial statements and internal control and audit functions. The Audit
Committee’s responsibilities include:
|
·
|
The
appointment, replacement, compensation, and oversight of work of the
independent auditor, including resolution of disagreements between
management and the independent auditor regarding financial reporting, for
the purpose of preparing or issuing an audit report or performing other
audit, review or attest services.
|
|
·
|
Reviewing
and discussing with management and the independent auditor various topics
and events that may have significant financial impact on our company or
that are the subject of discussions between management and the independent
auditors.
|
The board
of directors has adopted a written charter for the Audit Committee. A copy of
the Audit Committee Charter is posted on our corporate website at: www.nivsgroup.com/english/.
Compensation
Committee
We
established our Compensation Committee in August 2008. The Compensation
Committee consists of Ruxiang Niu, Minghui Zhang, and Charles Mo, each of whom
is an independent director. Charles Mo is the Chairman of the Compensation
Committee. The Compensation Committee is responsible for the design, review,
recommendation and approval of compensation arrangements for our directors,
executive officers and key employees, and for the administration of our equity
incentive plans, including the approval of grants under such plans to our
employees, consultants and directors. The Compensation Committee also reviews
and determines compensation of our executive officers, including our Chief
Executive Officer. The board of directors has adopted a written charter for the
Compensation Committee. A current copy of the Compensation Committee Charter is
posted on our corporate website at: www.nivsgroup.com/english/.
68
Nominating
Committee
The
Nominating Committee consists of Ruxiang Niu, Minghui Zhang, and Charles Mo,
each of whom is an independent director. Charles Mo is the Chairman of the
Nominating Committee. The Nominating Committee assists in the selection of
director nominees, approves director nominations to be presented for stockholder
approval at our annual general meeting and fills any vacancies on our board of
directors, considers any nominations of director candidates validly made by
stockholders, and reviews and considers developments in corporate governance
practices. The board of directors has adopted a written charter for the
Nominating Committee. A current copy of the Nominating Committee Charter is
posted on our corporate website at: www.nivsgroup.com/english/.
Code
of Business Conduct and Ethics
Our board
of directors has adopted a Code of Business Conduct and Ethics, which applies to
all directors, officers and employees. The purpose of the Code is to promote
honest and ethical conduct. The Code is posted on our corporate website located
at www.nivsgroup.com/english/,
and is available in print, without charge, upon written request to us at NIVS
IntelliMedia Technology Group, Inc., NIVS Industry Park, No. 29-31, Shuikou
Road, Huizhou, Guangdong, People’s Republic of China 516006. We intend to post
promptly any amendments to or waivers of the Code on our corporate
website.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Prior to
the closing of the Share Exchange, our current named executive officers were
compensated by NIVS BVI until the closing of the Share Exchange, including for
the year ended December 31, 2007 and the period from January 1, 2008 to July 25,
2008. The Chief Executive Officer and Chairman of the Board of NIVS
BVI, Tianfu Li, determined the compensation for himself and the other executive
officers of NIVS BVI that was earned in fiscal 2007 and the period from January
1, 2008 to July 25, 2008 after consulting with the board members of NIVS BVI. In
addition, the Board of Directors of NIVS BVI approved the compensation. From
January 1, 2008 to July 25, 2008 and during the fiscal years of 2007, 2006 and
2005, the compensation for NIVS BVI’s named executive officers consisted solely
of each executive officer’s salary and cash bonus. The Board of
Directors of NIVS BVI believe that the salaries paid to our executive officers
during 2007 and the period from January 1, 2008 to July 25, 2008 are indicative
of the objectives of its compensation program and reflect the fair value of the
services provided to NIVS BVI, as measured by the local market in
China.
Upon the closing of the Share Exchange,
the executive officers of NIVS BVI were appointed as our executive officers and
we adopted the compensation policies of NIVS BVI, as modified for a company
publicly reporting in the United States. Compensation for our current
executive officers is determined with the goal of attracting and retaining high
quality executive officers and encouraging them to work as effectively as
possible on our behalf. Compensation is designed to reward executive officers
for successfully meeting their individual functional objectives and for their
contributions to our overall development. For these reasons, the elements of
compensation of our executive officers are salary and bonus. Salary is paid to
cover an appropriate level of living expenses for the executive officers and the
bonus is paid to reward the executive officer for individual and company
achievement.
Salary is
designed to attract, as needed, individuals with the skills necessary for us to
achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue to
perform at or above the levels that we expect. When setting and adjusting
individual executive salary levels, we consider the relevant established salary
range, the named executive officer’s responsibilities, experience, potential,
individual performance and contribution. We also consider other factors such as
our overall corporate budget for annual merit increases, unique skills, demand
in the labor market and succession planning.
We
determine the levels of salary as measured primarily by the local market in
China. We determine market rate by conducting a comparison with the
local geographic area averages and industry averages in China. In determining
market rate, we review statistical data collected and reported by the Huizhou
City Labor Bureau which is published monthly. The statistical data provides the
high, median, low and average compensation levels for various positions in
various industry sectors. In particular, we use the data for the manufacturing
sector as our benchmark to determine compensation levels because we operate in
Huizhou city as a consumer electronics manufacturer. Our compensation levels are
at roughly the 80th-90th percentile of the compensation spectrum for the
manufacturing sector. Once we determine the overall compensation levels for our
officers based on the benchmarks, we allocate a certain portion of the total
compensation to salary, which is paid during the fiscal year, and allocate the
remainder to bonus, which will be paid after the end of the fiscal year if
corporate and individual performance goals are met.
69
Corporate
performance goals include sales targets, research and development targets,
production yields, and equipment utilization. Additional key areas of corporate
performance taken into account in setting compensation policies and decisions
are cost control, profitability, and innovation. The key factors may vary
depending on which area of business a particular executive officer’s work is
focused. Individual performance goals include subjective evaluation,
based on an employee’s team-work, creativity and management capability, and
objective goals such as sales targets. Generally, the amount of a
bonus, when awarded, will be equal to one month's salary plus 5% to 25% of the
individual's annual salary. If the corporate and individual goals are
fully met, the bonus will be closer to the top end of the range. If
the goals are only partially met, the amount of the bonus will be closer to the
bottom end of the range. In no event will there be a bonus equal to
more than one month's salary if the corporate goals are not met by at least
50%. For 2009, the amounts of the bonuses were determined in relation
to overall compensation levels, which were based on roughly the 80th-90th
percentile of the compensation spectrum for the manufacturing sector in Huizhou
City, China. A certain portion of total compensation was allocated to
salary and the remainder was allocated to bonus based on achievement of
corporate and individual performance goals. In 2009, our corporate
performance had improved in line with internal goals, including an increase in
revenue and profitability. We also experienced success in savings for
selling expenses as a percentage of revenue. Based on the attainment
of internal corporate goals, in addition to Tianfu Li’s contributions on an
individual level, Tianfu Li earned a cash bonus for 2009. Tianfu Li
received a cash bonus of $15,000 in 2009, as compared to a cash bonus of $10,500
for 2008. The primary causes for the increase in the bonus amounts
for 2009 as compared to 2008 were the achievement of corporate goals and the
increase in the executive officer’s salary. The Compensation
Committee determined the bonus award amounts for 2009 and the Board approved of
the amounts.
Our board
of directors established a compensation committee in August 2008 comprised of
non-employee directors. The compensation committee will perform, at
least annually, a strategic review of the compensation program for our executive
officers to determine whether it provides adequate incentives and motivation to
our executive officers and whether it adequately compensates our executive
officers relative to comparable officers in other companies with which we
compete for executives. Those companies may or may not be public companies or
companies located in the PRC or even, in all cases, companies in a similar
business. Prior to the formation of the compensation committee, Tianfu Li, upon
consulting with our board members, determined the compensation for himself and
our other current executive officers. Beginning in 2009, our compensation
committee currently determines compensation levels for our executive officers.
We have established a compensation program for executive officers for 2010 that
is designed to attract, as needed, individuals with the skills necessary for us
to achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue to
perform at or above the levels that we expect. For 2010, bonuses for
executive officers will be based on company and individual performance factors,
as described above.
Having
listed on the NYSE Amex in March 2009, we intend to adjust our bonus evaluations
upwards in 2010, but, in such case, we do not intend to increase them by more
than 20%. We believe that adopting higher compensation in the future may be
based on the increased amount of responsibilities assumed by each of the
executive officers after we became a publicly listed company.
We also
intend to expand the scope of our compensation, such as the possibility of
granting options to executive officers and tying compensation to predetermined
performance goals. We adopted an equity incentive plan in June 2009
and intend to issue stock-based awards under the plan to aid our company’s
long-term performance, which we believe will create an ownership culture among
our named executive officers that fosters beneficial, long-term performance by
our company. We do not currently have a general equity grant policy
with respect to the size and terms of grants that we intend to make in the
future, but we expect that our compensation committee will evaluate our
achievements for each fiscal year based on performance factors and results of
operations such as revenues generated, cost of revenues, and net
income.
70
Summary
Compensation Table
The
following table sets forth information concerning the compensation for the three
fiscal years ended December 31, 2009 of the principal executive officer,
principal financial officer, in addition to our three most highly compensated
officers whose annual compensation exceeded $100,000, and up to two additional
individuals, as applicable, for whom disclosure would have been required but for
the fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.
Name and Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
Tianfu
Li
|
2009
|
$ | 38,000 | $ | 15,000 | $ | 53,000 | |||||||
Chief
Executive Officer and
|
2008
|
33,000 | 10,500 | 43,500 | ||||||||||
Chairman
of the Board
|
2007
|
30,000 | 7,000 | 37,000 | ||||||||||
Simon
Zhang
|
2009
|
$ | 35,191 | $ | 5,500 | $ | 40,691 | |||||||
Chief
Financial Officer and
|
2008
|
- | - | - | ||||||||||
Corporate
Secretary
|
2007
|
- | - | - | ||||||||||
Ling
Yi (1)
|
2009
|
$ | 17,000 | $ | 5,500 | $ | 22,500 | |||||||
Former
Chief Financial Officer and
|
2008
|
15,600 | 4,000 | 19,600 | ||||||||||
Former
Corporate Secretary
|
2007
|
12,000 | 2,500 | 14,500 |
_____
|
(1)
|
In
January 2009, Ling Yi resigned as Chief Financial Officer and Corporate
Secretary and the Board of Directors appointed Simon Zhang as Chief
Financial Officer and Corporate Secretary. Ling Yi remains with
our company as a finance manager.
|
Grants
of Plan-Based Awards in 2009
There were no option grants in
2009.
Outstanding
Equity Awards at 2009 Fiscal Year End
There were no option exercises or
options outstanding in 2009.
Option
Exercises and Stock Vested in Fiscal 2009
There were no option exercises or stock
vested in 2009.
Pension
Benefits
There were no pension benefit plans in
effect in 2009.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
There
were no nonqualified defined contribution or other nonqualified deferred
compensation plans in effect in 2009.
Employment
Agreements
We
generally enter into standard, one-year employment agreements with certain of
our officers. For the period from January 1, 2010 to December 31,
2010, we entered into employment agreements with each of Gengqiang Yang and
Dongquan Zhang pursuant to which each employee will be paid a monthly salary
during 2010 as follows:
|
·
|
Gengqiang
Yang was paid a monthly salary of RMB 14,000, which is approximately
US$2,044.
|
|
·
|
Dongquan
Zhang was paid a monthly salary of RMB 14,000, which is approximately
US$2,044.
|
The
employment agreements provide for immediate termination upon serving written
notice to an employee, in which case we must pay the employee one month's salary
and any year-end bonus to which the employee is entitled. Under the employment
agreements, if we violate certain termination procedures in the process of
terminating an employee, we shall pay the employee twice the employee’s standard
compensation as a penalty. If an employment agreement expires without
appropriate termination notification from either us or an employee, the parties
are deemed to have agreed to renew the employment agreement. In such
circumstance, if either party refuses to enter into a renewal agreement, that
party must pay to the other party one month's salary. The employment
agreements restrict our ability to terminate the employment agreements under
certain circumstances including if an employee has been employed for 15 years or
more and is within 5 years from the legal age of retirement.
71
An
employee may terminate his or her employment under certain circumstances
including if we force the employee to work in a hostile environment or threat or
deprival of safe and healthy working conditions. Under the employment
agreements, the employees have an obligation to maintain our commercial
secrets. The employment agreements contain general provisions for
mediation and arbitration in the case of any dispute arising out of the
employment agreements that cannot first be settled by consultation and
negotiation.
We also
entered into an employment agreement with Simon Zhang on January 16, 2009 in
connection with his appointment as our CFO and Corporate Secretary. The
Agreement provides that we will employ Mr. Zhang until we hire a permanent CFO,
provided that the agreement is not terminated earlier with at least two weeks'
prior written notice by either us or Mr. Zhang. Pursuant to the terms
of the Agreement, Mr. Zhang will be paid a monthly salary of RMB20,000
(approximately USD$2,930). Pursuant to the Agreement, we will reimburse Mr.
Zhang for all authorized, ordinary and necessary out-of-pocket expenses
reasonably incurred in connection with the performance of Mr. Zhang's
services. The Agreement also contains provisions regarding Mr.
Zhang’s agreement not to disclose any of our proprietary information, trade
secrets, and confidential information. Mr. Zhang also agreed not to
solicit our clients or employees both during Mr. Zhang's term of employment and
for one year following Mr. Zhang's employment with us.
NIVS
IntelliMedia Technology Group, Inc. 2009 Omnibus Incentive Plan
On June
23, 2009, the NIVS IntelliMedia Technology Group, Inc. 2009 Omnibus Incentive
Plan (the “Plan”) was approved and adopted. As approved by our Board of
Directors and shareholders, the Plan reserves a total of 4.0 million shares
authorized for issuance under the Plan.
The
Compensation Committee of our Board of Directors and the Board of Directors (the
“Committee”) have the authority to determine, within the limits of the express
provisions of the Plan, the individuals to whom awards will be granted, the
nature, amount and terms of such awards and the objectives and conditions for
earning such awards. The Committee may grant awards to any employee, director,
consultant or other person providing services to us or our affiliates. The
maximum awards that can be granted under the Plan to a single participant in any
calendar year will be one million shares of common stock (whether through grants
of Options or Stock Appreciation Rights or other awards of common stock or
rights with respect thereto) or $1 million in the form of cash-based incentive
awards.
Awards
under the Plan may include incentive stock options, nonqualified stock options,
stock appreciation rights, restricted shares of common stock, restricted stock
units, performance share or unit awards, other stock-based awards and cash-based
incentive awards.
As of
December 31, 2009, no specific awards have been granted under the Plan. Also,
the exact types and amounts of any future awards to be made to any eligible
participants pursuant to the Plan are not presently determinable.
Director
Compensation
The
following table shows information regarding the compensation earned during the
fiscal year ended December 31, 2009 by members of our board of
directors.
Name
|
Fees Earned or
Paid in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
Gengqiang
Yang
|
10,800 | - | - | - | - | - | 10,800 | |||||||||||||||||||||
Ruxiang
Niu
|
10,800 | - | - | - | - | - | 10,800 | |||||||||||||||||||||
Minghui
Zhang
|
10,800 | - | - | - | - | - | 10,800 | |||||||||||||||||||||
Charles
Mo
|
10,800 | - | - | - | - | - | 10,800 |
72
We expect
to pay the directors $11,200 for their services performed in 2010. We
generally increase our director compensation approximately 5% to 10% each year,
but our Board of Directors considers numerous company and other economic factors
before determining director compensation each year.
Indemnifications
of Directors and Executive Officers and Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to us and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
73
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
NIVS
Holding Company Limited
NIVS
Holding Company Limited (“NIVS BVI”) is our wholly-owned subsidiary and has
interlocking executive and director positions with us.
Loans
involving Directors, Officers, Stockholders and Affiliated Parties;
Repayment
From June
2005 to November 2008, our subsidiaries entered into hundreds of loan
transactions with NIVS PRC’s founder and our principal shareholder and current
Chief Executive Officer and Chairman of the Board, Tianfu Li. In
these loan transactions, we would borrow funds from Mr. Li. In
addition, our subsidiaries, primarily through NIVS PRC and NIVS International
(H.K.) Limited (“NIVS HK”), would lend funds to the entities that were owned and
controlled by Mr. Li. These entities controlled by Mr. Li are NIVS
Investment (SZ) Co., Ltd.; Zhongkena Technology Development; Xentsan
Technology (SZ) Co., Ltd.; Korea Hyundai Light & Electric (Int'l) Holding;
NIVS Information & Technology (HZ) Co., Ltd.; and Hyundai Light &
Electric (HZ) Co., Ltd. (collectively, the “Related Companies”). Our
loans to related parties also include a loan to a supplier of Hyundai Light and
Electric (HZ) Co. Ltd. in the amount of 38,474,900 RMB, which is equal to
approximately U.S. $5.5 million. The note carried an interest rate of 1.5% per
month and was guaranteed by Hyundai Light and Electric (HZ) Co Ltd.
The amount of the loans made by our
subsidiaries to the Related Companies ranged in amount. The aggregate
amount loaned from our subsidiaries to the Related Companies was approximately
$13 million and $10 million during the years ended December 31, 2008 and 2007,
respectively. The loan amounts owed to our subsidiaries by the
Related Companies as of December 31, 2008 and 2007 were $0 and $2.2 million,
respectively. As of December 31, 2008, our subsidiaries had an
aggregate outstanding loan balance due to Mr. Li of $7.8 million, which was
converted into equity upon the closing of our public offering in March 2009. All
of the loans to and from our subsidiaries were unsecured with no fixed repayment
date. The loans were borrowed and repaid
frequently. Normally, it was agreed that the loan amounts were to be
paid back to our subsidiaries within three to six months from the date of the
loan transaction.
The loans to the Related Companies were
for temporary funding of each of the Related Companies’ business. The
businesses of the Related Companies are as follows: NIVS Investment
(SZ) Co., Ltd. invests in various industries, including real estate developments
and electronic, internet, communication and digital manufacturing and
distribution; Zhongkena Technology Development develops and distributes digital
media products, electronic home appliances, and portable baby-education
products; Xentsan Technology (SZ) Co., Ltd. purchases and distributes electronic
products and domestic commercial products; Korea Hyundai Light & Electric
(Int’l) Holding and Hyundai Light & Electric (HZ) Co., Ltd. is in the
business of electronic and lighting products development and sales; and NIVS
Information & Technology (HZ) Co., Ltd. designs, manufactures and sells
computer appliance software and digital products.
Mr. Li owns and controls each of the
Related Companies. Mr. Li owns 90% of, and is a director of, NIVS
Investment (SZ) Co., Ltd., which owns 60% of Zhongkena Technology Development,
51% of Xentsan Technology (SZ) Co., Ltd., and 95% of NIVS Information &
Technology (HZ) Co., Ltd. Mr. Li is also a director of Xentsan
Technology (SZ) Co., Ltd. Prior to July 2008, Mr. Li was the 100%
owner of Korea Hyundai Light & Electric (Int’l) Holding Limited., which is
the 100% owner of Hyundai Light & Electric (HZ) Co., Ltd. He was
also a director of the entities. On July 18, 2008, Mr. Li sold his
100% ownership in Korea Hyundai Light & Electric (Int’l) Holding Limited to
China Intelligent Electronic Holding Company Limited., which is now 100% owned
by Ms. Jin Xiang Ying. Ms. Jin Xiang Ying is an individual who is not
related to Mr. Li or the Related Companies. After the transfer, Mr. Li is no
longer a director of Korea Hyundai Light & Electric (Int’l) Holding Limited
and Hyundai Light & Electric (HZ) Co., Ltd. Mr. Li's sister, Ms.
