Attached files
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EX-3.3 - SRKP 20 Inc | v206292_ex3-3.htm |
EX-2.1 - SRKP 20 Inc | v206292_ex2-1.htm |
EX-21.1 - SRKP 20 Inc | v206292_ex21-1.htm |
EX-10.3 - SRKP 20 Inc | v206292_ex10-3.htm |
EX-10.2 - SRKP 20 Inc | v206292_ex10-2.htm |
EX-16.1 - SRKP 20 Inc | v206292_ex16-1.htm |
EX-10.4 - SRKP 20 Inc | v206292_ex10-4.htm |
EX-10.5 - SRKP 20 Inc | v206292_ex10-5.htm |
EX-10.1 - SRKP 20 Inc | v206292_ex10-1.htm |
EX-10.4(C) - SRKP 20 Inc | v206292_ex10-4c.htm |
EX-10.4(B) - SRKP 20 Inc | v206292_ex10-4b.htm |
EX-10.4(A) - SRKP 20 Inc | v206292_ex10-4a.htm |
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
report (Date of earliest event reported): December 16,
2010
Feigeda
Electronic Technology, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
000-53016
|
26-1357696
|
(State or Other Jurisdiction
of Incorporation)
|
(Commission File Number)
|
(IRS Employer Identification No.)
|
Building 66, Longwangmiao
Industrial Park, Baishixia , Fuyong Street, Bao’an District,
Shenzhen City, Guangdong
Province, P. R. China 518102
(Address,
including zip code, off principal executive offices)
Registrant’s
telephone number, including area code 86-755-27759072
SRKP
20, INC.
______________4737
North Ocean Drive, Suite 207, Lauderdale by the Sea, FL
33308_________
(Former
Name or Former Address, if Changed Since Last Report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2. below):
¨ Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
¨ Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
1.01
|
Entry
into a Material Definitive
Agreement.
|
See Item
2.01, below, regarding the discussion of the amended and restated share exchange
agreement dated as of December 6, 2010 (the “Exchange Agreement”), which was
entered into by and among SRKP 20, Inc. (“SRKP 20”), a Delaware corporation,
Immense Fortune Holdings Limited, a British Virgin Islands corporation (“Immense
Fortune”), Legend Media Holdings HK Limited, a Hong Kong corporation and a
wholly-owned subsidiary of Immense Fortune (“Legend”), Feigeda Electronic (SZ)
Co., Ltd., a company organized under the laws of the People’s Republic of China
and a wholly-owned subsidiary of Legend (“Shenzhen Feigeda”) and Finest Day
Limited, a British Virgin Islands corporation and sole shareholder of Immense
Fortune, as reported in the Current Report on Form 8-K filed with the Securities
Exchange Commission on December 6, 2010. A copy of the Exchange
Agreement is attached hereto as Exhibit
2.1.
Item
2.01
|
Completion
of Acquisition or Disposition of
Assets.
|
OVERVIEW
As used in this report, unless
otherwise indicated, the terms “we,” “Company” and “Feigeda” refer to Feigeda
Electronic Technology, Inc., a Delaware corporation, formerly known as
SRKP 20, Inc. (“SRKP 20”), and its wholly-owned subsidiary Immense
Fortune Holdings Limited, a British Virgin Islands corporation (“Immense
Fortune”), Legend Media Holdings HK Limited, a Hong Kong corporation and a
wholly-owned subsidiary of Immense Fortune (“Legend”), and Feigeda Electronic
(SZ) Co., Ltd., a company organized under the laws of the People’s Republic of
China and a wholly-owned subsidiary of Legend (“Shenzhen Feigeda”).
“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.
HISTORY
SRKP 20 was incorporated in the
State of Delaware on October 11, 2007 and was originally organized as a “blank
check” shell company to investigate and acquire a target company or business
seeking the perceived advantages of being a publicly held
corporation.
On December 16, 2010, SRKP 20
(i) closed a share exchange transaction, described below, pursuant to which
SRKP 20 became the 100% parent of Immense Fortune, (ii) assumed the operations
of Immense Fortune and its subsidiaries, Legend and Shenzhen Feigeda and (iii)
changed its name from “SRKP 20, Inc.” to “Feigeda Electronic Technology,
Inc.”
Immense Fortune is a holding company
incorporated on July 28, 2008 under the laws of the British Virgin
Islands. Legend is a holding company incorporated on June 16, 2008
under the laws of Hong Kong. Shenzhen Feigeda was incorporated in the
City of Shenzhen, Guangdong Province, PRC March 17, 2005.
Through Shenzhen Feigeda, we are
engaged in the research, development, production and sale of monochrome and
color small and medium sized liquid crystal display module (“LCM”) products
which are sold across China. Our products are used in a variety of
consumer devices, including watches, cellular telephones, MP3 and MP4 players,
clocks, digital electronics, industrial controls and instruments, and vehicle
dashboard displays. We produce standardized products, as well as
customized products specifically designed to meet the needs of a specific
customer.
1
CORPORATE
STRUCTURE
The corporate structure of the Company
is illustrated as follows:
Our principal executive offices and
corporate offices are located at Building 66, Longwangmiao Industrial Park,
Baishixia, Fuyong Street, Bao’an District, Shenzhen City, Guangdong Province, P.
R. China 518102.
PRINCIPAL
TERMS OF THE SHARE EXCHANGE
Effective as of April 21, 2010, SRKP 20
entered into a share exchange agreement with Immense Fortune, Legend, Shenzhen
Feigeda, Finest Day Limited, the sole shareholder of Immense Fortune and
Fangguan Electronic (CC) Co., Ltd., a company organized under the laws of the
People’s. On December 6, 2010, SRKP 20, Immense Fortune, Legend, Shenzhen
Feigeda and Finest Day Limited entered into an amended and restated share
exchange agreement (the “Exchange Agreement”). Pursuant to the
Exchange Agreement, SRKP 20 agreed to issue an aggregate of 15,156,468 shares of
its common stock in exchange for all of the issued and outstanding securities of
Immense Fortune (the “Share Exchange”). The Share Exchange closed on
December 16, 2010.
Upon the closing of the Share Exchange,
SRKP 20 issued an aggregate of 15,156,468 shares of its common stock to
designees of Finest Day Limited in exchange for all of the issued and
outstanding securities of Immense Fortune. Pursuant to an amended and
restated share and warrant cancellation agreement dated December 6, 2010 (the
“Cancellation Agreement”), the stockholders of SRKP 20 canceled an
aggregate of 4,267,674 shares held by them prior to the closing of the Share
Exchange, such that there were 4,264,519 shares of common stock outstanding
immediately prior to the Share Exchange. SRKP 20 stockholders also
canceled warrants to purchase an aggregate of 6,913,236 shares of common stock
such that such stockholders held warrants to purchase an aggregate of 2,293,519
shares of common stock immediately prior to the Share
Exchange. Immediately after the closing of the Share Exchange, we had
19,420,987 shares of common stock, no shares of preferred stock, no options, and
warrants to purchase 2,293,519 shares of common stock outstanding. In
addition we agreed to pay a $14,100 success fee to WestPark Capital, Inc.
(“WestPark”) for services provided in connection with the Share Exchange,
including coordinating the share exchange transaction process, interacting with
principals of the shell corporation and negotiating the definitive purchase
agreement for the shell corporation, conducting a financial analysis of Immense
Fortune, conducting due diligence on Immense Fortune and its subsidiaries and
managing the interrelationships of legal and accounting
activities.
2
Pursuant
to the terms of the Share Exchange and a Registration Rights Agreement entered
into with each of the original SRKP 20 stockholders, we agreed to register all
of the 4,264,519 shares of common stock and all of the 2,293,519 shares of
common stock underlying the warrants held by the original SRKP 20 stockholders,
all of which were outstanding immediately prior to the closing of the Share
Exchange. These shares will be included in a subsequent registration
statement (the “Subsequent Registration Statement”) filed by us no later than
the tenth (10th) day
after the end of the six (6) month period that immediately follows the date on
which we file a registration statement to register any shares of common stock
sold in our next offering of common stock (the “Required Filing
Date”). We agreed to use reasonable efforts to cause the Subsequent
Registration Statement to become effective within one hundred fifty (150) days
after the Required Filing Date or the actual filing date, whichever is earlier,
or one hundred eighty (180) days after the Required Filing Date or the actual
filing date, whichever is earlier, if such Subsequent Registration Statement is
subject to a full review by the SEC (the “Required Effectiveness Date”). If we
fail to file the Subsequent Registration Statement by the Required Filing Date
or if it does not become effective on or before the Required Effectiveness Date
we are required to issue, as liquidated damages, to each of the original SRKP 20
stockholders shares (the “Penalty Shares”) equal to a total of 0.0333% of their
respective shares for each calendar day that the Subsequent Registration
Statement has not been filed or declared effective by the SEC (and until the
Subsequent Registration Statement is filed with or declared effective by the
SEC), as applicable. However, no Penalty Shares shall be due to
the original SRKP 20 stockholders if we are using our best efforts to cause the
Subsequent Registration Statement to be filed and declared effective in a timely
manner.
Immediately
after the closing of the Share Exchange, on December 16, 2010, SRKP 20
changed its corporate name from “SRKP 20, Inc.” to “Feigeda Electronic
Technology, Inc.” Our shares of common stock are not currently listed or quoted
for trading on any national securities exchange or national quotation
system. We intend to apply for the listing of our common stock
on the Nasdaq Global Market or the NYSE Amex.
The transactions contemplated by the
Exchange Agreement, as amended, were intended to be a “tax-free” reorganization
pursuant to the provisions of Sections 351 and/or 368(a) of the Internal Revenue
Code of 1986, as amended.
The execution of the share exchange
agreement effective as of April 21, 2010 and the amended and restated share
exchange agreement were reported in Current Reports on Form 8-K filed with the
Securities and Exchange Commission (the “SEC”) on April 27,
2010 and December 6, 2010. A copy of the amended and restated share
exchange agreement is filed as Exhibit 2.1 to this
Current Report on Form 8-K.
THE
PURCHASE RIGHT
We currently owe an aggregate of
$1,785,494 to Wu Zuzi, our Chairman of the Board and Chief Executive Officer,
and Bu Falin, one of our directors, from Mr. Wu’s and Mr. Bu’s sale of 100% of
the ownership interest of Shenzhen Feigeda to Legend in March
2009. After the Share Exchange, we intend to offer Wu Zuzi, our
Chairman of the Board and Chief Executive Officer, and Bu Falin, one of our
directors, a thirty (30) -day right to purchase up to $1,785,494 in shares of
our common stock in our next offering of common stock at the per share price of
the shares sold in such offering to extinguish this debt in full.
FEIGEDA ELECTRONIC TECHNOLOGY,
INC.’S BUSINESS
We are engaged in the design,
production, marketing and sale of various types of small to medium sized liquid
crystal display modules (“LCM”). We produce monochrome twisted
nematic (“TN”), monochrome super-twisted nematic (“STN”), monochrome film
compensated STN (“FSTN”), color super-twisted nematic (“CSTN”) and thin film
transistor (“TFT”) LCMs. Our products are incorporated into a wide
variety of products, including MP3/MP4 players, cellular telephones, digital
cameras, digital photo frames, portable navigation displays, industrial controls
and instruments and vehicle dashboard displays. We produce standard LCM
products, as well as customized products designed and produced for specific
customers. Our products are sold throughout China, Hong Kong and
Macao.
Our
Industry
Products
LCMs
are modules that incorporate liquid crystal display (“LCD”) screens into a
complete assembly including integrated circuits (“ICs”), winding displacements,
electronics and backlights. Feigeda provides its customers with a
full range of LCMs, ranging from TN Monochrome to TFT color
modules. LCMs can be manufactured in a variety of different ways,
including Chip on Glass (“COG”) where ICs are mounted directly to the LCD panels
without the need for wire bonding allowing for a thin and light LCD, and Tape
Automated Bonding (“TAB”) that connects ICs with LCDs using a polyimide
film.
LCDs
consist of a layer of liquid crystal materials sandwiched between two glass
plates. The plates are typically paired with transparent electrodes
that allow for the application of an electric field across small areas of the
liquid crystal film. Polarizing filters are placed on one or both
sides of the glass to polarize the light entering and leaving the liquid
crystals. While normally the polarizers are perpendicular and no
light is able to pass through the display, the liquid crystals modify the
polarization of the light depending on the electric field being
applied. This will allow for certain spots where light will pass
through the display and certain spots will not pass though the display, which
parts of the screen remain dark. The use of light and dark in the
display is what the LCD uses to generate images in monochrome or
color. LCDs do not emit light. LCDs can either use
reflected ambient light from outside sources or can use light supplied from a
lighting device (a backlight). LCDs can contain thousands or millions
of pixels in a single display, which allows for greater clarity and resolution
than other display technologies, such as LEDs and cathode ray
tubes. By manipulating the light, LCDs display images using very
little power. This has made LCDs the preferred technology whenever
lower power consumption and compact size are critical.
3
Twisted Nematic (“TN”), Super Twisted
Nematic (“STN”), Film Compensated STN (“FSTN”), Color STN (“CSTN”) and thin film
transistor (“TFT”) are terms used to describe five types of LCDs, each twisting
the orientation of the light passing through the LCD structure differently to
effect contrast and colorization.
Small to Medium Sized LCM
Industry
LCMs are ideal for incorporation into
applications where size and weight are important because they do not contain
bulky picture tubes. As a result, LCMs are being incorporated into a
growing number of consumer devices that benefit from a screen that displays
information and images. This expansion of the small to medium sized
LCM industry is being driven by an increase in the variety of devices
incorporating LCMs and new technology in the LCM
industry. Consequently, the small to medium sized LCM industry is
closely tied to the consumer electrics industry. Technological
advancements in the electronic industry have greatly expanded the types of
consumer electric devices on the market and improved the functionality and
reliability of such devices and contributed to the growing demand for such
products.
China
China is one of the world’s largest
consumer markets. In 2009, China’s gross domestic product (“GDP”)
increased 8.7% over 2008 according to the National Bureau of Statistics of
China. China’s GDP for 2008 increased 9% over 2007. This
rapid economic growth in China has led to greater levels of personal disposable
income and increased spending among China’s expanding middle-class consumer
base. As a result of the increased spending, China’s market for
consumer electronics has been growing. 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 consumer electronics and their components, which
are expected to drive this growth:
|
·
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Low
costs. China continues to have a relatively low cost of
labor as well as easy access to raw materials and
land.
|
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·
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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.
|
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·
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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.
|
Competitive
Strengths
We believe the following strengths
contribute to our competitive advantages:
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. Our Chief Executive Officer,
Mr. Wu, Zuxi, has over 15 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.
4
Design and
manufacturing capabilities. We employ a rigorous and
systematic approach to product design and manufacturing. We employ a team of
engineers and technicians with members educated by top colleges in China, with
an average of 10 years of experience in the LCD and LCM industry. Our
research and development team develops and tracks new concepts and ideas from a
variety of sources, including direct customer feedback, trade shows, famous
domestic universities and research institutions and our suppliers. Our 60
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. We have received several accreditations, including The International
Organization for Standardization (ISO) 9001: 2000, RoHS certification and CE
certification attesting to our quality management requirements, manufacturing
safety, controls, procedures and environmental performance.
Customer first
service approach. We provide closed and one-stop services for
customers. We offer flexible delivery methods and product feedback opportunities
to our customers and the suitable solution will be discussed and provided. 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. For OEM customers, first hand information will be
provided during the production stage and quality assurance issue is closely
watched to ensure the quality is guaranteed as promised to the customers. 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.
Strategy
Our goal is to become a leading
producer of LCM products. We intend to achieve this goal
by implementing the following strategies:
Expand production
capacity. The increased consumer demand for cellular
telephones, MP3 and MP4 players, electronic dictionaries and home appliances is
increasing the demand for TN, STN, CSTN and TFT-LCMs. Specifically,
we intend to expand our production of TFT-LCM products, as demand for these
products is increasing due to TFT’s superior color and viewing angle compared to
TN, STN and CSTN-LCM products. We intend to expand capacity of our
current production lines and purchase LCM production lines in order to increase
our production of LCMs and increase our share of the LCM market.
Establish
partnership with existing clients. To further
diversify our product offerings, we intend to strengthen our relationship with
our existing client relationships and explore opportunities for product
expansion with such clients. We intend to establish partnerships with
existing clients whereby we develop and manufacture new products based on client
needs. Our close working relationships with our customers will allow
us to better understand and anticipate the needs of our clients and shift
production of products according to those needs. We expect that these
partnerships will increase our sales revenue and product offerings.
Continue to
produce affordable products. We believe that price
is a primary factor in electronic device manufacturers’ decisions to incorporate
our LCM products into their electric devices. We continue to explore
ways to control the cost of product manufacturing in order to provide our
products at low prices to our customers while continuing to offer high quality
products.
Pursue
acquisitions to broaden our product offerings and increase manufacturing
capacity. We intend to expand our line of LCM products to
include products for personal digital assistants, game consoles and
printers. We will consider strategic acquisitions that will provide
us with the ability to increase our production capacity and produce new LCM
products. In addition, we intend to acquire product lines that
will enable us to produce important components of our LCM products in house,
including LCDs (Liquid Crystal Display), indium tin oxide (“ITO”) glass and
color filters, which we believe will provide us with a steady supply of such
products and increase our profitability. When evaluating potential
acquisition targets, we will consider factors such as market position, growth
potential and earnings prospects and strength and experience of
management.
Our
Products
We
produce a wide variety of LCM products. Specifically, we produce the
following types of LCM products:
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·
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Monochrome
LCMs: We produce a total of 299 models of monochrome
(black-and-white) LCMs, including twisted nematic (“TN”) LCMs,
super-twisted nematic (“STN”) LCMs and film compensated super-twisted
nematic (“FSTN”) LCMs.
|
5
|
o
|
TN
LCMs: These products come in a single coloration – black
characters on a grey background. These displays are the
cheapest to manufacture and use the least amount of power of all
LCMs. These displays are primarily incorporated into cellular
telephone, calculator, consumer
appliance.
|
|
o
|
STN
LCMs: STN LCMs are cheaper to manufacture than other types of
LCMs, require less power than TFT-LCMs and have very good visual
quality. Our STN LCMs are mainly incorporated into inexpensive
MP3 players and cellular telephones. STN technology comes in
two colorations: dark violet/black characters on a green
background and dark blue/black characters on a silver
background.
|
|
o
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FSTN
LCMs: FSTN technology comes in a single coloration – black
characters on a white/grey background. It has a higher contrast
and better viewing angle than TN or STN technology. Our FSTN
LCM products are primarily incorporated into mechanical equipment, vehicle
dashboard displays.
|
|
·
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Color
super-twisted nematic (“CSTN”) LCMs: We produce 86 models of
CSTN-LCM products. CSTN products offer an advantage over STNs
because they display images in color, rather than in black and
white. CSTN technology is actually STN technology that uses a
white backlight and color filters to produce the hues required for a color
display. They also require less power and are cheaper to
produce than TFT-LCMs. Our CSTN LCM products are incorporated
into MP4 players, cellular telephones, digital cameras and digital picture
frames.
|
|
·
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Thin
film transistor (“TFT”) LCMs: We currently produce 274 models
of TFT LCMs with screens ranging in size from 1.4 inches to 4.3 inches,
which are mainly used in MP4 players, higher-end cellular telephones,
digital cameras, and digital picture frames and navigation
systems. TFT LCMs have a higher quality resolution than STN and
CSTN displays because they have a transistor for each pixel on the screen
which allows the electrical current that illuminates the display to be
turned on and off at a faster rate.
|
|
A
breakdown of our sales and revenues by product and service type is as
follows:
|
Nine Months Ended September 30,
|
Year Ended December 31,
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|||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
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||||||||||||||||||||||||||||||||||||
Product/Sevice Type
|
Units
(#)
|
Sales
($)
|
Units
(#)
|
Sales
($)
|
Units
(#)
|
Sales
($)
|
Units
(#)
|
Sales
($)
|
Units
(#)
|
Sales
($)
|
||||||||||||||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||||||||||||||||||
TN,
STN, FSTN LCMs
|
338 | 314 | 5,960 | 31,419 | 6,316 | 5,064 | 10,918 | 8,195 | 16,735 | 12,322 | ||||||||||||||||||||||||||||||
CSTN
LCMs
|
12,438 | 33,504 | - | - | 6,801 | 36,681 | 5,211 | 22,121 | 1,866 | 10,498 | ||||||||||||||||||||||||||||||
TFT
LCMs
|
6,009 | 19,250 | 5,371 | 4,657 | 972 | 5,112 | 1,040 | 4,885 | 210 | 1,576 | ||||||||||||||||||||||||||||||
Raw
material sales and service charges
|
- | 1,497 | n/a | 452 | n/a | 3,642 | n/a | 149 | n/a | 391 | ||||||||||||||||||||||||||||||
Total
|
18,785 | 54,565 | 11,331 | 36,528 | 14,089 | 50,499 | 17169 | 35,350 | 18,811 | 24,787 |
Major
Customers
For the nine months ended September 30,
2010 and the years ended December 31, 2009 and 2008, our top five customers
accounted for 30.0%, 22.0%, 31.3%, respectively, of our total
revenues. None of our customers in the nine months ended September
30, 2010 and the years ended December 31, 2009 and 2008, accounted for at least
10% of our revenues.
Supply
of Raw Materials
Raw materials for our LCM products
include liquid crystal displays (LCDs), integrated circuits (“IC”), indium tin
oxide coated (“ITO”) glass, liquid crystals, CTSN products, TFT products, light
emitting diodes (“LED”) lights, flexible print circuits (“FPC”) and auto bonding
machines. We purchase our raw materials and components based on
forecasts from our customers, as well as our own assessments of our customers’
needs. We generally prepare forecasts one to four months in advance, depending
on the raw materials and components, and update this forecast
monthly. In order to reduce our raw materials and component costs and
our dependence on any one supplier, we generally purchase our raw materials and
components from multiple sources. Special products and large orders are quoted
for delivery after receipt of orders at specific lead times. We typically do not
enter into contracts with our suppliers. However, during periods of
supply shortages, we typically enter into supply contracts with suppliers to
ensure a stable supply of necessary raw materials and
components.
6
We assess
and test the quality of the raw materials to ensure the quality of our LCM
products. We select reputable, high quality, and large companies as our
suppliers, and establish favorable and stable relationship with them to ensure a
fast, stable, high quality and large quantity supply of the raw
materials. 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.
Currently,
our primary suppliers of raw materials are located in South Korea, Taiwan,
United States, and China. We believe that the raw materials and components used
in manufacturing our portable electronic devices are available from enough
sources to be able to satisfy our manufacturing needs. Presently, our
relationships with our current suppliers are generally good and we expect that
our suppliers will be able to meet the anticipated demand for our products in
the future.
At times, the 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 tight 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.
Manufacturing
The manufacture of our LCM products
requires coordinated use of machinery and raw materials at various stages of
manufacturing. Our factory is located at Baishixia Longwangmiao
Industrial Park in Shenzhen and has a total production area of 46,000 square
meters. Our facilities include 62 standardized production lines for
LCMs and two closed dust-free, temperature and humidity controlled workshops. We
manufacture both COG LCMs and TAB LCMs. We produce approximately 40
million LCMs annually and our annual output capacity for our LCM production
lines is 60 million LCMs.
We have significantly increased our
production capacity over the past few years. In 2007, 2008 and 2009,
we had a total of 25, 29 and 60 production lines, respectively. The
increase of 35 production lines from 2007 to 2009 was due to the addition of new
LCM production lines. The increase in LCM production lines increased
our annual manufacturing capacity from 20 million LCM units in 2007 to 60
million LCM units in 2009. We plan to increase the number of LCM
production lines at our factory to increase our manufacturing capacity to meet
the increasing market demand for these products. We have added 3
production lines in 2010 and currently plan to add 3 LCM production lines in
2011.
We use automated machinery to process
key aspects of the manufacturing process to ensure high uniformity and
precision, while leaving the non-key aspects of the manufacturing process to
manual labor. Our production lines include machines such as COG
bonding machines, TAB heat pressing machines, Anisotropic Conductive Film
(“ACF”) pre-pasting machines, UV solidifying machines, air pressure machines and
mirroring machines. We intend to further improve our automated
production lines and strive to continue investing in our manufacturing
infrastructure to further increase our manufacturing capacity, helping us to
control the per unit cost of our products.
Quality
Control
We consider quality control an
important element of our business practices. We have stringent quality control
systems that are implemented by various Company-trained staff members to ensure
quality control over of each phase of the production process, from the purchase
of raw materials through each step in the manufacturing process. Our quality
control department executes the following functions:
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setting
internal controls and regulations for semi-finished and finished
products;
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testing
samples of raw materials from
suppliers;
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implementing
sampling systems and sample
files;
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maintaining
quality of equipment and instruments;
and
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articulating
the responsibilities of quality control
staff.
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We monitor quality and reliability in
accordance with the requirements of ISO 9001 systems. We have received European
Union’s CE attestation, Rohs Certification and ISO 9001:2000 certification. We
have passed stringent quality reviews and our products meet digital electronic
product standards in China, the United States and Europe. With our strong
technological capabilities and use of automated equipment for core aspects of
manufacturing process, we believe our product quality meets or even exceeds in
certain key aspects international industry standards.
Sales
and Marketing
We sell
our panels to original equipment manufacturing service providers and brand
companies. These original equipment manufacturing service providers,
most of whose production operations are located in Taiwan and the PRC, use our
LCM products in the products they manufacture on a contract basis for brand
companies.
We have a
sales team of 31 persons in our sale office in China. Our sales staff
targets key customers by arranging in-person sales presentations and providing
post-sale services. Our sales team works closely with our customers so that we
can better address their needs and improve the quality and features of our
products. We offer different price incentives to encourage large-volume and
long-term customers. Sales to our customers are based primarily on
purchase orders we receive from time to time rather than firm, long-term
purchase commitments from our customers. Uncertain economic conditions and our
general lack of long-term purchase commitments with our customers make it
difficult for us to predict revenue accurately over the longer term. Even in
those cases where customers are contractually obligated to purchase products
from us, we may elect not to enforce our contractual rights immediately because
of the long-term nature of our customer relationships and for other business
reasons, and instead may negotiate accommodations with customers regarding
particular situations.
We price
our products in accordance with prevailing market conditions, giving
consideration to the complexity of the product, the order size, the strength and
history of our relationship with the customer and our capacity utilization.
Purchase prices and payment terms for sales to related parties are not
significantly different from those for other customers. Our credit policy for
sales to related parties and other customers typically requires payment within
30 to 60 days. The average number of collection days extended for sales to our
customers for the years ended December 31, 2007, 2008 and 2009, was 36 days, 38
days, 41 days, respectively. We have experienced a significant decrease in the
number of collection days extended for sales to our customers primarily due to
our enhanced collection procedures and a strengthening of our receivables
management system which allowed for lower fluctuations in receivables as
compared to sales. In general, we extend longer credit terms to our
large customers compared to customers of our other products and our smaller
customers. We believe the terms for those customers and products are
comparable to the terms offered by our industry peer competitors. We
have not experienced any material problems relating to customer
payments.
We engage
in marketing activities such as attending industry-specific conferences and
exhibitions to promote our products and brand name. We also advertise
in industry journals, magazines and newspapers and through our website to market
our products. We believe these activities help in promote our products and brand
name among key industry participants
Warranties
and Return Policy
We do not
have a warranty or return policy in place. When a customer finds a
defect in our products, we will replace the defective
products. Historically, replacements and repairs of defective parts
have been insignificant.
Backlog
Our backlog of unfilled orders was
$1,790,463 as of September 30, 2010, as compared to $613,738 as of December 31,
2009 and $1,140,439 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.
8
Research
and Development
We focus
our product design efforts on both improving our existing products and
developing new products. We conduct substantially all of our research
and development with an in-house staff. We have a dedicated research
and development staff of 39 persons, including engineers and technicians with an
average of 10 years in the LCD and LCM industries. Our research and
development team researches new material and techniques, tests product
performance, inspects products and tests performance of machines used in the
manufacturing process. The duties of our research and development
team are to improve research and development management and market analysis, in
addition to establishing and regulating the large-scale production
projects.
For the nine months ended September 30,
2010 and the years ended December 31, 2009, 2008 and 2007, we expended $0.9
million, $0.8 million, $0.4 million and $0.3 million, respectively, in research
and development.
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. While we do not currently have any patents, we have 10
patent applications pending in the PRC related to technology that we use in our
business operations. These patents applications include utility
patents that relate to our products.
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 do not
have any registered trademarks or any pending 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.
Competition
The LCM industry in China is very
competitive and highly fragmented. Many of our competitors have
significantly more financial, marketing and other resources than we
have. We compete with other LCM manufacturers based on the
following:
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price;
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product
features and reliability;
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customer
service, including product design
support;
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ability
to keep production costs low by maintaining high yield and operating at
full capacity;
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ability
to provide sufficient quantity of products to meet customer
demand;
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quality
of the research and development
team;
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time-to-market;
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superior
logistics; and
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access
to capital.
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Our major
competitors in the TN, STN and CSTN LCM market and the TFT LCM market are Truly
Semiconductors Limited, Tianma Microelectronics Co., Ltd., BYD Company Ltd., and
GoWorld Electronics.
Insurance
We maintain limited property insurance.
We do not maintain any other types of insurance. We believe our insurance
coverage is customary and standard for similarly sized companies in our
industry. However, we cannot assure you that our existing insurance policies are
sufficient to insulate us from all losses and liabilities that we may
incur.
Employees
As of September 30, 2010, we had
approximately 974 employees, all of whom are full-time employees. All
of our employees are based inside China. We have not experienced any
work stoppages and we consider our relations with our employees to be
good.
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,
job injuries insurance, and maternity insurance, in accordance with relevant
regulations. Total contributions to the funds were approximately
$15,600 and $10,500 in the nine months ended September 30, 2010 and 2009,
respectively, and $10,700, $15,600 $10,500 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.
Under PRC laws, we are required to make
contributions to a housing assistance fund for our employees based in
China. However, we have not paid any amounts into the housing
assistance fund for any of our employees. We provide housing
facilities for our employees. At present, approximately 63.7% of our employees
live in company-provided housing facilities. Under PRC laws, are
required to make contributions to a housing assistance fund for employees based
in China. Any increase in contributions to the housing assistance
fund will increase the costs and expenses of conducting our business operations
and could have negative effect on our results of operations.
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. Shenzhen Feigeda’s business license covers its present business
to produce and market LCM modules, develop technology related to electronic
products, and wholesale, import and export, and provide related services for LCM
modules and electronic products. Companies that operate outside the
scope of their licenses can be subjected to fines, disgorgement of income and
ordered to cease operations. Prior to expanding our business beyond
that of our business licenses, we may be required to apply and receive approval
from the relevant PRC government authorities.
Employment
laws
We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour
requirements, working and safety conditions, and social insurance, housing funds
and other welfare. These include both national and local labor laws
and regulations, which may require substantial resources for
compliance.
China’s National Labor Law, which
became effective on January 1, 1995, and China’s National Labor Contract Law,
which became effective on January 1, 2008, permit workers in both state and
private enterprises in China to bargain collectively. The National
Labor Law and the National Labor Contract Law provide for collective contracts
to be developed through collaboration between the labor union (or worker
representatives in the absence of a union) and management that specify such
matters as working conditions, wage scales, and hours of work. The
laws also permit workers and employers in all types of enterprises to sign
individual contracts, which are to be drawn up in accordance with the collective
contract. The National Labor Contract Law has enhanced rights for the
nation’s workers, including permitting open-ended labor contracts and severance
payments. The legislation requires employers to provide written
contracts to their workers, restricts the use of temporary labor and makes it
harder for employers to lay off employees. It also requires that
employees with fixed-term contracts be entitled to an indefinite-term contract
after a fixed-term contract is renewed once or the employee has worked for the
employer for a consecutive ten-year period.
10
Environmental Regulations
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. We
currently hold an environmental permit from the Shenzhen Bao’an Environmental
Protection Bureau issued on September 27, 2009, which
allows us to conduct our production at our current registered
address.
We constructed our 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 from the Shenzhen Bao’an Environmental
Protection Bureau issued on September 27, 2009. If we fail to comply
with the provisions of the permits 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. We have not been
named as a defendant in any legal proceedings alleging violation of
environmental laws. Other than the expiration of our environmental approval, we
have no reasonable basis to believe that there is any threatened claim, action
or legal proceedings against us that would have a material adverse effect on our
business, financial condition or results of operations due to any non-compliance
with environmental laws.
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:
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Convention
establishing the World Intellectual Property Organization (WIPO
Convention) (June 4, 1980);
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Paris
Convention for the Protection of Industrial Property (March 19,
1985);
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Patent
Cooperation Treaty (January 1, 1994);
and
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The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
(December 11, 2001).
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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 2008 and 2010, 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 of the PRC covers three
kinds of patents, i.e., patents for inventions, utility models and designs
respectively. The Chinese patent system adopts the principle of first to file.
This means that, 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 should not 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. A compulsory
license for the patents for inventions or utility models can also be granted
where a national emergency or any extraordinary state of affairs occurs or where
the public interest so requires. The patent holder may appeal such decision
within three months from receiving notification by filing a suit in a people’s
court.
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PRC law defines patent infringement as
the exploitation of a patent without the authorization of the patent holder. A
patent holder who believes his 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. Evidence preservation and property preservation measures
are also available both before and during the litigation. 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 several times the license fee
under a contractual license. The infringing party may be also fined by the
Administration of Patent Management in an amount of up to four times the
unlawful income earned by such infringing party.
Regulations
on Trademarks
Both the PRC Trademark Law, adopted in
1982 and revised in 1993 and 2001, and the Implementation Regulation of the PRC
Trademark Law, adopted in 2002, provide protection to the holders of registered
trademarks. The State Trademark Bureau, under the authority of the SAIC, handles
trademark registrations and grants rights of a term of 10 years in connection
with registered trademarks. License agreements with respect to registered
trademark must be filed with the State Trademark Bureau.
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 a full refund of
the VAT that it has already paid or borne.
Foreign
currency exchange
Under the PRC foreign currency exchange
regulations applicable to us, 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 (“MOFCOM”), 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
Our principal executive offices are
located at Building 66, Longwangmiao Industrial Park, Baishixia, Fuyong Street,
Bao’an District, Shenzhen City, Guangdong Province, People’s Republic of China,
518102 (“Building 66”). We lease approximately 7,800 square meters of
factory space at this location on Floors 1 through 6 and approximately 8,180
square meters of housing facilities for employees at Building 65 in the same
industrial park, pursuant to a 5-year lease that expires on April 30,
2014. For the first two years of the lease, rental expenses under
this lease total RMB 162,520 (US$23,800) per month. For the last
three years of the lease, rental expenses under the lease will total RMB 178,500
($26,100) per month. We also pay a plan management fee of RMB 1,500
($219) per month pursuant to the lease. We have filed and registered
this lease with the Shenzhen Bao’an District Office of Housing Lease Management,
the relevant government authority in the PRC. The Company subleases a
portion of the factory space and dormitory space to two sublessees pursuant to
two subleases.
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Legal
Proceedings
We are not involved in any material
legal proceedings outside of the ordinary course of our
business.
13
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 Current
Report on Form 8-K before deciding whether to purchase our common
stock. Our business, financial condition or results of operations
could be materially adversely affected by these risks if any of them actually
occur. Our shares of common stock are not currently listed or quoted
for trading on any national securities exchange or national quotation
system. If and when our common stock is traded, the trading price
could decline due to any of these risks, and an investor may lose all or part of
his or her investment. Some of these factors have affected our
financial condition and operating results in the past or are currently affecting
us. This Current Report on Form 8-K also contains forward-looking
statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks described below
and elsewhere in this Current Report on Form 8-K.
Adverse
trends in the electronics industry, such as an overall decline in price or a
shift away from products that incorporate the Company’s products may cause a
decline in our sales and profitability.
Our
business depends on the strength of the electronics industry, which is subject
to rapid technological change, short product life cycles and profit margin
pressures. 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. A 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. Electronic device manufacturers expect suppliers, such
as our company, to cut their costs and lower the price of their products to
lessen the negative impact on the electronic device manufacturer’s own profit
margins. As a result, we have previously reduced the price of some of our
portable electronic products and expect to continue to face market-driven
downward pricing pressures in the future. Our results of operations will suffer
if we are unable to offset any declines in the average selling prices of our
products by developing new or enhanced products with higher selling prices or
gross profit margins, increasing our sales volumes or reducing our production
costs.
Additionally,
the electronics industry historically has been cyclical and subject to
significant downturns characterized by diminished product demand, accelerated
erosion of average selling prices and production over-capacity. It is also
characterized by sudden upswings in the cycle, which can lead to shortages of
key components needed for our business, for which there is not always an
alternative source. Economic conditions affecting the electronics industry in
general or our major customers may adversely affect our operating results if our
customers decide to purchase fewer products from us or decrease the prices at
which they are willing to purchase our products. If our customers’
products fail to gain widespread commercial acceptance, become obsolete or
otherwise suffer from low sales volume, our revenues and profitability may
stagnate or decline.
We
depend on the market acceptance of our customers’ products, and significant
slowdown in demand for those products would reduce our revenues and
profits.
Currently,
we do not sell our products to end-users. We sell our products to OEMs and
branded manufacturers that incorporate our LCM products into their
products. As a result, our success depends almost entirely upon the
widespread market acceptance of our customers’ products. Any significant
slowdown in the demand for our customers’ products would in turn reduce demand
for our products and likely reduce our revenues and profits. Therefore, we must
identify industries that have significant growth potential and establish strong,
long-term relationships with manufacturers in those industries. Our failure to
identify potential growth opportunities or establish these relationships would
limit our revenue growth and profitability.
Because
we do not have long-term purchase orders or commitments with our customers, our
customers can terminate their relationship with us at any time, which could
cause a material adverse effect on our results of operations.
All of
our significant customers issue purchase orders solely in their own discretion,
often only one to two 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, which could result in excess and obsolete inventory. 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.
14
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.
Substantial
defaults by our customers on accounts receivable or the loss of significant
customers could have a material adverse effect on our business.
We extend
credit to our customers based on assessments of their financial circumstances,
generally without requiring collateral. Our accounts receivable has
been an increasingly significant portion of our current assets, representing
$10.4 million, $5.5 million and $4.1 million, or 50.8%, 38.1% and 44.8% of
current assets, as of September 30, 2010, December 31, 2009 and December 31,
2008, respectively. As of September 30, 2010, we had 5 customers who
each accounted for over 5% of our accounts receivable, however, no customer
accounted more than 10% of our accounts receivable as of that date. 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 depend on a limited number of
suppliers for components for our LCM products. The inability to secure
components for our products could reduce our revenues and adversely affect our
relationship with our customers.
We use a
broad range of materials and suppliers in our LCM products, including LCDs,
integrated circuits, ITO glass and LEDs. We rely on a limited number
of suppliers for certain component parts and raw materials. For the nine months
ended September 30, 2010 and the year ended December 31, 2009, we had 8 and 4
suppliers, respectively, that accounted for at least 5% of our
purchases. Although there are many suppliers for each of
our component parts and raw materials, we are dependent on a limited number of
suppliers for many of the significant components and raw materials. This
reliance involves a number of significant potential risks,
including:
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lack of availability of materials
and interruptions in delivery of components and raw materials from our
suppliers;
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manufacturing delays caused by
such lack of availability or interruptions in
delivery;
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fluctuations in the quality and
the price of components and raw materials;
and
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risks related to foreign
operations.
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We generally do not have any long-term
or exclusive purchase commitments with any of our suppliers. Our
failure to maintain existing relationships with our suppliers or to establish
new relationships in the future could also negatively affect our ability to
obtain our components and raw materials used in our products in a timely manner.
A significant disruption in the supply of these materials could decrease
production and shipping levels, materially increase our operating costs and
materially adversely affect our profit margins. If we are unable to
obtain ample supply of products from our existing suppliers or alternative
sources of supply, we may be unable to satisfy our customers’ orders which could
materially and adversely affect our revenues and our relationship with our
customers.
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Our
operations would be materially adversely affected if third-party carriers were
unable to transport our products on a timely basis.
All of
our products are shipped through third party carriers. If a strike or other
event prevented or disrupted these carriers from transporting our products,
other carriers may be unavailable or may not have the capacity to deliver our
products to our customers. If adequate third party sources to ship our products
were unavailable at any time, our business would be materially adversely
affected.
We
may develop new products that may not gain market acceptance, and our
significant costs in designing and manufacturing services for new product
solutions may not result in sufficient revenue to offset those costs or to
produce profits.
We
operate in an industry characterized by frequent and rapid technological
advances, the introduction of new products and new design and manufacturing
technologies. As a result, we may be required to expend funds and commit
resources to research and development activities, possibly requiring additional
engineering and other technical personnel; purchasing new design, production,
and test equipment; and continually enhancing design and manufacturing processes
and techniques. We may invest in equipment employing new production techniques
for existing products and new equipment in support of new technologies that fail
to generate adequate returns on the investment due to insufficient productivity,
functionality or market acceptance of the products for which the equipment may
be used. We could, therefore, incur significant sums in design and manufacturing
services for new product solutions that do not result in sufficient revenue to
make those investments profitable. Furthermore, customers may change or delay
product introductions or terminate existing products without notice for any
number of reasons unrelated to us, including lack of market acceptance for a
product. Our future operating results will depend significantly on our ability
to provide timely design and manufacturing services for new products that
compete favorably with design and manufacturing capabilities and third party
suppliers.
Our products may contain errors or
defects, which could result in the rejection of our products, damage to our
reputation, lost revenues, diverted development resources and increased service
costs, warranty claims and litigation.
Our
products are complex and must meet stringent user requirements. In addition, we
must develop our products to keep pace with the rapidly changing portable
electronic device market. Sophisticated electronic products like ours are likely
to contain undetected errors or defects, especially when first introduced or
when new models or versions are released. Our products may not be free from
errors or defects after shipments have begun, which could result in returns,
claims, delayed shipments, rejection of our products and jeopardize our
relationship with our customers. End users may also reject or find issues with
our products and have a right to return them even if the products are free from
errors or defects. In either case, returns or quality issues could result in
damage to our reputation, lost revenues, diverted development resources,
increased customer service and support costs, and litigation which could harm
our business, results of operations and financial condition.
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 and became effective on July 1, 2010, 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
rely heavily on the founder of Shenzhen Feigeda and our current Chief Executive
Officer, Wu Zuxi. 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 Wu
Zuxi, who is one of the co-founders of Shenzhen Feigeda and our current Chairman
of the Board and Chief Executive Officer. Mr. Wu 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. Wu 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. Wu or any other executive officer. The loss of Mr. Wu could
significantly delay or prevent the achievement of our business objectives and
adversely affect our business, financial condition and results of
operations.
16
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. The main elements of
competition in the small-to-medium sized LCM industry include price, product
performance features and reliability, customer service and design support,
ability to reduce production costs, 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.
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.
Our
customers may decide to design and/or manufacture the products that they
currently purchase from us, which may reduce our revenues and profits, as we may
not be able to compete successfully with these in-house
developments.
Our
competitive position could also be adversely affected if one or more of our
customers decide to design and/or manufacture their own LCM displays. We may not
be able to compete successfully with these in-house developments by our
customers, which would tend to favor their in-house supply over our products,
even in cases where price and quality may not be comparable. If we
cannot compete successfully with these in-house developments or if we cannot
find new customers to replace lost orders from such customers, our revenues and
results of operations would be negatively 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 insurance coverage in the future, and even if we
are able to obtain coverage, we may not carry sufficient insurance coverage to
satisfy potential claims. Should uninsured losses occur, any purchasers of our
common stock could lose their entire investment.
17
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
are dependent on a technically trained workforce and an inability to retain or
effectively recruit such employees could have a material adverse effect on our
business, financial condition and results of operations.
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.
We
may not make enough contributions for our employees in relation to the social
insurance and housing assistance fund, which may result in fines and legal
sanctions.
Our PRC
subsidiary, Shenzhen Feigeda is subject to various social insurance and housing
fund laws and regulations in the PRC. Pursuant to these laws and regulations,
Shenzhen Feigeda must obtain and renew a social insurance registration
certificate and housing fund certificate and make sufficient contributions to
the local social insurance and housing fund authorities for our PRC employees.
Failure to comply with such laws and regulations would subject Shenzhen Feigeda
to various fines and legal sanctions and supplemental contributions to the local
social insurance and housing fund authorities. Feigeda has not obtained the
required housing fund certificate and has failed to make sufficient
contributions both to the local social insurance and housing fund authorities
for our PRC employees. The local
competent authority may require Shenzhen Feigeda to make up the supplemental
social insurance contributions within a specified time period, if Shenzhen
Feigeda fails to make sufficient contributions. In addition to making
up the supplemental social insurance contributions, Shenzhen Feigeda will be
required to pay overdue fees equal to 0.2% of the outstanding social insurance
contributions per day from the date of the nonpayment of the social insurance
contributions. The housing funds administrative authority may impose Shenzhen
Feigeda a fine of not less than RMB10, 000 and not more than RMB50,000 for its
failure to open housing provident funds accounts. Further, the local
housing funds administrative authority may require Shenzhen Feigeda to make up
the supplemental housing fund contributions to a designated account within a
specified time period. If Shenzhen Feigeda fails to do so within the
specified time period, the local housing authority may seek
judicial enforcement against Shenzhen Feigeda to make such
payment. As a result, it may adversely affect our business and
results of operations.
18
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.
Our
business may be adversely affected by the global economic downturn, in addition
to the continuing uncertainties in the financial markets.
The global economy is currently in a
pronounced economic downturn. Global financial markets are continuing to
experience disruptions, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, and uncertainty about economic stability. Given
these uncertainties, there is no assurance that there will not be further
deterioration in the global economy, the global financial markets and consumer
confidence. Any economic downturn generally or any decrease in consumer spending
in the PRC could decrease demand for consumer products in incorporating our LCM
products and would have a material adverse effect on our business, cash flows,
financial condition and results of operations.
Although we believe we have adequate
liquidity and capital resources to fund our operations internally, in light of
current market conditions, our inability to access the capital markets on
favorable terms, or at all, may adversely affect our financial performance. The
inability to obtain adequate financing from debt or capital sources could force
us to self-fund strategic initiatives or even forego certain opportunities,
which in turn could potentially harm our performance.
Our
business could be materially adversely affected if we infringe on the
intellectual property rights of others.
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:
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New Product Launch:
With the growth of our product portfolio, we experience increased
complexity in coordinating product development, manufacturing, and
shipping. As this complexity increases, it places a strain on our ability
to accurately coordinate the commercial launch of our products with
adequate supply to meet anticipated customer demand and effective
marketing to stimulate demand and market acceptance. If we are unable to
scale and improve our product launch coordination, we could frustrate our
customers and lose retail shelf space and product
sales;
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Forecasting, Planning and
Supply Chain Logistics: With the growth of our product portfolio,
we also experience increased complexity in forecasting customer demand and
in planning for production, and transportation and logistics management.
If we are unable to scale and improve our forecasting, planning and
logistics management, we could frustrate our customers, lose product sales
or accumulate excess inventory;
and
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Support
Processes: To manage the growth of our operations, we
will need to continue to improve our transaction processing, operational
and financial systems, and procedures and controls to effectively manage
the increased complexity. If we are unable to scale and improve these
areas, the consequences could include: delays in shipment of product,
degradation in levels of customer support, lost sales, decreased cash
flows, and increased inventory. These difficulties could harm or limit our
ability to expand.
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Our
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.
Factors
that may affect our quarterly results include:
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vulnerability
of our business to a general economic downturn in China and
globally;
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fluctuation
and unpredictability of costs related to raw materials used to manufacture
our products;
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changes
in the laws of the PRC that affect our
operations;
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competition;
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compensation
related expenses;
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application
of accounting standards;
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our
ability to obtain and maintain all necessary government certifications
and/or licenses to conduct our business;
and
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development
of a public trading market for our
securities.
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We
may need additional capital to implement our current business strategy, which
may not be available to us, and if we raise additional capital, it may dilute
your ownership in us.
We currently depend on net revenues to
meet our short-term cash requirements. In order to grow revenues and
sustain profitability, we will need additional capital. 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.
We
may pursue future growth through strategic acquisitions and alliances which may
not yield anticipated benefits and may adversely affect our operating results,
financial condition and existing business.
We may seek to grow in the future
through strategic acquisitions in order to complement and expand our business.
The success of our acquisition strategy will depend on, among other
things:
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the
availability of suitable
candidates;
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competition
from other companies for the purchase of available
candidates;
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our
ability to value those candidates accurately and negotiate favorable terms
for those acquisitions;
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the
availability of funds to finance
acquisitions;
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the
ability to establish new informational, operational and financial systems
to meet the needs of our business;
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the
ability to achieve anticipated synergies, including with respect to
complementary products or services;
and
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the
availability of management resources to oversee the integration and
operation of the acquired
businesses.