Li Xue Mei, is an executive director and general manager of Hyundai Light &
Electric (HZ) Co., Ltd.
Upon the closing of the Share Exchange,
we, a publicly reporting company under U.S. securities laws, gained ownership of
the subsidiaries. As a result, our subsidiaries became subject to the
Sarbanes-Oxley Act of 2002, including Section 402’s prohibition against personal
loans to directors and executive officers, either directly or
indirectly. Because the loans did not have a purpose directly related
to the business operations of our company or our subsidiaries, we believe that
the loans made and outstanding after the closing of the Share Exchange may
violate Section 402 of Sarbanes-Oxley, which would subject us and our chief
executive officer to possible criminal, civil or administrative sanctions,
penalties, or investigations, in addition to potential private securities
litigation. It was intended that all loans from our subsidiaries to
our officers and directors, whether directly or indirectly, be repaid in full
prior to the closing of the Share Exchange, and no further loans were to be made
to such related parties after the closing of the Share Exchange, which occurred
on July 25, 2008. In November 2008, it was discovered that the loans
to the entities owned by Mr. Li continued after the closing of the Share
Exchange, as more fully described in the notes to the financial statements
contained in this prospectus. We made a total of 47 loans, with a
total loan amount of $3,221,915, to the Related Companies after the closing of
the Share Exchange.
74
On November 28, 2008, we and our
subsidiaries entered into a Debt Repayment and Set-Off Agreement (the
“Agreement”) with Mr. Li and the Related Companies. Pursuant to the
Agreement, as it was amended on December 22, 2008, each of the Related Companies
agreed to completely and immediately repay all outstanding loan amounts that it
owed to us and our subsidiaries and we and our subsidiaries agreed to repay
approximately $1.0 million of the debt that we and our subsidiaries owed to Mr.
Li. As inducement for the Related Companies for entering into the
Agreement, we and our subsidiaries agreed to, among other things, permit the
amounts owed to us by the Related Companies to be off-set by amounts that we
owed to Mr. Li and acknowledge that the Related Companies no longer owed any
loan amounts to us or our subsidiaries.
Immediately prior to the repayments
under the Agreement, our subsidiaries had an aggregate outstanding loan amount
of approximately $8.8 million owed to Mr. Li (the “Li Debt”). On the
same date, Mr. Li, through the Related Companies, had an aggregate outstanding
loan amount of approximately $1.0 million owed to our subsidiaries (the “Related
Companies’ Debt”), which consisted of approximately $1.0 million owed by Korea
Hyundai Light & Electric (Int'l) Holding. Pursuant to the Agreement, the
Related Companies’ Debt of approximately $1.0 million was repaid by set off
against the Li Debt of approximately $8.8 million. As a result of the
transactions contemplated by the Agreement, the Related Companies’ Debt is no
longer outstanding and neither Mr. Li nor any of the Related Companies owed us
or our subsidiaries any loan amount. Moreover, immediately after the
repayments under the Agreement, our subsidiaries’ remaining debt owed to Mr. Li
was approximately $7.8 million. The parties to the Repayment
Agreement also acknowledged that there were no remaining debt obligations owed
to the us or our subsidiaries, either directly or indirectly, by Mr. Li, any
other executive officer or director, or any related family member, of our
company or subsidiaries, or any entity owned or controlled by such persons,
including the Related Companies, and that no loans or similar arrangements will
be made by us or our subsidiaries to such persons or entities in the
future.
On December 24, 2008, we and three of
our subsidiaries (NIVS BVI, NIVS HK, and NIVS PRC) entered into an agreement
with Mr. Li pursuant to which the outstanding debt of $7.8 million that we owed
to Mr. Li would be converted into shares of our common stock based on the
closing price of our public offering that we conducted in March
2009. According to the agreement, we issued 2,240,493 shares of our
common stock to Mr. Li in March 2009 upon the closing of our public
offering. As a result of the conversion, the debt amount of $7.8
million was converted into shares of common stock at $3.50 per share, and the
debt is no longer outstanding.
Assignment
and Transfer of Intellectual Property Rights
The founder of NIVS PRC and our
principal shareholder and current Chief Executive Officer, Tianfu Li, has legal
ownership of the approximately 43 patents in China, in addition to 19 patent
applications, that we rely on in the operation of our business. In
July 2008, NIVS PRC entered into an assignment and transfer agreement with Mr.
Li for the transfer and assignment of these patents and patent applications to
NIVS PRC, in addition to other intellectual property related to our business
operations. We and Mr. Li also intend to file appropriate transfer
certificates with the Bureau of Intellectual Property in the PRC, which, after
approved by the Bureau, would result in the legal transfer of the patents and
patent applications to us. Mr. Li did not receive any additional
consideration for the transfer and assignment of the intellectual property
rights to NIVS PRC, other than the execution of the transfer and assignment
agreement being a condition to closing of the Share Exchange, as described
below.
Share
Exchange
On July 25, 2008, we completed the
Share Exchange with NIVS BVI and the former shareholders of NIVS BVI. At the
closing, NIVS BVI became our wholly-owned subsidiary and 100% of the issued and
outstanding securities of NIVS BVI were exchanged for our securities. An
aggregate of 27,546,667 shares of common stock were issued to these shareholders
and their designees. As of the date of this prospectus, these shareholders owned
approximately 74.7% of our issued and outstanding stock. Prior to the closing of
the Share Exchange, our shareholders agreed to the cancellation of an aggregate
of 4,756,390 shares held by them such that there were 2,340,000 shares of common
stock owned by them immediately after the Share Exchange and the initial closing
of the Private Placement. The Board resigned in full and appointed Tianfu Li,
Wei Lin, Lu Liu, Gengqiang Yang, and Yucai Zhang to the board of directors of
our company, with Tianfu Li serving as Chairman. The Board also appointed Tianfu
Li as our Chief Executive Officer, Gengqiang Yang as Chief Operating Officer,
Ailing Liu as Production Manager, Ling Yi as Chief Financial Officer and
Corporate Secretary, Dongquan Zhang as Chief Technology Officer, and Lichun
Zhang as Marketing Manager. Each of these executives and directors were
executives and directors of NIVS BVI and/or its subsidiaries. In
December 2008, Wei Lin and Lu Liu resigned as directors and the Board of
Directors appointed Ruxiang Niu and Minghui Zhang as directors. In
January 2009, Ling Yi resigned as Chief Financial Officer and Corporate
Secretary and the Board of Directors appointed Simon Zhang as Chief Financial
Officer and Corporate Secretary. In January 2009, the Board of
Directors appointed Charles Mo as a director. In April 2009, Yucai Zhang
resigned as a director.
75
Private
Placement and Underwriting Services
Richard Rappaport, one of our
controlling stockholders prior to the Share Exchange, indirectly holds a 100%
interest in WestPark Capital, Inc., the placement agent for the equity
financing, of approximately $11.8 million conducted by us in connection with the
Share Exchange. Anthony C. Pintsopoulos, an officer, director and
significant stockholder of ours prior to the Share Exchange, is the Chief
Financial Officer of WestPark Capital, Inc. In addition, Debbie
Schwartzberg, one of our principal stockholders, was a note holder of WestPark
Capital Financial Services, LLC, the parent company of WestPark Capital,
Inc. The note, which was repaid in full in August 2008, had entitled
her to a 1.5% interest in the net profits of WestPark Capital Financial
Services, LLC, one of our principal stockholders prior to the Share
Exchange. Kevin DePrimio and Jason Stern, each employees of WestPark
Capital, Inc., are also our stockholders. Richard Rappaport is the
sole owner of the membership interests of WestPark Capital Financial Services,
LLC. Each of Messrs. Rappaport and Pintsopoulos resigned from all of
their executive and director positions with us upon the closing of the Share
Exchange. We paid WestPark Capital, Inc. a commission equal to 6.5%
of the gross proceeds from the financing, in addition to a $130,000 success fee
for the Share Exchange, for an aggregate fee of $896,000. In
addition, WestPark Capital, Inc. acted as the underwriter in our public offering
that we closed in March 2009. We sold a total of 550,000 shares of
common stock in the public offering at $3.50, for gross proceeds of
approximately $1.9 million. As compensation for its services,
WestPark Capital received a discount and commissions of $192,500, a $57,750
non-accountable expense allowance, in addition to roadshow expenses of
approximately of $10,000 and legal counsel fees (excluding blue sky fees) of
$40,000. WestPark Capital also received a five-year warrant to
purchase 55,000 shares of our common stock at an exercise price of $4.20 per
share. In April 2009, WestPark Capital exercised its over-allotment
option to purchase an additional of 82,500 shares of common stock. The shares
were sold a price of $3.50 per share for a gross proceed of $288,750.
Compensation incurred in the public offering included discounts and commissions
of $28,875, an $8,663 non-accountable expense allowance, other expenses of
$4,821, and legal counsel fees of $42,500.
WestPark
Capital is also providing underwriting services to us in connection with this
offering.
Policy
for Approval of Related Party Transactions
In August
2008, we established an Audit Committee and adopted an Audit Committee
Charter. The Charter contains our policy for approval of related
party transactions. Our policy is to have our Audit Committee review
and pre-approve any related party transactions and other matters pertaining to
the integrity of management, including potential conflicts of interest, trading
in our securities, or adherence to standards of business conduct as required by
our policies.
Prior to
adopting our Audit Committee Charter in August 2008, we did not have a policy
with respect to approval of related party transactions. In addition,
prior to August 2008, our subsidiaries entered into related party loan
transactions with NIVS PRC’s founder and our principal shareholder and current
Chief Executive Officer and Chairman of the Board, Tianfu Li, and certain
entities controlled by Mr. Li (the “Related Companies”). Upon the
closing of the Share Exchange, we intended for all loans from our subsidiaries
to our officers and directors, whether directly or indirectly, be repaid in full
prior to the closing of the Share Exchange, and no further loans were to be made
to such related parties after the closing of the Share Exchange, which occurred
on July 25, 2008. In November 2008, it was discovered that the loans
to the entities owned by Mr. Li continued after the closing of the Share
Exchange. On November 28, 2008, we and our subsidiaries entered into
a Debt Repayment and Set-Off Agreement (the “Agreement”) with Mr. Li and the
Related Companies pursuant to which each of the Related Companies agreed to
completely and immediately repay all outstanding loan amounts that it owed to us
and our subsidiaries. For additional information regarding our
subsidiaries’ loan transactions with Mr. Li and the Related Companies, see above
at CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS—Loans involving Directors, Officers, Stockholders and
Affiliated Parties; Repayment.
In an
effort to take further measures to improve our internal controls and procedures
regarding related party transactions, we adopted a formal policy for the
identification, approval, processing, recording and disclosure of related party
transactions. On January 28, 2009, our Board of Directors and Audit
Committee adopted the NIVS IntelliMedia Technology Group, Inc. Policy and
Procedures With Respect To Related Person Transactions (the “RPT Policy”). The
RPT Policy provides that enter into or ratify related party transactions only
when our Board, acting through the Audit Committee or as otherwise prescribed in
the RPT Policy, determines that the related party transaction in question is in,
or is not inconsistent with, the best interests of our company and our
stockholders. Situations where related party transactions may be in
the best interest of our company and stockholders include situations where we
may obtain products or services of a nature, quantity or quality, or on other
terms, that are not readily available from alternative sources or when we
provide products or services to related party on an arm’s length basis on terms
comparable to those provided to unrelated third parties or on terms comparable
to those provided to employees generally. In addition, the RPT Policy
provides that our officers and directors must keep the Audit Committee informed
as to his or her related persons and entities through quarterly declarations to
the Committee. A master list of such related persons was distributed
to the heads of our business and financial departments in order to prevent
related party transactions occurring without being properly identified and
reported to the Audit Committee for evaluation.
76
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this prospectus are deemed outstanding even if they have
not actually been exercised. Those shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.
The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on issued and outstanding shares of common
stock before and after the offering, by:
|
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
|
·
|
Each
executive officer;
|
|
·
|
Each
director; and
|
|
·
|
All
of the executive officers and directors as a
group.
|
The
number of shares of our common stock outstanding as of the date of this
prospectus, excludes up
to shares
of our common stock (excluding an underwriters’ option to purchase an
additional shares
to cover over-allotments) to be offered by us in a firm commitment public
offering concurrently herewith. Unless otherwise indicated, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the stockholder’s name,
subject to community property laws, where applicable. Unless
otherwise indicated, the address of each stockholder listed in the table is c/o
NIVS IntelliMedia Technology Group, Inc., NIVS Industry Park, No. 29-31, Shuikou
Road, Huizhou, Guangdong, People’s Republic of China 516006.
Name and Address
of Beneficial Owner
|
Title
|
Shares of
Common
Stock
Beneficially
Owned
Before the
Offering
|
Percent of
Class
Beneficially
Owned
Prior to
Offering (1)
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering
|
Percent of Class
Beneficially
Owned After
Offering (2)
|
|||||||||||||
Directors
and Executive Officers
|
||||||||||||||||||
Tianfu
Li
|
Chief
Executive Officer and Chairman of the Board
|
14,445,160 | 35.5 | % | 14,445,160 |
%
|
||||||||||||
Ruxiang
Niu
|
Director
|
- | - | - | - | |||||||||||||
Minghui
Zhang
|
Director
|
- | - | - | - | |||||||||||||
Gengqiang
Yang
|
Chief
Operating Officer and Director
|
1,220,000 | 3.0 | % | 1,220,000 |
%
|
||||||||||||
Kwok
Fu (“Jason”) Wong
|
Executive
Vice President of Investor Relations
|
- | - | - | - |
77
Name and Address
of Beneficial Owner
|
Title
|
Shares of
Common
Stock
Beneficially
Owned
Before the
Offering
|
Percent of
Class
Beneficially
Owned
Prior to
Offering (1)
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering
|
Percent of Class
Beneficially
Owned After
Offering (2)
|
|||||||||||||
Simon
Zhang
|
Chief
Financial Officer and Corporate Secretary
|
- | - | - | - | |||||||||||||
Dongquan
Zhang
|
Chief
Technology Officer
|
- | - | - | - | |||||||||||||
Charles
Mo
|
Director
|
- | - | - | - | |||||||||||||
Officers
and Directors as a Group (total of 8 persons)
|
15,665,160 | 38.5 | % | 15,665,160 |
%
|
______
(1)
|
Based
on 40,675,347 shares of common stock issued and outstanding as of April
16, 2010.
|
(2)
|
Based
on shares
of common stock, which consists of (i) 40,675,347 shares of common stock
issued and outstanding as of April 16, 2010 and
(ii) shares
of common stock issued in the public offering (excluding the underwriters’
over-allotment option of up
to shares).
|
78
CHANGE
IN ACCOUNTANTS
We
engaged MaloneBailey, LLP (“MaloneBailey”) as our independent registered public
accounting firm effective January 21, 2010. Concurrent with this appointment, we
dismissed Kempisty & Company Certified Public Accountants PC (“Kempisty”),
effective January 21, 2010. The decision to change our principal independent
registered public accounting firm was approved by our Board of
Directors.
The
reports of Kempisty on our consolidated financial statements for each of the
fiscal years ended December 31, 2008 and 2007 did not contain any adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope or accounting principles. During our fiscal years
ended December 31, 2008 and 2007, and during the subsequent period through
to the date of Kempisty's dismissal, there were no disagreements between us and
Kempisty, whether or not resolved, on any matter of accounting principles or
practices, financial statements disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Kempisty, would have
caused Kempisty to make reference in their reports on our audited consolidated
financial statements. During the fiscal years ended December 31, 2008 and
2007, and during the subsequent period through the date of Kempisty's dismissal,
there were no "reportable events" as such term is defined in
Item 304(a)(1)(v) of Regulation S-K ("Reportable Event").
During
the two years ended December 31, 2008, and through the date of our
retention of MaloneBailey as our independent registered public accounting firm
on September 11, 2009, we did not consult with MaloneBailey on matters that
involved the application of accounting principles to a specified transaction,
the type of audit opinion that might be rendered on our financial statements or
any other matter that was either the subject of a disagreement or a Reportable
Event.
We have
provided Kempisty with a copy of the above statements and have requested that it
furnish a letter addressed to the SEC stating whether Kempisty agrees with such
statements. A copy of that letter will be filed as an exhibit to the
registration statement of which this prospectus forms a part.
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue 100,000,000 shares of common stock, $0.0001 par value per
share, of which 40,675,347 shares are issued and outstanding as of the date of
this prospectus. Each outstanding share of common stock is entitled
to one vote, either in person or by proxy, on all matters that may be voted upon
by their holders at meetings of the stockholders.
Holders
of our common stock:
(i)
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our Board of
Directors;
|
(ii)
|
are
entitled to share ratably in all of our assets available for distribution
to holders of common stock upon our liquidation, dissolution or winding
up;
|
(iii)
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
(iv)
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
At the
date of this prospectus, the principal stockholders of NIVS BVI prior to the
Share Exchange, and their designees, own approximately 75% of the outstanding
shares of our common stock. Accordingly, after completion of the Share Exchange,
these stockholders are in a position to control all of our affairs.
Preferred
Stock
We may
issue up to 10,000,000 shares of our preferred stock, par value $0.0001 per
share, from time to time in one or more series. No shares of Preferred Stock
have been issued.
79
Our Board
of Directors, without further approval of our stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights, liquidation preferences and other rights and restrictions relating to
any series. Issuances of shares of preferred stock, while providing flexibility
in connection with possible financings, acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of our common stock and prior series of preferred stock then
outstanding.
Warrants
We issued
a warrant to WestPark Capital, Inc. as partial compensation for underwriting
services in connection with our public offering in March
2009. Commencing one year from the date of issuance, WestPark Capital
may purchase up to 55,000 shares of common stock at an exercise price of $4.20
per share under the warrant, which has a term of five years.
In addition, we plan to issue a
warrant to the underwriters of this public offering as partial compensation for
underwriting services in connection with this offering. The
Underwriters will be able to purchase up to a number of shares of common stock
equal to 3% the aggregate number of shares sold in this offering (excluding the
over-allotment option) at an exercise price equal to 125% of this offering’s per
share offering price. The warrants will be exercisable starting one
year after the effective date of the registration statement of which this
prospectus forms a part and continue to be exercisable for five years after such
effective date.
Market
Price of Our Common Stock
The
shares of our common stock commenced trading on the NYSE Amex in March 2009,
prior to which there was no market for our securities. The price of
our common stock will likely fluctuate. The stock market in general has
experienced extreme stock price fluctuations in the past few years. In some
cases, these fluctuations have been unrelated to the operating performance of
the affected companies. Many companies have experienced dramatic volatility in
the market prices of their common stock. We believe that a number of factors,
both within and outside our control, could cause the price of our common stock
to fluctuate, perhaps substantially. Factors such as the following could have a
significant adverse impact on the market price of our common stock:
|
·
|
Our
financial position and results of
operations;
|
|
·
|
Concern
as to, or other evidence of, the reliability and safety of our products
and services or our competitors’ products and
services;
|
|
·
|
Our
ability to obtain additional financing and, if available, the terms and
conditions of the financing;
|
|
·
|
Announcements
of innovations or new products or services by us or our
competitors;
|
|
·
|
Federal
and state regulatory actions and the impact of such requirements on our
business;
|
|
·
|
The
development of litigation against
us;
|
|
·
|
Changes
in estimates of our performance by any securities
analysts;
|
|
·
|
The
issuance of new equity securities pursuant to a future offering or
acquisition;
|
|
·
|
Changes
in interest rates;
|
|
·
|
Competitive
developments, including announcements by competitors of new products or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital
commitments;
|
|
·
|
Period-to-period
fluctuations in our operating
results;
|
|
·
|
Investor
perceptions of us; and
|
|
·
|
General
economic and other national
conditions.
|
Delaware
Anti-Takeover Law and Charter Bylaws Provisions
We are
subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
·
|
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
80
|
·
|
on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section
203 defines a business combination to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our company, including changes
a stockholder might consider favorable. In particular, our
certificate of incorporation and bylaws, as applicable, among other things,
will:
|
·
|
provide
our board of directors with the ability to alter our bylaws without
stockholder approval;
|
|
·
|
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business to be
brought before a meeting of stockholders;
and
|
|
·
|
provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal and
to discourage some tactics that may be used in proxy fights. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure our company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing
changes in our management.