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If we are not successful in integrating
acquired businesses and completing acquisitions in the future, we may be
required to reevaluate our acquisition strategy. We also may incur substantial
expenses and devote significant management time and resources in seeking to
complete acquisitions. Acquired businesses may fail to meet our performance
expectations. If we do not achieve the anticipated benefits of an acquisition as
rapidly as expected, or at all, investors or analysts may not perceive the same
benefits of the acquisition as we do. If these risks materialize, our stock
price could be materially adversely affected.
We
face risks related to natural disasters, terrorist attacks or other
unpredictable events in China 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 where all of our operations are located. 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. The occurrence of any future
disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer
viruses, transportation disasters or other events, 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 operations. We may incur expenses relating to such damages,
which could have a material adverse effect on our business and results of
operations.
We
may adopt an equity incentive plan under which we may grant securities to
compensate employees and other services providers, which would result in
increased share-based compensation expenses and, therefore, reduce net
income.
We may adopt an equity incentive plan
under which we may grant shares or options to qualified employees. Under current
accounting rules, we would be required to recognize share-based compensation as
compensation expense in our statement of operations, based on the fair value of
equity awards on the date of the grant, and recognize the compensation expense
over the period in which the recipient is required to provide service in
exchange for the equity award. We have not made any such grants in the past, and
accordingly our results of operations have not contained any share-based
compensation charges. The additional expenses associated with share-based
compensation may reduce the attractiveness of issuing stock options under an
equity incentive plan that we may adopt in the future. If we grant equity
compensation to attract and retain key personnel, the expenses associated with
share-based compensation may adversely affect our net income. However, if we do
not grant equity compensation, we may not be able to attract and retain key
personnel or be forced to expend cash or other compensation instead.
Furthermore, the issuance of equity awards would dilute the stockholders’
ownership interests in our company.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
As
substantially all of our assets are located in the PRC and all of our revenues
are derived from our operations in China, 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.
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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. Decided legal cases do not have so much value
as precedent in China as those in the common law system prevalent in the United
States. There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including but not limited to,
governmental approvals required for conducting business and investments, laws
and regulations governing the consumer electronics business and electric product
safety, national security-related laws and regulations and export/import laws
and regulations, as well as commercial, antitrust, patent, product liability,
environmental laws and regulations, consumer protection, and financial and
business taxation laws and regulations.
The Chinese government has been
developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic matters.
However, because these laws and regulations are relatively new, and because of
the limited volume of published cases and judicial interpretation and their lack
of force as precedents, interpretation and enforcement of these laws and
regulations involve significant uncertainties. New laws and regulations that
affect existing and proposed future businesses may also be applied
retroactively.
Our PRC subsidiary, Shenzhen Feigeda,
is considered a foreign invested enterprise under PRC laws, and as a result is
required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of existing or new
PRC laws or regulations may have on our businesses. If the relevant authorities
find us in violation of PRC laws or regulations, they would have broad
discretion in dealing with such a violation, including, without
limitation:
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levying
fines;
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revoking
our business license, other licenses or
authorities;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
All of our current operations are
conducted in China. Moreover, all of our directors and officers are nationals
and residents of China. All or substantially all of the assets of these persons
are located outside the United States and in the PRC. As a result, it may not be
possible to effect service of process within the United States or elsewhere
outside China upon these persons. In addition, uncertainty exists as to whether
the courts of China would recognize or enforce judgments of U.S. courts obtained
against us or such officers and/or directors predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof, or
be competent to hear original actions brought in China against us or such
persons predicated upon the securities laws of the United States or any state
thereof.
The
scope of the business license for Shenzhen Feigeda in China is limited, and we
may not expand or continue our business without government approval and renewal,
respectively.
Our principal operating entity,
Shenzhen Feigeda, can only conduct business within its approved business scope,
which ultimately appears on its business license. Shenzhen Feigeda’s
business license covers its present business to produce and market LCM modules,
develop technology related to electronic products, and wholesale, import and
export, and provide related services for LCM modules and electronic
products. Companies that operate outside the scope of their licenses
can be subjected to fines, disgorgement of income and ordered to cease
operations. Prior to expanding our business beyond that of our
business licenses, we are required to apply and receive approval from the
relevant PRC government authorities. In order for us to expand our
business beyond the scope of our license, we will be required to enter into a
negotiation with the PRC authorities for the approval to expand the scope of our
business. We cannot assure investors that we will be able to obtain
the necessary government approval for any change or expansion of Shenzhen
Feigeda’s business.
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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. 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.
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.
Contract
drafting, interpretation and enforcement in China involve significant
uncertainty.
We have entered into numerous contracts
governed by PRC law, many of which are material to our business. As compared
with contracts in the United States, contracts governed by PRC law tend to
contain less detail and are not as comprehensive in defining contracting
parties’ rights and obligations. As a result, contracts in China are more
vulnerable to disputes and legal challenges. In addition, contract
interpretation and enforcement in China is not as developed as in the United
States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.
A
failure by our stockholders or beneficial owners who are PRC citizens or
residents to comply with certain PRC foreign exchange regulations could restrict
our ability to distribute profits, restrict our overseas and cross-border
investment activities or subject us to liability under PRC laws, which could
adversely affect our business and financial condition.
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 controlled by PRC residents
in mergers and acquisitions in China. This circular requires that (1) a PRC
resident shall register with a local branch of the SAFE before he or she
establishes or controls an overseas special purpose vehicle, or SPV, for the
purpose of overseas equity financing (including convertible debt financing); (2)
when a PRC resident contributes the assets of or his or her equity interests in
a domestic enterprise to an SPV, or engages in overseas financing after
contributing assets or equity interests to an SPV, such PRC resident must
register his or her interest in the SPV and any changes in such interest with a
local branch of the SAFE; and (3) when the SPV undergoes a material change
outside of China, such as a change in share capital or merger or acquisition,
the PRC resident shall, within 30 days from the occurrence of the event that
triggers the change, register such change with a local branch of the SAFE. In
addition, SAFE issued updated internal implementing rules, or the Implementing
Rules in relation to Circular 75. However, there exist uncertainties regarding
the SAFE registration for PRC residents’ interests in overseas companies.
If any PRC resident stockholder of a SPV fails to make the required SAFE
registration and amended registration, the onshore PRC subsidiaries of that
offshore company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore entity. Failure to comply with the SAFE registration and
amendment requirements described above could result in liability under PRC laws
for evasion of applicable foreign exchange restrictions. On December 16, 2010,
we closed the Share Exchange and several PRC citizens, including but not limited
to the former shareholders of Shenzhen Feigeda, Wu Zuxi and Bu Falin, became our
stockholders. As a result of the closing of the Share Exchange, such
PRC citizens, and any PRC citizens who become our stockholders in the future,
are subject to the requirement of registration with SAFE under Circular 75.
Because of uncertainty in how Circular 75 will be interpreted and enforced, we
cannot be sure how it will affect our business operations or future plans. We
attempt to comply, and attempt to ensure that our stockholders who are PRC
citizens or residents comply, with Circular 75 requirements. We have requested
Mr. Wu Zuxi and Mr. Bu Falin and other stockholders who are PRC residents to
make the necessary applications, filings and amendments as required under
Circular 75 and other related rules. However, we cannot assure you
that such PRC citizens or residents will be able to complete the necessary
approval and registration procedures required by the SAFE
regulations. Furthermore, we may not at all times be fully aware or
informed of the identities of all of our beneficial owners who are PRC citizens
or residents, and we may not always be able to compel beneficial owners of our
securities to comply with Circular 75 requirements. As a result, some or all of
our stockholders or beneficial owners who are PRC citizens or residents may not
at all times comply with, or in the future make or obtain any applicable
registrations or approvals required by, Circular 75 or other related
regulations. Failure by any PRC stockholder or beneficial
owner to register as required with the relevant branch of SAFE could
subject such stockholders or beneficial owners to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit Shenzhen
Feigeda’s ability to make distributions or pay dividends or affect our ownership
structure, which could adversely affect our business and
prospects.
23
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our ability to
operate.
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. The PRC regulatory
authorities may take the view that the Share Exchange and/or our restructuring
constitute a transaction which requires the prior approval of the CSRC. If the
authorities take such a position, we would attempt to find a way to re-establish
control of Shenzhen Feigeda’s business operations through a series of
contractual arrangements rather than an outright purchase of Shenzhen Feigeda.
However, we cannot assure you that any such contractual arrangements will be
protected by PRC law or that the Company can receive as complete or effective
economic benefit and overall control of Shenzhen Feigeda’s business than if the
Company had indirect ownership of Shenzhen Feigeda. In addition, we cannot
assure you that any such contractual arrangements can be successfully effected
under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the
PRC regulatory authorities to do so, and if we cannot put in place or enforce
relevant contractual arrangements as an alternative and equivalent means of
control of Shenzhen Feigeda, our business and financial performance will be
materially adversely affected.
If the CSRC approval is not obtained,
we may face regulatory actions or other sanctions from the CSRC or other PRC
regulatory agencies. These regulatory agencies may impose fines and penalties on
our operations in the PRC, limit our operating privileges in the PRC, delay or
restrict the repatriation of the proceeds from any financings into the PRC, or
take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as
the trading price of our common stock. The CSRC or other PRC regulatory agencies
also may take actions requiring us, or making it advisable for us, to halt any
proposed public offering before settlement and delivery of the common stock
offered thereby. Consequently, if investors engage in market trading or other
activities in anticipation of and prior to settlement and delivery, they do so
at the risk that settlement and delivery may not occur.
According
to the Revised M&A Regulations, a “Related Party Acquisition” is defined as
having taken place when a PRC business that is owned by PRC individual(s) is
sold to a non-PRC entity that is established or controlled, directly or
indirectly, by those same PRC individual(s). Under the Revised M&A
Regulations, any Related Party Acquisition must be approved by MOFCOM and any
indirect arrangement or series of arrangements which achieves the same end
result for the purpose of avoidance of the approval of MOFCOM incurred by a
Related Party Acquisition is a violation of the New M&A Regulations without
the approval of MOFCOM is a violation of PRC law.
24
Our BVI
subsidiary, Immense Fortune, and Immense Fortune’s Hong Kong subsidiary, Legend,
were owned by non-PRC individuals. Legend obtained all the equity interests of
Shenzhen Feigeda (the “Acquisition”) further to an Equity Transfer Agreement
dated March 2, 2009 (the “Equity Transfer Agreement”) by and among Legend, Bu
Falin and Wu Zuxi. With respect to the Restructuring, our PRC legal counsel, Han
Kun Law Offices, believes that: (i) the Equity Transfer Agreement and the
Acquisition have received all requisite approvals from the competent
authorities, and all required registrations, certifications and approvals for
the Equity Transfer Agreement and the Acquisition have been received by Shenzhen
Feigeda, except that the approval for the extension of the payment of the equity
purchase price is yet to be granted by competent PRC Government Agencies; (ii)
all authorizations from any PRC governmental authority required under the PRC
laws and regulations in connection with the Acquisition were obtained in writing
and are in full force and effect, and no such authorization has been withdrawn
or revoked.
On
December 6, 2010, we entered into the Exchange Agreement, pursuant to which,
several PRC citizens, including but not limited to the former shareholders of
Shenzhen Feigeda, Wu Zuxi and Bu Falin, become our stockholders upon the close
of the Share Exchange on December 16, 2010.
The PRC regulatory authorities may take
the view that the Acquisition and the Share Exchange are part of an overall
series of arrangements which constitute a Related Party Acquisition, because at
the end of these transactions, PRC individuals become majority owners and
effective controlling parties of a foreign entity that acquired ownership of
Shenzhen Feigeda. The PRC regulatory authorities may also take the view that the
approval of the Acquisition by competent government authorities in Shenzhen may
not evidence that the Acquisition has been properly approved because the
relevant parties did not fully disclose to the PRC government authorities the
overall restructuring arrangements, the existence of the Share Exchange and its
link with the Acquisition. As a result, the PRC government
authorities may require the MOFCOM’s approval for the Acquisition and impose
material regulatory actions or other sanctions on the Company and Shenzhen
Feigeda if the Company and Shenzhen Feigeda are unable to obtain the MOFCOM
approval or a waiver of such approval, if and when procedures are established to
obtain such a waiver. In such case, the PRC government authorities
could invalidate the Acquisition and our ownership of Shenzhen
Feigeda, impose fines and sanctions on operations of Shenzhen Feigeda in
China, delay or restrict the repatriation of the proceeds from any private or
public offerings by the Company into China, and limit Shenzhen Feigeda’s ability
to make distributions or pay dividends to the Company.
According to the Revised M&A
Regulations and other PRC rules regarding foreign exchange, an offshore
company’s shares can be used as consideration for the acquisition of a domestic
PRC company’s equity by foreign investors only under very limited circumstances.
Prior approval from the MOFCOM must be obtained before such a share exchange can
be done. If relevant PRC government authorities deem a future acquisition
of a domestic PRC company’s equity by us or our offshore subsidiary using our
common stock or other types of our securities as consideration to be a
transaction subject to the Revised M&A Regulations, complying with the
requirements of this regulation to complete such transactions could be
time-consuming and any required approval processes, including obtaining approval
from the MOFCOM, may delay or inhibit our ability to complete such transactions.
Any delay or inability to obtain applicable approvals to complete acquisitions
could affect our ability to expand our business or maintain our market
share. However, the application of the Revised M&A
Regulations remains unclear and it is uncertain whether a future
acquisition of a domestic PRC company’s equity by our domestic PRC subsidiary
using our common stock or other types of our securities as consideration will be
subject to such regulations.
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 with such
rules.
If
the land use rights of our landlord are revoked, we would be forced to relocate
operations.
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 could be 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. We
do not have any land use rights but each of our facilities relies on land use
rights of a landlord, and the loss of such rights would require us to identify
and relocate our operations, which could have a material adverse effect on our
financial conditions and results of operations.
25
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.
We
face uncertainty from China’s Circular on Strengthening the Administration of
Enterprise Income Tax on Non-Resident Enterprises' Share Transfer Income
(“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 10, 2009 that addresses the transfer of shares of Chinese resident
companies 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. While Circular 698 does not apply to shareholders who are
individuals, Finest Day Limited, the sole shareholders of Immense Fortune, was a
BVI company. The PRC authority has the discretion to determine
whether this enterprise shareholder is treated as a resident enterprise. If such
shareholder is recognized as a non-resident enterprise, Circular 698 may have
been applicable to the Share Exchange due to the transfer of shares of Immense
Fortune, which directly holds the equity interests of Shenzhen Feigeda, to
the Company by such enterprise shareholder. Circular 698 provides
that where a non-resident enterprise investor indirectly transfers the equity of
a PRC resident enterprise, if the overseas intermediary holding company being
transferred by the non-resident enterprise is established in a country/region
where the effective tax rate is less than 12.5% or which does not tax the
overseas income of its residents, the non-resident enterprise must submit the
required documents to the PRC tax authority in charge of the PRC resident
enterprise within 30 days after the equity transfer agreement is
concluded. However, 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. We have not provided any information to the relevant PRC
tax authorities regarding the share exchange transaction.
We have sought the advice, but not an
opinion, of PRC legal counsel regarding the application of and the risks
associated with Circular 698. 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. It
further provides that 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. However, there are no 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.
26
If the
PRC tax authorities determines that Circular 698 applies to the Share Exchange
and we need to make up underpaid taxes, the underpaid taxes will equal the
equity transfer gains multiplied by the applicable income tax rate determined by
the PRC tax authorities, and pursuant to Circular 698, equity transfer gains
will equal the balance of the equity transfer price after deducting the cost of
equity investment. However, because the transfer of the equity of Immense
Fortune by its original shareholder involved a share exchange transaction with
the Company, a "blank check" shell company at that time, it is difficult to
determine the fair market value of the shares of the Company, and thus the
equity transfer gains received by the original company shareholders. Circular
698 has not provided any guidance under such circumstances. The short
history of and lack of clear guidance on the application of Circular 698 make it
hard to quantify the tax consequences in advance.
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 our holding
companies, Feigeda Electronic Technology, Inc., a Delaware corporation, and
Immense Fortune, a company organized under the laws of the British Virgin
Islands. If Feigeda Electronic Technology, Inc. or Immense Fortune
is determined to be a PRC resident enterprise by PRC tax authorities, Circular
698 will not be applicable to any direct or indirect transfer of our
shareholdings in Shenzhen Feigeda, or in an intermediary holding company between
Feigeda Electronic Technology, Inc. and Shenzhen Feigeda. If Feigeda
Electronic Technology, Inc. or Immense Fortune is determined to be a
non-resident enterprise by the PRC tax authorities and the direct or indirect
transfer of our shareholdings in Shenzhen Feigeda, or in an intermediary holding
company between Feigeda Electronic Technology, Inc. and Shenzhen Feigeda, is
recognized by the tax authority in charge as the transfer of shares of Chinese
resident companies by nonresident companies, 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. Because Immense Fortune, a
British Virgin Islands company indirectly owns 100% of Shenzhen Feigeda and the
Company, a Delaware corporation, owns 100% of Immense Fortune, it is possible
that Circular 698 could apply to any transfer of shares of the Company or
Immense Fortune, as an indirect transfer of the equity of Shenzhen Feigeda, if
such transfers are not made through a public securities market or by
individuals. If the PRC tax authority determines that Circular 698 applies to
us, we will be obligated to make tax returns filings with the relevant PRC tax
authority in accordance with PRC tax laws and regulations. Failure to do
so will subject us to fines up to RMB 10,000 ($1,471). Furthermore,
if the PRC tax authority determines that our arrangement which resulted in the
underpayment of taxes was done to evade taxation, in addition to paying all the
underpaid taxes, we may be subject to further penalties including late fees,
fines ranging from 50% to 500% of the underpaid taxes, and even criminal
liabilities under grave circumstances.
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
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 U.S. 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 U.S. dollar.
As we may rely on dividends and other
fees paid to us by our subsidiary in China, any significant revaluation of the
Renminbi may materially and adversely affect our cash flows, revenues, earnings
and financial position, and the amount of, and any dividends payable on, our
shares in U.S. dollars. To the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount
we would receive from the conversion. Conversely, if we decide to convert our
Renminbi into U.S. dollars for the purpose of making payments for dividends
on our shares or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us. In addition, since our functional and
reporting currency is the U.S. dollar while the functional currency of our
subsidiary and affiliated consolidated entities in China is Renminbi,
appreciation or depreciation in the value of the Renminbi relative to the
U.S. dollar would have a positive or negative effect on our reported
financial results, which may not reflect any underlying change in our business,
results of operations or financial condition.
27
Governmental
control of currency conversion may limit our ability to utilize our
revenues.
Substantially all of our revenues and
expenses are denominated in Renminbi. Under PRC laws, the Renminbi is
currently convertible under a company’s “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the company’s “capital account,” which includes foreign direct investment
and loans, without the prior approval of SAFE. SAFE reserves the
discretion to deny the conversion of RMB into foreign currencies for capital
account transactions. Currently our PRC subsidiary, Shenzhen Feigeda, may
purchase foreign currencies for settlement of current account transactions,
including payments of dividends to us, without the approval of SAFE.
Therefore, Shenzhen Feigeda may convert revenues it generates in RMB into other
currencies, such as U.S. Dollars, for settlement of current account transactions
without having to obtain approval from SAFE. However, foreign exchange
transactions by Shenzhen Feigeda under the capital account continue to be
subject to significant foreign exchange controls and require the approval of or
need to register with PRC governmental authorities, including SAFE. Therefore,
Shenzhen Feigeda may not convert its revenues from RMB into other currencies for
capital account transactions, such as to repay a loan, without first obtaining
the approval of SAFE. If Shenzhen Feigeda borrows foreign currency loans
from us or other foreign lenders, these loans must first be registered with the
SAFE. If Shenzhen Feigeda, a wholly foreign-owned enterprise, borrows
foreign currency, the accumulative amount of its foreign currency loans shall
not exceed the difference between the total investment and the registered
capital of Shenzhen Feigeda. If we finance Shenzhen Feigeda by means of
additional capital contributions, these capital contributions must be approved
by certain government authorities such as the Ministry of Commerce or its local
counterparts. Additionally, the existing and future restrictions on currency
exchange may affect the ability of our PRC subsidiary or affiliated entities to
obtain foreign currencies, limit our ability to meet our foreign currency
obligations, or otherwise materially and adversely affect our
business.
The
ability of Shenzhen Feigeda, our Chinese operating subsidiary, to pay dividends
may be restricted due to foreign exchange control regulations of
China.
The
ability of Shenzhen Feigeda, our Chinese operating subsidiary, to pay dividends
may be restricted due to the foreign exchange control policies and availability
of cash balance of Shenzhen Feigeda. 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 Shenzhen
Feigeda’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.
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, in October
2010 China’s Consumer Price Index increased 4.4% year over year. 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 would likely
slow economic activity in China which could, in turn, materially increase our
costs and also reduce demand for our products and
services.
28
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 March 28, 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 known 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. Domestic individuals who are granted
shares or share options by companies listed on overseas stock exchanges based on
the employee share option or share incentive plan are required to register with
the State Administration of Foreign Exchange or its local counterparts. Pursuant
to Circular 78, PRC individuals participating in the employee stock option plans
of the overseas listed companies shall entrust their employers, including the
overseas listed companies and the subsidiaries or branch offices of such
offshore listed companies in China, or engage domestic agents to handle various
foreign exchange matters associated with their employee stock options plans. The
domestic agents or the employers shall, on behalf of the domestic individuals
who have the right to exercise the employee stock options, apply annually to the
State Administration of Foreign Exchange or its local offices for a quota for
the conversion and/or payment of foreign currencies in connection with the
domestic individuals’ exercise of the employee stock options. The foreign
exchange proceeds received by the domestic individuals from sale of shares under
the stock option plans granted by the overseas listed companies must be remitted
into the bank accounts in China opened by their employers or PRC
agents. We intend to adopt an equity compensation plan in
the future and make option grants to our officers and directors, most of whom
are PRC citizens. We will comply with Circular 78 when we adopt an equity
incentive plan. 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. If we are unable to compensate
our PRC employees and directors through equity compensation, our business
operations may be adversely affected.
Shenzhen
Feigeda 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, Shenzhen Feigeda has had tax advantages granted by local
government for enterprise income taxes. Shenzhen Feigeda was entitled to a
reduced corporate tax rate of 15% for all years prior to 2008 due to its
establishment in the Shenzhen Economic Zone. 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.
29
Under
the New EIT Law, we, Immense Fortune and Legend may be classified as “resident
enterprises” of China for tax purpose, which may subject us, Immense Fortune and
Legend 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, 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 Immense
Fortune. The Company has not sought the advice of PRC tax
counsel regarding the risks associated with the New EIT Law. Because
our, Immense Fortune and Legend’s members of management are located in China, we
believe it is likely that we, Immense Fortune and Legend meet the qualifications
of a “resident enterprise” and would be recognized as a Chinese “resident
enterprise,” subject to the ultimate judgment of the PRC tax authority, based on
the standard of “de facto management body”. “Resident enterprise”
treatment would not have impacted the Company’s results since the New EIT Law’s
effectiveness, as we have no taxable income and no dividends were paid by any of
our subsidiaries, including Immense Fortune, Legend and Shenzhen Feigeda.
If the PRC tax authorities determine that either we, Immense Fortune or Legend
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. The failure to pay such taxes
will subject us to fines up to RMB10,000 ($1,471). 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 on April 22, 2010, 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, Immense Fortune or Legend receives from
Shenzhen Feigeda 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. We have not
consulted with PRC tax counsel regarding the taxes that may be associated with
dividends paid by us.
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 Immense Fortune is holding Shenzhen
Feigeda, 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.
30
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. If we have such an obligation, our omission
or failure to fulfill such obligation may subject us to similar penalties to
those applied to a taxpayer, including fines up to RMB10,000, and in the case of
being recognized as constituting evasion of taxation, other than making up for
the underpaid taxes, we may be subject to further penalties including late fees,
fines ranging from 50% to 500% of the underpaid taxes, and even criminal
liabilities under grave circumstances.
SAFE
rules and regulations may limit our ability to transfer the net proceeds from
any offering of our securities to Shenzhen Feigeda, which may adversely affect
the business expansion of Shenzhen Feigeda, and we may not be able to convert
the net proceeds from an offering of our securities into Renminbi to invest in
or acquire any other PRC companies.
On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company
of foreign currency into Renminbi by restricting how the converted Renminbi may
be used. The notice requires that the registered capital of a foreign-invested
company settled in Renminbi converted from foreign currencies may only be used
for purposes within the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the registered
capital of a foreign-invested company settled in Renminbi converted from foreign
currencies. The use of such Renminbi capital may not be changed without SAFE’s
approval, and may not in any case be used to repay Renminbi loans if the
proceeds of such loans have not been used. Violations of Circular 142 will
result in severe penalties, such as heavy fines. As a result, Circular 142 may
significantly limit our ability to transfer the net proceeds from this offering
to Shenzhen Feigeda, and we may not be able to convert the net proceeds from
this offering into Renminbi to invest in or acquire any other PRC
companies.
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, such as the spread of H1N1 (“Swine”) Flu, in
the PRC could adversely affect our operations.
A renewed outbreak of SARS, Avian Flu
or another widespread public health problem, , such as the spread of H1N1
(“Swine”) Flu, in China, where all of our operations are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon our ability to continue to
manufacture our LCM products. Such an outbreak could have an impact on our
operations as a result of:
|
·
|
quarantines or closures of some
of our facilities, which would severely disrupt our
operations,
|
|
·
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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.
Further
downturn in the economy of the PRC may slow our growth and
profitability.
All of our revenues are generated from
sales in China. The growth of the Chinese economy has been uneven across
geographic regions and economic sectors, in large part due to the recent
downturn in the global economy, which resulted in slow growth of the China
economy. While the Chinese economy has recently begun to show signs of
improvement, there can be no assurance that growth of the Chinese economy will
be steady or that there will not be further deterioration in the global economy
as a whole or the Chinese economy in particular. If economic conditions
deteriorate further, our business and results of operations could be materially
and adversely affected, especially if such conditions result in a decreased use
of our products or in pressure on us to lower our prices.
31
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. GAAP and securities laws, and which could cause a materially
adverse impact on our financial statements, the trading of our common stock and
our business
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
difficulty hiring new employees in the PRC with experience and expertise
relating to U.S. GAAP and U.S. public-company reporting requirements. 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, material weaknesses or lack of compliance could result in
restatements of our historical financial information, cause investors to lose
confidence in our reported financial information, have an adverse impact on the
trading price of our common stock, adversely affect our ability to access the
capital markets and our ability to recruit personnel, lead to the delisting of
our securities from the stock exchange on which they are traded, lead to
litigation claims, thereby diverting management’s attention and resources, and
which may lead to the payment of damages to the extent such claims are not
resolved in our favor, lead to regulatory proceedings, which may result in
sanctions, monetary or otherwise, and have a materially adverse effect on our
reputation and business.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
There
is no current trading market for our common stock, and there is no assurance of
an established public trading market, which would adversely affect the ability
of our investors to sell their securities in the public market.
Our common stock is not currently
listed or quoted for trading on any national securities exchange or national
quotation system. We intend to apply for the listing of our common stock on the
Nasdaq Global Market or the NYSE Amex in the future. There is no guarantee that
Nasdaq Global Market or the NYSE Amex, or any other securities exchange or
quotation system, will permit our shares to be listed and traded. If we fail to
obtain a listing on the NYSE Amex Equities, we may seek quotation on the OTC
Bulletin Board. FINRA has enacted changes that limit quotations on the OTC
Bulletin Board to securities of issuers that are current in their reports filed
with the Securities and Exchange Commission. The effect on the OTC Bulletin
Board of these rule changes and other proposed changes cannot be determined at
this time. The OTC Bulletin Board is an inter-dealer, over-the-counter market
that provides significantly less liquidity than the Nasdaq Global Market and
NYSE Amex. Quotes for stocks included on the OTC Bulletin Board are not listed
in the financial sections of newspapers as are those for the NYSE Amex and The
NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and holders of common stock may be
unable to resell their securities at or near their original offering price or at
any price.
The
market price and trading volume of shares of our common stock may be
volatile.
When and if a market develops for our
securities, the market price of our common stock could fluctuate significantly
for many reasons, including for reasons unrelated to our specific performance,
such as reports by industry analysts, investor perceptions, or negative
announcements by customers, competitors or suppliers regarding their own
performance, as well as general economic and industry conditions. For example,
to the extent that other large companies within our industry experience declines
in their share price, our share price may decline as well. In addition, when the
market price of a company’s shares drops significantly, shareholders could
institute securities class action lawsuits against the company. A lawsuit
against us could cause us to incur substantial costs and could divert the time
and attention of our management and other resources.
32
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.
We also intend to register the
4,264,519 shares of common stock held by our stockholders immediately prior to
the Share Exchange and all of the 2,293,519 shares of common stock underlying
the warrants held by our stockholders immediately prior to the Share
Exchange. All of the shares included in an effective registration
statement may be freely sold and transferred, subject to a lock-up
agreement.
Additionally, following the Share
Exchange, the former shareholder of Immense Fortune and its designees may be
eligible to sell all or some of our shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144, promulgated
under the Securities Act (“Rule 144”), subject to certain
limitations. Under Rule 144, an affiliate stockholder who has
satisfied the required holding period may, under certain circumstances, sell
within any three-month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. As of the closing of the Share Exchange, 1% of our issued and
outstanding shares of common stock was approximately 194,209
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. Each of the
former shareholders of Immense Fortune have agreed to enter into a lock-up
agreement pursuant to which they will agree not to sell any of their securities
of the Company until 24 months after our common stock began to be listed on the
Nasdaq Global Market or NYSE Amex.
Following
the Share Exchange, the designees of Finest Day Limited, the former sold
shareholder of Immense Fortune, who received shares in the Share Exchange have
significant influence over us.
The designees of Finest Day Limited
beneficially own or control approximately 78.0% of our outstanding shares as of
the close of the Share Exchange and 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. These stockholders may also have the power to
prevent or cause a change in control. In addition, without the
consent of these stockholders, we could be prevented from entering into
transactions that could be beneficial to us. The interests of these
stockholders may differ from the interests of our other
stockholders.
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. The standards that must be met for
management to assess the internal control over financial reporting as effective
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. If we cannot assess our internal control over
financial reporting as effective, investor confidence and share value may be
negatively impacted.
In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any actual or
perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting, disclosure of management’s assessment of our
internal controls over financial reporting, or disclosure of our public
accounting firm’s attestation to or report on management’s assessment of our
internal controls over financial reporting may have an adverse impact on the
price of our common stock.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On December6, 2010, we entered into an
Amended and Restated Share Exchange Agreement with Immense Fortune, Legend,
Shenzhen Feigeda and Finest Day Limited, the sole shareholder of Immense
Fortune, pursuant to which we agreed to acquire 100% of the issued and
outstanding securities of Immense Fortune in exchange for shares of our common
stock. On December 16, 2010, the Share Exchange closed, Immense
Fortune became our 100%-owned subsidiary, and our sole business operations
became that of Immense Fortune and its subsidiaries. We also have a
new Board of Directors and management consisting mostly of persons from Immense
Fortune and Shenzhen Feigeda and changed our corporate name from “SRKP 20, Inc.”
to “Feigeda Electronic Technology, Inc.”
33
We may not realize the benefits that we
hoped to receive as a result of the Share Exchange, which include:
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·
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access
to the capital markets of the United
States;
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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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the
ability to use registered securities to make acquisition of assets or
businesses;
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increased
visibility in the financial
community;
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enhanced
access to the capital markets;
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improved
transparency of operations; and
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·
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perceived
credibility and enhanced corporate image of being a publicly traded
company.
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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 15, 2011. Our
management team will need to invest significant management time and financial
resources to comply with both existing and evolving standards for public
companies, which will lead to increased general and administrative expenses and
a diversion of management time and attention from revenue generating activities
to compliance activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our common stock, which is not
currently listed or quoted for trading, may be considered to be a “penny stock”
if it does not qualify for one of the exemptions from the definition of “penny
stock” under Section 3a51-1 of the Securities Exchange Act for 1934, as amended
(the “Exchange Act”), once, and if, it starts trading. Our common stock may be a
“penny stock” if it meets one or more of the following conditions (i) the stock
trades at a price less than $5.00 per share; (ii) it is NOT traded on a
“recognized” national exchange; (iii) it is NOT quoted on the Nasdaq Capital
Market, or even if so, has a price less than $5.00 per share; or (iv) is issued
by a company that has been in business less than three years with net tangible
assets less than $5 million.
The principal result or effect of being
designated a “penny stock” is that securities broker-dealers participating in
sales of our common stock will be subject to the “penny stock” regulations set
forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For
example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document at least two
business days before effecting any transaction in a penny stock for the
investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult and time consuming for holders of
our common stock to resell their shares to third parties or to otherwise dispose
of them in the market or otherwise.
34
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any
cash dividends on our shares of common stock in the foreseeable future and
currently intend to retain any future earnings for funding growth. As
a result, investors should not rely on an investment in our securities if they
require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors’ sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell
their shares of our common stock at or above the price they paid for
them.
35
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information contained in this
report, including in the documents incorporated by reference into this report,
includes some statement that are not purely historical and that are
“forward-looking statements” as defined by the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, but are
not limited to, statements regarding our and our management’s expectations,
hopes, beliefs, intentions or strategies regarding the future, including our
financial condition, results of operations, and the expected impact of the Share
Exchange on the parties’ individual and combined financial
performance. 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 report are based on current expectations and beliefs
concerning future developments and the potential effects on the parties and the
transaction. 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:
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Our
ability to raise additional capital to fund our
operations;
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Declines
in the average selling prices of our
products;
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Our
reliance on the expected growth in demand for our
products;
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Our
reliance on introducing new products on a timely
basis;
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Market
acceptance of our products;
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Exposure
to product liability and defect
claims;
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Exposure
to intellectual property claims from third
parties;
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Expected
growth in consumer spending and average income
levels;
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Changes
in the laws of the PRC that affect our operations and our corporate
structure;
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Inflation
and fluctuations in foreign currency exchange
rates;
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Our
ability to obtain all necessary government certifications, approvals,
and/or licenses to conduct our
business;
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Development
of a public trading market for our
securities;
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The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations;
and
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The
other factors referenced in this Current Report, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Business.”
|
These risks and uncertainties, along
with others, are also described above under the heading “Risk Factors.” Should
one or more of these risks or uncertainties materialize, or should any of the
parties’ assumptions prove incorrect, actual results may vary in material
respects from those projected in these forward-looking statements. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
may be required under applicable securities laws.
36
ADDITIONAL
DISCLOSURE
For additional information that would
be required if the Company were filing a general form for registration of
securities on Form 10, see Item 2.02 for “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” Item 3.03 for a description
of the Company’s securities post-Share Exchange and related discussion of market
price, and Item 4.01 regarding changes in the Company’s accountant, all
incorporated by reference herein. Required disclosure regarding the
change in control of the Company, the impact on its directors, executive
officers, control persons and related compensation and beneficial ownership
issues are addressed in Item 5.01, incorporated by reference
herein. Attention is also directed to Item 9.01, which provides our
unaudited financial statements as of and for the nine months ended September 30,
2010 and 2009 and our audited financial statements as of and for the years ended
December 31, 2009, 2008 and 2007.
Item 2.02 Results of Operations and Financial
Condition.
SELECTED
CONSOLIDATED FINANCIAL DATA
Consolidated Statements of
Operations
Nine Months Ended
September 30,
|
Years Ended December 31,
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|||||||||||||||||||||||||||
2010
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2009
|
2009
|
2008
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2007
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2006
|
2005
|
||||||||||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
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|||||||||||||||||||||||||
(all
amounts are in thousands)
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||||||||||||||||||||||||||||
Revenue
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$ | 54,565 | $ | 36,528 | $ | 50,499 | $ | 35,349 | $ | 24,787 | $ | 10,875 | $ | 4,824 | ||||||||||||||
Cost
of Goods Sold
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42,179 | 28,109 | 39,123 | 27,175 | 18,965 | 8,343 | 3,730 | |||||||||||||||||||||
Gross
Profit
|
12,386 | 8,419 | 11,376 | 8,174 | 5,822 | 2,532 | 1,094 | |||||||||||||||||||||
Operating
costs and expenses
|
||||||||||||||||||||||||||||
Selling
expenses
|
1,832 | 1,324 | 1,953 | 1,468 | 917 | 676 | 369 | |||||||||||||||||||||
General
and administrative
|
899 | 1,009 | 1,315 | 1,351 | 801 | 654 | 310 | |||||||||||||||||||||
Research
and development
|
853 | 531 | 760 | 378 | 294 | 286 | 137 | |||||||||||||||||||||
Loss
on disposal of assets
|
8 | 242 | 242 | - | - | - | - | |||||||||||||||||||||
Total
operating costs and expenses
|
3,592 | 3,106 | 4,270 | 3,197 | 2,012 | 1,616 | 816 | |||||||||||||||||||||
Income
from operations
|
8,794 | 5,313 | 7,106 | 4,977 | 3,810 | 916 | 278 | |||||||||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||||||
Loss
on loan guarantees
|
- | (239 | ) | (240 | ) | - | - | - | - | |||||||||||||||||||
Interest
income
|
66 | 69 | 108 | 76 | - | - | - | |||||||||||||||||||||
Interest
expense
|
(12 | ) | (78 | ) | (79 | ) | (68 | ) | (56 | ) | (50 | ) | - | |||||||||||||||
Total
other income (expenses)
|
54 | (249 | ) | (211 | ) | 8 | (56 | ) | (50 | ) | - | |||||||||||||||||
Income
before income taxes
|
8,848 | 5,065 | 6,895 | 4,985 | 3,754 | 866 | 278 | |||||||||||||||||||||
Income
taxes
|
(1,947 | ) | (997 | ) | (1,420 | ) | (933 | ) | (570 | ) | 136 | 42 | ||||||||||||||||
Net
Income
|
$ | 6,901 | $ | 4,068 | $ | 5,475 | $ | 4,052 | $ | 3,184 | $ | 730 | $ | 236 |
Consolidated Balance Sheets |
September 30,
|
December 31,
|
||||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Total
current assets
|
$ | 20,501 | $ | 13,990 | $ | 9,088 | $ | 6,677 | 3,328 | 821 | ||||||||||||||
Total
assets
|
25,928 | 18,674 | 11,646 | 8,982 | 4,978 | 1,296 | ||||||||||||||||||
Total
current liabilities
|
8,304 | 7,536 | 4,936 | 3,761 | 3,274 | 1,045 | ||||||||||||||||||
Total
liabilities
|
8,304 | 8,268 | 4,936 | 3,761 | 3,274 | 1,045 | ||||||||||||||||||
Total
stockholders' equity
|
17,624 | 10,406 | 6,710 | 5,221 | 1,704 | 251 |
37
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion relates to a discussion of the financial condition and
results of operations of Immense Fortune Holdings Limited (“Immense Fortune”),
and its subsidiaries. Collectively, Immense Fortune and its subsidiaries are
referred to throughout as the “Company,” “we,” “our,” and “us.”
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes, and the other financial information included in this
report. For a discussion of important factors that could cause actual
results to differ from results discussed in the forward-looking statements, see
above section entitled “Cautionary Statement Regarding Forward-Looking
Statements.”
Overview
Through Shenzhen Feigeda, we are
engaged in the research, development, production and sale of monochrome and
color small and medium sized liquid crystal display module (“LCM”) products
which are sold across China, Hong Kong and Macao. Our products are
used in a variety of consumer devices, including watches, cellular telephones,
MP3 and MP4 players, clocks, digital electronics, industrial controls and
instructions, and vehicle dashboard displays. We produce standardized
products, as well as customized products specifically designed to meet the needs
of a specific customer.
We have significantly increased our
production capacity over the past few years. In 2007, 2008 and 2009,
we had a total of 25, 29 and 59 production lines, respectively. The
increase in LCM production lines increased our annual manufacturing capacity
from 20 million LCM units in 2007 to 60 million LCM units in 2009. We
plan to increase the number of LCM production lines at our factory to increase
our manufacturing capacity to meet the increasing market demand for these
products. .
We believe that price is a primary
factor in electronic device manufacturers’ decisions to incorporate our LCM
products into their electric devices. We continue to explore ways to
control the cost of product manufacturing in order to provide our products at
low prices to our customers while continuing to offer high quality products. At
times, the 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 tight 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.
We price our products in accordance
with prevailing market conditions, giving consideration to the complexity of the
product, the order size, the strength and history of our relationship with the
customer and our capacity utilization. Our credit policy for sales to related
parties and other customers typically requires payment within 30 to 60 days. The
average number of collection days extended for sales to our customers for the
years ended December 31, 2007, 2008 and 2009, was 36 days, 38 days, 41 days,
respectively. We have experienced a significant decrease in the number of
collection days extended for sales to our customers primarily due to our
enhanced collection procedures and a strengthening of our receivables management
system which allowed for lower fluctuations in receivables as compared to
sales. In general, we extend longer credit terms to our large
customers compared to customers of our other products and our smaller
customers.
To further diversify our product
offerings, we intend to strengthen our relationship with our existing client
relationships and explore opportunities for product expansion with such
clients. We intend to establish partnerships with existing clients
whereby we develop and manufacture new products based on client
needs. We expect that these partnerships will increase our sales
revenue and product offerings.
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. We face challenges with the
expansion of our product portfolio such as:
38
|
·
|
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;
|
|
·
|
Forecasting, Planning and
Supply Chain Logistics: With the growth of our product portfolio,
we experience increased complexity in forecasting customer demand and in
planning for production, and transportation and logistics management;
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.
|
We have
experienced increased sales volume annually and as a result, we need to maintain
certain amounts of finished goods to meet the customers’ demand for our
products. We expect to experience increases 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.
Our
accounts receivable has been an increasingly significant portion of our current
assets. A significant deterioration in our ability to collect on accounts
receivable would affect our cash flow and working capital position and could
also impact the cost or availability of financing available to us.
Recent
Events
SRKP 20, Inc., a Delaware corporation
(“SRKP 20”), entered into an amended and restated share exchange agreement dated
December 6, 2010, with Immense Fortune, Legend Media, Shenzhen Feigeda and
Finest Day Limited, the sole shareholder of Immense Fortune, pursuant to which
Finest Day Limited would transfer all of the issued and outstanding securities
of Immense Fortune to SRKP 20 in exchange for 15,156,468 shares of SRKP 20’s
common stock. On December 16, 2010, the Share Exchange closed and
Immense Fortune became a wholly-owned subsidiary of SRKP 20, which immediately
changed its name to “Feigeda Electronic Technology, Inc.” A total of 15,156,468
shares were issued to Finest Day Limited and its designees. In
addition we agreed to pay a $14,100 success fee to WestPark Capital, Inc.
(“WestPark”) for services provided in connection with the Share Exchange,
including coordinating the share exchange transaction process, interacting with
principals of the shell corporation and negotiating the definitive purchase
agreement for the shell corporation, conducting a financial analysis of Immense
Fortune, conducting due diligence on Immense Fortune and its subsidiaries and
managing the interrelationships of legal and accounting
activities..
Critical
Accounting Policies and Estimates
We prepare our combined financial
statements in conformity with U.S. GAAP, which requires us to make estimates and
assumptions that affect the reported amounts of our assets and liabilities as of
the date of our financial statements and our revenues and expenses during the
financial reporting period. Our estimates and assumptions are based on available
information and our historical experience, as well as other estimates and
assumptions that we believe to be reasonable. The estimates and assumptions that
form the basis for our judgments may not be readily apparent from other sources.
We continually evaluate these estimates and assumptions based on the most
recently available information, our own experience and other assumptions that we
believe to be reasonable. Our actual results may differ significantly from
estimated amounts as a result of changes in our estimates or changes in the
facts or circumstances underlying our estimates and assumptions. Some of our
accounting policies require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical to an
understanding of our financial statements as their application places the most
significant demands on our management’s judgment. When reviewing our combined
financial statements, you should take into account:
|
·
|
our
critical accounting policies discussed
below;
|
|
·
|
the
related judgments made by our management and other uncertainties affecting
the application of these policies;
|
|
·
|
the
sensitivity of our reported results to changes in prevailing facts and
circumstances and our related estimates and assumptions;
and
|
39
|
·
|
the
risks and uncertainties described under “Risk
Factors.”
|
See note 2 to our consolidated
financial statements for additional information regarding our critical
accounting policies.
Revenue
recognition. We recognize revenue from the sale 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 collectability is
reasonably assured. Sales revenue is presented net of value added tax (VAT). 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 and the current economic
climate. We adjust the allowance for doubtful accounts using the
aging method.
Inventories. Inventories
include raw materials, packaging materials and finished goods. Finished goods
contain direct material, direct labor and manufacturing overhead and do not
contain general and administrative costs. Inventories are stated at
the lower of cost or market. Inventory costs are determined using the
weighted average basis. Costs of inventories include purchase and related costs
incurred in bringing the products to their present location and
condition.
Income
taxes. Under the tax laws of PRC, Shenzhen Feigeda has had tax
advantages granted by the local government in Shenzhen for corporate income
taxes and sales taxes. Prior to 2008, Shenzhen Feigeda was entitled
to a preferential corporate tax rate of 15%. 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, like Shenzhen Feigeda, the tax rate will be gradually increased
starting in 2008. Shenzhen Feigeda’s tax rates are as follows for the
following fiscal years:
Year
|
Tax Rate
|
|||
2008
|
18 | % | ||
2009
|
20 | % | ||
2010
|
22 | % | ||
2011
|
24 | % | ||
2012
and thereafter
|
25 | % |
Results
of Operations
The
following table sets forth information from our statements of operations for the
nine months ended September 30, 2010 and 2009 (unaudited) and the years ended
December 31, 2009, 2008 and 2007, in dollars (in thousands) and as a percentage
of revenue:
Nine Months Ended September 30,
|
Years Ended December 31,
|
|||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||||
Revenue
|
$ | 54,565 | 100.0 | % | $ | 36,528 | 100.0 | % | $ | 50,499 | 100.0 | % | $ | 35,349 | 100.0 | % | $ | 24,787 | 100.0 | % | ||||||||||||||||||||
Cost
of goods sold
|
42,179 | 77.3 | % | 28,109 | 77.0 | % | 39,123 | 77.5 | % | 27,175 | 76.9 | % | 18,965 | 76.5 | % | |||||||||||||||||||||||||
Gross
profit
|
12,386 | 22.7 | % | 8,419 | 23.0 | % | 11,376 | 22.5 | % | 8,174 | 23.1 | % | 5,822 | 23.5 | % | |||||||||||||||||||||||||
Operating
costs and expenses
|
||||||||||||||||||||||||||||||||||||||||
Selling
expenses
|
1,832 | 3.4 | % | 1,324 | 3.6 | % | 1,953 | 3.9 | % | 1,468 | 4.2 | % | 917 | 3.7 | % | |||||||||||||||||||||||||
General
and administrative
|
899 | 1.7 | % | 1,009 | 2.8 | % | 1,321 | 2.6 | % | 1,351 | 3.8 | % | 801 | 3.2 | % | |||||||||||||||||||||||||
Research
and development
|
853 | 1.6 | % | 531 | 1.5 | % | 760 | 1.5 | % | 378 | 1.1 | % | 294 | 1.2 | % | |||||||||||||||||||||||||
Loss
on disposal of assets
|
8 | * | 242 | 0.7 | % | 242 | 0.5 | % | - | - | - | - | ||||||||||||||||||||||||||||
Total
operating costs and expenses
|
3,592 | 6.6 | % | 3,106 | 8.6 | % | 4,270 | 8.5 | % | 3,197 | 9.0 | % | 2,012 | 8.1 | % | |||||||||||||||||||||||||
Income
from operations
|
8,794 | 16.1 | % | 5,313 | 14.5 | % | 7,106 | 14.1 | % | 4,977 | 14.1 | % | 3,810 | 15.4 | % | |||||||||||||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||||||||||||||||||
Loss
on loan guarantees
|
- | - | (239 | ) | 0.7 | % | (240 | ) | 0.5 | % | - | 0.2 | % | - | - | |||||||||||||||||||||||||
Interest
income
|
66 | 0.1 | % | 69 | 0.2 | % | 108 | 0.2 | % | 76 | 0.2 | % | * | * | ||||||||||||||||||||||||||
Interest
expense
|
(12 | ) | * | (78 | ) | 0.2 | % | (79 | ) | 0.2 | % | (68 | ) | 0.2 | % | (56 | ) | 0.2 | % | |||||||||||||||||||||
Total
other income (expenses)
|
54 | 0.1 | % | (249 | ) | 0.7 | % | (211 | ) | 0.4 | % | 8 | * | (56 | ) | 0.2 | % | |||||||||||||||||||||||
Income
before income taxes
|
8,848 | 16.2 | % | 5,065 | 13.9 | % | 6,895 | 13.7 | % | 4,985 | 14.1 | % | 3,754 | 15.2 | % | |||||||||||||||||||||||||
Income
taxes
|
(1,947 | ) | 3.6 | % | (997 | ) | 2.7 | % | (1,420 | ) | 2.8 | % | (933 | ) | 2.6 | % | (570 | ) | 2.3 | % | ||||||||||||||||||||
Net
Income
|
$ | 6,901 | 12.7 | % | $ | 4,068 | 11.1 | % | $ | 5,475 | 10.8 | % | $ | 4,052 | 12.7 | % | $ | 3,184 | 12.9 | % |
*Less
than 1,000 or 0.1%
40
Nine
Months ended September 30, 2010 and 2009
Revenues were $54.6 million for the
nine months ended September 30, 2010, an increase of $18.1 million, or 49.6%,
compared to $36.5 million for the same period in 2009. The increase
was attributable to $33.5 million in sales of our CSTN LCM products in the nine
months ended September 30, 2010, compared to no sales of such products in the
comparable period in 2009. The increase was also attributable to a
$14.6 million increase in sales of our TFT LCM products, which resulted from an
11.9% increase in the number of such products sold and a 269% increase in the
average selling price of such products. These increases
were partially offset by a $31.1 million decrease in sales of our TN, STN and
FSTN LCM products, which resulted from a decrease of 5.6 million in the number
of such products sold.