Transfer
Agent
The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc.
Listing
Our
shares of common stock are traded on the NYSE Amex under the ticker symbol
“NIV.”
81
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
the listing of our Common Stock on the NYSE Amex in March 2009, there has been
no public market for our securities in the United States. Future
sales of substantial amounts of our common stock in the public market could
adversely affect market prices. Upon completion of this offering, we will have
outstanding an aggregate
of shares
of common stock, assuming no exercise of the underwriters’ over-allotment
option. All of these shares will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by our "affiliates," as that term is defined in Rule 144 of the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below.
All other
outstanding shares not sold in this offering will be deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 promulgated under the Securities Act, which rules
are summarized below. Certain of our shareholders became eligible to utilize
Rule 144 in July 2009, which is 12 months from the date we filed our Form 10
information, as required under Rule 144. Subject to the lock-up agreements
described below and the provisions of Rules 144, additional shares will be
available for sale in the public market as follows:
Approximate Number of
Shares Eligible for
Future Sale
|
Date
|
|
After
the date of this prospectus, freely tradable shares sold in this
offering.
|
||
632,500
|
We
conducted an underwritten public offering of these shares in March 2009,
all of which are freely tradable.
|
|
9,731,714
|
These
shares were registered under resale registration statements that became
effective in March and April 2009 and are freely tradable by selling
stockholders listed in the respective prospectuses, subject to the lock-up
arrangement described below. As of the date of this prospectus,
lock up restrictions have expired on all of the shares except
approximately 1.6 million shares, which will be completely free from the
lock up restrictions on May 7, 2010.
|
|
29,706,922
|
Beginning
on July 30, 2009, which is twelve months after the filing of a current
report on Form 8-K reporting the closing of the share exchange
transaction, these shares, which were issued in connection with the share
exchange transaction, may be sold under and subject to Rule
144. However, all of the holders of these shares have agreed
with WestPark Capital not to directly or indirectly sell, offer, contract
or grant any option to sell, pledge, transfer (excluding intra-family
transfers, transfers to a trust for estate planning purposes or to
beneficiaries of officers, directors and shareholders upon their death),
or otherwise dispose of or enter into any transaction which may
result in the disposition of any shares of our common stock or securities
convertible into, exchangeable or exercisable for any shares of our common
stock, without the prior written consent of WestPark Capital,
until March 12, 2011.
|
Rule
144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who is
not deemed to have been one of our affiliates at any time during the 90 days
preceding a sale and who has beneficially owned shares of our common stock for
at least six months, including the holding period of any prior owner, except if
the prior owner was one of our affiliates, would be entitled to sell all of
their shares, provided the availability of current public information about our
company.
Sales
under Rule 144 may also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Any substantial sale of common stock pursuant to any resale
registration statement or Rule 144 may have an adverse effect on the market
price of our common stock by creating an excessive supply.
We issued
2,340,000 shares of common stock to stockholders prior to the Share Exchange,
and we issued 27,546,667 shares pursuant to the Share Exchange. All
of these shares became eligible for sale under Rule 144, subject to its
requirements, as of July 30, 2009, which is 12 months after the filing of a
current report on Form 8-K reporting the closing of the Share
Exchange.
82
Lock-Up Agreements and
Registration
The
investors in our private placement, in which we sold 6,544,047 shares of common
stock, entered into a lock-up agreement pursuant to which they agreed not to
sell their shares until 90 days after our common stock begins to be listed or
quoted on either the New York Stock Exchange, NYSE Amex, NASDAQ Global Market,
NASDAQ Capital Market or the OTC Bulletin Board, when one-twelfth of their
shares will be released from the lock-up restrictions, and after which their
shares will automatically be released from the lock-up restrictions every 30
days in eleven equal installments. We agreed to, and did, file a
registration statement covering the common stock sold in the Private
Placement. The registration statement was declared effective in March
2009 and, subject to the lock-up agreement, the shares are freely
tradable. An additional 3,187,667 shares of common stock, all
of which have been registered for resale, are subject to the same restrictions
pursuant to lock up agreements that were entered into with the stockholders who
held shares of our company prior to the Share Exchange.
We agreed
with WestPark Capital, Inc. that we will not, without the prior written consent
of WestPark Capital, directly or indirectly sell, offer, contract or grant any
option to sell, pledge, transfer, or otherwise dispose of or enter
into any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable for any
shares of our common stock (excluding the exercise of certain warrants and/or
options currently outstanding and exercisable) until March 12,
2011.
In
addition, each of our executive officers and directors, in addition to all of
the shareholders that received shares issued in the Share Exchange holding an
aggregate of 27,546,667 shares of common stock, have agreed with WestPark
Capital not to directly or indirectly sell, offer, contract or grant any option
to sell, pledge, transfer (excluding intra-family transfers, transfers to a
trust for estate planning purposes or to beneficiaries of officers, directors
and shareholders upon their death), or otherwise dispose of or enter
into any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable for any
shares of our common stock, without the prior written consent of
WestPark Capital, until March 12, 2011.
We have
been advised by WestPark Capital that it has no present intention and there are
no agreements or understandings, explicit or tacit, relating to the early
release of any locked-up shares. WestPark Capital may, however,
consent to an early release from the lock-up period if, in its opinion, the
market for the common stock would not be adversely impacted by
sales. The release of any lock-up would be considered on a
case-by-case basis. Factors that WestPark Capital may consider in
deciding whether to release shares from the lock-up restriction include the
length of time before the lock-up expires, the number of shares involved, the
reason for the requested release, market conditions, the trading price of our
securities, historical trading volumes of our securities and whether the person
seeking the release is an officer, director or affiliate of
us.
83
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement
dated ,
2010 Rodman & Renshaw, LLC (“Rodman”) and WestPark Capital, Inc.
(“WestPark” together with Rodman, the “Underwriters”), have agreed to
purchase from us the number of shares of common stock set forth below at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus.
Underwriter
|
Number of
Shares
|
|||
Rodman
& Renshaw, LLC
|
||||
Westpark
Capital, Inc.
|
||||
Total
|
The
underwriting agreement provides that the agreement may be terminated by the
Underwriters at any time prior to delivery of and payment for the shares if, in
the Underwriters’ judgment, payment for and delivery of the shares is rendered
impracticable or inadvisable by reason of events specified in the underwriting
agreement, including but not limited to the state of the financial markets and
our financial condition. Subject to the foregoing, the Underwriters are
committed to purchase all of the common stock being offered by us if any of such
shares are purchased, other than those covered by the over-allotment option
described below.
The
following table shows the per share and total underwriting discounts and
commissions that we will pay to the underwriters. Such amounts are
shown assuming both no exercise and full exercise of the underwriters’
over-allotment option to
purchase additional
shares.
Paid by Us
|
No Exercise
|
Full Exercise
|
||||||
Per
share
|
$
|
$
|
||||||
Total
|
$
|
$
|
The
Underwriters propose to offer the common stock directly to the public at the
public offering price set forth on the cover page of this prospectus. The
Underwriters may offer the common stock to some dealers at that price less a
concession not in excess of
$ per
share. Dealers may reallow a concession not in excess of
$ per
share to some other dealers. After the shares of common stock are released for
sale to the public, the Underwriters may vary the offering price and other
selling terms.
We have
granted to the Underwriters an option, exercisable for up to 45 days after the
date of this prospectus, to purchase a number of additional shares of common
stock that is equal to 15% of the shares sold in this offering, which is equal
to additional
shares of common stock, at the public offering price set forth on the cover of
this prospectus solely to cover over-allotments, if any.
Some of
the Underwriters are expected to make offers and sales both inside and outside
the United States through their respective selling agents. Any offers and sales
in the United States will be conducted by broker-dealers registered with the
SEC.
The
Underwriters have entered into an agreement in which they agree to restrictions
on where and to whom they and any dealer purchasing from them may offer shares
of common stock, as a part of the distribution of the shares. The Underwriters
also have agreed that they may sell shares of common stock among
themselves.
We
have agreed with the Underwriters that we will not, without the prior consent of
the Underwriters, directly or indirectly sell, offer, contract or grant any
option to sell, pledge, transfer, or otherwise dispose of or enter into any
transaction which may result in the disposition of any shares of our common
stock or securities convertible into, exchangeable or exercisable for any shares
of our common stock (excluding the exercise of certain warrants and/or options
currently outstanding and exercisable) until March 12, 2011.
Each of
our executive officers and directors, in addition to all of the stockholders
that received shares issued in the Share Exchange, holding an aggregate
of shares
of common stock, have agreed with the Underwriters not to directly or indirectly
sell, offer, contract or grant any option to sell, pledge, transfer (excluding
intra-family transfers, transfers to a trust for estate planning purposes or to
beneficiaries of officers, directors and stockholders upon their death), or
otherwise dispose of or enter into any transaction which may result in the
disposition of any shares of our common stock or securities convertible into,
exchangeable or exercisable for any shares of our common stock, without the
prior written consent of the Underwriters, for a period of six months after the
date of this prospectus.
84
We have
agreed to indemnify the Underwriters against some liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
Underwriters may be required to make in respect thereof.
We
have agreed to pay the Underwriters a non-accountable expense allowance in the
amount of 1% of the gross proceeds from this offering (excluding the proceeds
from the underwriters’ over-allotment option), $50,000 of which was previously
paid to the Underwriters as a refundable advance. In addition, we
have agreed to pay (i) the Underwriters’ road show expenses of $10,000, (ii) the
fees, expenses and disbursements incurred by the Underwriters relating to
background checks of the Company’s officers and directors in an amount equal to
$23,000, and (iii) counsel fees (excluding blue sky fees) of
$75,000. We also granted the Underwriters a right of first refusal to
conduct future private and public equity offerings for us during the six month
period beginning September 25, 2009 in exchange for advisory
services.
Upon
the closing of this offering, we have agreed to sell to the Underwriters
warrants to purchase up
to shares
of our common stock, which is equal to 3% the aggregate number of shares sold in
this offering, excluding the over-allotment option. The warrants will
be exercisable at a per share exercise price equal to 125% of the public
offering price, subject to standard anti-dilution adjustments for stock splits
and similar transactions, and will become exercisable one year after
the effective date of the registration statement covered by this
prospectus and expire five years from the effective date of the
registration statement covered by this prospectus. The warrants and underlying
shares are deemed by FINRA to be underwriting compensation in connection with
this offering pursuant to FINRA Rule 5110. In addition, unless an exemption is
available under FINRA Rule 5110(g)(2), these securities will be subject to
lock-up restrictions under FINRA Rule 5110(g). FINRA Rule 5110(g) provides that
the warrants and underlying shares shall not be sold during this offering or
sold, transferred, assigned, pledged or hypothecated, or be the subject of any
hedging, short sale, derivative, put or call transaction that would result in
the effective economic disposition of the warrants or underlying shares by any
person for a period of 180 days immediately following the date of effectiveness
or commencement of sales of this offering.
The
Underwriters may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, penalty bids and passive market making in accordance with
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Penalty bids may have the effect of deterring syndicate members from
selling to people who have a history of quickly selling their shares. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to some limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the NASDAQ Global Market or otherwise and, if commenced, may be
discontinued at any time.
In
connection with the offering, the Underwriters may make short sales of the
issuer’s shares and may purchase the issuer’s shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
Underwriters of a greater number of shares than they are required to purchase in
the offering. ‘Covered’ short sales are sales made in an amount not greater than
the Underwriters’ ‘overallotment’ option to purchase additional shares in the
offering. The Underwriters may close out any covered short position by either
exercising its overallotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
Underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. ‘Naked’ short sales are sales
in excess of the overallotment option. The Underwriters must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the Underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Similar to
other purchase transactions, the Underwriters’ purchases to cover the syndicate
short sales may have the effect of raising or maintaining the market price of
the issuer’s stock or preventing or retarding a decline in the market price of
issuer’s stock. As a result, the price of the issuer’s stock may be higher than
the price that might otherwise exist in the open market.
We
estimate that our out of pocket expenses for this offering will be approximately
$700,000.
85
Foreign
Regulatory Restrictions on Purchase of the Common Stock
No action
may be taken in any jurisdiction other than the United States that would permit
a public offering of the common stock or the possession, circulation or
distribution of this prospectus in any jurisdiction where action for that
purpose is required. Accordingly, the common stock may not be offered or sold,
directly or indirectly, and neither the prospectus nor any other offering
material or advertisements in connection with the common stock may be
distributed or published in or from any country or jurisdiction except under
circumstances that will result in compliance with any applicable rules and
regulations of any such country or jurisdiction.
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon for
us by K&L Gates LLP, Los Angeles, California. Stubbs Alderton
& Markiles, LLP, Sherman Oaks, California is acting as counsel for the
underwriters. Legal matters as to PRC law will be passed upon for us by
Guangdong Laowei Law Firm. K&L Gates LLP may rely upon Guangdong Laowei Law
Firm with respect to matters governed by PRC law.
EXPERTS
The (i)
consolidated financial statements of NIVS IntelliMedia Technology Group, Inc. as
of December 31, 2009 and for the year ended December 31, 2009 (ii) condensed
parent-only balance sheet of NIVS IntelliMedia Technology Group, Inc. as of
December 31, 2009, and the related condensed parent-only statements of income
and cash flows for the year ended December 31, 2009 included in footnote 25 to
the Consolidated Financial Statements of NIVS IntelliMedia Technology Group,
Inc., each appearing in this prospectus and registration statement have been
audited by MaloneBailey, LLP, an independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The (i) consolidated financial
statements of NIVS IntelliMedia Technology Group, Inc. as of December 31, 2008
and for the years ended December 31, 2008 and 2007, (ii) and the condensed
parent-only balance sheet of NIVS IntelliMedia Technology Group, Inc. as of
December 31, 2008, and the related condensed parent-only statements of
operations and cash flows for the year ended December 31, 2008 and the period
January 3, 2007 (inception) to December 31, 2007 included in footnote 25 to the
Consolidated Financial Statements of NIVS IntelliMedia Technology Group, Inc.,
each appearing in this prospectus and registration statement have been audited
by Kempisty & Company Certified Public Accountants PC, an independent
registered public accounting firm, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 for the shares of common stock in this offering. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedule that were filed with the registration statement.
For further information with respect to us and our common stock, we refer you to
the registration statement and the exhibits and schedule that were filed with
the registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
86
INDEX
TO FINANCIAL STATEMENTS
NIVS
IntelliMedia Technology Group, Inc.
Financial
Statements
(Stated
in US dollars)
CONTENTS
|
PAGE
|
|
DECEMBER
31, 2009, 2008 and 2007
|
||
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
F-2
to F-5
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-6
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
F-7
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
F-8
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
F-9
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-10
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-11
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
NIVS
IntelliMedia Technology Group, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of NIVS IntelliMedia
Technology Group, Inc. and Subsidiaries (“the Company”) as of December 31, 2009
and the related consolidated statements of income, change in stockholders’
equity, comprehensive income, and cash flows for the year then ended. In
connection with our audits of the consolidated financial statements, we
also have audited financial statement schedule II for the year ended December
31, 2009. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and the
financial statement schedule based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NIVS IntelliMedia Technology
Group, Inc. as of December 31, 2009, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/MALONEBAILEY,
LLP
www.malone-bailey.com
Houston,
Texas
March 24,
2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
NIVS
IntelliMedia Technology Group, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of NIVS
IntelliMedia Technology Group, Inc. and Subsidiaries as of December 31, 2008 and
the related consolidated statements of income, changes in stockholders’ equity
and comprehensive income and cash flows for the years ended December 31, 2008
and 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required at
this time, to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of NIVS IntelliMedia Technology Group,
Inc. and Subsidiaries at December 31, 2008 and the results of its operations and
its cash flows for the years ended December 31, 2008 and 2007 in conformity
with accounting principles generally accepted in the in the United States of
America.
Kempisty
& Company
Certified
Public Accountants PC
New York,
New York
March 24,
2009
F-3
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
NIVS
IntelliMedia Technology Group, Inc. and Subsidiaries
We have
audited the condensed Parent Only balance sheet of NIVS IntelliMedia Technology
Group, Inc. (the “Company”) as of December 31, 2009 and the related condensed
Parent Only statements of income and cash flows for the year then ended included
in Footnote 25 to the Consolidated Financial Statements of NIVS IntelliMedia
Technology Group, Inc. These Parent Only condensed financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required at
this time, to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the condensed Parent Only financial statements referred to above
present fairly, in all material respects, the financial position of NIVS
IntelliMedia Technology Group, Inc. at December 31, 2009 and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the in the United States of
America.
/s/MALONEBAILEY,
LLP
www.malone-bailey.com
Houston,
Texas
March
24, 2010
F-4
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
NIVS
IntelliMedia Technology Group, Inc.
We have
audited the condensed Parent Only balance sheet of NIVS IntelliMedia Technology
Group, Inc. (the “Company”) as of December 31, 2008 and the related condensed
Parent Only statements of income and cash flows for the years ended December 31,
2008 and the period from inception to December 31, 2007 included in Footnote 25
to the Consolidated Financial Statements of NIVS IntelliMedia Technology Group,
Inc. These Parent Only condensed financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required at
this time, to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the condensed Parent Only financial statements referred to above
present fairly, in all material respects, the results of NIVS IntelliMedia
Technology Group, Inc.’s operations and its cash flows for the year ended
December 31, 2008 and the period from inception to December 31,
2007 in conformity with accounting principles generally accepted in the in
the United States of America.