Cost of
goods sold was $42.2 million for the nine months ended September 30, 2010, an
increase of $14.1 million, 50.1%, compared to $28.1 million for the same period
in 2009. Cost of goods sold consists of the costs of raw materials and direct
labor and manufacturing overhead expenses. The increase of cost of
goods sold was primarily a result of an increase in our product sales and an
increase in the costs of raw materials for our LCM products. The quantity
of raw materials purchased increased by 66.5% during the nine months
ended September 30, 2010 as compared to the nine months ended September 30,
2009. As a percentage of revenue, cost of goods sold for
the nine months ended September 30, 2010 and 2009 were 77.3% and 77.0%,
respectively.
Gross
profit for the nine months ended September 30, 2010 was $12.4 million, or 22.7%
of revenues, an increase of $4.0 million or 47.1% compared to $8.4 million, or
23.0% of revenues, for the comparable period in 2009.
Selling
expenses were $1.8 million for the nine months ended September 30, 2010, an
increase of $0.5 million or 38.4%, compared to $1.3 million for the same
period in 2009. The increase primarily resulted from an increase of $0.3 million
in advertising expenses and an increase of $0.2 million in transportation
expenses in the nine months ended September 30, 2010 as compared to the same
period in 2009. The increase in advertising expenses was due to a
twelve fold increase in the number of magazine and newspaper
advertisements.
General
and administrative expenses were $0.9 million for the nine months ended
September 30, 2010, a decrease of $0.1 million, or 10.9%, compared to
$1.0 million for the same period in 2009. The decrease was primarily a
result of legal and audit fees recorded in the nine months ended September 30,
2009, partially offset by an increase in deprecation due to addition of fixed
assets. The general and administrative expense is consistent with costs incurred
in the same period of prior year.
Research
and development costs increased by approximately $0.4 million, from $0.5 million
in the nine months ended September 30, 2009 to $0.9 million in the nine months
ended September 30, 2010. The increase was primarily due to our
increase of $0.3 million in research and development costs associated with new
TFT LCM products.
Income
taxes for the nine months ended September 30, 2010 were $1.9 million, an
increase of $0.9 million over income taxes of $1.0 million for the
nine months ended September 30, 2009. The increase in income taxes
was primarily a result of an increase in our taxable income and an increase in
our income tax rate to 22% from 20% in the nine months ended September 30,
2009.
Net
income for the nine months ended September 30, 2010 was $6.9 million, an
increase of 69.6%, from net income of $4.1 million for the nine months
ended September 30, 2009.
Years
ended December 31, 2009 and 2008
Revenues were $50.5 million for the
year ended December 31, 2009, an increase of $15.2 million, or 42.9%, compared
to $35.3 million for the same period in 2008. The increase was
attributable to a $14.6 million increase in sale of our CSTN LCM products, which
resulted from a 30.5% increase in the number of units sold and a 27.1% increase
in the average selling price of such products, and a 0.22 million increase in
sales of our TFT LCM products, which resulted from a 12.0% increase in the
average selling price of such products and a 6.5% decrease in the number of such
products sold in the year ended December 31, 2009 as compared to the year ended
December 31, 2008. These increases were partially offset by a $3.3
million decrease in sales of our TN, STN and FSTN LCM products.
41
Cost of
goods sold was $39.1 million for the year ended December 31, 2009, an increase
of $11.9 million, or 44.0%, compared to $27.2 million for the same period in
2008. Cost of goods sold consists of the costs of raw materials and direct labor
and manufacturing overhead expenses. The increase of cost of goods
sold was primarily a result of an increase in our product sales and an increase
in the costs of raw materials for our LCM products. The quantity of raw
materials purchased increased by 6.7% while the average purchase price of
purchased raw materials increased by 21.1% during the year ended December 31,
2009 as compared to the year ended December 31, 2008. As a percentage of
revenue, cost of goods sold for the years ended December 31, 2009 and 2008 were
77.5% and 76.9%, respectively.
Gross
profit for the year ended December 31, 2009 was $11.4 million, or 22.5% of
revenues, an increase of $3.2 million or 39.2% compared to $8.2 million, or
23.1% of revenues, for the comparable period in 2008. The increase in our gross
profit for the year ended December 31, 2009 was due to an increase in revenue
for the period compared to the comparable period in 2008.
Selling
expenses were $2.0 million for the year ended December 31, 2009, an increase of
$0.5 million, or 33.0%, compared to $1.5 million for the same period in 2008.
The increase primarily resulted from a $0.2 million increase in marketing
expenses, a $0.2 million increase in transportation expenses and a $0.1 million
increase in labor costs. Advertising expenses increased from
$0.4 million in 2008 to $0.5 million in 2009. The small increase in
advertising expenses was due to increased costs spent in the number of magazine
and newspaper advertisements.
General
and administrative expenses were $1.3 million for the year ended December 31,
2009, which remained relatively flat compared to compared to $1.4 million for
the same period in 2008. The decrease was primarily the result of a decrease of
$0.1million in management expense. We spent $2.9 million on fixed
assets for our factory in 2009 as compared to $0.4 million in 2008, a 656%
increase. There was also a $0.1 million increase in entertainment expenses and a
$0.1 million increase in depreciation expenses.
Research
and development costs for the year ended December 31, 2009 were $0.8 million as
compared to $0.4 million in the comparable period in 2008, an increase of
101%. The increase in research and development expenses is a result
of our investment into the development of LCM products to increase our shares of
LCM market.
The year
ended December 31, 2009 also includes a $0.2 million loss on the disposal of
assets and a $0.2 million loss on loan guarantees related to a penalty fee for a
default on a loan guaranteed by the Company.
Income
taxes for the year ended December 31, 2009 were $1.4 million compared to income
taxes of $0.9 million for the year ended December 31, 2008. Our
income tax rate in 2009 was 20%, compared to 18% in 2008.
Net
income for the year ended December 31, 2009 was $5.5 million compared to net
income of $4.1 million for the year ended December 31, 2008.
Years
ended December 31, 2008 and 2007
Revenues were $35.3 million for the
year ended December 31, 2008, an increase of $10.5 million, or 42.6%, compared
to $24.8 million for the same period in 2007. The increase was
attributable to an $11.6 million increase in sale of our CSTN LCM products,
which resulted from a 179% increase in the number of units sold and a 24.5%
decrease in the average selling price of such products, and a $3.3 million
increase in sales of our TFT LCM products, which resulted from a 395% increase
in the number of such products sold and an 37.4% decrease in the average selling
price of such products, in the year ended December 31, 2008 as compared to the
year ended December 31, 2009. These increases were partially offset
by a $4.1 million decrease in sales of our TN, STN and FSTN LCM
products.
Cost of
goods sold was $27.2 million for the year ended December 31, 2008, an increase
of $8.2 million, or 43.3%, compared to $19.0 million for the same period in
2007. Cost of goods sold consists of the costs of raw materials and direct labor
and manufacturing overhead expenses. The increase of cost of goods
sold was primarily a result of an increase in our product sales and an increase
in the costs of raw materials for our LCM products. The average
purchase price of our raw materials increased by 65% while the quantity of raw
materials purchased decreased by 24% during the year ended December 31, 2008 as
compared to the year ended December 31, 2007. As a percentage of revenue, cost
of goods sold for the years ended December 31, 2008 and 2007 were 76.9% and
76.5%, respectively.
42
Gross
profit for the year ended December 31, 2008 was $8.2 million, or 23.1% of
revenues, an increase of $2.4 million or 40.1% compared to $5.8 million, or
23.5% of revenues, for the comparable period in 2007. The increase in our gross
profit margin for the year ended December 31, 2008 is primarily because of an
increase in the development and sale of more higher-margin
products. Revenues for our CSTN and TFT LCM products increased
by 104% in the year ended December 31, 2008 as compared to the year ended
December 31, 2007.
Selling
expenses were $1.5 million for the year ended December 31, 2008, an increase of
$0.6 million, or 60.1%, compared to $0.9 million for the same period in 2007.
The increase primarily resulted from an increase in marketing expenses we spent
on expanding our business. Advertising expenses increased by $0.1
million, from $0.3 million in 2007 to $0.4 million in 2008. The
increase in advertising expenses was due to a six fold increase in the number of
magazine and newspaper advertisements.
General
and administrative expenses were $1.4 million for the year ended December 31,
2008, an increase of $0.6 million or 68.7%, compared to $0.8 million for the
same period in 2007. The increase was primarily a result of a 400% increase in
telecommunication related charges, a 76% increase in rental expenses, a 213%
increase in entertainment charges related to business development, a 118%
increase in office expenses, and an 8.8% increase in labor costs.
Research
and development costs for the year ended December 31, 2008 were $0.4 million as
compared to $0.3 million in the comparable period in 2007. The
increase in research and development expenses is a result of our investment into
the development of new LCM products to increase our share of the LCM
market.
Income
taxes for the year ended December 31, 2008 were $1.0 million compared to income
taxes of $0.6 million for the year ended December 31, 2007. Our
income tax rate in 2008 was 18%, compared to 15% in 2007.
Net
income for the year ended December 31, 2008 was $4.1 million compared to net
income of $3.2 million for the year ended December 31, 2007.
Liquidity
and Capital Resources
We had
cash and cash equivalents of approximately $0.3 million as of September 30,
2010, as compared to $0.1 million as of December 31, 2009 and $0.2 million as of
December 31, 2008. Our funds are kept in financial institutions located in the
PRC, which do not provide insurance for amounts on deposit. Moreover,
we are subject to the regulations of the PRC which restrict the transfer of cash
from the PRC, except under certain specific circumstances. Accordingly, such
funds may not be readily available to us to satisfy obligations which have been
incurred outside the PRC.
To
provide liquidity and flexibility in funding our operations, we borrow amounts
under bank facilities and other external sources of financing. On
April 15, 2009, the Company obtained a one year term loan of RMB 8,000,000 (or
approximately $1,173,000) from Pudong Development Bank ("PDB") bearing interest
at approximately 110% of the prevailing prime rate at the time of the loan
(approximately 4%-5%). The loan, which was personally guaranteed by
the Company’s CEO, Mr. Wu, and his spouse, was repaid in full on April 14, 2010.
The loan was part of a package of loans PDB made to six different companies
where all the companies cross guarantee each others’ loans. In the event
one company defaulted on its loan, the other companies are required to cover the
loss incurred by the bank based on the percentage of the defaulted loan to
PDB. Additionally, each company was required to deposit a specified
percentage of the loan amount it received in an account held at PDB to be used
as collateral for the loans. The Company deposited RMB 960,000 (or
approximately $140,000) in the bank account as restricted cash, which was
refunded to the Company on April 15, 2010 upon the loan’s repayment in
full. The cross guarantee was limited to the restricted cash held at the
bank. The Company, based upon its review of the loans, believed there
was only a remote chance of any of the companies defaulting on these loans and
did not set up a reserve for any loss for this transaction. Due the
Company’s repayment of the loan in full in April 2010, it is no longer liable
for any defaults by any of the other companies pursuant to the cross
guarantee.
On June
15, 2009, we entered into a two-year loan agreement with Xinye Bank for RMB
5,000,000 (US$733,000). The loan matures on June 14, 2011 and is
interest free. The loan was granted by the Shenzhen Mid-to-Small
Enterprise Guarantee Center, a semi-government group, which authorized Xinye
Bank to advance the funds to the Company. The loan is personally
guaranteed by the Company’s CEO, Mr. Wu, and his spouse and a director of the
Company, Mr. Bu, and his spouse. Additionally, the loan is guaranteed
by Yongshen Electronic (JX) Cos. Ltd., a company controlled by Mr. Wu and Mr.
Bu. Mr. Bu’s personal residence is also collateral for the
loan.
43
Our
accounts receivable has been an increasingly significant portion of our current
assets, representing $10.4 million, $5.5 million and $4.1 million, or 50.8%,
39.2% and 44.8% of current assets, as of September 30, 2010, December 31, 2009
and December 31, 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.
As of
September 30, 2010, inventories amounted to $9.7 million, compared to $3.8
million as of December 31, 2009, and $2.3 million as of December 31, 2008. We
have experienced increased sales volume annually and as a result, we need to
maintain certain amounts of finished goods to meet the customers’ demand for our
products. We expect to experience increases 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. For the nine months ended September 30, 2010 and 2009 and
the years ended December 31, 2009 and 2008, our inventory turnover was 6,12,
13,and 13 times, respectively. The average days outstanding of our accounts
receivable at September 30, 2010 was 42 days, as compared to 41 days as of
December 31, 2009 and 38 days as of December 31, 2008. Inventory
turnover and average days outstanding are key operating measures that management
relies on to monitor our business.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total contributions to the
funds were approximately $15,600 and $10,500 for the nine months ended September
30, 2010 and 2009, respectively, and $10,700, $15,600 and $10,500 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.
Net cash
used in operating activities was $1.8 for the nine months ended September 30,
2010, as compared to net cash provided by operating activities of $1.5 million
for the nine months ended September 30, 2009. The difference was primarily due
to an increase of approximately $5.5 million in inventories and an increase of
approximately $2.0 million in accounts receivable, partially offset by an
increase of approximately $2.8 million in net income in the nine months ended
September 30, 2010 as compared to the comparable period in 2009. Net
cash provided by operating activities was $4.4 million for the year ended
December 31, 2009, compared to net cash provided by operating activities of $3.7
million for the year ended December 31, 2008. The $0.7 million difference was
primarily attributable to an increase of approximately $1.4 million in net
income, an increase of approximately $0.9 million increase in accounts
receivable, an increase of approximately $1.0 million increase in inventories,
and an increase of $0.2 million in VAT and other taxes payable in the year ended
December 31, 2009 as compared to the year ended December 31,
2008. Net cash provided by operating activities was $3.7 million for
the year ended December 31, 2008, compared to net cash provided by operating
activities of $2.0 million for the year ended December 31, 2007. The
increase in cash provided by operating activities was primarily due to an
increase of approximately $0.9 million in net income, an increase of
approximately $0.9 million in accounts receivable, and a decrease of
approximately $0.3 million in VAT and other taxes payable, in the year ended
December 31, 2008 as compared to the year ended December 31, 2007.
Net cash
provided by investing activities was approximately $3.3 million for the nine
months ended September 30, 2010, as compared to net cash used in investing
activities of $1.9 million for the comparable period in 2009. The
difference is primarily attributable to an increase of $1.8 million from
collections of short-term loans receivable, an increase of $1.7 million from
collections of advances to a related party, a decrease of approximately $0.9
million in advances to related parties and a $0.7 million decrease in the
purchases of property and equipment in the nine months ended September 30, 2010
as compared to the nine months ended September 30, 2009. Net cash used in
investing activities amounted to approximately $5.0 million and $1.6 million for
the years ended December 31, 2009 and 2008, respectively. The increase in net
cash used in investing activities was primarily attributable to an increase of
$2.6 million in expenses for the purchase of property and equipment, a decrease
of $0.8 million in the collection of advances to related parties and a decrease
of $0.9 million in collections of short-term loans receivable, partially offset
by a $0.7 million decrease in advances of short-term loans
receivable. Net cash used in investing activities amounted to
approximately $1.6 million in the year ended December 31, 2008, as compared to
$1.9 million for the comparable period in 2007. The decrease in net
cash used in investing activities was attributable to a $1.3 million increase in
collections of short-term loans receivable and a $1.3 million increase in
collections of advances to related party, partially offset by an increase of
$1.8 million in advances to a related party and an increase of $0.4 million in
expenses related to the purchase of property and equipment.
44
Net cash
used in financing activities was $1.3 million during the nine months ended
September 30, 2010, as compared to net cash provided by financing activities of
$0.5 million for the comparable period in 2009. The increase in cash
used in financing activities was mainly due to a $2.6 million decrease in
proceeds from loans payable and a $0.5 million increase in repayments to related
parties, partially offset by a $1.3 million decrease in repayments of loans
payable. Net cash provided by financing activities was $0.6 million
during the year ended December 31, 2009, as compared to net cash used in
financing activities of $2.0 million in the year ended December 31,
2008. The difference in cash provided by financing activities was
largely due to dividends paid of $3.9 million paid during fiscal
2008. Other factors included a $1.3 million increase in proceeds from
loans payable during the year ended December 31, 2009 as compared to the
comparable period in 2008 and an increase of $2.4 million in repayment of loans
payable. Net cash used in financing activities was $2.0 million
during the year ended December 31, 2008, as compared to $0.2 million for the
comparable period in 2007. The decrease in net cash used in financing
activities was largely due to dividends paid of $3.9 million paid during fiscal
2008. This decrease was partially offset by a $1.4 million increase
in proceeds from loans payable and a $1.4 million increase in contribution from
capital injection during the year ended December 31, 2008 as compared to the
year ended December 31, 2007.
Based
upon our present plans, we believe that our working capital together with cash
flow from operations and funds available to us through financing will be
sufficient to fund our capital needs for at least the next 12 months. We expect
that our primary sources of funding for our operations for the upcoming 12
months and thereafter will result from our operations and possibility of
conducting debt and equity financings. 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:
Payments due by Period (in $)
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1 - 3
Years
|
3 - 5
Years
|
More Than
5 Years
|
|||||||||||||||
Operating
Lease Obligations
|
$ | 1,388,058 | $ | 299,283 | $ | 970,304 | $ | 118,471 | $ | - | ||||||||||
Long-Term
Debt Obligations
|
$ | 731,250 | $ | 731,250 | $ | - | $ | - | $ | - | ||||||||||
Total
|
$ | 2,119,308 | $ | 1,030,533 | $ | 970,304 | $ | 118,471 | $ | - |
Seasonality
There is
no seasonal effect on our results of operations.
The table
below presents selected (unaudited) results of operations for the quarters
indicated. All amounts are in thousands.
Quarter Ended
|
||||||||||||||||
September 30,
2010
|
June 30,
2010
|
March 31,
2010
|
Total
|
|||||||||||||
Revenues
|
$ | 22,561 | $ | 17,829 | $ | 14,175 | $ | 54,565 | ||||||||
Gross
Profit
|
5,241 | 3,891 | 3,326 | 12,386 | ||||||||||||
Net
Income
|
3,088 | 2,072 | 1,741 | 6,901 |
45
Quarter Ended
|
||||||||||||||||||||
December 31,
2009
|
September 30,
2009
|
June 30,
2009
|
March 31,
2009
|
Total
|
||||||||||||||||
Revenues
|
$ | 13,971 | $ | 14,906 | $ | 12,346 | $ | 9,276 | $ | 50,499 | ||||||||||
Gross
Profit
|
3,019 | 3,492 | 2,770 | 2,095 | 11,376 | |||||||||||||||
Net
Income
|
1,961 | 1,418 | 1,201 | 895 | 5,475 |
Quarter Ended
|
||||||||||||||||||||
December 31,
2008
|
September 30,
2008
|
June 30,
2008
|
March 31,
2008
|
Total
|
||||||||||||||||
Revenues
|
$ | 10,126 | $ | 9,344 | $ | 8,810 | $ | 7,069 | $ | 35,349 | ||||||||||
Gross
Profit
|
2,452 | 2,109 | 2,042 | 1,571 | 8,174 | |||||||||||||||
Net
Income (loss)
|
1,204 | 1,155 | 1,019 | 674 | 4,052 |
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”). 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.
Item
3.02
|
Unregistered
Sales of Equity Securities.
|
On
December 16, 2010, pursuant to the terms of the Exchange Agreement, entered into
by and between SRKP 20, Inc. (“SRKP 20”), Immense Fortune, Shenzhen
Feigeda and Finest Day Limited, as the sole shareholder of Immense Fortune (as
described in Item 2.01 above), SRKP 20 issued 15,156,468 shares of common
stock to designees of Finest Day Limited in exchange for all of the issued and
outstanding securities of Immense Fortune. 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. 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 of
1933, as amended (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.
46
DESCRIPTION
OF SECURITIES - POST-SHARE EXCHANGE
Common
Stock
We are authorized to issue 100,000,000
shares of common stock, $0.0001 par value per share. Prior to the
Share Exchange, the stockholders of SRKP 20 held an aggregate of 8,532,193
shares. An aggregate of 4,267,674 shares were cancelled in
conjunction with the closing of the Share Exchange. There are
currently 19,420,987 shares of common stock issued and
outstanding. 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 the Company’s 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 completion of the Share
Exchange, the former shareholders of Immense Fortune and its designees own
approximately 78.0% 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.
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
Prior to the Share Exchange, the
stockholders of SRKP 20 held an aggregate of 9,206,755 warrants to purchase
shares of our common stock, and an aggregate of 6,913,236 warrants were
cancelled in conjunction with the closing of the Share
Exchange. Immediately after the closing of the Share Exchange, the
shareholders held an aggregate of 2,293,519 warrants with an exercise price of
$0.0001. The warrants expire five years from the closing date of the
Share Exchange.
MARKET
PRICE OF AND DIVIDENDS ON THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The shares of our common stock are not
currently listed or quoted for trading on any national securities exchange or
national quotation system. We intend to apply for the listing of our
common stock on the Nasdaq Global Market or the NYSE Amex. If and
when our common stock is listed or quoted for trading, the price of our common
stock will likely fluctuate in the future. 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:
47
|
·
|
Our
financial position and results of
operations;
|
|
·
|
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;
|
|
·
|
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.
|
Stockholders
of Record
As of December 16, 2010, there were 32
stockholders of record of our common stock.
Dividends
There were no dividends paid during the
nine months ended September 30, 2010 or the year ended December 31,
2009. In the year ended December 31, 2008, Shenzhen Feigeda declared
and paid dividends of $3.9 million.
DELAWARE
ANTI-TAKEOVER LAW AND CHARTER AND BYLAW 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
|
|
·
|
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.
|
48
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 its 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;
|
|
·
|
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 its 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.
Item 4.01 Changes in Registrant’s Certifying
Accountant.
On December 16, 2010, Feigeda
Electronic Technology, Inc. (the “Company”) dismissed AJ. Robbins, PC ("AJ.
Robbins") as its independent registered public accounting firm following the
change in control of the Company on the closing of the Share
Exchange. The Company engaged AJ. Robbins to audit its financial
statements for the year ended December 31, 2009 and December 31,
2008. The decision to change accountants was approved and ratified by
the Company’s Board of Directors. The report of AJ. Robbins on the
financial statements of the Company for the years ended December 31, 2009 and
2008 did not contain any adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope, or accounting principle,
except for an explanatory paragraph relative to the Company’s ability to
continue as a going concern. Additionally, during the Company's two
most recent fiscal years and any subsequent interim period, there were no
disagreements with AJ. Robbins on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
procedure.