Kempisty
& Company
Certified
Public Accountants PC
New York,
New York
March 24,
2009
F-5
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In US
Dollars)
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
5,916,224
|
$
|
461,504
|
||||
Trade
receivables, net
|
33,228,955
|
20,364,356
|
||||||
Inventories,
net
|
9,626,048
|
11,279,832
|
||||||
Prepaid
expenses, deposit and other receivables
|
8,641,448
|
81,690
|
||||||
VAT
refundable
|
869,202
|
1,094,090
|
||||||
Restricted
cash
|
4,840,137
|
11,681,595
|
||||||
Total
current assets
|
63,122,014
|
44,963,067
|
||||||
Property,
equipment and construction in progress, net
|
58,409,374
|
56,331,487
|
||||||
Advances
to suppliers
|
16,649,904
|
15,286,028
|
||||||
Intangible
assets, net
|
2,295,244
|
2,343,383
|
||||||
Total
Assets
|
$
|
140,476,536
|
$
|
118,923,965
|
||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable - trade
|
$
|
3,932,115
|
$
|
2,020,363
|
||||
Accrued
liabilities and other payable
|
1,485,577
|
1,441,922
|
||||||
Wages
payable
|
801,972
|
800,744
|
||||||
Corporate
tax payable
|
1,372,117
|
2,744,518
|
||||||
Various
taxes payable
|
494,678
|
470,860
|
||||||
Customer
deposits
|
-
|
1,393,171
|
||||||
Short-term
loans
|
43,987,358
|
35,871,715
|
||||||
Bank
notes payable
|
7,712,609
|
18,849,201
|
||||||
Total
current liabilities
|
59,786,426
|
63,592,494
|
||||||
Due
to shareholder
|
-
|
7,842,780
|
||||||
Total
Liabilities
|
59,786,426
|
71,435,274
|
||||||
Shareholders'
Equity
|
||||||||
NIVS
IntelliMedia Technology Group, Inc.'s shareholders' equity
|
||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued
and outstanding at December 31, 2009 and December 31, 2008,
respectively
|
-
|
-
|
||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 40,675,347 and
36,855,714 shares issued and outstanding at December 31, 2009 and December
31, 2008, respectively
|
4,068
|
3,686
|
||||||
Additional
paid-in capital
|
21,717,239
|
12,663,513
|
||||||
Accumulated
other comprehensive income
|
3,979,941
|
3,960,012
|
||||||
Statutory
reserve fund
|
5,722,107
|
3,568,869
|
||||||
Retained
earnings (unrestricted)
|
47,497,211
|
26,193,371
|
||||||
Total
NIVS IntelliMedia Technology Group, Inc. Shareholders'
Equity
|
78,920,566
|
46,389,451
|
||||||
Noncontrolling
interest
|
1,769,544
|
1,099,240
|
||||||
Total
Shareholders' Equity
|
80,690,110
|
47,488,691
|
||||||
Total
Liabilities & Shareholders' Equity
|
$
|
140,476,536
|
$
|
118,923,965
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Income
(In US
Dollars)
For
the Year Ended
|
||||||||||||
December
31,
|
December
31,
|
December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenues
|
$
|
185,197,972
|
$
|
143,630,679
|
$
|
77,626,516
|
||||||
Other
Revenues
|
282,289
|
414,968
|
516,415
|
|||||||||
Cost
of Goods Sold
|
(142,416,067
|
)
|
(109,762,476
|
)
|
(58,864,342
|
)
|
||||||
Gross
Profit
|
43,064,194
|
34,283,171
|
19,278,589
|
|||||||||
Selling
Expenses
|
6,761,597
|
5,376,083
|
3,269,414
|
|||||||||
General
and administrative
|
||||||||||||
Amortization
|
78,665
|
68,788
|
62,175
|
|||||||||
Depreciation
|
331,153
|
337,445
|
327,575
|
|||||||||
Bad
debts (recovery)
|
(2,745,003
|
)
|
2,531,479
|
473,218
|
||||||||
Merger
cost
|
-
|
1,785,696
|
-
|
|||||||||
Stock-based
compensation
|
-
|
765,000
|
-
|
|||||||||
Other
general and administrative
|
4,850,370
|
3,171,458
|
2,548,047
|
|||||||||
Total
general and administravive
|
2,515,185
|
8,659,866
|
3,411,015
|
|||||||||
Research
and development
|
5,314,781
|
1,737,323
|
373,472
|
|||||||||
Total
operating expenses
|
14,591,563
|
15,773,272
|
7,053,901
|
|||||||||
Income
from operations
|
28,472,631
|
18,509,899
|
12,224,688
|
|||||||||
Other
income (expenses)
|
||||||||||||
Government
grant
|
575,870
|
31,713
|
28,138
|
|||||||||
Write-down
of inventory
|
-
|
(131,837
|
)
|
(105,106
|
)
|
|||||||
Interest
income
|
6
|
91
|
234,655
|
|||||||||
Interest
expense
|
(1,566,976
|
)
|
(2,208,051
|
)
|
(1,791,490
|
)
|
||||||
Imputed
interest
|
-
|
(656,167
|
)
|
(526,428
|
)
|
|||||||
Sundry
income (expense), net
|
11,407
|
(51,714
|
)
|
(111,405
|
)
|
|||||||
Total
other income (expenses)
|
(979,693
|
)
|
(3,015,965
|
)
|
(2,271,636
|
)
|
||||||
Income
before noncontrolling interest and income taxes
|
27,492,938
|
15,493,934
|
9,953,052
|
|||||||||
Income
taxes
|
(3,406,230
|
)
|
(2,031,031
|
)
|
(1,268,963
|
)
|
||||||
Net
income
|
24,086,708
|
13,462,903
|
8,684,089
|
|||||||||
Net
income attributable to the noncontrolling interest
|
(629,630
|
)
|
(429,490
|
)
|
(217,569
|
)
|
||||||
Net
income attributable NIVS IntelliMedia Technology Group,
Inc.
|
$
|
23,457,078
|
$
|
13,033,413
|
$
|
8,466,520
|
||||||
Basic
earnings per share - net income attributable to NIVS's common
shareholders
|
$
|
0.59
|
$
|
0.41
|
$
|
0.31
|
||||||
Weighted-average
shares outstanding, Basic
|
39,858,756
|
31,553,197
|
27,546,667
|
|||||||||
Diluted
earnings per share - net income attributable to NIVS's common
shareholders
|
$
|
0.59
|
$
|
0.41
|
$
|
0.31
|
||||||
Weighted-average
shares outstanding, Diluted
|
39,858,756
|
31,967,040
|
27,546,667
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
For the
years ended December 31, 2009, 2008 and 2007
(In US
Dollars)
NIVS IntelliMedia Technology Group, Inc. and Subsidiaries
|
||||||||||||||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
Additional
|
Statutory
|
Other
|
Retained
|
Total
|
||||||||||||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Reserve
|
Comprehensive
|
Earnings
|
Due from
|
Stockholders'
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Fund
|
Income
|
(Unrestricted)
|
Related Parties
|
Equity
|
Interest
|
Equity
|
|||||||||||||||||||||||||||||||
Balance
at December 31, 2006
|
27,546,667
|
$
|
2,755
|
$
|
229,375
|
$
|
522,058
|
$
|
439,688
|
$
|
7,740,249
|
$
|
(7,015,018
|
)
|
$
|
1,919,107
|
$
|
288,654
|
$
|
2,207,761
|
||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
-
|
-
|
-
|
756,706
|
-
|
(756,706
|
)
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||
Capital
contribution from noncontrolling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
80,762
|
80,762
|
||||||||||||||||||||||||||||||
Imputed
interest allocated
|
-
|
-
|
526,428
|
-
|
-
|
-
|
-
|
526,428
|
-
|
526,428
|
||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
1,682,924
|
-
|
-
|
1,682,924
|
33,146
|
1,716,070
|
||||||||||||||||||||||||||||||
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
8,466,520
|
-
|
8,466,520
|
217,569
|
8,684,089
|
||||||||||||||||||||||||||||||
Due
from related parties
|
-
|
-
|
-
|
-
|
-
|
-
|
4,801,648
|
4,801,648
|
-
|
4,801,648
|
||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
27,546,667
|
2,755
|
755,803
|
1,278,764
|
2,122,612
|
15,450,063
|
(2,213,370
|
)
|
17,396,627
|
620,131
|
18,016,758
|
|||||||||||||||||||||||||||||
Retain
of 2,340,000 shares by original SRKP 19, Inc. stockholders prior to
reverse merger
|
2,340,000
|
234
|
(234
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||
Issuance
of 6,544,047 shares at $1.80 in private placement occurred in July,
2008
|
6,544,047
|
654
|
11,778,631
|
-
|
-
|
-
|
-
|
11,779,285
|
-
|
11,779,285
|
||||||||||||||||||||||||||||||
Financing
cost related to private placement
|
-
|
-
|
(1,291,811
|
)
|
-
|
-
|
-
|
-
|
(1,291,811
|
)
|
-
|
(1,291,811
|
)
|
|||||||||||||||||||||||||||
Issuance
of 425,000 shares at $1.80 to IR company as part of service
fee
|
425,000
|
43
|
764,957
|
-
|
-
|
-
|
-
|
765,000
|
-
|
765,000
|
||||||||||||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
-
|
-
|
-
|
2,290,105
|
-
|
(2,290,105
|
)
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||
Capital
injection from noncontrolling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
22,032
|
22,032
|
||||||||||||||||||||||||||||||
Imputed
interest allocated
|
-
|
-
|
656,167
|
-
|
-
|
-
|
-
|
656,167
|
-
|
656,167
|
||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
1,837,400
|
-
|
-
|
1,837,400
|
27,587
|
1,864,987
|
||||||||||||||||||||||||||||||
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
13,033,413
|
-
|
13,033,413
|
429,490
|
13,462,903
|
||||||||||||||||||||||||||||||
Comprehensive
Income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||
Due
from related parties
|
-
|
-
|
-
|
-
|
-
|
-
|
2,213,370
|
2,213,370
|
-
|
2,213,370
|
||||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
36,855,714
|
3,686
|
12,663,513
|
3,568,869
|
3,960,012
|
26,193,371
|
-
|
46,389,451
|
1,099,240
|
47,488,691
|
||||||||||||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
-
|
-
|
-
|
2,153,238
|
-
|
(2,153,238
|
)
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||
Sales
of 550,000 shares at $3.50 in IPO, net of issuance cost of
$916,509
|
550,000
|
55
|
1,008,436
|
-
|
-
|
-
|
-
|
1,008,491
|
-
|
1,008,491
|
||||||||||||||||||||||||||||||
Issuance
of 2,240,493 shares at $3.50 in exchange for "Li Debt"
|
2,240,493
|
224
|
7,841,502
|
-
|
-
|
-
|
-
|
7,841,726
|
-
|
7,841,726
|
||||||||||||||||||||||||||||||
Issuance
of 946,640 shares upon cashless exercise of 946,667 warrants at $4.12 per
share
|
946,640
|
95
|
(95
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||
Issuance
of 82,500 shares at $3.50, net of issuance cost of $84,859
|
82,500
|
8
|
203,883
|
203,891
|
-
|
203,891
|
||||||||||||||||||||||||||||||||||
Capital
contributed from noncontrolling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
13,746
|
13,746
|
||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
19,929
|
-
|
-
|
19,929
|
26,928
|
46,857
|
|||||||||||||||||||||||||||||||
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
23,457,078
|
-
|
23,457,078
|
629,630
|
24,086,708
|
||||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
40,675,347
|
$
|
4,068
|
$
|
21,717,239
|
$
|
5,722,107
|
$
|
3,979,941
|
$
|
47,497,211
|
$
|
-
|
$
|
78,920,566
|
$
|
1,769,544
|
$
|
80,690,110
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-8
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
For the
years ended December 31, 2009, 2008 and 2007
(In US
Dollars)
For the Year Ended
|
||||||||||||
December 31,
|
December 31,
|
December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
income
|
$
|
24,086,708
|
$
|
13,462,903
|
$
|
8,684,089
|
||||||
Other
comprehensive income, net of tax:
|
||||||||||||
Unrealized
gain (loss) on foreign currency translation, net of tax
|
46,857
|
1,864,987
|
1,716,070
|
|||||||||
Comprehensive
income
|
24,133,565
|
15,327,890
|
10,400,159
|
|||||||||
Comprehensive
income attributable to the noncontrolling interest
|
(656,558
|
)
|
(457,077
|
)
|
(250,715
|
)
|
||||||
Comprehensive
income attributable to NIVS's common shareholders
|
$
|
23,477,007
|
$
|
14,870,813
|
$
|
10,149,444
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-9
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(In US
Dollars)
For the Year Ended
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
Flows From Operating Activities
|
||||||||||||
Net
income
|
$
|
24,086,708
|
$
|
13,462,903
|
$
|
8,684,089
|
||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Imputed
interest
|
-
|
656,167
|
526,428
|
|||||||||
Bad
debt expense (recovery)
|
(2,745,003
|
)
|
2,531,479
|
473,218
|
||||||||
Depreciation
expense
|
5,850,550
|
4,887,386
|
1,169,319
|
|||||||||
Amortization
expense
|
78,665
|
68,788
|
62,175
|
|||||||||
Stock-based
compensation
|
-
|
765,000
|
-
|
|||||||||
Write-down
of inventory
|
-
|
131,837
|
105,106
|
|||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Trade receivables
|
(10,117,126
|
)
|
(18,385,002
|
)
|
(4,838,184
|
)
|
||||||
Advances
to suppliers
|
350,934
|
1,318,827
|
(13,640,207
|
)
|
||||||||
Prepaid
expenses and deposits
|
-
|
(63,105
|
)
|
38,265
|
||||||||
Inventories,
net
|
1,655,152
|
6,067,538
|
(15,908,385
|
)
|
||||||||
VAT
refundable
|
225,021
|
(1,094,090
|
)
|
-
|
||||||||
Accounts
payable, accrued liabilities and customer deposits
|
561,647
|
(12,650,271
|
)
|
12,402,518
|
||||||||
Various
taxes payable
|
23,761
|
283,149
|
(315,905
|
)
|
||||||||
Wages
payable
|
1,131
|
192,522
|
436,329
|
|||||||||
Corporate
tax payable
|
(1,372,734
|
)
|
1,018,753
|
1,092,944
|
||||||||
Net
cash provided by (used in) operating activities
|
18,598,706
|
(808,119
|
)
|
(9,712,290
|
)
|
|||||||
Cash
Flows From Investing Activities
|
||||||||||||
Restricted
cash
|
6,842,875
|
(9,698,348
|
)
|
(276,104
|
)
|
|||||||
Deposits
for Dongri Acquisition
|
(8,559,748
|
)
|
-
|
-
|
||||||||
Purchases
of property, plant and equipment
|
(5,232,911
|
)
|
(15,326,949
|
)
|
(15,297,640
|
)
|
||||||
Payments
made for construction in progress
|
(4,405,199
|
)
|
(1,480,627
|
)
|
-
|
|||||||
Purchases
of intangible assets
|
(31,605
|
)
|
(28,830
|
)
|
-
|
|||||||
Due
from related parties
|
-
|
2,213,370
|
4,801,648
|
|||||||||
Short-term
investment, marketable securities
|
-
|
-
|
(650
|
)
|
||||||||
Net
cash used in investing activities
|
(11,386,588
|
)
|
(24,321,384
|
)
|
(10,772,746
|
)
|
||||||
Cash
Flows From Financing Activities
|
||||||||||||
Net
borrowing from bank loans payable
|
8,111,292
|
3,230,239
|
15,985,886
|
|||||||||
Net
borrowing (repayment) in bank notes payable
|
(11,138,878
|
)
|
12,744,638
|
(145,438
|
)
|
|||||||
Capital
lease payable
|
-
|
-
|
(61,669
|
)
|
||||||||
Net
proceeds of share issuances
|
1,212,382
|
10,487,474
|
-
|
|||||||||
Due
to shareholder
|
-
|
(3,165,990
|
)
|
4,916,614
|
||||||||
Net
cash provided by (used in) financing activities
|
(1,815,204
|
)
|
23,296,361
|
20,695,393
|
||||||||
Effect
of exchange rate changes on cash
|
57,806
|
855,995
|
668,904
|
|||||||||
Net
increase in cash and cash equivalents
|
5,454,720
|
(977,147
|
)
|
879,261
|
||||||||
Cash
and cash equivalents, beginning of period
|
461,504
|
1,438,651
|
559,390
|
|||||||||
Cash
and cash equivalents, end of period
|
$
|
5,916,224
|
$
|
461,504
|
$
|
1,438,651
|
||||||
Supplemental
disclosure information::
|
||||||||||||
Interest
expense paid
|
$
|
1,706,762
|
$
|
2,208,051
|
$
|
1,791,490
|
||||||
Income
taxes paid
|
$
|
4,773,839
|
$
|
2,031,031
|
$
|
1,268,963
|
||||||
Non
cash investing and financing activities:
|
||||||||||||
Exchange
of investment for equipment
|
$
|
-
|
$
|
-
|
$
|
12,824,623
|
||||||
Conversion
of Li debt to common stock
|
$
|
7,841,726
|
$
|
-
|
$
|
-
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-10
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
Because
the shares issued by the NIVS USA to the shareholders of Niveous and their
designees in the aforementioned transaction represented a controlling interest,
the transaction has been accounted for as a recapitalization or reverse merger
with Niveous being considered the accounting acquirer. The accompanying
consolidated financial statements have been restated on a retroactive basis to
present the capital structure of Niveous as though it was the reporting
entity.
Niveous
was incorporated in British Virgin Islands (BVI) on October 31,
2003. As at December 31, 2009, Niveous had 50,000 capital shares
authorized with $1.00 par value and 10,000 shares issued and
outstanding.
In April,
2004, Niveous acquired 97.5% of ownership of NIVS (HZ) Audio & Video Tech
Company Limited (“NIVS PRC”) from its original shareholders. NIVS PRC
is the main operating company located in Huizhou, PRC. It engages in
research, development, production, marketing and sales of audio & video
electronic equipment for the domestic and international markets.
In April,
2005, Niveous acquired 100% of ownership of NIVS International (H.K.) Limited
(“NIVS HK”) under an ownership transfer agreement. NIVS HK is a
holding company incorporated in November 2004 in Hong Kong, PRC with the
original sole shareholder Mr. Li Tianfu. Pursuant to the ownership
transfer agreement, Niveous agreed to pay Mr. Li Tianfu 1 million HKD for the
ownership transfer.
In
February 2006, NIVS PRC established a branch company NIVS (HZ) Audio & Video
Tech Company Limited Shenzhen Branch (“NIVS Shenzhen”) located in Shenzhen, PRC.
NIVS Shenzhen is currently performing sales and marketing for the Company’s
products.
In
November 2007, Niveous entered an ownership transfer agreement to transfer its
whole ownership of NIVS PRC to NIVS HK. After the restructuring, NIVS
PRC became a subsidiary of NIVS HK.
In June
2008, NIVS HK entered an ownership transfer agreement to transfer its whole
ownership of NIVS PRC to Niveous. Pursuant to the agreement, Niveous
agreed to pay NIVS HK 50M HKD within three months. After the restructuring, NIVS
PRC became a subsidiary of Niveous. As a result, Niveous and Mr. Li
Tianfu hold 97.5% and 2.5% of total interests of NIVS PRC,
respectively.
In June
2008, Niveous entered into entered into a share exchange agreement with SRKP 19,
Inc., a Delaware corporation, and all of the shareholders of Niveous. Pursuant
to the share exchange agreement, as it was amended (the “Exchange Agreement”),
SRKP 19 agreed to issue an aggregate of 27,546,667 shares of its common stock in
exchange for all of the issued and outstanding securities of Niveous (the “Share
Exchange”). The Share Exchange closed in July 2008. Upon the closing of the
Share Exchange on July 25, 2008, SRKP 19 issued an aggregate of 27,546,667
shares of its common stock to the shareholders of Niveous and their designees in
exchange for all of the issued and outstanding securities of Niveous.
Immediately after the closing of the Share Exchange, SRKP 19 changed its
corporate name from “SRKP 19, Inc.” to “NIVS IntelliMedia Technology Group,
Inc.” For accounting purposes, the Share Exchange was treated as a reverse
acquisition.
Prior to
the closing of the Share Exchange, the NIVS USA’s shareholders canceled an
aggregate of 4,756,390 shares held by them such that there were 2,340,000 shares
of common stock outstanding immediately prior to the Share Exchange. The
shareholders also canceled an aggregate of 6,149,723 warrants such that the
shareholders held an aggregate of 946,667 warrants immediately after the Share
Exchange.
F-11
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)
Concurrently
with the close of the Share Exchange, NIVS USA conducted an initial closing of a
private placement transaction pursuant to which NIVS USA sold an aggregate of
5,239,460 shares of common stock at $1.80 per share, for gross proceeds of
approximately $9.4 million. On August 12, 2008, NIVS USA conducted the second
and final closing of the private placement pursuant to which NIVS USA sold an
aggregate of 1,304,587 shares of common stock at $1.80 per share, for gross
proceeds of approximately $2.3 million. Accordingly, NIVS USA sold a total of
6,544,047 shares of common stock in the private placement for aggregate gross
proceeds of $11.8 million. WestPark Capital, Inc., the placement
agent for the Private Placement, was paid a commission equal to 6.5% of the
gross proceeds from the financing, in addition to a $130,000 success fee for the
Share Exchange, for an aggregate fee of approximately $896,000. NIVS USA filed a
registration statement covering the common stock sold in the Private Placement
within 30 days of the closing of the Share that was declared effective by the
Securities and Exchange Commission ("SEC") in March 2009.