49
While AJ. Robbins was engaged by the
Company, there were no disagreements with AJ. Robbins on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure with respect to the Company, which disagreements if not
resolved to the satisfaction of AJ. Robbins would have caused it to make
reference to the subject matter of the disagreements in connection with its
report on the Company’s financial statements for the fiscal year ended
December 31, 2009 or its report on the Company’s financial statements for
the fiscal year ended December 31, 2008.
The Company provided AJ. Robbins with a
copy of the disclosures to be included in Item 4.01 of this Current Report
on Form 8-K and requested that AJ. Robbins furnish the Company with a
letter addressed to the Commission stating whether or not AJ. Robbins agrees
with the foregoing statements. A copy of the letter from AJ. Robbins
to the Commission, dated December 21, 2010, is attached as Exhibit 16.1 to
this Current Report on Form 8-K.
The Company engaged MaloneBailey, LLP
(“MaloneBailey”) as the Company’s independent registered public accounting
firm as of December 16, 2010. MaloneBailey is and has been Immense
Fortune’s independent registered public accounting firm.
Changes
in Control of Registrant.
|
OVERVIEW
On
December 6, 2010, SRKP 20 entered into an amended and restated share exchange
agreement with Immense Fortune, Legend, Shenzhen Feigeda and Finest Day Limited,
the sole shareholder of Immense Fortune (the “Exchange Agreement”). Pursuant to
the Exchange Agreement, SRKP 20 agreed to issue an aggregate of 15,156,468
shares of its common stock in exchange for all of the issued and outstanding
securities of Immense Fortune (the “Share Exchange”). On December 16,
2010, the Share Exchange closed. Upon the closing of the Share
Exchange, SRKP 20 (i) became the 100% parent of Immense Fortune, (ii) assumed
the operations of Immense Fortune and its subsidiaries and (iii) changed its
name from “SRKP 20, Inc.” to “Feigeda Electronic Technology, Inc.”
Immediately following the closing of
the Share Exchange, the designees of Finest Day Limited, the former sole
shareholder of Immense Fortune, beneficially owned approximately 78.0% of our
issued and outstanding common stock and the pre-existing stockholders of SRKP 20
owned approximately 30.2%. Prior to the closing of the Share
Exchange, the stockholders of SRKP 20 agreed to the cancellation of an aggregate
of 4,267,674 shares held by them such that there were 4,264,519 shares
of common stock outstanding immediately prior to the Share
Exchange. We issued no fractional shares in connection with the Share
Exchange. SRKP 20 stockholders also canceled an aggregate of
6,913,236 warrants such that the stockholders held an aggregate of
2,293,519 warrants immediately prior to the Share
Exchange. Immediately after the closing of the Share Exchange, we had
19,420,987 outstanding shares of common stock, no shares of Preferred Stock, no
options, and warrants to purchase 2,293,519 shares of common stock.
Pursuant to the terms of the Share
Exchange, we agreed to register all of the 4,264,519 shares of common stock and
all of the 2,293,519 shares of common stock underlying the 2,293,519 warrants
held by the original SRKP 20 stockholders, all of which were outstanding
immediately prior to the closing of the Share Exchange.
The shares of our common stock are not
currently listed or quoted for trading on any national securities exchange or
national quotation system. We intend to apply for the listing of its
common stock on the Nasdaq Global Market or the NYSE Amex.
The shares of our common stock issued
to the designees of Finest Day Limited in connection with the Share Exchange
were not registered under the Securities Act of 1933, as amended (the
“Securities Act”) and, as a result, are “restricted securities” that may not be
offered or sold in the United States absent registration or an applicable
exemption from registration.
We intend to carry on the business of
Immense Fortune and its subsidiaries. Our relocated executive offices
became that of Shenzhen Feigeda, which are located at Building 66, Longwangmiao
Industrial Park, Baishixia, Fuyong Street, Baoan District, Shenzhen City,
Guangdong Province, P. R. China 518102.
For accounting purposes, the Share
Exchange is being treated as a reverse acquisition, because Finest Day
Limited and its designees own a majority of the issued and outstanding
shares of common stock of our company immediately following the Share
Exchange. Due to the issuance of the 15,156,487 shares of our common
stock, a change in control of our company occurred on December 16,
2010.
50
At the consummation of the Share
Exchange, SRKP 20’s board of directors immediately prior to the Share
Exchange, which consisted of Richard A. Rappaport and Anthony C. Pintsopoulos,
appointed Wu Zuxi and Bu Falin to the board of directors of our company, with Wu
Zuxi serving as Chairman. The directors and officers of SRKP 20
prior to the Share Exchange then resigned as officers and directors of our
company upon the closing of the Share Exchange. In addition,
concurrent with the closing of the Share Exchange, our board appointed Wu
Zuxi as our Chief Executive Officer, Costas “Michael” Takkas as our Chief
Financial Officer, and Cui Xiaoling as our Corporate
Secretary. Because of the change in the composition of our board of
directors and the exchange of securities pursuant to the Exchange Agreement,
there was a change-of-control of our company on the date the Share Exchange was
completed.
The execution of the Exchange Agreement
was reported in a Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 6, 2010. A copy of the Exchange
Agreement is filed as Exhibit 2.1 to this
Current Report on Form 8-K. The transactions contemplated by the
Exchange Agreement, as amended, were intended to be a
“tax-free” reorganization pursuant to the provisions of Sections 351 and/or
368(a) of the Internal Revenue Code of 1986, as amended.
EXECUTIVE
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Prior to the Share Exchange, Richard A.
Rappaport and Anthony C. Pintsopoulos served as directors of SRKP 20 and
Mr. Pintsopoulos served as Chief Financial Officer and Secretary and Mr.
Rappaport served as President of SRKP 20.
Upon
closing of the Share Exchange, the following individuals were named to the board
of directors and executive management of our company:
Name
|
Age
|
Position
|
||
Wu
Zuxi
|
43
|
Chief
Executive Officer and Chairman of the Board
|
||
Bu
Falin
|
30
|
Director
|
||
Costas
“Michael” Takkas
|
53
|
Chief
Financial Officer
|
||
Cui
Xiaoling
|
24
|
Corporate
Secretary
|
Wu Zuxi
has served as the Company’s Chief Executive Officer and Chairman of the Board
since December 2010. Mr. Wu has also served as a director of Immense
Fortune since September 2008. In April 2005, Mr. Wu co-founded
Shenzhen Feigeda and has served as the Chief Executive Officer and Director of
Shenzhen Feigeda since the company’s founding. In July 2003, Mr. Wu
founded Shenzhen Tongxingda Technology Co., Ltd. and served as its Chairman of
the Board until June 2006. From January 1998 to July 2003, Mr. Wu
worked in the mold department of Shenzhen China Display Technology Co.,
Ltd. From January 1996 to December 1997, Mr. Wu worked in the
research and development department of Shenzhen Hanglong Electronics Co.,
Ltd. Mr. Wu received a bachelor’s degree in Electronics from Jiangxi
University in 1990. We believe that Wu Zuxi’s knowledge of all
aspects of the Company’s business and his historical understanding of its
operations, combined with his years of experience in the electronics industry
and his drive for innovation and excellence, position him well to serve as our
Chairman and Chief Executive Officer.
Bu Falin
has served as a director of the Company since December
2010. Mr. Bu co-founded Shenzhen Feigeda in April 2005 and has served
as its General Manager and Director since that time. From June 2000
to December 2004, Mr. Bu served as the Quality Assurance Manager at the Shenzhen
H&T Electronic Technology Co. Ltd. From October 1999 to May 2000, Mr. Bu
worked in the Quality Assurance Department at Shenzhen China Display Technology
Co. Ltd. Mr. Bu received an MBA in Commerce and Management from the
University of Northern Virginia in 2008. We believe that Bu Falin’s
knowledge of all aspects of the Company’s business and his historical
understanding of its operations, combined with his years of experience in the
electronics industry and his drive for innovation and excellence, position him
well to serve as a member of our board of directors.
Costas “Michael”
Takkas has served as the Chief Financial Officer and Corporate Secretary
of the Company since December 2010. Mr. Takkas served as has served
as director and Chief Financial Officer of Sonnen Corp. (OTCBB: SONP.OB) since
July 2009. Since
August 2010, Mr. Takkas has served as the Chief Financial Officer of Abakan,
Inc. (OTCBB: ABKI). From July
2007 to June 2009, Mr. Takkas served as Observer and Major Financier of CPLAbor
do Brasil Construtora Ltda. (Brazil). From October 2002 to June 2007,
Mr. Takkas served as director and Chief Financial Officer of Strategic Rare
Earth Company. Mr. Takkas received a Bachelor’s of Science degree in
Physics from the Imperial College of Science and Technology, University of
London in 1978. Mr. Takkas has been a member of the Institute of
Chartered Accountants in England & Wales (ACA) since 1982.
51
Cui Xiaoling has served as the
Secretary of the Company since December 2010 and as the Secretary of Feigeda
Electronics (SZ) Co., Ltd. since June 2010. From October 2007 to May
2010, Cui Xiaoling worked in international sales at Shenzhen CXD Science &
Technology Co., Ltd. Cui Xiaoling received a Bachelor’s degree in
Business English from Central South University in 2007.
Family
Relationships
There are no family relationships among
any of the officers and directors.
Involvement
in Certain Legal Proceedings
There have been no events under any
bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or
decrees material to the evaluation of the ability and integrity of any director,
executive officer, promoter or control person of the Company during the past ten
years.
The Company is not aware of any legal
proceedings in which any director, nominee, officer or affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
voting securities of the Company, or any associate of any such director,
nominee, officer, affiliate of the Company, or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
Board
of Directors and Committees
Our Board of Directors does not
maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are
performed by its Board of Directors as a whole. We are not required
to maintain such committees under the rules applicable to companies that do not
have securities listed or quoted on a national securities exchange or national
quotation system. We intend to create board committees, including an
independent audit committee, in the near future. If we are successful
in listing our common stock on the NASDAQ Global Market or the NYSE Amex, we
would be required to have, prior to listing, an independent audit committee
formed, in compliance with the requirements for listing on the NASDAQ Global
Market or NYSE Amex and in compliance with Rule 10A-3 of the Securities Exchange
Act of 1934, as amended.
Director
Independence
None of our directors are considered
independent directors under NYSE Amex, even though such definition does not
currently apply to us because we are not listed on the NYSE Amex.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Compensation
Before the Share Exchange
Prior to the closing of the Share
Exchange on December 16, 2010, we were a “blank check” shell company named SRKP
20, Inc. (“SRKP 20”) that was formed to investigate and acquire a target company
or business seeking the perceived advantages of being a publicly held
corporation. The only officers and directors of SRKP 20, Richard Rappaport
and Anthony Pintsopoulos, SRKP 20’s President and Chief Financial Officer,
respectively, did not receive any compensation or other perquisites for serving
in such capacities. Messrs. Rappaport and Pintsopoulos resigned from
all of their executive and director positions with SRKP 20 upon the closing of
the Share Exchange and are no longer employed by or affiliated with our
company.
Prior to the closing of the Share
Exchange, our current named executive officers were compensated by Shenzhen
Feigeda until the closing of the Share Exchange, including for the year ended
December 31, 2009 and the period from January 1, 2010 to December 16,
2010. The compensation of executive officers of Shenzhen Feigeda was
determined by the Chief Executive Officer of Shenzhen Feigeda, Wu Zuxi, based on
the local market and the officers’ responsibilities, experience, potential,
individual performance, and contribution to the company. In addition,
the Board of Directors of Shenzhen Feigeda approved the
compensation. From January 1, 2010 to December 16, 2010 and during
the fiscal years of 2009, 2008 and 2007, the compensation for Shenzhen Feigeda’s
named executive officers consisted solely of each executive officer’s salary and
cash bonus. The management of Shenzhen Feigeda believes that the
salaries paid to our executive officers during 2009 and the period from January
1, 2010 to December 16, 2010 are indicative of the objectives of its
compensation program and reflect the fair value of the services provided to
Shenzhen Feigeda, as measured by the local market in China.
52
Compensation
After the Share Exchange
Upon the closing of the Share Exchange,
the some executive officers of Shenzhen Feigeda were appointed as our executive
officers and we adopted the compensation policies of Shenzhen Feigeda, 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 Shenzhen 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 as a
manufacturer of electronic products in Shenzhen. Our compensation
levels are at roughly the 100th-110th percentile of the compensation spectrum
for the manufacturing sector.
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
Shenzhen, 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.
If we
successfully complete our proposed listing of our common stock on the Nasdaq
Global Market or NYSE Amex, we may increase the amount of our bonuses to
management personnel if corporate and individual performance goals are
met. Generally, the amount of an annual 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%.
53
Our board of directors intends to
establish a compensation committee in 2011 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, Mr. Wu, upon consulting with our board members, determined the
compensation for our current executive officers. In 2011, our
compensation committee will determine 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. If paid, bonuses for executive officers in 2010 will be based
on company and individual performance factors, as described above.
If we successfully complete our
proposed listing on Nasdaq Global Market or NYSE Amex in 2011, we intend to
adjust our compensation evaluations upwards in 2011, including through the
payment of bonuses. However, in such case, we do not intend to
increase compensation by more than 20%. We believe that adopting
higher compensation in the future may be based on the increased amount of
responsibilities and the expansion of our business to be assumed by each of the
executive officers after we become 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 intend to adopt an equity incentive plan in the near future
and 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.
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
|
||||||||||
Wu
Zuxi
|
2009
|
$ | 36,000 | $ | 3,000 | $ | 39,000 | |||||||
Chief
Executive Officer and
|
2008
|
36,000 | 3,000 | 39,000 | ||||||||||
Chairman
of the Board
|
2007
|
36,000 | 3,000 | 39,000 | ||||||||||
|
||||||||||||||
Costas
“Michael” Takkas
|
2009
|
$ | - | $ | - | $ | - | |||||||
Chief
Financial Officer
|
2008
|
- | - | - | ||||||||||
2007
|
- | - | - | |||||||||||
|
||||||||||||||
Richard
Rappaport (1)
|
2009
|
$ | - | $ | - | $ | - | |||||||
Former
President
|
2008
|
- | - | - | ||||||||||
and
Former Director
|
2007
|
- | - | - | ||||||||||
Anthony
Pintsopoulos (1)
|
2009
|
$ | - | $ | - | $ | - | |||||||
Former
Secretary, Former Chief
|
2008
|
- | - | - | ||||||||||
Financial
Officer, and Former
|
2007
|
- | - | - | ||||||||||
Director
|
(1) Upon
the close of the Share Exchange on December 16, 2010, Messrs. Rappaport and
Pintsopoulos resigned from all positions with the Company, which they held from
the Company’s inception on October 11, 2007.
Grants
of Plan-Based Awards in 2009
There were no option grants in
2009.
54
Outstanding
Equity Awards at 2009 Fiscal Year End
There were no outstanding equity awards
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 have an employment agreement with
our Corporate Secretary, Cui Xiaoling, pursuant to which she is
paid RMB7,500 ($1,103) per month. The
employment agreement expires on June 11, 2011.
Director
Compensation
The following table shows information
regarding the compensation earned during the fiscal year ended December 31,
2009 by members of board of directors.
Name
|
Fees Earned
or Paid in
Cash
($) (1)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||
Bu
Falin
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
Wu
Zuxi
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
We do not currently have an established
policy to provide compensation to members of our Board of Directors for their
services in that capacity. We intend to develop such a policy in the
near future.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Immense
Fortune
Immense Fortune, Legend Media and
Shenzhen Feigeda, which are either directly or indirectly wholly-owned
subsidiaries of the Company, each have interlocking executive and director
positions with us and with each other.
Share
Exchange
On December 16, 2010, SRKP 20 completed
the Share Exchange with Immense Fortune, Legend Media, Shenzhen Feigeda and
Finest Day Limited, the sole shareholders of Immense Fortune. At the
closing, Immense Fortune became a wholly-owned subsidiary of SRKP 20 and 100% of
the issued and outstanding securities of Immense Fortune were exchanged for
securities of SRKP 20. An aggregate of 15,156,468 shares of common
stock were issued to designees of Finest Day Limited. As of the close
of the Share Exchange, the designees of Finest Day Limited owned approximately
78.0% of the issued and outstanding stock of SRKP 20. Prior to the
closing of the Share Exchange, the stockholders of SRKP 20 agreed to the
cancellation of an aggregate of 4,267,674 shares and 6,913,236 warrants to
purchase shares of common stock held by them such that there were 4,264,519
shares of common stock and warrants to purchase 2,293,519 shares of common stock
owned by them immediately after the Share Exchange. The Board
resigned in full and appointed Wu Zuxi and Bu Falin to the board of directors of
our company, with Wu Zuxi serving as Chairman. The Board also
appointed Wu Zuxi as our Chief Executive Officer, Costas “Michael” Takkas as our
Chief Financial Officer and Cui Xiaoling as our Corporate Secretary. Each of
these executives and directors were executives and directors of Shenzhen Feigeda
and/or its subsidiaries. In addition we agreed to pay a $14,100
success fee to WestPark for services provided in connection with the Share
Exchange, including coordinating the share exchange transaction process,
interacting with principals of the shell corporation and negotiating the
definitive purchase agreement for the shell corporation, conducting a financial
analysis of Immense Fortune, conducting due diligence on Immense Fortune and its
subsidiaries and managing the interrelationships of legal and accounting
activities.
55
Guarantees
of Bank Loan
Wu Zuxi, our Chairman and Chief
Executive Officer, Bu Falin, one of our directors, and Yongsheng Electronic (JX)
Co., Ltd., a company controlled by Mr. Bu and Mr. Wu, personally
guaranteed our loan with Xinye Bank for RMB5,000,000
($730,000). Pursuant to a Guaranty Agreement entered into by each of
these guarantors, as well as three other guarantors, each of the guarantors
agreed, jointly and severally, to guarantee the payment of the principal of the
loan, interest, liquidated damages and other costs related to the enforcement of
the bank’s creditor rights, including attorneys’ fees, insurance fees and audit
fees, and assessment fees. Pursuant to the guarantee, none of the
guarantors may take any of the following actions without first obtaining the
bank’s written consent, including: (a) conducting operations pursuant to a
contract, letting, joint operation or trusteeship; (b) conducing a merger,
acquisition division or transforming its stock system; (c) setting up a
subsidiary; (d) undertaking any winding up or liquidation proceedings; (d)
switching its industry of operation or ceasing operations; (e) reducing its
registered capital or undergoing a reorganization, reconstruction or
transformation; (f) significantly changing or transferring its property or
equity; (g) engaging in significant investment activity or asset transfer; or
(h) assigning its obligations under the guaranty agreement to another
party.
Policy
for Approval of Related Party Transactions
We do not currently have a formal
related party approval policy for review and approval of transactions required
to be disclosed pursuant to Item 404 (a) of Regulation S-K. We expect our board
to adopt such a policy in the near future.
This
current report is not an offer of securities for sale. Any securities
sold in the private placement have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
INDEMNIFICATION
OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify its 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 for
the indemnification, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, of officers,
directors, employees and agents of the Company. We may, prior to the
final disposition of any proceeding, pay expenses incurred by an officer or
director upon 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 shall indemnify any officer, director, employee or
agent upon a determination that such individual has met the applicable standards
of conduct specified in Section 145. In the case of an officer or
director, the determination shall be made by (a) a majority vote of directors
who are not parties to such proceeding, even though less than a quorum; (b) a
committee of such directors designated by majority vote of such directors, even
though less than a quorum; (c) if there are no such directors, independent legal
counsel in a written opinion or (d) the stockholders.
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 no 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.
56
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 its
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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT FOLLOWING THE SHARE
EXCHANGE
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 closing of the Share Exchange on December 16, 2010 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.
Immediately prior to the closing of the
Share Exchange, we had outstanding 8,532,193 shares of common stock, no options
and 9,206,755 warrants to purchase shares of common
stock. Immediately after the closing of the Share Exchange, we had
19,420,987 shares of common stock and warrants to purchase 2,293,519 shares of
common stock issued and outstanding.
The following table sets forth certain
information with respect to beneficial ownership of our common stock immediately
after the closing of the Share Exchange based on issued and outstanding shares
of common stock, 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.
|
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 Feigeda
Electronic (SZ) Co., Ltd., Building 66, Longwangmiao Industrial Park, Baishixia,
Fuyong Street, Baoan District, Shenzhen City, Guangdong Province, P. R. China
518102.
57
Name and Address
of Beneficial Owner
|
Title
|
Beneficially
Owned
Post-Share
Exchange
|
Percent
of Class
(1)
|
|||||||
Directors
and Executive Officers
|
||||||||||
Wu
Zuxi
|
Chief
Executive Officers and Chairman of the Board
|
5,183,966 | 26.7 | % | ||||||
Bu
Falin
|
Director
|
3,031,294 | 15.6 | % | ||||||
Costas
“Michael” Takkas
|
Chief
Financial Officer
|
- | - | |||||||
Cui
Xiaoling
|
Corporate
Secretary
|
- | - | |||||||
Officers
and Directors as a Group (total of 4 persons)
|
8,215,260 | 42.3 | % | |||||||
5%
Holders
|
||||||||||
Richard
A. Rappaport (2)
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
4,271,303 | (2) | 20.3 | % | ||||||
WestPark
Capital Financial Services, LLC (3)
1900
Avenue of the Stars, Suite 310
Los
Angeles, CA 90067
|
3,294,054 | (4) | 15.8 | % | ||||||
Zhuo
Chen
TianLai
17 Block, Zheng Zhong Golf
Long
Gong District, Shenzhen, China
|
1,502,160 | (5) | 5.4 | % | ||||||
Hailan
Zhang
TianLai
17 Block, Zheng Zhong Golf
Long
Gong District, Shenzhen, China
|
1,502,160 | (5) | 5.4 | % |
(1)
|
Each
stockholder's percentage of ownership in the above table is based upon
19,420,987 shares of the Company’s common stock outstanding as of December
16, 2010.
|
(2)
|
Richard
A. Rappaport served as President and director of the Company prior to the
Share Exchange. Includes 470,399 shares of common stock and a
warrant to purchase 155,040 shares of common stock owned by Mr. Rappaport,
in addition to the shares of common stock and warrants to purchase common
stock owned by the Amanda Rappaport Trust and the Kailey Rappaport Trust
(together, the “Rappaport Trusts”) and WestPark Capital Financial Services
LLC (“West Park LLC”), which totals 2,143,519 shares and 1,502,345
warrants. Mr. Rappaport, as Trustee of the Rappaport Trusts and
Chief Executive Officer (“CEO”) and Chairman of WestPark LLC, may be
deemed the indirect beneficial owner of these securities since he has sole
voting and investment control over the securities and disclaims beneficial
ownership of the securities except to of his pecuniary interest in the
securities.
|
(3)
|
Mr. Rappaport
serves as Chief Executive Officer and Chairman of WestPark LLC and has
sole voting and investment control over the securities and thus may be
deemed to be the indirect beneficial owner of the securities held by
WestPark LLC.
|
(4)
|
Includes
warrants to purchase 1,415,135 shares of common
stock.
|
(5)
|
Includes
warrants to purchase 96,055 shares of common
stock.
|
Item
5.02 Departure of Directors or
Principal Officers; Election of Directors; Appointment of Principal
Officers.
At the consummation of the Share
Exchange, SRKP 20’s board of directors immediately prior to the Share Exchange,
which consisted of Richard A. Rappaport and Anthony C. Pintsopoulos, appointed
Wu Zuxi and Bu Falin, to the board of directors of our company, with
Wu Zuxi serving as Chairman. The directors and officers of SRKP 20
prior to the Share Exchange then resigned as officers and directors of our
Company upon the closing of the Share Exchange. In addition,
concurrent with the closing of the Share Exchange, our Company’s board appointed
Wu Zuxi as our Chief Executive Officer, Costas “Michael” Takkas as our Chief
Financial Officer and Cui Xiaoling as our Corporate Secretary.
58
For complete information regarding our
new officers and directors, refer to “Executive Officers, Directors and Key
Employees” under Item 5.01, above.
Item
5.03
|
Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
|
Immediately after the closing of the
Share Exchange, SRKP 20 changed its corporate name from “SRKP 20, Inc.” to
“Feigeda Electronic Technology, Inc.” by the filing of Articles of Merger with
the Delaware Secretary of State’s Office on December 16, 2010. SRKP
20 effected the name change to better reflect the nature of its new business
operations following the Share Exchange. The Articles of Merger are
attached hereto as Exhibit
3.3. Holders of stock certificates bearing the name “SRKP 20,
Inc.” may continue to hold them and will not be required to exchange them for
new certificates or take any other action.
Item
5.06
|
Change
in Shell Company Status.
|
Prior to the closing of the Share
Exchange, SRKP 20 was a “shell company” as defined in Rule 405 of the Securities
Act and Rule 12b-2 of the Exchange Act. As described in Item 2.01
above, which is incorporated by reference into this Item 5.06, SRKP 20 ceased
being a shell company upon completion of the Share Exchange December 16,
2010.
Item 9.01 Financial Statements and
Exhibits.
(a)
Financial Statements of Business Acquired.
We are providing financial and other
information for informational purposes only. It does not necessarily
represent or indicate what the financial position and results of operations of
our company will be now that the Share Exchange is concluded.
FINANCIAL
STATEMENTS OF IMMENSE FORTUNE LIMITED
The financial statements of Immense
Fortune Limited, a British Virgin Islands corporation, for the nine months ended
September 30, 2010 and 2009 and the years ended December 31, 2009, 2008 and 2007
are provided below. You are encouraged to review the financial
statements and related notes.
59
IMMENSE
FORTUNE HOLDINGS LIMITED AND SUBSIDIARIES
|
INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
PAGE
|
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
60
|
CONSOLIDATED
BALANCE SHEETS
|
62
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
63
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
64
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
65
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
66
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
68
|
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
|
The
Board of Directors
|
Immense
Fortune Holdings Limited
British
Virgin Islands
We have
audited the accompanying consolidated balance sheets of Immense Fortune Holdings
Limited, (“Immense Fortune”) as of December 31, 2009 and the related
consolidated statements of operations, changes in stockholders’ equity,
comprehensive income and cash flows for the year ended December 31, 2009. These
consolidated financial statements are the responsibility of Immense Fortune’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits 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
consolidated 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 audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Immense as of
December 31, 2009 and the consolidated results of its operations and its cash
flows for the year ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
MALONEBAILEY,
LLP
www.malone-bailey.com
Houston,
Texas
December
22, 2010
61
KEMPISTY
& COMPANY
|
CERTIFIED
PUBLIC ACCOUNTANTS, P.C.
|
15
MAIDEN LANE - SUITE 1003 - NEW YORK, NY 10038 - TEL (212) 406-7272 - FAX
(212) 513-1930
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Immense
Fortune Holdings Limited
We have
audited the accompanying consolidated balance sheets of Immense Fortune Holdings
Limited as of December 31, 2008 and 2007 and the related consolidated statements
of operations, changes in stockholders’ equity and comprehensive income and cash
flows for each of years in the three year period ended December 31, 2008. 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 audits 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 audits 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
audits provide 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 Immense Fortune Holdings Limited at
December 31, 2008 and 2007 and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2008, 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
December
29, 2009
62
Immense
Fortune Holdings Limited and Subsidiaries
Consolidated
Balance Sheets
(In US
Dollars)
September 30,
|
December 31,
|
|||||||||||||||
2010
|
2009
|
2008
|
2007
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
Assets
|
||||||||||||||||
Current
Assets
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 340,338 | $ | 139,402 | $ | 153,596 | $ | 371,256 | ||||||||
Accounts
receivables, net
|
10,412,739 | 5,488,271 | 4,068,149 | 3,271,465 | ||||||||||||
Short-term
loans receivable
|
- | 2,163,762 | 1,662,369 | 1,233,874 | ||||||||||||
Advance
to suppliers
|
- | 464,599 | - | 1,156 | ||||||||||||
Inventories,
net
|
9,703,970 | 3,819,675 | 2,330,035 | 1,735,362 | ||||||||||||
Restricted
cash
|
- | 140,448 | 366,725 | - | ||||||||||||
Prepaid
expenses and other receivables
|
44,141 | - | - | 42,034 | ||||||||||||
Due
from related parties
|
- | 1,773,428 | 507,334 | 21,936 | ||||||||||||
Total
current assets
|
20,501,188 | 13,989,585 | 9,088,208 | 6,677,083 | ||||||||||||
Property,
plant and equipments, net
|
5,375,201 | 4,636,651 | 2,532,613 | 2,286,347 | ||||||||||||
Security
deposits for long-term operating leases
|
51,268 | 47,553 | 25,111 | 18,841 | ||||||||||||
Total
Assets
|
$ | 25,927,657 | $ | 18,673,789 | $ | 11,645,932 | $ | 8,982,271 | ||||||||
Liabilities
& Stockholders’ Equity
|
||||||||||||||||
Current
Liabilities
|
||||||||||||||||
Accounts
payable & accrued liabilities
|
$ | 4,007,969 | $ | 3,705,437 | $ | 2,781,264 | $ | 2,274,184 | ||||||||
Short-term
loans payable
|
- | 889,504 | 1,393,512 | - | ||||||||||||
Other
payables
|
38,264 | 36,737 | 256 | - | ||||||||||||
VAT
and other taxes payable
|
264,978 | 235,980 | 159,419 | 271,484 | ||||||||||||
Customers
deposits
|
- | - | - | - | ||||||||||||
Current
portion of long-term debt
|
746,500 | - | - | - | ||||||||||||
Wages
payable
|
514,198 | 433,736 | 244,245 | 202,842 | ||||||||||||
Corporate
taxes payable
|
880,835 | 421,780 | 291,361 | 188,464 | ||||||||||||
Distributions
payable
|
1,785,494 | 1,749,616 | - | - | ||||||||||||
Due
to related parties
|
65,968 | 63,332 | 66,040 | 823,540 | ||||||||||||
Total
current liabilities
|
8,304,206 | 7,536,122 | 4,936,097 | 3,760,514 | ||||||||||||
Long
term loans payable
|
- | 731,500 | - | - | ||||||||||||
Total
liabilities
|
8,304,206 | 8,267,622 | 4,936,097 | 3,760,514 | ||||||||||||
Stockholders’
Equity
|
||||||||||||||||
Common
stock, $0.0001 par value, 50,000 shares authorized, 1 share issued and
outstanding as of September 30, 2010, December 31, 2009, 2008 and 2007,
respectively.
|
1 | 1 | 1 | 1 | ||||||||||||
Additional
paid-in capital
|
2,149,915 | 2,149,915 | 2,149,915 | 773,864 | ||||||||||||
Accumulated
other comprehensive income
|
581,211 | 264,618 | 289,270 | 297,459 | ||||||||||||
Statutory
surplus reserve fund
|
1,497,189 | 642,244 | 642,244 | 642,244 | ||||||||||||
Retained
earnings (unrestricted)
|
13,395,135 | 7,349,389 | 3,628,405 | 3,508,189 | ||||||||||||
Total
Stockholders’ Equity
|
17,623,451 | 10,406,167 | 6,709,835 | 5,221,757 | ||||||||||||
Total
Liabilities & Stockholders’ Equity
|
$ | 25,927,657 | $ | 18,673,789 | $ | 11,645,932 | $ | 8,982,271 |
The
accompanying notes are an integral part of these consolidated financial
statements.
63
Immense
Fortune Holdings Limited and Subsidiaries
Consolidated
Statements of Operations
(In US
Dollars)
For the Nine Months Ended
September 30,
|
For the Year Ended
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Revenues
|
$ | 54,565,232 | $ | 36,528,166 | $ | 50,499,386 | $ | 35,349,528 | $ | 24,786,828 | ||||||||||
Cost
of goods sold
|
42,178,786 | 28,108,977 | 39,123,143 | 27,175,031 | 18,964,984 | |||||||||||||||
Gross
Profit
|
12,386,446 | 8,419,189 | 11,376,243 | 8,174,497 | 5,821,844 | |||||||||||||||
Operating
costs and expenses
|
||||||||||||||||||||
Selling
expenses
|
1,832,302 | 1,323,811 | 1,952,967 | 1,467,853 | 917,390 | |||||||||||||||
General
and administrative
|
898,579 | 1,008,518 | 1,315,161 | 1,351,040 | 800,923 | |||||||||||||||
Research
and development
|
853,511 | 530,833 | 759,918 | 378,412 | 293,535 | |||||||||||||||
Loss
on disposal of assets
|
8,210 | 241,773 | 241,806 | - | - | |||||||||||||||
Total
operating costs and expenses
|
3,592,602 | 3,104,935 | 4,269,852 | 3,197,305 | 2,011,848 | |||||||||||||||
Income
from operations
|
8,793,844 | 5,314,254 | 7,106,391 | 4,977,192 | 3,809,996 | |||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||
Loss
on loan guarantees
|
- | (239,696 | ) | (240,440 | ) | - | - | |||||||||||||
Interest
income
|
66,464 | 68,663 | 108,268 | 75,715 | 213 | |||||||||||||||
Interest
expense
|
(12,776 | ) | (78,259 | ) | (78,912 | ) | (67,484 | ) | (55,708 | ) | ||||||||||
Total
other income (expenses)
|
53,688 | (249,292 | ) | (211,084 | ) | 8,231 | (55,495 | ) | ||||||||||||
Income
before income taxes
|
8,847,532 | 5,064,962 | 6,895,307 | 4,985,423 | 3,754,501 | |||||||||||||||
Income
taxes
|
(1,946,841 | ) | (997,353 | ) | (1,420,162 | ) | (933,510 | ) | (570,266 | ) | ||||||||||
Net
Income
|
$ | 6,900,691 | $ | 4,067,609 | $ | 5,475,145 | $ | 4,051,913 | $ | 3,184,235 |
The
accompanying notes are an integral part of these consolidated financial
statements.
64
Immense
Fortune Holdings Limited and Subsidiaries
Consolidated
Statements of Changes in Shareholders' Equity
For
the Nine Months Ended September 30, 2010 and For the Years Ended December 31,
2009, 2008 and 2007
(In US
Dollars)
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Other
|
Statutory
|
Retained
|
Total
|
||||||||||||||||||||||||
Common Share
|
Paid-in
|
Comprehensive
|
Surplus
|
Earnings
|
Stockholders'
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Reserve Fund
|
(Unrestricted)
|
Equity
|
||||||||||||||||||||||
Balance at December
31, 2006
|
1 | $ | 1 | $ | 726,589 | $ | 44,391 | $ | 171,525 | $ | 794,673 | $ | 1,737,179 | |||||||||||||||
Imputed
interest allocated
|
47,275 | 47,275 | ||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
253,068 | 253,068 | ||||||||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
470,719 | (470,719 | ) | - | ||||||||||||||||||||||||
Net
income for the period
|
3,184,235 | 3,184,235 | ||||||||||||||||||||||||||
Balance
at December 31, 2007
|
1 | $ | 1 | $ | 773,864 | $ | 297,459 | $ | 642,244 | $ | 3,508,189 | $ | 5,221,757 | |||||||||||||||
Imputed
interest allocated
|
6,612 | 6,612 | ||||||||||||||||||||||||||
Capital
injections in PRC and HK subsidiaries
|
1,369,439 | 1,369,439 | ||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
(8,189 | ) | (8,189 | ) | ||||||||||||||||||||||||
Net
income for the period
|
4,051,913 | 4,051,913 | ||||||||||||||||||||||||||
Cash
dividends
|
(3,931,697 | ) | (3,931,697 | ) | ||||||||||||||||||||||||
Balance
at December 31, 2008
|
1 | $ | 1 | $ | 2,149,915 | $ | 289,270 | $ | 642,244 | $ | 3,628,405 | $ | 6,709,835 | |||||||||||||||
Foreign
currency translation adjustment
|
(24,652 | ) | (24,652 | ) | ||||||||||||||||||||||||
Deemed
distributions declared
|
(1,754,161 | ) | (1,754,161 | ) | ||||||||||||||||||||||||
Net
income for the period
|
5,475,145 | 5,475,145 | ||||||||||||||||||||||||||
Balance
at December 31, 2009
|
1 | $ | 1 | $ | 2,149,915 | $ | 264,618 | $ | 642,244 | $ | 7,349,389 | $ | 10,406,167 | |||||||||||||||
Foreign
currency translation adjustment
|
316,593 | 316,593 | ||||||||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
854,945 | (854,945 | ) | - | ||||||||||||||||||||||||
Net
income for the period
|
6,900,691 | 6,900,691 | ||||||||||||||||||||||||||
Balance
at September 30, 2010 (Unaudited)
|
1 | $ | 1 | $ | 2,149,915 | $ | 581,211 | $ | 1,497,189 | $ | 13,395,135 | $ | 17,623,451 |
The
accompanying notes are an integral part of these consolidated financial
statements.
65
Immense
Fortune Holdings Limited and Subsidiaries
Consolidated
Statements of Comprehensive Income
(In US
Dollars)
For the Nine Months Ended
September 30,
|
For the Year Ended December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Net
Income
|
$ | 6,900,691 | $ | 4,067,609 | $ | 5,475,145 | $ | 4,051,913 | $ | 3,184,235 | ||||||||||
Other
Comprehensive Income, net of tax:
|
||||||||||||||||||||
Unrealized
gain(loss) on foreign currency transaction, net of tax
|
316,593 | (88,550 | ) | (24,652 | ) | (8,189 | ) | 253,068 | ||||||||||||
Comprehensive
income
|
$ | 7,217,284 | $ | 3,979,059 | $ | 5,450,493 | $ | 4,043,724 | $ | 3,437,303 |
The
accompanying notes are an integral part of these consolidated financial
statements.
66
Immense
Fortune Holdings Limited and Subsidiaries
Consolidated
Statements of Cash Flows
(In US
Dollars)
For the Nine Months Ended
|
For the Years Ended
|
|||||||||||||||||||
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
Cash
Flows From Operating Activities
|
||||||||||||||||||||
Net
Income
|
$ | 6,900,691 | $ | 4,067,609 | $ | 5,475,145 | $ | 4,051,913 | $ | 3,184,235 | ||||||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||||||||||
Depreciation
|
548,865 | 320,852 | 481,734 | 304,425 | 258,685 | |||||||||||||||
Loss
on disposal of assets
|
8,210 | 241,773 | 241,806 | - | - | |||||||||||||||
Loss
on loan guarantee
|
- | 240,408 | 240,440 | - | - | |||||||||||||||
Imputed
interest
|
- | 10,901 | - | 6,612 | 47,256 | |||||||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
Accounts
receivable, net
|
(4,741,021 | ) | (2,783,727 | ) | (1,433,844 | ) | (558,068 | ) | (1,449,180 | ) | ||||||||||
Advance
to suppliers
|
467,139 | (542,969 | ) | (465,583 | ) | 1,215 | (1,110 | ) | ||||||||||||
Prepaid
expenses and other receivables
|
(43,490 | ) | - | - | 44,196 | (21,827 | ) | |||||||||||||
Inventories,
net
|
(5,720,416 | ) | (206,095 | ) | (1,498,932 | ) | (465,124 | ) | (413,861 | ) | ||||||||||
Security
deposits for long-term operating leases
|
(2,699 | ) | (29,926 | ) | (22,541 | ) | (4,882 | ) | (14,939 | ) | ||||||||||
Accounts
payable and accrued liabilities
|
223,973 | (209,474 | ) | 970,020 | 342,258 | 134,771 | ||||||||||||||
VAT
and other taxes payable
|
23,803 | 37,262 | 77,142 | (128,786 | ) | 163,452 | ||||||||||||||
Wages
payable
|
70,513 | 66,879 | 190,538 | 26,744 | (10,541 | ) | ||||||||||||||
Customer
deposit
|
- | 212,772 | - | - | - | |||||||||||||||
Corporate
tax payable
|
443,770 | 99,100 | 131,462 | 88,166 | 150,897 | |||||||||||||||
Net
cash provided by (used in) operating activities
|
(1,820,662 | ) | 1,525,365 | 4,387,387 | 3,708,669 | 2,027,838 | ||||||||||||||
Cash
Flows From Investing Activities
|
||||||||||||||||||||
Restricted
cash
|
141,216 | (14,659 | ) | (14,661 | ) | (360,375 | ) | - | ||||||||||||
Purchases
of property and equipment
|
(1,210,222 | ) | 1,932,773 | ) | (2,941,332 | ) | (389,296 | ) | (763,514 | ) | ||||||||||
Proceeds
of disposal of fixed assets
|
19,157 | 102,613 | 102,627 | - | - | |||||||||||||||
Advances
of short-term loans receivable
|
- | - | (946,662 | ) | (1,633,636 | ) | (1,185,030 | ) | ||||||||||||
Collections
of short-term loans receivable
|
2,175,594 | 379,394 | 439,830 | 1,297,350 | - | |||||||||||||||
Advances
– related party
|
- | (884,795 | ) | (2,232,341 | ) | (1,815,563 | ) | - | ||||||||||||
Collection
of advance – related party
|
2,183,895 | 452,092 | 550,402 | 1,340,062 | 13,167 | |||||||||||||||
Net
cash provided by (used in) investing activities
|
3,309,640 | (1,898,128 | ) | (5,042,137 | ) | (1,561,458 | ) | (1,935,377 | ) | |||||||||||
Cash
Flows From Financing Activities
|
||||||||||||||||||||
Borrowing
from loans payable
|
2,638,620 | 2,638,980 | 1,369,425 | - | ||||||||||||||||
Repayments
of loans payable
|
(907,744 | ) | (2,301,463 | ) | (2,407,336 | ) | - | (263,340 | ) | |||||||||||
Proceeds
from related parties
|
128,632 | 651,037 | 409,300 | 64,883 | 952,195 | |||||||||||||||
Repayments
to related parties
|
(534,058 | ) | (518,753 | ) | - | (865,907 | ) | (877,014 | ) | |||||||||||
Contribution
from injection
|
- | - | - | 1,369,439 | - | |||||||||||||||
Dividends
declared and paid
|
- | - | - | (3,931,697 | ) | - | ||||||||||||||
Net
cash provided by (used in) financing activities
|
(1,313,170 | ) | 469,441 | 640,944 | (1,993,857 | ) | (188,159 | ) | ||||||||||||
Effect
of exchange rate
changes on cash
|
25,128 | 6,461 | (388 | ) | (371,014 | ) | 26,458 | |||||||||||||
Net
increase in cash and cash equivalents
|
200,936 | 103,139 | (14,194 | ) | (217,660 | ) | (69,240 | ) |
(continued)
67
Immense
Fortune Holdings Limited and Subsidiaries
Consolidated
Statements of Cash Flows
(In US
Dollars)
(continued)
For the Nine Months Ended
|
For the Years Ended
|
|||||||||||||||||||
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Cash
and cash equivalents, beginning of period
|
139,402 | 153,596 | 153,596 | 371,256 | 440,496 | |||||||||||||||
Cash
and cash equivalents, end of period
|
$ | 340,338 | $ | 256,735 | $ | 139,402 | $ | 153,596 | $ | 371,256 | ||||||||||
Supplemental
disclosure information:
|
||||||||||||||||||||
Interest
expense paid
|
$ | 12,776 | $ | 78,259 | $ | 78,912 | $ | 67,484 | $ | 55,708 | ||||||||||
Income
taxes paid
|
$ | 1,503,071 | $ | 898, 253 | $ | 1,288,700 | $ | 969,979 | $ | 419,368 |
The
accompanying notes are an integral part of these consolidated financial
statements.
68
NOTE
1- DESCRIPTION OF BUSINESS AND ORGANIZATION
Immense
Fortune Holdings Limited (“Immense”) was incorporated in British Virgin Islands
(“BVI”) on July 28, 2008. Immense has 50,000 common shares authorized at $1.00
par value with 1 share issued and outstanding. The sole shareholder of Immense
is Finest Day Limited (“Finest Day”), a company registered in BVI. The board of
directors of Immense consists of Mr. Chien-Lung Lee (“Mr. Lee”) and Mr. Zuxi Wu
(“Mr. Wu”). Mr. Lee is the sole owner of Finest
Day.
Legend
Media Holdings HK Limited (“Legend Media”) was incorporated in Hong Kong, PRC
(“HK”) on June 16, 2008. Legend Media has 10,000 shares of common stock
authorized at a par value of 1.00 Hong Kong dollars (HKD) with 1 share issued
and outstanding. On February 5, 2009, Legend Media issued an
additional 99 shares of common stock to Mr. Lee, its original shareholder, for
HKD 99.
Feigeda
Electronics (SZ) Co., Ltd. (“Feigeda”) was incorporated in the City of Shenzhen,
Province of Guangdong, People’s Republic of China (“PRC”) on March 17, 2005 with
a registered and invested capital of Renminbi (“RMB”) 500,000. The original
shareholders of Feigeda were Mr. Wu with a 55% ownership interest, or RMB
275,000; and Mr. Bu, Falin (“Mr. Bu”) with a 45% ownership interest, or RMB
225,000, respectively. The Company mainly engages in the production, marketing,
sale and research and development of electronics and various types of small to
medium sized Liquid Crystal Modules (“LCM”), black and white display COG, TAB,
CSTN, and TFT Modules among them, which are in turn used for cellular phones,
MP3, MP4, and other electronic equipment for domestic markets. On
March 17, 2008, Mr. Wu and Mr. Bu (collectively, the “Feigeda Management”)
increased the registered capital of Feigeda from RMB 500,000 to RMB 10,000,000.
After the transaction, Feigeda had a registered and invested capital of RMB
10,000,000 which was held by Mr. Wu with a 55% ownership interest, or RMB
5,500,000; and Mr. Bu with a 45% ownership interest, or RMB 4,500,000,
respectively. Mr. Wu and Mr. Bu are the officers and management of the
Company.
The Restructuring of
Immense, Legend Media and Feigeda
To enable
Feigeda to go public, Feigeda’s officers and management made the following
restructuring arrangements:
On March
2, 2009, Legend Media acquired 100% of the ownership interest of Feigeda from
Mr. Wu and Mr. Bu pursuant to an ownership transfer agreement for an appraised
value of RMB 11,959,100 (or approximately $1.7 million). Legend Media became the
parent and sole owner of Feigeda while the officers and management remained
unchanged. The ownership transfer amount was to be paid on or before April 1,
2009, however it remains unpaid as of the date of the report. The transaction is
treated as a distribution to the former owners with a reduction to retained
earnings.
On May
12, 2009, Immense acquired all the issued and outstanding shares of Legend Media
from Mr. Lee for HKD 100 (or $13) pursuant to an ownership transfer agreement.
Immense became the parent and sole owner of Legend Media while the officers and
management remained unchanged.
For
accounting purposes, the restructuring transactions above have been accounted
for as business combinations of entities under common control as they were
effected by parties under common control. The Company accounted for them similar
to a pooling of interest transaction where an adjusted carry over basis was
used. The historical financial statements include the operations of Feigeda for
all periods presented.
69
Immense
and its subsidiaries – namely, Legend Media and Feigeda are collectively
referred throughout as the “Company”. To summarize the paragraphs
above, the organization and ownership structure of the Company is currently as
follows:
NOTE
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
a.
|
Basis
of preparation
|
|
b.
|
Basis
of consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. 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.
|
Fair
values of financial instruments
|
US GAAP
requires certain disclosures about the fair value of financial instruments. The
Company defines fair value, using the required three-level valuation hierarchy
for disclosures of fair value measurement, the enhanced disclosures requirements
for fair value measures. Current assets and current liabilities qualify 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
follows:
|
·
|
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 liabilities, 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.
70
|
e.
|
Cash
and cash equivalents
|
Cash and
cash equivalents include cash on hand, cash on deposit with various financial
institutions in PRC and Hong Kong, and all highly-liquid investments with
original maturities of three months or less at the time of purchase. Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit.
|
f.
|
Restricted
cash
|
The
restricted cash is recorded as an asset when the Company deposits cash in the
bank as collateral for bank loans, separately from cash and cash
equivalents.
|
g.
|
Accounts
receivable
|
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
Company estimates the valuation allowance for anticipated uncollectible
receivables balances based on historical experience as well as current economic
climate. Such calculated percentage is applied to customers’ balances
categorized by the number of months the underlying invoices have remained
outstanding. The valuation allowance balance is adjusted to the amount computed
as a result of the aging method. When facts subsequently become available to
indicate that the amount provided as the allowance to date has been inadequate,
an adjustment, which is classified as a change in estimate, is
made.
|
h.
|
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. Management writes
down the inventories to market value if they are below cost. Management
regularly evaluates the composition of the Company’s inventories to identify
slow-moving and obsolete inventories to determine if a valuation allowance is
required.
|
i.
|
Property,
plant and equipment
|
Property,
plant and equipment are initially recognized and recorded at cost. Gains or
losses on disposals are reflected as a gain or loss in the period of disposal.