On
December 24, 2008, NIVS USA entered into an agreement with Mr. Li pursuant to
which the outstanding debt that the Company owed to Mr. Li would be converted
into shares of NIVS USA common stock. According to the agreement, the
shares would be issued upon the closing of its public offering. The
public offering closed on March 18, 2009 and NIVS USA issued 2,240,493 shares of
common stock to Mr. Li, which is equal to the debt amount of approximately $7.8
million divided by the offering price of public offering, which was $3.50 per
share. As a result of the conversion of the debt into equity, the
debt is no longer outstanding, and NIVS USA and its subsidiaries do not have any
outstanding debt owed to Mr. Li. As a result of the shares issued in
the debt conversion, the number of shares that Mr. Li beneficially owns
increased from 12,204,667 shares to 14,445,160 shares.
In March
2009, NIVS USA completed a public offering consisting of 550,000 shares of
common stock. WestPark Capital, Inc. acted as underwriter in the public
offering. Shares of common stock were sold to the public at a price
of $3.50 per share, for gross proceeds of approximately $1.9
million. Compensation for WestPark Capital’s services included
discounts and commissions of $192,500, a $57,750 non-accountable expense
allowance, roadshow expenses of approximately of $10,000, and legal counsel fees
(excluding blue sky fees) of $40,000. WestPark Capital also received
a warrant to purchase 55,000 shares of common stock at an exercise price of
$4.20 per share. The warrant, which has a term of five years, is not
exercisable until at least one-year from the date of
issuance. The warrant also carries registration
rights.
In April
2009, the underwriter to the Company’s public offering that closed in March 2009
exercised its over-allotment option to purchase an additional of 82,500 shares
of common stock (the “Shares”). The Shares were sold to the underwriter at a
price of $3.50 per share for gross proceeds of $288,750. Compensation
incurred in the public offering included discounts and commissions of $28,875,
an $8,663 non-accountable expense allowance, other expenses of $4,821, and legal
counsel fees of $42,500.
NIVS USA
and its subsidiaries – Niveous, NIVS HK, NIVS PRC and NIVS Shenzhen shall be
collectively referred throughout as the “Company”.
To
summarize the paragraphs above, the organization and ownership structure of the
Company is currently as follows:
To
summarize the paragraphs above, the organization and ownership structure of the
Company is as follows:
F-12
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a.
|
Basis
of preparation
|
The
accompanying consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States
of America.
In the
opinion of the management, the consolidated financial statements reflect all
adjustments (which include normal recurring adjustments) necessary to present
fairly the financial position of the Company as of December 31, 2009 and 2008,
and the results of operations and cash flows for the years ended December 31,
2009, 2008 and 2007.
b.
|
Basis
of consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Significant inter-company 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.
|
Reclassifications
|
Certain
amounts in the consolidated financial statements for the prior years have been
reclassified to confirm to the presentation of the current year for the
comparative purposes.
e.
|
Fair
values of financial instruments
|
The
Company adopted ASC 820 “Fair Value Measurements,” which defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosures requirements for fair value measures.
Current assets and current liabilities qualified as financial instruments and
management believes their carrying amounts are a reasonable estimate of fair
value because of the short period of time between the origination of such
instruments and their expected realization and if applicable, their current
interest rate is equivalent to interest rates currently
available. The three levels are defined as follow:
·
|
Level
1 — inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
|
·
|
Level
2 — inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
·
|
Level
3 — inputs to the valuation methodology are unobservable and
significant to the fair value.
|
As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
f.
|
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-13
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
g.
|
Restricted
cash
|
The
restricted cash are recorded as an asset when the Company deposits cash in the
bank as collateral for bank loans, separately from cash and cash
equivalents.
The
Company reclassified the increase/decrease of the restricted cash for all
periods presented from “Cash flows from operating activities” to “Cash flows
from investing activities” on the Company’s Consolidated Statements of Cash
Flows. The reclassification has no impact on the Consolidated
Statements of Income for the periods or the Consolidated Balance Sheets for the
periods presented.
h.
|
Trade receivables
|
Trade receivables
are recognized and carried at original invoiced amount less an allowance for
uncollectible accounts, as needed.
The
allowance for loan losses on trade receivables reflects management’s best
estimate of probable losses determined principally on the basis of historical
experience. The allowance for losses is determined primarily on the basis of
management’s best estimate of probable losses, including specific allowances for
known troubled accounts. All accounts or portions thereof deemed to be
uncollectible or to require an excessive collection cost are written off to the
allowance for losses. When facts subsequently become available to indicate that
the amount provided as the allowance was incorrect, an adjustment which
classified as a change in estimate is made.
i.
|
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.
j.
|
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:
Building
|
45
years
|
|
Molds
|
8
years
|
|
Machinery
and Equipment
|
10
years
|
|
Electronic
Equipment
|
5
years
|
|
Leasehold
Improvements
|
5
years
|
|
Office
and Other Equipment
|
5
years
|
|
Automobiles
|
5
years
|
k.
|
Intangible
assets
|
The
Company’s intangible assets are stated at cost less accumulated amortization and
are comprised of land-use rights, computer software licenses and
trademarks. Land-use rights are related to land the Company occupies
in Guangdong Province, PRC and are being amortized on a straight-line basis over
a period of 40 years. Computer software licenses are being amortized on a
straight-line basis over a period of 10 years. All trademarks are being
amortized on a straight-line basis over their lives.
F-14
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
l.
|
Impairment
of long-lived assets
|
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with ASC 360, “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.
m.
|
Income
taxes
|
The
Company accounts for income taxes in accordance with the accounting standard
which 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 the accounting standard 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 to file a return in a particular
jurisdiction).
n.
|
Comprehensive
income
|
The
Company reports comprehensive income, its components, and accumulated balances
in its financial statements. Accumulated other comprehensive income represents
the accumulated balance of foreign currency translation adjustments. No other
items of comprehensive income are present.
o.
|
Foreign
currency translation
|
The
functional currency of Niveous and NIVS HK is Hong Kong Dollar (“HKD”). The
Company maintains its 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 NIVS PRC and NIVS Shenzhen is the Renminbi (“RMB”), the
PRC’s currency. These two companies maintain their financial statements using
their 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 Niveous and NIVS HK,
which are prepared in HKD, are translated into the Company’s reporting currency,
United States Dollars (“USD”); the financial statements of NIVS PRC and NIVS
Shenzhen, 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.
F-15
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
||||||
Year
ended December 31, 2007
|
7.29410 | 7.59474 | ||||||
Year
ended December 31, 2008
|
6.81710 | 6.93722 | ||||||
Year
ended December 31, 2009
|
6.81720 | 6.84088 |
The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
Period
Covered
|
Balance
Sheet Date Rates
|
Average
Rates
|
||||||
Year
ended December 31, 2007
|
7.80214 | 7.80153 | ||||||
Year
ended December 31, 2008
|
7.74960 | 7.78634 | ||||||
Year
ended December 31, 2009
|
7.75477 | 7.75218 |
p.
|
Revenue
recognition
|
The
Company generates revenues from the sales of audio and video electronic products
and subcontracting activities. Sales are recognized when the following four
revenue criteria are met: persuasive evidence of an arrangement exists, delivery
has occurred, the selling price is fixed or determinable, and collectability is
reasonably assured. Sales are presented net of value added tax (VAT). No return
allowance is made as products returns are insignificant based on historical
experience.
q.
|
Research
and development costs
|
Research
and development costs are expensed to operations as incurred. The Company spent
$5,314,781, $1,737,323 and $373,472, on direct research and development
(“R&D”) efforts in the years ended December 31, 2009, 2008 and 2007,
respectively.
r.
|
Advertising
|
The
Company expenses advertising costs as incurred. Advertising is included in
selling expenses for financial reporting. The Company incurred
advertising costs of $3,853,206, $129,043 and $490,234 for the years
ended December 31, 2009, 2008 and 2007, respectively.
s.
|
Government
grants
|
Grants
from the PRC government are recognized at their fair value where there is a
reasonable assurance that the grant will be received and the Company will comply
with all attached conditions. Government grants are recognized as other income
or gains in the period received and as assets, decreases of liabilities, or
expenses depending on the form of the grants received. During the years ended
December 31, 2009, 2008 and 2007, the Company received from the PRC government
$575,870, $31,713 and $28,138, respectively.
t.
|
Related
parties
|
A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
F-16
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
u.
|
Recently
issued accounting pronouncements
|
In June
2009, the Financial Accounting Standards Board (FASB) issued a standard that
established the FASB Accounting Standards Codification (ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and
amended the hierarchy of generally accepted accounting principles (GAAP) such
that the ASC became the single source of authoritative nongovernmental U.S.
GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All previously existing
accounting standard documents were superseded and all other accounting
literature not included in the ASC is considered non-authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by
the FASB through Accounting Standards Updates (ASUs). The Company adopted the
ASC on July 1, 2009. This standard did not have an impact on the Company’s
consolidated results of operations or financial condition. However, throughout
the notes to the consolidated financial statements references that were
previously made to various former authoritative U.S. GAAP pronouncements have
been changed to coincide with the appropriate section of the
ASC.
In
December 2007, the FASB issued a new standard which established the
accounting for and reporting of noncontrolling interests (NCIs) in partially
owned consolidated subsidiaries and the loss of control of subsidiaries. Certain
provisions of this standard indicate, among other things, that NCIs (previously
referred to as minority interests) be treated as a separate component of equity,
not as a liability (as was previously the case); that increases and decreases in
the parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
Company adopted the standard beginning January 1, 2009. The provisions of
the standard were applied to all NCIs prospectively, except for the presentation
and disclosure requirements, which were applied retrospectively to all periods
presented. As a result, upon adoption, the Company retroactively reclassified
the “Minority interest in subsidiaries” balance previously included in the
“Other liabilities” section of the consolidated balance sheet to a new component
of equity with respect to NCIs in consolidated subsidiaries. The adoption also
impacted certain captions previously used on the consolidated statement of
income, largely identifying net income including NCI and net income attributable
to the Company. The adoption of this standard did not have a material
impact on the Company’s consolidated financial position or results of
operations.
In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing 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. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The adoption of this standard did not have a material
impact on the Company’s consolidated financial position or results of
operations.
In
June 2009, the FASB issued an accounting standard that 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. The standard is effective January 1, 2010. The
adoption of this standard did not have a material impact on the Company’s
consolidated financial position or results of operations.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 1, 2009. The adoption of this standard did not have a material
impact on the Company’s consolidated financial position or results of
operations.
F-17
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
u.
|
Recently
issued accounting pronouncements
(continued)
|
In
September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC
820 to provide guidance on measuring the fair value of certain alternative
investments such as hedge funds, private equity funds and venture capital funds.
The ASU indicates that, under certain circumstance, the fair value of such
investments may be determined using net asset value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other
than NAV. In those situations, the practical expedient cannot be used and
disclosure of the remaining actions necessary to complete the sale is required.
The ASU also requires additional disclosures of the attributes of all
investments within the scope of the new guidance, regardless of whether an
entity used the practical expedient to measure the fair value of any of its
investments. This ASU is effective October 1, 2009. The adoption of this
standard did not have a material impact on the Company’s consolidated financial
position or results of operations.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements—a consensus of the FASB Emerging Issues Task
Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance: the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). The ASU is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on the
Company’s consolidated results of operations and financial
condition.
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under ASC 820
by adding required disclosures about items transferring into and out of levels 1
and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and
clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for the first quarter of 2010,
except for the requirement to provide level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which is effective beginning the
first quarter of 2011. Since this standard impacts disclosure requirements only,
its adoption will not have a material impact on the Company’s consolidated
results of operations or financial condition.
F-18
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – TRADE RECEIVABLES, NET
Trade
receivables consists of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Trade
receivables
|
$
|
33,861,964
|
$
|
23,742,433
|
||||
Allowance
for doubtful accounts
|
(633,009
|
)
|
(3,378,077
|
)
|
||||
Trade
receivables, net
|
$
|
33,228,955
|
$
|
20,364,356
|
The
change in the allowance for doubtful accounts for the years ended December 31,
2009 and 2008 is as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$
|
(3,378,077
|
)
|
$
|
(728,265
|
)
|
||
Provision
during the period
|
-
|
(2,531,479
|
)
|
|||||
Reversal
during the period
|
2,745,003
|
-
|
||||||
Exchange
rate effect
|
65
|
(118,333
|
)
|
|||||
Ending
balance
|
$
|
(633,009
|
)
|
$
|
(3,378,077
|
)
|
NOTE
4 – ADVANCES TO SUPPLIERS
In
accordance with the contracts with the Company’s suppliers, cash is advanced for
material and equipment purchases. The delivery term is usually 30 days. In the
event of a breach of contract, the Company has the following rights and penalty
protection: The Company has the right to get back the deposit and charge double
interest on the deposit according to the interest rate during the same period in
which the contract was breached. The Company owns the raw material and equipment
acquired from the suppliers under the agreements. The Company has the legal
right to take possession of it. The Company did not have any contract breaches
for the years ended December 31, 2009, 2008 and 2007.
For the
year ended December 31, 2009, one supplier accounted for 59% of the advances to
suppliers. Total purchases from this supplier in 2009 accounted for
approximately 14% of total purchases.
For the
year ended December 31, 2008, four suppliers accounted for more than 10% of the
advances to suppliers and each accounted approximately 24%, 24%, 19% and 12%,
respectively. Total purchases of each supplier in 2008 accounted for
approximately, 19%, 0%, 0% and 6%, respectively. Those two suppliers with zero
purchases in 2008 were the main suppliers of raw materials related with the
Company’s IPTV products. The Company made cash advances in November 2008
and December 2008 and raw materials were shipped in February 2009.
For the
year ended December 31, 2007, two suppliers accounted for more than 10% of the
advances to suppliers and each accounted approximately 45% and 19%,
respectively. Total purchases of each supplier in 2007 accounted for
approximately 6% and 13%, respectively.
F-19
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - INVENTORIES, NET
Inventories
include raw material and finished goods. Finished goods contain direct material,
direct labor and manufacturing overhead. Inventory as of December 31, 2009 and
2008 consisted of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Raw
material
|
$
|
6,413,707
|
$
|
10,692,030
|
||||
Finished
goods
|
3,453,235
|
828,700
|
||||||
Reserve
for obsolete inventory
|
(240,894
|
)
|
(240,898
|
)
|
||||
Inventory,
net
|
$
|
9,626,048
|
$
|
11,279,832
|
The
change in the reserve for obsolete inventory for the years ended December 31,
2009 and 2008 is as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$
|
(240,898
|
)
|
(105,391
|
)
|
|||
Provision/(Reversal)
during the period
|
-
|
(131,837
|
)
|
|||||
Foreign
exchange adjustment
|
4
|
(3,670
|
)
|
|||||
Ending
balance
|
$
|
(240,894
|
)
|
(240,898
|
)
|
NOTE
6 - PROPERTY, EQUIPMENT AND CONSTRUCTION IN PROGRESS, NET
Property
and equipment consisted of the following as of December 31, 2009 and
2008:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Building
|
$
|
16,656,528
|
$
|
16,656,779
|
||||
Molds
|
33,874,681
|
28,712,602
|
||||||
Machinery
and Equipments
|
16,197,884
|
14,452,170
|
||||||
Electronic,
office and other equipments
|
2,163,727
|
4,102,610
|
||||||
Automobiles
|
1,281,547
|
1,215,387
|
||||||
Construction
in progress
|
4,420,501
|
1,506,717
|
||||||
Accumulated
Depreciation
|
(16,185,494
|
)
|
(10,314,778
|
)
|
||||
Property
and equipments, net
|
$
|
58,409,374
|
$
|
56,331,487
|
Construction in
progress
On
October 26, 2009, the Company started the construction on Phase II of its
factory in Huizhou (“Phase II”), which will include a new manufacturing facility
and dormitory. Phase II's manufacturing facility, adjacent to Phase I, will span
approximately 36,000 square meters and will be dedicated to designing and
making super thin LEDTVs, HD LCDTVs and 3G cell phones under the NIVS brand name
and intended for distribution in China's domestic market. The expected
production capacity will be 2 million TV sets and 1.5 million phones per year.
The estimate completion date is April 30, 2010 for the manufacturing facility
and June 30, 2010 for the dormitory. The total budget of the construction is RMB
53,500,000 (approximately $7,847,380).
F-20
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - PROPERTY, EQUIPMENT AND CONSTRUCTION IN PROGRESS, NET
(CONTINUED)
The
depreciation expenses for the years ended December 31, 2009, 2008 and 2007,
respectively, as follows:
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cost
of sales
|
$
|
5,252,546
|
$
|
4,418,823
|
$
|
681,653
|
||||||
Selling
expenses
|
266,851
|
131,118
|
160,091
|
|||||||||
General
and administrative expenses
|
331,153
|
337,445
|
327,575
|
|||||||||
Total
|
$
|
5,850,550
|
$
|
4,887,386
|
$
|
1,169,319
|
NOTE
7 - INTANGIBLE ASSETS, NET
Intangible
assets consist of the following as of:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Land
use rights
|
$
|
2,757,728
|
$
|
2,757,770
|
||||
Computer
software use rights
|
4,824
|
4,824
|
||||||
Trade
mark
|
61,052
|
29,338
|
||||||
Accumulated
amortization
|
(528,360
|
)
|
(448,549
|
)
|
||||
Intangible
assets, net
|
$
|
2,295,244
|
$
|
2,343,383
|
The
amortization expenses for the years ended December 31, 2009, 2008 and 2007 are
$78,665, $68,788 and $62,175, respectively.
NOTE
8 - CUSTOMER DEPOSITS
Prior to
December 31, 2008, the Company required its customers to pay 30% deposit of the
total amount for each order. The customer deposits are recorded as a liability
when the Company receives it and will be recognized as revenue after the total
amount is paid off upon the delivery of the products. In the agreement, the
Company specifies the delivery date (usually 30 days after the order
is placed) and the liability for breach of the contract. If the Company
cannot fulfill its supply to its customers according to the contract, the
customers have the right to get back their deposit. If the products do not meet
the quality standard or need to be reworked, the Company is responsible for
the rework and certain expenses. The Company may compensate its customers for
their loss if the customers rework or repack by themselves. If the customers do
not pay the balance according to the contract, the Company will charge them 0.5%
of the balance amount each day at the second week after the due date. But the
total breach amount should not be over 20% of the total amount of the contract.
For the years ended December 31, 2009, 2008 and 2007, the Company has had
no costs related to a contract breach or product quality issue.
As of
December 31, 2008, the Company had $1,393,171 customer deposits recorded on its
book. Two customers accounted for more than 10% of the customer deposits and
each accounted approximately 26% and 12%, respectively. There are no customer
deposits outstanding as of December 31, 2009.
For the
year ended December 31, 2007, three customers each accounted for approximately
10% of the customer deposit. Only one customer accounted for approximately 5% of
total sales, and other two customers accounted for less than
1%.
F-21
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 - SHORT TERM LOANS
Short
term loans consisted of the following as of:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Construction
Bank
|
$
|
18,983,613
|
$
|
19,495,158
|
||||
Defutai
Bank
|
2,503,667
|
2,175,207
|
||||||
Nanyian
Bank
|
5,594,085
|
6,683,487
|
||||||
Minsheng
Bank
|
4,994,944
|
-
|
||||||
Shenzhen
Development Bank
|
7,510,415
|
5,757,583
|
||||||
Pufa
Bank
|
4,400,634
|
1,760,280
|
||||||
$
|
43,987,358
|
$
|
35,871,715
|
The above
outstanding short term loans are used primarily for general working capital
purposes. Recurring bank loans carry annual interest rates of 3.27%~5.84% with
maturity dates ranging from 30 days to one year. These loans are
either non-secured or secured by the Company’s accounts receivable, equipment,
building and land-use rights, except Minsheng Bank.
The
annual interest rates are shown as follows:
2009
|
2008
|
|||||||
Construction
Bank
|
3.58
|
%
|
6.84
|
%
|
||||
Defutai
Bank
|
4.83
|
%
|
4.92
|
%
|
||||
Agricultural
Bank
|
-
|
7.20
|
%
|
|||||
Nanyian
Bank
|
3.27
|
%
|
6.84
|
%
|
||||
Minsheng
Bank
|
3.93
|
%
|
-
|
|||||
Shenzhen
Development Bank
|
5.35
|
%
|
6.48
|
%
|
||||
Pufa
Bank
|
5.84
|
%
|
5.08
|
%
|
F-22
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - RESTRICTED CASH AND BANK NOTES PAYABLE
Bank
notes payable consisted of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Construction
Bank,
|
$
|
3,816,816
|
$
|
8,512,596
|
||||
Shenzhen
Development Bank
|
733,439
|
10,336,605
|
||||||
Shanghai
Pufa Bank
|
3,162,354
|
-
|
||||||
$
|
7,712,609
|
$
|
18,849,201
|
The bank
notes have no interest bearing. Additionally, the banks charge 0.05 percent
fee on the amounts borrowed by the Company. All bank notes payable
are secured by the Company’s assets.
The terms
of the bank notes payable and some short term loans require the Company to
maintain a deposit at the bank to secure the notes as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Shanghai
Pufa Bank
|
$
|
3,162,354
|
$
|
-
|
||||
Nanyang
Bank
|
203,436
|
-
|
||||||
Defutai
Bank
|
501,063
|
-
|
||||||
China
Minsheng Bank
|
8,675
|
-
|
||||||
Shenzhen
Pingan Bank
|
-
|
4,765
|
||||||
Shenzhen
Development Bank
|
-
|
9,923,397
|
||||||
Construction
Bank
|
964,609
|
1,753,433
|
||||||
$
|
4,840,137
|
$
|
11,681,595
|
F-23
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 - DUE TO SHAREHOLDER
Due to
shareholder consists of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Due
to Mr. Li Tianfu
|
$
|
-
|
$
|
7,842,780
|
The above
amounts are due to Mr. Li Tianfu. These amounts are non-secured, no interest
bearing, and are considered to be long-term with no fixed repayment date. The
imputed interests are assessed as an expense to the business operation and an
addition to the paid-in capital. The calculation is performed quarterly by
annual rate in the range of 5.22 ~ 6.57% with the reference to the average three
months loan rate. The imputed interests are as follows:
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Imputed
interests
|
$
|
-
|
$
|
656,167
|
$
|
526,428
|
On
November 28, 2008, the Company and its subsidiaries entered into a Debt
Repayment and Set-Off Agreement (the “Repayment Agreement”) with Mr. Li and each
of NIVS Investment (SZ) Co., Ltd.; Zhongkena Technology Development; Xentsan
Technology (SZ) Co., Ltd.; Korea Hyundai Light & Electric (Int'l) Holding;
NIVS Information & Technology (HZ) Co., Ltd.; and Hyundai Light &
Electric (HZ) Co., Ltd. (collectively, the “Related
Companies”). Pursuant to the Agreement, as it was amended on December
22, 2008, each of the Related Companies agreed to completely and immediately
repay all outstanding loan amounts that it owed to the Company and the Company
agreed to repay $996,567 of the debt that it owed to Mr. Li.
Pursuant
to the terms of the Repayment Agreement, the Company and its subsidiaries
(collectively, the “NIVS Group”) had outstanding loan amounts of $8,839,347 owed
to Mr. Li (the “Li Debt”), and Mr. Li, through the Related Companies, had an
aggregate outstanding loan amount of $996,567 owed to the NIVS Group (the
“Related Companies’ Debt”), with $996,567 owed by Korea Hyundai Light &
Electric (Int'l) Holding. The loans were unsecured with no fixed
repayment date. Pursuant to the Repayment Agreement, the Related Companies’ Debt
of $996,567 was repaid in full by set-off against the Li Debt of $8,839,347 such
that, as a result of the transactions contemplated by the Repayment Agreement,
the Related Companies’ Debt was no longer outstanding and neither Mr. Li nor any
of the Related Companies owed the NIVS Group any loan
amount. Moreover, after the repayments under the Repayment Agreement,
the Company’s remaining debt owed to Mr. Li was $7,842,780 as of December 31,
2008.
The
parties to the Repayment Agreement also acknowledged that there were no
remaining debt obligations owed to the Company or its subsidiaries, either
directly or indirectly, by Mr. Li, any other executive officer or director, or
any related family member, of the Company, or any entity owned or controlled by
such persons, including the Related Companies, and that no loans or similar
arrangements will be made by the Company or its subsidiaries to such persons or
entities in the future. Due to the loans that the Company made
to the entities owned and controlled by its chief executive officer in violation
of Section 402 of the Sarbanes-Oxley Act of 2002, the Company and/or its chief
executive officer could become subject to criminal, civil or administrative
sanctions, penalties, or investigations and may also face potential private
securities litigation.
On
December 24, 2008, the Company entered into an agreement with Mr. Li pursuant to
which the outstanding debt of $7,841,726 that the Company owed to Mr. Li would
be converted into shares of the Company’s common stock. According to
the agreement, the shares would be issued upon the closing of its public
offering, which closed in March 2009. The number of shares that the Company
issued to Mr. Li was equal to the debt amount of approximately $7,841,726 (as
adjusted for currency fluctuations) divided by the offering price of the public
offering. Based on the offering price for the Company’s offering of
$3.50 per share, the Company issued 2,240,493 shares of common stock to Mr.
Li. After giving effect to the conversion, the debt owed to Mr. Li
was no longer outstanding and the Company does not have any outstanding debt
owed to Mr. Li. As a result of the conversion, the number of shares
that Mr. Li beneficially owned increased from 12,204,667 shares to 14,445,160
shares. This represented a 3.3% increase of Mr. Li’s ownership of the
Company’s outstanding shares of common stock from 33.1% to
36.4%.
F-24
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - OTHER GENERAL AND ADMINISTRATIVE
Other
general and administrative expenses for the years ended December 31, 2009, 2008
and 2007 consisted of the following:
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Audit
and accounting
|
$
|
294,569
|
$
|
43,732
|
$
|
75,000
|
||||||
Legal
fee
|
349,630
|
18,543
|
-
|
|||||||||
Office
expenses
|
1,769,370
|
1,741,415
|
984,600
|
|||||||||
Salary
and wages
|
704,342
|
991,636
|
1,022,154
|
|||||||||
Consulting
|
145,544
|
65,552
|
202,534
|
|||||||||
Utilities
|
51,630
|
126,753
|
93,456
|
|||||||||
Employee
housing fund
|
863,263
|
-
|
-
|
|||||||||
Others
|
672,022
|
183,827
|
170,303
|
|||||||||
$
|
4,850,370
|
$
|
3,171,458
|
$
|
2,548,047
|
NOTE
13 - STATUTORY RESERVES
As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries
of the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company. For the years ended
December 31, 2009 and 2008, the Company reserved $2,153,238 and $2,290,105,
respectively.
NOTE
14 - INCOME TAX
Niveous
is registered in BVI and pays no taxes.
NIVS HK
is a holding company registered in Hong Kong and has no operating profit for tax
liabilities.
NIVS
Shenzhen serves as a branch company of NIVS PRC. The assessment of its tax
liabilities is combined with that of NIVS PRC. NIVS PRC is qualified
as Hi-Tech Company in 2009.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The new standard EIT rate of 25% replaces the 33% rate applicable to both DES
and FIEs, except for High Tech companies that pay a reduced rate of 15%, subject
to government verification for Hi-Tech company status in every three years. For
companies established before March 16, 2007 continue to enjoy tax holiday
treatment approved by local government for a grace period of either for the next
5 years or until the tax holiday term is completed, whichever is
sooner.
The
provision for taxes on earnings consisted of:
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
PRC
Enterprises Income Taxes
|
$
|
3,406,230
|
$
|
2,031,031
|
$
|
1,268,963
|
||||||
United
States Federal Income Taxes
|
-
|
-
|
-
|
|||||||||
Total
|
$
|
3,406,230
|
$
|
2,031,031
|
$
|
1,268,963
|
F-25
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - INCOME TAX (CONTINUED)
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:
Tax
Year
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
U.S.
statutory rate
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||||
Foreign
income not recognized in the U.S.
|
-34.0
|
%
|
-34.0
|
%
|
-34.0
|
%
|
||||||
PRC
preferential enterprise income tax rate
|
25.0
|
%
|
25.0
|
%
|
24.0
|
%
|
||||||
Tax
holiday and relief granted to the Subsidiary
|
-10.0
|
%
|
-12.5
|
%
|
-12.0
|
%
|
||||||
Permanent
differences related to R&D expense and other
|
-2.6
|
%
|
0.6
|
%
|
0.7
|
%
|
||||||
Provision
for income tax
|
12.4
|
%
|
13.1
|
%
|
12.7
|
%
|
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. There were no significant temporary
differences.
Accounting for
Uncertainty in Income Taxes
The
Company adopted the provisions of Accounting for Uncertainty in Income Taxes on
January 1, 2007. The provisions clarify the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with the
standard “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. The provisions of
Accounting for Uncertainty in Income Taxes 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.
F-26
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 - COMMITMENTS AND CONTINGENCIES
Lack of
Insurance
The
Company does not carry any business interruption insurance, products liability
insurance or any other insurance policy except for a limited property insurance
policy. As a result, the Company may incur uninsured losses, increasing the
possibility that the investors would lose their entire investment in the
Company.
The
Company could be exposed to liabilities or other claims for which the Company
would have no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy except for property insurance policies with
limited coverage. As a result, the Company may incur uninsured liabilities and
losses as a result of the conduct of its business. There can be no guarantee
that the Company will be able to obtain additional insurance coverage in the
future, and even if it can obtain additional coverage, the Company may not carry
sufficient insurance coverage to satisfy potential claims. Should uninsured
losses occur, any purchasers of the Company’s common stock could lose their
entire investment.
Because
the Company does not carry products liability insurance, a failure of any of the
products marketed by the Company may subject the Company to the risk of product
liability claims and litigation arising from injuries allegedly caused by the
improper functioning or design of its products. The Company cannot assure that
it will have enough funds to defend or pay for liabilities arising out of a
products liability claim. To the extent the Company incurs any product liability
or other litigation losses, its expenses could materially increase
substantially. There can be no assurance that the Company will have sufficient
funds to pay for such expenses, which could end its operations and the investors
would lose their entire investment.
Fines and penalties by
housing authority
According
to the relevant PRC regulations on housing provident funds, PRC enterprises are
required to contribute housing provident funds for their employees. The monthly
contributions for Huizhou City must be at least 5% of each employee’s average
monthly income in the previous year. The Company has not paid such funds for its
employees since its establishment and the accumulated unpaid amount is
approximately $870,000. The Company accrued the entire balance as of December
31, 2009 on its books. Under local regulations on collection of housing
provident funds in Huizhou City where the Company’s subsidiary, NIVS PRC, is
located, the local housing authority may require the Company to rectify its
non-compliance by setting up bank accounts and making payment and relevant
filings for the unpaid housing funds for its employees within a specified time
period. If the Company fails to do so within the specified time period, the
local housing authority may impose a monetary fine on it and may also apply to
the local people’s court for enforcement. The Company’s employees may also be
entitled to claim payment of such funds individually.
If the
Company receives any notice from the local housing authority or any claim from
our current and former employees regarding the Company’s non-compliance with the
regulations, the Company will be required respond to the notice and pay all
amounts due to the government, including any administrative penalties imposed,
which would require the Company to divert its financial resources and/or impact
its cash reserves, if any, to make such payments. Additionally, any
administrative costs in excess of the payments, if material, may impact the
Company's operating results. As of December 31, 2009, the Company has
not received any notice from the local housing authority or any claim from our
current and former employees.
F-27
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
16 - OPERATING RISKS
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.
Exchange
risk
The
Company cannot guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore, the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on changes in the
political and economic environments without notice.
Credit
risk
A
significant portion of the Company’s cash at December 31, 2009 and 2008 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.
Political
risk
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
Interest
risk
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company
does not hedge its interest rate. As of December 31, 2009 and 2008, the Company
believes it has no exposure to interest rate risk
NOTE
17 - MAJOR CUSTOMERS
For the
year ended December 31, 2009, one customer had net sales exceeding 10% of the
Company’s total net sales for the year. For year ended December 31, 2008, three
customers had net sales exceeding 10% of the Company’s total net sales for the
year.
F-28
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
18 - REVENUE INFORMATION AND GEOGRAPHIC INFORMATION
The revenue
information and geographic information for revenue is as follows:
For The Year Ended
|
|||||||||||||
|
|
December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||||
Standard
|
China
|
$
|
41,173,879
|
$
|
86,266,936
|
$
|
41,603,534
|
||||||
audio
and
|
Europe
|
15,420,230
|
4,130,756
|
9,250,213
|
|||||||||
video
|
North
America
|
1,625,781
|
1,423,100
|
166,671
|
|||||||||
equipment:
|
Other
Asian Countries
|
23,493,074
|
20,276,620
|
18,632,732
|
|||||||||
South
America
|
1,935,324
|
3,164,052
|
2,015,198
|
||||||||||
Other
Countries
|
6,822,186
|
241,241
|
-
|
||||||||||
Intelligent
|
China
|
32,384,806
|
14,444,163
|
1,912,726
|
|||||||||
audio
and
|
Europe
|
13,236,920
|
356,765
|
-
|
|||||||||
video
|
North
America
|
1,009,186
|
141,620
|
-
|
|||||||||
equipment
|
Other
Asian Countries
|
26,559,599
|
3,110,701
|
2,435,253
|
|||||||||
South
America
|
2,157,076
|
-
|
-
|
||||||||||
Other
Countries
|
8,503,815
|
-
|
-
|
||||||||||
Other
audio
|
China
|
7,101,558
|
10,074,725
|
1,610,189
|
|||||||||
and
video
|
Europe
|
1,080,265
|
-
|
-
|
|||||||||
equipment
|
Other
Asian Countries
|
2,694,273
|
-
|
-
|
|||||||||
Total
|
$
|
185,197,972
|
$
|
143,630,679
|
$
|
77,626,516
|
NOTE
19 - STOCK-BASED COMPENSATION
In July
2008, the Company entered into a two-year consulting agreement with Nascent
Value LLC (“Nascent”). According to the agreement, as amended, Nascent will
provide the Company with business consulting and investor relation services.
Nascent is a third-party investor relations firm that does not have any other
relationship or common ownership with the Company or any of the Company’s
affiliates. As the consideration for entering into the agreement and
compensation for Nascent’s services under the agreement, the Company issued to
Nascent 425,000 shares (“IR Shares”) of its common stock upon the closing of the
Share Exchange. In connection with the IR Shares, the Company recognized a
stock-based compensation charge during the year ended December 31, 2008 in the
amount of $765,000, which is the fair value of the stock derived from valuing
each share at $1.80, the price at which shares of the Company’s common stock
were sold in the Private Placement. The Company also agreed to pay Nascent
$6,000 per month for its services. Nascent also entered into a lock-up
agreement with WestPark Capital, Inc., the placement agent for the Private
Placement, pursuant to which 20,000 IR Shares will be subject to lock-up
restrictions until the Company’s securities are listed on a national securities
exchange and the remaining 405,000 IR Shares will be subject to lock-up
restrictions following the listing of the Company’s common stock on NYSE Amex,
which occurred in March 2009. WestPark Capital, Inc. reserves the right to
release all or a portion of the shares at its sole discretion.
F-29
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
20 - COMMON STOCK WARRANTS
Since the
inception of NIVS USA, the shareholders of NIVS USA held an aggregate of
7,096,390 warrants. Immediately prior to the closing of the share exchange on
July 25, 2008, the shareholders agreed and canceled an aggregate of 6,149,723
warrants. Immediately after the Share Exchange and the cancellation, the
shareholders held an aggregate of 946,667 warrants. On March 19, 2009, the
shareholders exercised all warrants under the cashless exercise provision as
stated in the warrant agreements and received 946,640 shares of common stock of
the Company.
In March
2009, NIVS USA completed a public offering of its commons stock and issued a
warrant to its placement agent for its service to purchase 55,000 shares at an
exercise price of $4.20 per share. The warrant has 5 year term and is not
exercisable until at least one year from the date of issuance. These warrants
are classified as equity. Fair value of $167,464 was calculated using the
Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model for warrants issued include (1) discount rate of
1.86%, (2) warrant life is the contractual term of 5 years,
(3) expected volatility of 117% and (4) zero expected
dividends.
A summary
of the Company’s warrant activities for the years ended December 31, 2009 and
2008 is as follows:
Warrants
|
Average
Exercise Price
|
|||||||
Balance
December 31, 2007
|
7,096,390
|
$
|
0.0001
|
|||||
Forfeited/canceled
|
(6,149,723
|
)
|
$
|
0.0001
|
||||
Balance
December 31, 2008
|
946,667
|
0.0001
|
||||||
Warrants
issued to underwriter
|
55,000
|
$
|
4.20
|
|||||
Warrants
exercised
|
(946,667
|
)
|
$
|
0.0001
|
||||
Balance
December 31, 2009
|
55,000
|
4.20
|
NOTE
21 – OMNIBUS INCENTIVE PLAN
On June
23, 2009, the NIVS IntelliMedia Technology Group, Inc. 2009 Omnibus Incentive
Plan (the “Plan”) was approved and adopted by the Board and the shareholders,
the Plan reserved a total of 4 million shares authorized for issuance under the
Plan. A description of the material terms of the Plan and a complete copy of the
Plan are included in the Company's definitive proxy statement filed with the SEC
on April 30, 2009 in connection with the Annual Meeting. The material features
of the Plan are summarized as follows:
The
Compensation Committee of the Company’s Board of Directors (or the Board of
Directors if so desired) (the “Committee”) has the authority to determine,
within the limits of the express provisions of the Plan, the individuals to whom
awards will be granted, the nature, amount and terms of such awards and the
objectives and conditions for earning such awards. The Committee may grant
awards to any employee, director, consultant or other person providing services
to the Company or its affiliates. The maximum awards that can be granted under
the Plan to a single participant in any calendar year will be 1 million shares
of common stock (whether through grants of Options or Stock Appreciation Rights
or other awards of common stock or rights with respect thereto) or $1 million in
the form of cash-based incentive awards.
Awards
under the Plan may include incentive stock options, nonqualified stock options,
stock appreciation rights (“SARs”), restricted shares of common stock,
restricted stock units, performance share or unit awards, other stock-based
awards and cash-based incentive awards.
As of
December 31, 2009, no specific awards have been granted or are contemplated
under the Plan. Also, the exact types and amounts of any future awards to be
made to any eligible participants pursuant to the Plan are not presently
determinable. Due to the discretionary nature of the Plan, it is
impossible to state who the participants in the Plan will be in the future or
the number of options or other awards to be received by a person or
group.
F-30
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
21 – OMNIBUS INCENTIVE PLAN (CONTINUED)
An
aggregate of 4 million shares of the Company’s common stock is reserved for
issuance and available for awards under the Plan, including incentive stock
options granted under the Plan. With respect to awards made under the Plan,
shares of common stock underlying awards that are forfeited or canceled (as a
result, for example, of the lapse of an option or a forfeiture of restricted
stock), as well as any shares surrendered to or withheld by the Company in
payment or satisfaction of the exercise price of a stock option or tax
withholding obligations with respect to an award, will be available for
additional grants under the Plan. On the exercise of a SAR, only the
number of shares actually issued will be counted against the number of
shares reserved for grant under the Plan. Shares to be issued or purchased under
the Plan will be authorized but unissued shares of common stock. Shares issued
with respect to awards assumed by the Company in connection with acquisitions do
not count against the total number of shares available for new awards under the
Plan.
NOTE
22 - EARNINGS PER SHARE
Basic net
income per share is computed by dividing net income by the weighted-average
number of shares outstanding during the period.
Diluted
net income per share is computed by using the weighted-average number of shares
of common stock outstanding and, when dilutive, potential shares from warrants
to purchase common stock, using the treasury stock method.
The
following table illustrates the computation of basic and dilutive net income per
share and provides a reconciliation of the number of weighted-average basic and
diluted shares outstanding:
For the year ended
|
||||||||||||
|
December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
income attributable to NIVS IntelliMedia Technology Group,
Inc.
|
$
|
23,457,078
|
$
|
13,033,413
|
8,466,520
|
|||||||
Denominator:
|
||||||||||||
Basic
weighted-average shares outstanding
|
39,858,756
|
31,553,197
|
27,546,667
|
|||||||||
Effect
of dilutive warrants
|
-
|
413,843
|
-
|
|||||||||
Diluted
weighted-average shares outstanding
|
39,858,756
|
31,967,040
|
27,546,667
|
|||||||||
Net
income per share:
|
||||||||||||
Basic
|
$
|
0.59
|
$
|
0.41
|
$
|
0.31
|
||||||
Diluted
|
$
|
0.59
|
$
|
0.41
|
$
|
0.31
|
F-31
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
23 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
Quarter Ended
|
||||||||||||||||||||
|
December 31, 2009
|
September 30, 2009
|
June 30, 2009
|
March 31, 2009
|
Total
|
|||||||||||||||
Revenues
|
$ | 62,696,827 | $ | 52,384,695 | $ | 40,859,722 | $ | 29,256,728 | $ | 185,197,972 | ||||||||||
Operating
Income
|
12,455,628 | 6,787,122 | 5,934,249 | 3,295,632 | 28,472,631 | |||||||||||||||
Net
Income
|
10,955,250 | 5,537,876 | 4,595,485 | 2,368,467 | 23,457,078 | |||||||||||||||
Net
Income Per Share
|
||||||||||||||||||||
Basic
|
0.28 | 0.14 | 0.11 | 0.06 | 0.59 | |||||||||||||||
Diluted
|
0.28 | 0.14 | 0.11 | 0.06 | 0.59 |
Quarter Ended
|
||||||||||||||||||||
|
December 31, 2008
|
September 30, 2008
|
June 30, 2008
|
March 31, 2008
|
Total
|
|||||||||||||||
Revenues
|
$ | 42,582,316 | $ | 49,411,468 | $ | 24,860,574 | $ | 26,776,321 | $ | 143,630,679 | ||||||||||
Operating
Income
|
3,860,406 | 5,830,170 | 4,463,915 | 4,355,408 | 18,509,899 | |||||||||||||||
Net
Income
|
1,934,659 | 4,563,188 | 3,285,513 | 3,250,053 | 13,033,413 | |||||||||||||||
Net
Income Per Share
|
||||||||||||||||||||
Basic
|
0.04 | 0.13 | 0.12 | 0.12 | 0.41 | |||||||||||||||
Diluted
|
0.04 | 0.13 | 0.12 | 0.12 | 0.41 |
Quarter Ended
|
||||||||||||||||||||
|
December 31, 2007
|
September 30, 2007
|
June 30, 2007
|
March 31, 2007
|
Total
|
|||||||||||||||
Revenues
|
$ | 26,966,317 | $ | 16,730,346 | $ | 17,561,852 | $ | 16,368,001 | $ | 77,626,516 | ||||||||||
Operating
Income
|
5,747,517 | 2,169,331 | 1,850,634 | 2,457,206 | 12,224,688 | |||||||||||||||
Net
Income
|
4,416,767 | 1,433,133 | 1,078,842 | 1,537,778 | 8,466,520 | |||||||||||||||
Net
Income Per Share
|
||||||||||||||||||||
Basic
|
0.16 | 0.05 | 0.04 | 0.06 | 0.31 | |||||||||||||||
Diluted
|
0.16 | 0.05 | 0.04 | 0.06 | 0.31 |
NOTE
24 - SUBSEQUENT EVENTS
On
January 22, 2010, the Company, through NIVS BVI, acquired 100% of the equity
interest of Huizhou Dongri Digital Co., Ltd., ("Dongri"), a mobile phone product
manufacturer located in the Huizhou Zhongkai Hi-tech Zone area. The
aggregate purchase price that the Company agreed to pay is up to $23 million,
with $13 million being paid within one month of closing and up to an additional
$10 million that may become payable at future dates if Dongri meets after-tax
income targets. If Dongri's after-tax income for the first half of
2010 exceeds approximately $1.91 million, then an additional $3 million will be
paid to the former shareholder of Dongri. If Dongri's after-tax income is
between $955,000 and $1.91 million, then a pro-rata amount will be payable, and
no percentage of the $3 million will be paid if the after-tax income is less
than approximately $955,000. For the third quarter of 2010, if
Dongri's after-tax income exceeds approximately $1.03 million, then an
additional $3 million will be paid to the former Dongri shareholder. If Dongri's
after-tax income is between approximately $514,000 and $1.03 million, then a
pro-rata amount will be paid, and no amount will be paid if the after-tax
income is less than $514,000. Similarly, for the fourth quarter of
2010, the Company will pay Dongri an additional $4 million if Dongri’s after-tax
income exceeds $1.18 million, and a pro rata portion if it falls between
approximately $590,000 and $1.18 million. No amount will be paid for
the fourth quarter if Dongri's after-tax income is less than $590,000. The
Company has paid $13 million through the date of this prospectus.
The
Company has evaluated all subsequent events through the filing date of
this prospectus and has determined that there were no other subsequent
events to recognize or disclose in these financial statements.
F-32
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
25 - 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 NIVS IntelliMedia Technology Group exceed 25% of the
consolidated net assets of NIVS IntelliMedia Technology Group. 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 its
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 its 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.
F-33
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
25 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
(Formerly
SRKP 19, Inc.)
CONDENSED
PARENT COMPANY BALANCE SHEETS
(Dollars
in Thousands)
December
31, 2009
|
December
31, 2008
|
|||||||
ASSETS
|
||||||||
Other
receivables
|
$
|
8
|
$
|
-
|
||||
Investment
in subsidiaries, at equity in net assets
|
78,912
|
46,521
|
||||||
Total
Assets
|
$
|
78,920
|
$
|
46,521
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Due
to subsidiaries
|
$
|
-
|
$
|
132
|
||||
Total
Liabilities
|
-
|
132
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
stock, $.0001 par value, 10,000,000 shares authorized, none
issued
|
||||||||
Common
stock, $.0001 par value, 100,000,000 shares authorized,
40,675,347 and 36,855,714 shares issued and outstanding at December
31, 2009 and December 31, 2008, respectively
|
4
|
4
|
||||||
Additional
Paid in Capital
|
21,717
|
12,663
|
||||||
Accumulated
other comprehensive income
|
3,980
|
3,960
|
||||||
Statutory
reserve fund
|
5,722
|
3,569
|
||||||
Retained
earnings (unrestricted)
|
47,497
|
26,193
|
||||||
Total
Stockholders’ Equity
|
78,920
|
46,389
|
||||||
Total
Liabilities & Shareholders' Equity
|
$
|
78,920
|
$
|
46,521
|
F-34
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
25 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
NIVS
IntelliMedia Technology Group, Inc.
|
(Formerly
SRKP 19, Inc.)
|
CONDENSED
PARENT COMPANY STATEMENTS OF OPERATIONS
(Dollars
in Thousands)
For the period from
|
||||||||||||
|
For Year Ended
|
For Year Ended
|
January 3, 2007
|
|||||||||
|
December 31,
|
December 31,
|
(Inception) to
|
|||||||||
|
2009
|
2008
|
December 31, 2007
|
|||||||||
Merger
cost
|
$
|
-
|
$
|
944
|
$
|
-
|
||||||
Other
general and administrative
|
987
|
166
|
39
|
|||||||||
Total
Expenses
|
987
|
1,110
|
39
|
|||||||||
Equity
in undistributed income
|
||||||||||||
of
subsidiaries
|
25,074
|
14,143
|
8,506
|
|||||||||
Net
income
|
$
|
24,087
|
$
|
13,033
|
$
|
8,467
|
F-35
NIVS
INTELLIMEDIA TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
25 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
NIVS
IntelliMedia Technology Group, Inc.
|
(Formerly
SRKP 19, Inc.)
|
CONDENSED PARENT COMPANY
STATEMENTS OF CASH FLOWS
(Dollars
in Thousands)
For the period from
|
||||||||||||
|
For Year Ended
|
For Year Ended
|
January 3, 2007
|
|||||||||
|
December 31,
|
December 31,
|
(Inception) to
|
|||||||||
|
2009
|
2008
|
December 31, 2007
|
|||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Net
income
|
$
|
24,087
|
$
|
13,033
|
$
|
8,467
|
||||||
Increase
in due to subsidiary
|
-
|
132
|
-
|
|||||||||
Other
receivables
|
(8
|
)
|
-
|
-
|
||||||||
Equity
in undistributed income of subsidiaries
|
(25,074
|
)
|
(14,143
|
)
|
(8,506
|
)
|
||||||
Net
Cash Used in Operating Activities
|
(995
|
)
|
(978
|
)
|
(39
|
)
|
||||||
Cash
Flows from Investing Activities:
|
||||||||||||
Capital
contribution to subsidiaries
|
(217
|
)
|
(9,479
|
)
|
-
|
|||||||
Net
Cash Used in Investing Activities
|
(217
|
)
|
(9,479
|
)
|
-
|
|||||||
Cash Flows from Financing
Activities:
|
||||||||||||
Advances
from stockholders
|
32
|
|||||||||||
Repayment
to stockholders
|
-
|
(32
|
)
|
-
|
||||||||
Proceeds
from issuance of shares
|
1,212
|
-
|
3
|
|||||||||
Proceeds
from issuance of warrants
|
-
|
5
|
||||||||||
Net
proceeds of share issuance
|
-
|
10,488
|
-
|
|||||||||
Net
Cash Provided by Financing Activities
|
1,212
|
10,456
|
40
|
|||||||||
Net
increase/(decrease) in cash and cash equivalents
|
-
|
(1
|
)
|
1
|
||||||||
Cash
and cash equivalents, beginning of period
|
-
|
1
|
-
|
|||||||||
Cash
and cash equivalents, end of period
|
$
|
-
|
$
|
-
|
$
|
1
|
F-36
$20,000,000
of Common Stock
NIVS IntelliMedia
Technology Group, Inc.
PROSPECTUS
Rodman
& Renshaw, LLC
|
WestPark
Capital, Inc.
|
_________,
2010
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The following table sets forth the
costs and expenses, other than underwriting discounts and commissions, if any,
payable by the Registrant relating to the sale of common stock being
registered.
Securities
and Exchange Commission registration fee(1)
|
$ | 1,693 | ||
FINRA
Filing Fee(1)
|
2,875 | |||
NYSE
Amex additional listing fees(1)
|
45,000 | |||
Printing
and transfer agent fees
|
52,432 |
(2)
|
||
Accounting
fees and expenses
|
100,000 |
(2)
|
||
Non-accountable
1% fee to underwriters
|
200,000 |
(2)
|
||
Legal
fees and expenses
|
200,000 |
(2)
|
||
Underwriter’s
counsel fees and expenses (including background check
fees)
|
98,000 |
(2)
|
||
Miscellaneous
|
30,432 |
(2)
|
||
Total
|
$ | 700,000 |
(2)
|
All
amounts are estimates other than the Commission’s registration fee, FINRA filing
fee and NYSE Amex listing fee.
To be
added by amendment.
Item
14. Indemnification of directors and officers
Under Section 145 of the General
Corporation Law of the State of Delaware, we can indemnify our directors and
officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933, as amended (the “Securities Act”).
Our certificate of incorporation provides that, pursuant to Delaware law, our
directors shall not be liable for monetary damages for breach of the directors’
fiduciary duty of care to us and our stockholders. This provision in the
certificate of incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director’s duty of loyalty to us or our stockholders, for acts or omissions not
in good faith or involving intentional misconduct or knowing violations of the
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our bylaws provide for the
indemnification of our directors to the fullest extent permitted by the Delaware
General Corporation Law. Our bylaws further provide that our Board of Directors
has discretion to indemnify our officers and other employees. We are required to
advance, prior to the final disposition of any proceeding, promptly on request,
all expenses incurred by any director or executive officer in connection with
that proceeding on receipt of an undertaking by or on behalf of that director or
executive officer to repay those amounts if it should be determined ultimately
that he or she is not entitled to be indemnified under the bylaws or otherwise.
We are not, however, required to advance any expenses in connection with any
proceeding if a determination is reasonably and promptly made by our Board of
Directors by a majority vote of a quorum of disinterested Board members that (i)
the party seeking an advance acted in bad faith or deliberately breached his or
her duty to us or our stockholders and (ii) as a result of such actions by the
party seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
applicable sections of our bylaws.
We have been advised that in the
opinion of the Securities and Exchange Commission, insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event a
claim for indemnification against such liabilities (other than our payment of
expenses incurred or paid by our director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-1
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Item
15. Recent sales of unregistered securities
On March
18, 2009, pursuant to the terms of the Agreement to Convert Debt into Equity
dated December 24, 2008 entered into by and between the Company, Niveous Holding
Company Limited, NIVS (HZ) Audio & Video Tech Company Limited, NIVS
International (H.K.) Limited, and Tianfu Li, the Company issued the 2,240,493
shares of common stock to Mr. Li, who is the Company’s Chief Executive Officer
and Chairman of the Board. In accordance with the terms of the
Agreement, the share issuance occurred concurrently the closing of the Company’s
public offering. The consideration for the issuance of the shares was
the outstanding debt that the Company owed to Mr. Li at the time of the
conversion, which was equal to $7.8 million. The per share conversion
price was equal to the offering price of the Company’s public offering, which
was $3.50 per share. All of the securities were offered and
issued in reliance upon an exemption from registration pursuant to Regulation S
of the Securities Act of 1933, as amended (the “Securities Act”). The Company
complied with the conditions of Rule 903 as promulgated under the Securities Act
including, but not limited to, the following: (i) the recipient of the shares is
a non-U.S. resident and has not offered or sold his shares in accordance with
the provisions of Regulation S; (ii) an appropriate legend was affixed to the
securities issued in accordance with Regulation S; (iii) the recipient of the
shares has represented that he was not acquiring the securities for the account
or benefit of a U.S. person; and (iv) the recipient of the shares agreed to
resell the securities only in accordance with the provisions of Regulation S,
pursuant to a registration statement under the Securities Act, or pursuant to an
available exemption from registration. The Company will refuse to register any
transfer of the shares not made in accordance with Regulation S, after
registration, or under an exemption.
On July
25, 2008, pursuant to the terms of the Exchange Agreement entered into by and
between us, NIVS Holding Company Limited (“NIVS BVI”) and the shareholders of
NIVS BVI, we issued 27,546,667 shares of common stock to the shareholders of
NIVS BVI and their designees in exchange for all of the issued and outstanding
securities of NIVS BVI. All of the securities except 100,000 shares of common
stock issued to one individual were offered and issued in reliance upon an
exemption from registration pursuant to Regulation S of the Securities Act. We
complied with the conditions of Rule 903 as promulgated under the Securities Act
including, but not limited to, the following: (i) each recipient of the shares
is a non-U.S. resident and has not offered or sold their shares in accordance
with the provisions of Regulation S; (ii) an appropriate legend was affixed to
the securities issued in accordance with Regulation S; (iii) each recipient of
the shares has represented that it was not acquiring the securities for the
account or benefit of a U.S. person; and (iv) each recipient of the shares
agreed to resell the securities only in accordance with the provisions of
Regulation S, pursuant to a registration statement under the Securities Act, or
pursuant to an available exemption from registration. We will refuse to register
any transfer of the shares not made in accordance with Regulation S, after
registration, or under an exemption. A total of 100,000 shares of common stock
issued to one individual were offered and issued in reliance upon an exemption
from registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder. The individual qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933, as
amended).
II-2
On July
25, 2008, concurrently with the close of the Share Exchange, we conducted an
initial closing of a private placement transaction pursuant to which we sold an
aggregate of 5,239,460 shares of common stock at $1.80 per share, for gross
proceeds of approximately $9.4 million. On August 12, 2008, we
conducted a second and final closing of the private placement pursuant to which
we sold an additional 1,304,587 shares of common stock at $1.80 per share for
gross proceeds of approximately $2.3 million. Accordingly, we sold a
total of 6,544,047 shares of common stock in the private placement for aggregate
gross proceeds of approximately $11.8 million (the “Private
Placement”). The securities were offered and sold to investors in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of
the persons and/or entities receiving our securities qualified as an accredited
investor (as defined by Rule 501 under the Securities Act of 1933, as
amended).
On July
25, 2008, we issued 425,000 shares of common stock to an investor relations firm
in connection with an agreement for consulting and investor relations
services. These services were valued at $765,000 based upon the value
of $1.80 per share issued. The securities were offered and sold to
investors in reliance upon exemptions from registration pursuant to Section 4(2)
under the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder. The investor relations firm receiving our securities qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933, as
amended).
On
January 3, 2007, we offered and sold an aggregate of 7,096,390 shares of Common
Stock for aggregate proceeds equal to $5,000, pursuant to the terms and
conditions set forth in those certain common stock purchase agreements (each a
“Common Stock Purchase Agreement”), and warrants (the “Warrants”) to purchase an
aggregate of 7,096,390 shares of Common Stock for aggregate proceeds equal to
$2,500, pursuant to the terms and conditions set forth in those certain warrant
purchase agreements (each a “Warrant Purchase Agreement”). The Warrants have an
exercise price equal to $0.0001. The Warrants are immediately exercisable and
terminate on the earlier of January 3, 2017 or five years from the date we
consummate a merger or other business combination with an operating business or
any other event pursuant to which we cease to be a “shell company” and a “blank
check company.” This event occurred on July 25, 2008 upon the closing
of the Share Exchange. In connection with the
Share Exchange, the shareholders agreed to cancel an aggregate of the 4,756,390
shares of common stock and an aggregate of 6,149,723 warrants. On
March 19, 2009, the shareholders exercised the all of the remaining warrants at
$0.0001 per share in accordance with the cashless exercise provision in the
underlying warrant agreements, and the Company issued an aggregate of 946,640
shares of common stock. The securities were offered and sold
to investors in reliance upon exemptions from registration pursuant to Section
4(2) under the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder. Each of the persons and/or entities receiving our
securities qualified as an accredited investor (as defined by Rule 501 under the
Securities Act of 1933, as amended).
Item
16. Exhibits
Exhibit
No.
|
Description
|
|
1.1
|
Form
of Underwriting Agreement.
|
|
2.1
|
Share
Exchange Agreement, dated as of June 27, 2008, by and among the
Registrant, NIVS Holding Company Limited and all of the shareholders of
NIVS Holding Company Limited (incorporated by reference from Exhibit 2.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2008).
|
|
2.1(a)
|
Amendment
No. 1 to the Share Exchange Agreement, dated as of July 25, 2008, by and
among the Registrant, NIVS Holding Company Limited and all of the
shareholders of NIVS Holding Company Limited (incorporated by reference
from Exhibit 2.1(a) to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 30, 2008).
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-52933) filed with the
Securities and Exchange Commission on November 26,
2007).
|
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-52933) filed with the Securities and Exchange
Commission on November 26, 2007).
|
|
3.3
|
Articles
of Merger effecting name change filed with the Office of Secretary of
State of Delaware on July 25, 2008 (incorporated by reference from Exhibit
3.3 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
4.1
|
Form
of Warrant dated January 3, 2007 (incorporated by reference from Exhibit
4.1 to the Registration Statement on Form 10-SB (File No. 000-52933) filed
with the Securities and Exchange Commission on November 26,
2007).
|
|
4.2
|
NIVS
IntelliMedia Technology Group, Inc. 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
June 25, 2009).
|
II-3
Exhibit
No.
|
Description
|
|
4.3
|
Form
of Stock Option Agreement for 2009 Omnibus Incentive Plan (incorporated by
reference to Exhibit 4.2 to the Registrant’s Registration Statement on
Form S-8 (File No. 333-162508) filed with the Securities and Exchange
Commission on October 15, 2009).
|
|
4.4
|
Form
of Restricted Stock Agreement for 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-162508) filed with the Securities and
Exchange Commission on October 15, 2009).
|
|
4.5
|
Form
of Restricted Stock Unit Agreement for 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.4 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-162508) filed with the Securities and
Exchange Commission on October 15, 2009).
|
|
4.6
|
Form
of Stock Appreciate Rights Agreement for 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.5 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-162508) filed with the Securities and
Exchange Commission on October 15, 2009).
|
|
4.7 | Form of Underwriters Warrant | |
5.1
|
Opinion
of K&L Gates LLP.
|
|
10.1
|
Registration
Rights Agreement dated July 25, 2008 entered into by and between the
Registrant and Shareholders (incorporated by reference from Exhibit 10.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2008).
|
|
10.2
|
Share
and Warrant Cancellation Agreement dated July 25, 2008 entered into by and
between the Registrant and Shareholders (incorporated by reference from
Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on July 30, 2008).
|
|
10.3
|
Form
of 2008 Employment Agreement dated December 2008 entered into with
executive officers indicated in Schedule A attached to the Form of
Agreement (translated to English) (incorporated by reference from Exhibit
10.3 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
10.4
|
Form
of 2007 Employment Agreement dated December 2007 entered into with
executive officers indicated in Schedule A attached to the Form of
Agreement (translated to English) (incorporated by reference from Exhibit
10.4 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
10.5
|
Land
Purchase Contract dated November 24, 2003 entered into by and between
Haoran Industrial Company, Huicheng District, Huizhou City; HuiZhou NIVS
AUDIO & VIDEO TECH CO., LTD.; and Shuikou County Real Estate
Development Corporation (translated to English) (incorporated by reference
from Exhibit 10.5 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 30, 2008).
|
|
10.6
|
Supplementary
Agreement dated December 19, 2003 to Land Purchase Contract entered into
by and between Haoran Industrial Company, Huicheng District, Huizhou City;
HuiZhou NIVS AUDIO & VIDEO TECH CO., LTD.; and Shuikou County Real
Estate Development Corporation (translated to English) (incorporated by
reference from Exhibit 10.6 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 30,
2008).
|
|
10.7
|
Loan
Contract between Huizhou NIVS Audio & Video Technology Co., Ltd. and
Nanyang Commercial Bank, Guangzhou Branch dated July 17, 2007 (translated
to English) (incorporated by reference from Exhibit 10.7 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
July 30, 2008).
|
|
10.8
|
Loan
Contract between Huizhou NIVS Audio & Video Technology Co., Ltd. and
Agricultural Bank of China, Huizhou Branch dated September 3, 2007
(translated to English) (incorporated by reference from Exhibit 10.8 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2008).
|
|
10.9
|
Notice
of Credit Approval for Huizhou NIVS Audio & Video Technology CO., LTD
from China Construction Bank, Guangdong Province Branch dated September
12, 2007 (translated to English) (incorporated by reference from Exhibit
10.9 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30,
2008).
|
II-4
Exhibit
No.
|
Description
|
|
10.10
|
Intellectual
Property Assignment Agreement dated July 18, 2008 entered into by and
between NIVS (Huizhou) Audio & Video Tech. Co., Ltd. and Tianfu Li
(Schedule A translated to English) (incorporated by reference from Exhibit
10.10 to the Registration Statement on Form S-1 (File No. 333-153005)
filed with the Securities and Exchange Commission on October 10,
2008).
|
|
10.11
|
Form
of Subscription Agreement dated July 25, 2008 and August 12, 2008 between
investors and the Registrant (incorporated by reference from Exhibit 10.11
to the Registration Statement on Form S-1 (File No. 333-153005) filed with
the Securities and Exchange Commission on August 13,
2008).
|
|
10.12
|
Form
of Common Stock Purchase Agreement dated January 3, 2007 (incorporated by
reference from Exhibit 10.1 to the Registration Statement on Form 10-SB
(File No. 000-52933) filed with the Securities and Exchange Commission on
November 26, 2007).
|
|
10.13
|
Form
of Warrant Purchase Agreement dated January 3, 2007 (incorporated by
reference from Exhibit 10.2 to the Registration Statement on Form 10-SB
(File No. 000-52933) filed with the Securities and Exchange Commission on
November 26, 2007).
|
|
10.14
|
Debt
Repayment and Set-Off Agreement dated November 28, 2008, by and between
the Registrant, Niveous Holding Company Limited, NIVS (HZ) Audio &
Video Tech Company Limited, NIVS International (H.K.) Limited, NIVS (HZ)
Audio & Video Tech Company Limited Shenzhen Branch, Tianfu Li, NIVS
Investment (SZ) Co., Ltd., Zhongkena Technology Development, Xentsan
Technology (SZ) Co., Ltd., Korea Hyundai Light & Electric (Int’l)
Holding, NIVS Information & Technology (HZ) Co., Ltd., and Hyundai
Light & Electric (HZ) Co., Ltd. (incorporated by reference from
Exhibit 10.14 to the Registration Statement on Form S-1 (File No.
333-153005) filed with the Securities and Exchange Commission on December
5, 2008).
|
|
10.15
|
Amendment
No. 1 to the Debt Repayment and Set-Off Agreement dated December 22, 2008,
by and between the Registrant, Niveous Holding Company Limited, NIVS (HZ)
Audio & Video Tech Company Limited, NIVS International (H.K.) Limited,
NIVS (HZ) Audio & Video Tech Company Limited Shenzhen Branch, Tianfu
Li, NIVS Investment (SZ) Co., Ltd., Zhongkena Technology Development,
Xentsan Technology (SZ) Co., Ltd., Korea Hyundai Light & Electric
(Int’l) Holding, NIVS Information & Technology (HZ) Co., Ltd., and
Hyundai Light & Electric (HZ) Co., Ltd. (incorporated by reference
from Exhibit 10.15 to the Registration Statement on Form S-1 (File No.
333-153005) filed with the Securities and Exchange Commission on January
9, 2009).
|
|
10.16
|
Agreement
to Convert Debt into Equity dated December 24, 2008, by and between the
Registrant, Niveous Holding Company Limited, NIVS (HZ) Audio & Video
Tech Company Limited, NIVS International (H.K.) Limited, and Tianfu Li
(incorporated by reference from Exhibit 10.16 to the Registration
Statement on Form S-1 (File No. 333-153005) filed with the Securities and
Exchange Commission on January 9, 2009).
|
|
10.17
|
Employment
Agreement dated January 16, 2009 entered into by and between the
Registrant and Simon Zhang (incorporated by reference from Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 23, 2009).
|
|
10.18
|
Stock
Purchase Agreement dated January 19, 2010 entered into by and between NIVS
Holding Company Limited, East Best Industrial Limited, and Hu Xui Li
(incorporated by reference from Exhibit 10.1 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on January 28,
2010).
|
|
16.1
|
Letter
from Kempisty & Company Certified Public Accountants, P.C. to the
Securities and Exchange Commission dated January 21, 2010 (incorporated by
reference from Exhibit 16.1 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 21,
2010).
|
|
21.1
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 28, 2010).
|
|
23.1
|
Consent
of Kempisty & Company Certified Public Accountants
PC.
|
|
23.2
|
Consent
of K&L Gates LLP (contained in Exhibit 5.1).
|
|
23.3
|
Consent
of Guangdong Laowei Law Firm.
|
|
23.4
|
Consent
of MaloneBailey, LLP.
|
|
24.1**
|
Power
of Attorney (included on signature
page).
|
**
Previously filed.
II-5
Item
17. Undertakings
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 (the
“Act”) may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
The
undersigned Registrant hereby undertakes that it will:
(i)
|
for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it
effective.
|
(ii)
|
for
determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those
securities.
|
II-6
SIGNATURES
Pursuant
to the requirements of the Securities Act, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Huizhou, People’s Republic of China, on the 19th
day of April, 2010.
NIVS
IntelliMedia Technology Group, Inc.
|
||
By:
|
/s/ Tianfu
Li
|
|
Name:
|
Tianfu
Li
|
|
Title:
|
Chief
Executive Officer and Chairman of the
Board
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE
|
TITLE
|
DATE
|
||
/s/ Tianfu
Li
|
Chief
Executive Officer and Chairman of the
Board (Principal Executive Officer) |
April
19, 2010
|
||
Tianfu
Li
|
||||
/s/ Simon
Zhang
|
Chief
Financial Officer and Corporate Secretary
(Principal Financial and Accounting Officer) |
April
19, 2010
|
||
Simon
Zhang
|
||||
*
|
Director
|
April
19, 2010
|
||
Ruxiang
Niu
|
||||
*
|
Director
|
April
19, 2010
|
||
Minghui
Zhang
|
||||
*
|
Chief
Operating Officer and Director
|
April
19, 2010
|
||
Gengqiang
Yang
|
||||
*
|
Director
|
April
19, 2010
|
||
Charles
Mo
|
/s/ Tianfu Li
|
|
II-7
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
1.1
|
Form
of Underwriting Agreement.
|
|
2.1
|
Share
Exchange Agreement, dated as of June 27, 2008, by and among the
Registrant, NIVS Holding Company Limited and all of the shareholders of
NIVS Holding Company Limited (incorporated by reference from Exhibit 2.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2008).
|
|
2.1(a)
|
Amendment
No. 1 to the Share Exchange Agreement, dated as of July 25, 2008, by and
among the Registrant, NIVS Holding Company Limited and all of the
shareholders of NIVS Holding Company Limited (incorporated by reference
from Exhibit 2.1(a) to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 30, 2008).
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-52933) filed with the
Securities and Exchange Commission on November 26,
2007).
|
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-52933) filed with the Securities and Exchange
Commission on November 26, 2007).
|
|
3.3
|
Articles
of Merger effecting name change filed with the Office of Secretary of
State of Delaware on July 25, 2008 (incorporated by reference from Exhibit
3.3 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
4.1
|
Form
of Warrant dated January 3, 2007 (incorporated by reference from Exhibit
4.1 to the Registration Statement on Form 10-SB (File No. 000-52933) filed
with the Securities and Exchange Commission on November 26,
2007).
|
|
4.2
|
NIVS
IntelliMedia Technology Group, Inc. 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
June 25, 2009).
|
|
4.3
|
Form
of Stock Option Agreement for 2009 Omnibus Incentive Plan (incorporated by
reference to Exhibit 4.2 to the Registrant’s Registration Statement on
Form S-8 (File No. 333-162508) filed with the Securities and Exchange
Commission on October 15, 2009).
|
|
4.4
|
Form
of Restricted Stock Agreement for 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-162508) filed with the Securities and
Exchange Commission on October 15, 2009).
|
|
4.5
|
Form
of Restricted Stock Unit Agreement for 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.4 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-162508) filed with the Securities and
Exchange Commission on October 15, 2009).
|
|
4.6
|
Form
of Stock Appreciate Rights Agreement for 2009 Omnibus Incentive Plan
(incorporated by reference to Exhibit 4.5 to the Registrant’s Registration
Statement on Form S-8 (File No. 333-162508) filed with the Securities and
Exchange Commission on October 15, 2009).
|
|
4.7 | Form of Underwriters Warrant. | |
5.1
|
Opinion
of K&L Gates LLP.
|
|
10.1
|
Registration
Rights Agreement dated July 25, 2008 entered into by and between the
Registrant and Shareholders (incorporated by reference from Exhibit 10.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2008).
|
|
10.2
|
Share
and Warrant Cancellation Agreement dated July 25, 2008 entered into by and
between the Registrant and Shareholders (incorporated by reference from
Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on July 30,
2008).
|
Exhibit
No.
|
Description
|
|
10.3
|
Form
of 2008 Employment Agreement dated December 2008 entered into with
executive officers indicated in Schedule A attached to the Form of
Agreement (translated to English) (incorporated by reference from Exhibit
10.3 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
10.4
|
Form
of 2007 Employment Agreement dated December 2007 entered into with
executive officers indicated in Schedule A attached to the Form of
Agreement (translated to English) (incorporated by reference from Exhibit
10.4 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
10.5
|
Land
Purchase Contract dated November 24, 2003 entered into by and between
Haoran Industrial Company, Huicheng District, Huizhou City; HuiZhou NIVS
AUDIO & VIDEO TECH CO., LTD.; and Shuikou County Real Estate
Development Corporation (translated to English) (incorporated by reference
from Exhibit 10.5 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 30, 2008).
|
|
10.6
|
Supplementary
Agreement dated December 19, 2003 to Land Purchase Contract entered into
by and between Haoran Industrial Company, Huicheng District, Huizhou City;
HuiZhou NIVS AUDIO & VIDEO TECH CO., LTD.; and Shuikou County Real
Estate Development Corporation (translated to English) (incorporated by
reference from Exhibit 10.6 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 30,
2008).
|
|
10.7
|
Loan
Contract between Huizhou NIVS Audio & Video Technology Co., Ltd. and
Nanyang Commercial Bank, Guangzhou Branch dated July 17, 2007 (translated
to English) (incorporated by reference from Exhibit 10.7 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
July 30, 2008).
|
|
10.8
|
Loan
Contract between Huizhou NIVS Audio & Video Technology Co., Ltd. and
Agricultural Bank of China, Huizhou Branch dated September 3, 2007
(translated to English) (incorporated by reference from Exhibit 10.8 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2008).
|
|
10.9
|
Notice
of Credit Approval for Huizhou NIVS Audio & Video Technology CO., LTD
from China Construction Bank, Guangdong Province Branch dated September
12, 2007 (translated to English) (incorporated by reference from Exhibit
10.9 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 30, 2008).
|
|
10.10
|
Intellectual
Property Assignment Agreement dated July 18, 2008 entered into by and
between NIVS (Huizhou) Audio & Video Tech. Co., Ltd. and Tianfu Li
(Schedule A translated to English) (incorporated by reference from Exhibit
10.10 to the Registration Statement on Form S-1 (File No. 333-153005)
filed with the Securities and Exchange Commission on October 10,
2008).
|
|
10.11
|
Form
of Subscription Agreement dated July 25, 2008 and August 12, 2008 between
investors and the Registrant (incorporated by reference from Exhibit 10.11
to the Registration Statement on Form S-1 (File No. 333-153005) filed with
the Securities and Exchange Commission on August 13,
2008).
|
|
10.12
|
Form
of Common Stock Purchase Agreement dated January 3, 2007 (incorporated by
reference from Exhibit 10.1 to the Registration Statement on Form 10-SB
(File No. 000-52933) filed with the Securities and Exchange Commission on
November 26, 2007).
|
|
10.13
|
Form
of Warrant Purchase Agreement dated January 3, 2007 (incorporated by
reference from Exhibit 10.2 to the Registration Statement on Form 10-SB
(File No. 000-52933) filed with the Securities and Exchange Commission on
November 26, 2007).
|
Exhibit
No.
|
Description
|
|
10.14
|
Debt
Repayment and Set-Off Agreement dated November 28, 2008, by and between
the Registrant, Niveous Holding Company Limited, NIVS (HZ) Audio &
Video Tech Company Limited, NIVS International (H.K.) Limited, NIVS (HZ)
Audio & Video Tech Company Limited Shenzhen Branch, Tianfu Li, NIVS
Investment (SZ) Co., Ltd., Zhongkena Technology Development, Xentsan
Technology (SZ) Co., Ltd., Korea Hyundai Light & Electric (Int’l)
Holding, NIVS Information & Technology (HZ) Co., Ltd., and Hyundai
Light & Electric (HZ) Co., Ltd. (incorporated by reference from
Exhibit 10.14 to the Registration Statement on Form S-1 (File No.
333-153005) filed with the Securities and Exchange Commission on December
5, 2008).
|
|
10.15
|
Amendment
No. 1 to the Debt Repayment and Set-Off Agreement dated December 22, 2008,
by and between the Registrant, Niveous Holding Company Limited, NIVS (HZ)
Audio & Video Tech Company Limited, NIVS International (H.K.) Limited,
NIVS (HZ) Audio & Video Tech Company Limited Shenzhen Branch, Tianfu
Li, NIVS Investment (SZ) Co., Ltd., Zhongkena Technology Development,
Xentsan Technology (SZ) Co., Ltd., Korea Hyundai Light & Electric
(Int’l) Holding, NIVS Information & Technology (HZ) Co., Ltd., and
Hyundai Light & Electric (HZ) Co., Ltd. (incorporated by reference
from Exhibit 10.15 to the Registration Statement on Form S-1 (File No.
333-153005) filed with the Securities and Exchange Commission on January
9, 2009).
|
|
10.16
|
Agreement
to Convert Debt into Equity dated December 24, 2008, by and between the
Registrant, Niveous Holding Company Limited, NIVS (HZ) Audio & Video
Tech Company Limited, NIVS International (H.K.) Limited, and Tianfu Li
(incorporated by reference from Exhibit 10.16 to the Registration
Statement on Form S-1 (File No. 333-153005) filed with the Securities and
Exchange Commission on January 9, 2009).
|
|
10.17
|
Employment
Agreement dated January 16, 2009 entered into by and between the
Registrant and Simon Zhang (incorporated by reference from Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 23, 2009).
|
|
10.18
|
Stock
Purchase Agreement dated January 19, 2010 entered into by and between NIVS
Holding Company Limited, East Best Industrial Limited, and Hu Xui Li
(incorporated by reference from Exhibit 10.1 to the Current Report on Form
8-K filed with the Securities and Exchange Commission on January 28,
2010).
|
|
16.1
|
Letter
from Kempisty & Company Certified Public Accountants, P.C. to the
Securities and Exchange Commission dated January 21, 2010 (incorporated by
reference from Exhibit 16.1 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 21,
2010).
|
|
21.1
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 28, 2010).
|
|
23.1
|
Consent
of Kempisty & Company Certified Public Accountants
PC.
|
|
23.2
|
Consent
of K&L Gates LLP (contained in Exhibit 5.1).
|
|
23.3
|
Consent
of Guangdong Laowei Law Firm.
|
|
23.4
|
Consent
of MaloneBailey, LLP.
|
|
24.1**
|
Power
of Attorney (included on signature
page).
|
**
Previously filed.