Property, plant and equipment is recorded at cost and depreciated using the
straight-line method, with an estimated 5% salvage value of original cost
(except for computer software which has no salvage value with estimated life of
3 years), over the estimated useful lives of the assets as follows:
Machinery
and equipment
|
10
years
|
|
Electronic
equipment
|
5
years
|
|
Computer
equipment
|
5
years
|
|
Office
equipment
|
5
years
|
|
Automobile
|
5
years
|
|
Other
equipment
|
5
years
|
Expenditures
for repairs and maintenance, which do not improve or extend the expected useful
lives of the assets, are expensed as incurred while major replacements and
improvements are capitalized.
When
property, plant and equipment is retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, with any resulting gains
or losses being included in net income or loss in the year of
disposition.
|
j.
|
Impairment
of long-lived assets
|
The
Company evaluates the potential impairment of long-lived assets, in accordance
with applicable accounting standards, which requires the Company to evaluate a
long-lived asset for recoverability when there is an event or circumstances 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.
71
|
k.
|
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.
|
l.
|
Revenue
recognition
|
The
Company generates revenues from the sale of electronics and various types of
small to medium sized LCMs. 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 product returns are insignificant based on historical
experience.
The
products sold to the customers are parts to be used as an assembly in finished
goods. The Company does not have a warranty or return policy in place. Whenever
a customer finds faulty parts, the Company will replace them using new parts.
There is no allowance for cost of replacement on product sales as historical
costs incurred for replacements and repairs have been
insignificant.
m.
|
Research
and development costs
|
Research
and development costs are expensed to operations as incurred. The Company spent
$853,511 and $530,833 for the nine months ended September 30, 2010 and 2009, and
$759,918, $378,412, and $293,535 the years ended December 31, 2009, 2008 and
2007, respectively, on direct research and development (“R&D”)
efforts.
n.
|
Advertising
|
The
Company expenses advertising costs as incurred. Advertising is included in
selling expenses for financial reporting. The Company spent $635,663 and
$343,044 for the nine months ended September 30, 2010 and 2009, and $536,050,
$373,608 and $275,964 for the years ended December 31, 2009, 2008 and 2007,
respectively, on advertising expenses.
|
o.
|
Income
taxes
|
The
Company accounts for income taxes in accordance with the asset and liability
method 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 accounts for uncertainty in income taxes in accordance with applicable
accounting standards, which require a comprehensive model for how a company
should recognize, measure, present and disclose in its financial statements
uncertain tax positions that the company has taken or expects to take on a tax
return (including a decision whether to file or not file to file a return in a
particular jurisdiction).
|
p.
|
Foreign
currency translation
|
The
functional currency of Immense is the United States Dollars (“USD”), and for
Legend Media is the Hong Kong Dollar (“HKD”). These two companies maintain their
financial statements using their respective functional currencies. 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 Feigeda is Renminbi (“RMB”), the PRC’s currency. Feigeda
maintains its financial statements using its own functional currency. Monetary
assets and liabilities denominated in currencies other than the functional
currency are translated into the functional currency at rates of exchange
prevailing at the balance sheet dates. Transactions denominated in currencies
other than the functional currency are translated into the functional currency
at the exchange rates prevailing at the dates of the transaction. Exchange gains
or losses arising from foreign currency transactions are included in the
determination of net income (loss) for the respective periods.
72
For
financial reporting purposes, the financial statements of Legend Media, which
are prepared in HKD, are translated into the Company’s reporting currency,
United States Dollars (“USD”); the financial statements of Feigeda, 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.
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
|
6.83527 | 6.82082 | ||||||
Nine-month period ended September 30, 2009 | 6.83761 | 6.82175 | ||||||
Nine-month
period ended September 30, 2010
|
6.69792 | 6.79810 |
q.
|
Customer
deposits
|
Customer
deposits are recorded as liabilities when the Company receives them and
recognized as revenue after the total amount is paid off upon the delivery of
the products.
|
r.
|
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 (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 and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended September 30,
2009.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
For the Company, this standard was effective prospectively beginning
April 1, 2009. The adoption of this standard did not have a material impact
on the Company’s consolidated results of operations or financial
condition.
73
In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. This standard added an additional
required disclosure relative to the date through which subsequent events have
been evaluated and whether that is the date on which the financial statements
were issued. For the Company,
this standard was effective beginning July 1, 2009.
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. This ASU was 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
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 activities 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.
NOTE
3- ACCOUNTS RECEIVABLE, NET
Accounts
receivable consist of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Accounts
receivable
|
$ | 10,412,739 | $ | 6,888,490 | $ | 5,488,271 | $ | 4,068,149 | $ | 3,271,465 | ||||||||||
Allowance
for doubtful accounts
|
- | (35,055 | ) | - | - | - | ||||||||||||||
Accounts
receivable, net
|
$ | 10,412,739 | $ | 6,853,435 | $ | 5,488,271 | $ | 4,068,149 | $ | 3,271,465 |
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 terms are usually 30 days. In the
event of a breach of contract, the Company has the following rights and penalty
protection:
(i.)
|
The
Company has the right to recoup the deposit and charge double interest on
the deposit according to the interest rate during the same period in which
the contract was breached;
|
(ii.)
|
The
Company owns the raw material and equipment acquired from the suppliers
under the agreements; and
|
(iii.)
|
The
Company has the legal right to take possession of the material and
equipment.
|
74
The
Company did not have any contract breaches in the nine months ended September
30, 2010 and 2009, or in the years ended December 31, 2009, 2008 and
2007.
NOTE
5- INVENTORIES, NET
Inventories
include raw materials, packaging materials and finished goods. Finished goods
contain direct material, direct labor and manufacturing overhead and do not
contain general and administrative costs. Inventories consist of the
following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Raw
materials
|
$ | 6,965,074 | $ | 1,763,520 | $ | 2,721,192 | $ | 1,621,751 | $ | 1,264,280 | ||||||||||
Packaging
materials
|
- | 11,932 | - | - | - | |||||||||||||||
Finished
goods
|
2,796,951 | 760,719 | 1,155,372 | 765,325 | 568,979 | |||||||||||||||
Subtotal
|
9,762,025 | 2,536,171 | 3,876,564 | 2,387,076 | 1,833,259 | |||||||||||||||
Less:
Reserve for obsolete or slow-moving inventory
|
(58,055 | ) | - | (56,889 | ) | (57,041 | ) | (97,897 | ) | |||||||||||
Inventories,
net
|
$ | 9,703,970 | $ | 2,536,171 | $ | 3,819,675 | $ | 2,330,035 | $ | 1,735,362 |
NOTE
6- RELATED PARTIES TRANSACTIONS
Due from related
parties:
Due from
related parties consists of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Liansheng
Electronics (SZ) Co., Ltd. (controlled by CEO's brother)
|
$ | - | $ | 660,060 | $ | 690,346 | $ | 352,778 | $ | - | ||||||||||
Yongsheng
Electronics (JX) Co., Ltd. (controlled by CEO and GM until December
2009)
|
- | - | 822,168 | - | - | |||||||||||||||
Mr.
Bu Suxiang (GM's Father)
|
- | - | - | 29,337 | 21,936 | |||||||||||||||
Fangguan
Electronic Limited (Controlled by CEO until July 2009)
|
- | 267,534 | 256,923 | 125,219 | - | |||||||||||||||
Finest
Day Limited (Immense's Sole Shareholder)
|
- | - | 3,991 | - | - | |||||||||||||||
Due
from related parties
|
$ | - | $ | 927,594 | $ | 1,773,428 | $ | 507,334 | $ | 21,936 |
Amounts
owed to the Company by Finest Day Limited represented amounts advanced for
disbursements for ordinary operating activities, which was unsecured and short
term.
Amounts
owed to the Company by Liansheng Electronics (SZ) Co., Ltd. ("Liansheng")
represent a one year non-secured short term loan that matured on October 31,
2009 and bore an interest rate of 4.86%. This loan was further extended on its
original maturity date for another year and matured on October 31, 2010. The
loans were used to facilitate suppliers’ relations in order to maintain a stable
supply of key materials as well as making good use of excessive funds. Liansheng
is controlled by the brother of the Company’s CEO. On May 6, 2010, the
outstanding balance, including interest, was fully repaid by
Liansheng.
Amounts
owed to the Company by Fangguan Electronics Technologies Co., Ltd. ("Fangguan")
represent purchases and sales between Feigeda and Fangguan. Mr. Wu, Zuxi, CEO,
held 60% ownership of Fangguan prior to July 2009. In July 2009, Mr. Wu sold his
ownership interest of Fangguan and Fangguan is no longer a related
party.
In
anticipation of being a U.S. public company, all balances were repaid prior to
September 30, 2010 and no loans to the related parties are
outstanding.
75
Due to related
parties:
Due to
related parties consists of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Wu,
Zuxi (CEO & Chairman of the Board)
|
$ | 65,968 | $ | 59,754 | $ | 63,332 | $ | 66,040 | $ | 734,993 | ||||||||||
Bu,
Falin (General Manager & Director)
|
- | - | - | - | 10,283 | |||||||||||||||
Fangguan
Electronics Technologies Co., Ltd
|
- | - | - | - | 78,264 | |||||||||||||||
Yongsheng
Electronics (JX) Co., Ltd. (controlled by CEO and GM until December,
2009)
|
- | 132,352 | - | - | - | |||||||||||||||
Due
to related parties
|
$ | 65,968 | $ | 192,106 | $ | 63,332 | $ | 66,040 | $ | 823,540 |
The
amounts due to the CEO of the Company, Mr. Wu, were unsecured and non-interest
bearing, but the Company later paid interest on the loan in 2008 and 2007. No
interest was paid to Mr. Wu in 2009 or 2010.
Yongsheng
Electronics (JX) Co., Ltd. (“Yongsheng”) is a related company that was
controlled by the officers of the Company, namely, Mr. Wu and Mr. Bu, until they
sold their ownership at the end of December 2009.
Distribution
payable
Distribution
payable to former owners consist of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Payable
by Legend Media
|
$ | 1,785,494 | $ | 1,754,161 | $ | 1,749,616 | $ | - | $ | - |
On March
2, 2009, Legend Media acquired 100% ownership interest of Feigeda from Mr. Wu
and Mr. Bu under an ownership transfer agreement for an appraised value of RMB
11,959,100 (or $1.7 million). Legend Media became the parent and sole owner of
Feigeda while the officers and management remain unchanged. The ownership
transfer amount was to be paid on or before April 1, 2009, however, it remains
unpaid as of the date of this filing. The transaction is treated as a
distribution to the former owners with a reduction to retained
earnings.
NOTE
7 – PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment consists of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Machinery
and equipment
|
$ | 5,915,558 | $ | 3,712,068 | $ | 4,708,117 | $ | 3,179,127 | $ | 2,606,885 | ||||||||||
Computer
equipment
|
57,672 | 32,552 | 32,468 | 29,204 | 23,519 | |||||||||||||||
Other
equipment
|
113,648 | 76,925 | 77,223 | 73,322 | 66,477 | |||||||||||||||
Automobiles
|
74,273 | 47,705 | 47,582 | 47,708 | 44,589 | |||||||||||||||
Computer
software
|
33,145 | 32,563 | 32,468 | 32,565 | 30,436 | |||||||||||||||
Leasehold
improvements
|
970,450 | 953,420 | 950,950 | - | - | |||||||||||||||
Subtotal
|
7,164,746 | 4,855,233 | 5,848,808 | 3,361,926 | 2,771,906 | |||||||||||||||
Less:
Accumulated depreciation
|
(1,789,545 | ) | (1,054,401 | ) | (1,212,157 | ) | (829,313 | ) | (485,559 | ) | ||||||||||
Property,
plant and equipment, net
|
$ | 5,375,201 | $ | 3,800,832 | $ | 4,636,651 | $ | 2,532,613 | $ | 2,286,347 |
Depreciation
expense was $548,865 and $320,852 for the nine months ended September 30, 2010
and 2009, and $481,734, $304,425 and $258,685 for the years ended December 31,
2009, 2008 and 2007, respectively.
76
Depreciation
expense consists of the following:
Nine Months Ended September 30,
|
Years Ended December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Cost
of goods sold
|
$ | 371,818 | $ | 250,540 | $ | 354,676 | $ | 264,784 | $ | 232,155 | ||||||||||
General
and administrative expenses
|
177,047 | 70,312 | 127,058 | 39,641 | 26,530 | |||||||||||||||
Total
depreciation expenses
|
$ | 548,865 | $ | 320,852 | $ | 481,734 | $ | 304,425 | $ | 258,685 |
NOTE
8- SHORT-TERM LOANS PAYABLE
Short-term
loans outstanding payables consist of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Shanghai
Pudong Bank (1-year term loan, matured on 04/14/10, at 4.779% per
annum)
|
$ | - | $ | 997,424 | $ | 889,504 | $ | - | $ | - | ||||||||||
Shanghai
Pudong Bank (1-year term loan, matured on 10/20/09, at 7.8386% per
annum)
|
- | - | - | 1,393,512 | - | |||||||||||||||
Short-term
loans payable
|
$ | - | $ | 997,424 | $ | 889,504 | $ | 1,393,512 | $ | - |
On April
15, 2009, the Company obtained a one year term loan of RMB 8,000,000 (or
approximately $1,173,000) from Pudong Development Bank (“PDB”) bearing interest
at approximately 110% of the prevailing prime rate at the time of the loan
(approximately 4%-5%). The loan was personally guaranteed by the
Company’s CEO, Mr. Wu, and his spouse. Pursuant to the loan contract, the
monthly payment was RMB 240,000 starting the month after the loan advance date
plus monthly interest and the balance was to be repaid in April 2010. The loan
was part of a package of loans PDB made to six different companies where all the
companies cross guaranteed each others’ loans. In the event one company
defaulted on its loan, the other companies were required to cover the loss
incurred by the bank based on the percentage of the defaulted loan to PDB.
Additionally, each company was required to deposit a specified percentage of the
loan amount it received in an account held at PDB to be used as collateral for
the loans. The Company deposited RMB 960,000 (or approximately $140,000)
in the bank account as restricted cash. The cross guarantee was limited to
the restricted cash held at the bank. The loan was fully repaid on April 14,
2010 and PDB refunded cash deposit of RMB 960,000 to the Company on April 15,
2010.
On
October 28, 2008, the Company obtained a one year term loan of RMB 10,000,000
(or approximately $1,464,000) from Pudong Development Bank (“PDB”) bearing
interest at approximately 110% of the prevailing prime rate at the time of the
loan (approximately 7%-8%). The loan was personally guaranteed by the Company’s
CEO, Mr. Wu, and his spouse. Pursuant to the loan contract, the monthly payment
was RMB 500,000 starting the month after the loan advance date plus monthly
interest and the balance was to be repaid in October 2009. The loan was part of
a package of loans PDB made to five different companies where all the companies
cross-guaranteed each others’ loans. In the event one company defaulted on its
loan the other companies were required to cover the loss incurred by the bank
based on the percentage of the defaulted loan to PDB. Additionally, each company
was required to deposit a specified percentage of the loan amount it received in
an account held at PDB to be used as collateral for the loans. The Company
deposited RMB 2,500,000 (or approximately $366,000) in the bank account as
restricted cash. The cross-guarantee was limited to the restricted cash
held at the bank. On March 23, 2009, one of the five companies’ loans went into
default and the Company received a notice from PDB for a penalty fee of RMB
1,640,000 (or approximately $240,586). This amount was deducted from the
restricted cash held at PDB, and the Company reflected the contingency loss
as other expense to loss on guaranteed loan. On April 14, 2009, the bank
recalled the loan and the Company repaid the loan in full.
NOTE
9 – CORPORATE INCOME TAX
Immense
is registered in the BVI and is not liable for any taxes in this
jurisdiction.
Legend
Media is a holding company registered in Hong Kong and has no operating profit
for tax liabilities.
The
Company’s subsidiary – Feigeda – as a manufacturing enterprise established
in Shenzhen, PRC, was entitled to a preferential enterprise tax rate of 15%
prevailing in Shenzhen Economic Zone for all years before 2008, and the
following preferential rates started on January 1, 2008:
77
Year
|
Tax Rate
|
|||
2008
|
18 | % | ||
2009
|
20 | % | ||
2010
|
22 | % | ||
2011
|
24 | % | ||
2012
and thereafter
|
25 | % |
The
provision for taxes on earnings consists of the following:
Nine Months Ended September 30,
|
Years Ended December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
PRC
Enterprise Income Taxes
|
$ | 1,946,841 | $ | 997,353 | $ | 1,420,162 | $ | 933,510 | $ | 570,266 | ||||||||||
United
States Federal Income Taxes
|
- | - | - | - | - | |||||||||||||||
Total
|
$ | 1,946,841 | $ | 997,353 | $ | 1,420,162 | $ | 933,510 | $ | 570,266 |
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Company’s provision for income tax is as follows:
Nine Months Ended September 30,
|
Year Ended December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
U.S.
statutory tax rate
|
34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||||
Foreign
income not recognized in the United States
|
-34.0 | % | -34.0 | % | -34.0 | % | -34.0 | % | -34.0 | % | ||||||||||
PRC
preferential enterprise income tax rate
|
25.0 | % | 25.0 | % | 25.0 | % | 25.0 | % | 15.0 | % | ||||||||||
Preferential
rate relief for Shenzhen Economic Zone
|
-3.0 | % | -5.0 | % | -5.0 | % | -7.0 | % | 0.0 | % | ||||||||||
Valuation
allowance
|
0.0 | % | -0.3 | % | 0.6 | % | 0.7 | % | 0.2 | % | ||||||||||
Provision
for income tax
|
22.0 | % | 19.7 | % | 20.6 | % | 18.7 | % | 15.2 | % |
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 complete
their relevant tax filings. Therefore, the Company’s tax filings results are
subject to change. 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.
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.
Various
Taxes
The
Company is subject to various taxes such as Value Added Tax (VAT), City
Development Tax, and Education tax to the local government tax authorities. The
VAT collected on sales is netted against the taxes paid for purchases of cost of
goods sold to determine the amounts payable and refundable. The City Development
Tax and Education Tax are expensed as general and administrative
expenses.
78
NOTE
10 – LONG-TERM LOANS PAYABLE
Long-term
loans payable consist of the following:
September 30,
|
December 31,
|
|||||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Xinye
Bank (2-year term loan, matures on 06/14/11, at 0% per
annum)
|
$ | 746,500 | $ | 733,400 | $ | 731,500 | $ | - | $ | - | ||||||||||
Less:
current portion
|
746,500 | - | - | - | - | |||||||||||||||
Long
-term portion
|
$ | - | $ | 733,400 | $ | 731,500 | $ | - | $ | - |
On June
15, 2009, the Company obtained a two-year-term, interest-free loan of RMB
5,000,000 (or approximately $733,000) granted by a semi-government agency,
Shenzhen Mid-to-Small Enterprise Guarantee Centre, which authorized Xinye Bank
to advance the loan to the Company. The loan is
|
(i)
|
personally
guaranteed by the Company’s CEO, Mr. Wu, and his
spouse;
|
|
(ii)
|
personally
guaranteed by the Company’s GM, Mr. Bu, and his
spouse;
|
|
(iii)
|
corporate
guaranteed by Yongsheng Electronic (JX) Co., Ltd., a company controlled by
Mr. Wu and Mr. Bu; and
|
|
(iv)
|
guaranteed
by the collateral of the personal residence of the Company’s GM, Mr.
Bu.
|
In
addition, the Company’s CEO, Mr. Wu is required to deposit RMB 2,100,000 (or
approximately $308,000) into a designated bank account at a monthly installment
of RMB 350,000 starting December 2010.
The loan
is to be used for technological improvements and will mature on June 14, 2011 on
which the full amount of the loan principal shall be repaid.
NOTE
11- STATUTORY RESERVES
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises and the VIE’s income, after the payment of the PRC income
taxes, shall be allocated to the statutory surplus reserves and statutory public
welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve
was 10 percent of the profit after tax to the surplus reserve fund and
additional 5-10 percent to the public welfare fund. The public welfare fund
reserve was limited to 50 percent of the registered
capital. Effective January 1, 2006, there is now only one fund
requirement. The reserve is 10 percent of income after tax, not to exceed 50
percent of registered capital. Statutory Reserve funds are restricted for set
off against losses, expansion of production and operation or increase in
register capital of the respective company. Statutory public welfare fund is
restricted to the capital expenditures for the collective welfare of employees.
These reserves are not transferable to the Company in the form of cash
dividends, loans or advances. These reserves are therefore not available for
distribution except in liquidation.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Lack of
Insurance
The
Company does not carry any business interruption insurance, products liability
insurance or any other 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
has no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy. 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 insurance
coverage in the future, and even if it can obtain 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
unqualified composition or quality 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. 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.
79
Minimum lease payments on
operating leases
The
Company has entered into several tenancy agreements for the lease of factory
premises and staff quarters. The Company’s commitments for minimum lease
payments under these non-cancelable operating leases for the next five years are
as follows:
Year
|
Minimum Lease Payments
|
|||
2010
|
$ | 299,283 | ||
2011
|
315,644 | |||
2012
|
327,330 | |||
2013
|
327,330 | |||
2014
and thereafter
|
118,471 | |||
Total
|
$ | 1,388,058 |
The rent
expense was $171,266 and $190,929 for the nine months ended September 30, 2010
and 2009, and $257,302, $193,868, and $91,581 for the years ended December 31,
2009, 2008 and 2007, respectively.
NOTE
13 – OPERATING RISK
Country
Risk
The
Company has significant investments in China. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in China 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 a material adverse effect upon the Company’s
business and financial condition.
Exchange
risk
The
Company cannot guarantee that the RMB/USD exchange rate will remain steady and,
therefore, the Company could post the same profit for two comparable periods and
post higher or lower profit depending on fluctuations in the RMB/USD
exchange rate. The exchange rate may fluctuate in response to changes in the
political environment or economic conditions without notice.
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.
Political
risk
Currently,
China is in a period of growth and is openly promoting business development in
order to bring more business into China. Additionally, the Chinese
government 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 Chinese government, the Company’s ability to
operate China subsidiaries could be affected.
NOTE
14: CONCENTRATION OF CREDIT RISK
A
significant portion of the Company’s cash at September 30, 2010 and 2009, and at
December 31, 2009, 2008 and 2007 is maintained at various financial institutions
in the PRC which do not provide insurance for amounts on deposit. The
Company has not experienced any losses in such accounts and believes it is not
exposed to significant credit risk in this area.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
For the
nine months ended September 30, 2010 and 2009, and for the years ended December
31, 2009, 2008 and 2007, no customer had net sales exceeding 10% of the
Company’s total net sales for the respective period.
For the
nine months ended September 30, 2010, no suppliers accounted for more than 10%
of the Company’s total purchases.
80
For the
nine months ended September 30, 2009, one supplier accounted for more than 10%
of the Company’s total purchases.
For the
years ended December 31, 2009, 2008 and 2007, no suppliers accounted for more
than 10% of the Company’s total purchases.
NOTE
15- SUBSEQUENT EVENTS
On April
21, 2010, the Company entered into a share exchange agreement with SRKP 20,
Inc., a company incorporated in the State of Delaware, and Finest Day
Limited, the sole shareholder of Immense. On December 6, 2010, the
Company entered into an amended and restated share exchange agreement with SRKP
20 and Finest Day Limited (the “Exchange Agreement”). Pursuant to the
Exchange Agreement, SRKP 20 agreed to issue an aggregate of 15,146,168 shares of
its common stock to the Finest Day Limited and its designees in exchange for all
of the issued and outstanding securities of Immense (the “Share
Exchange”). The Share Exchange closed on December 16,
2010. Prior to the closing of the Share Exchange a, the stockholders
of SRKP 20 agreed to cancel an aggregate of 4,267,674 shares of common stock
held by them. As a result of the Share Exchange, the Company became SRKP 20’s
wholly-owned subsidiary and the former shareholders of the Company became
controlling stockholders of SRKP 20. The transaction was accounted
for as a reverse merger and recapitalization whereby the Company is the
accounting acquirer and SRKP 20 is the acquired party.
81
Item
9.01 (d) Exhibits:
Exhibit No.
|
Exhibit Description
|
|
2.1
|
Amended
and Restated Share Exchange Agreement, dated as of December 6, 2010, by
and among the Registrant, Immense Fortune Holdings Limited, Legend Media
Holdings HK Limited and Feigeda Electronic (SZ) Co., Ltd.
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53016) filed with the
Securities and Exchange Commission on January 16, 2008).
|
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53016) filed with the Securities and Exchange
Commission on January 16, 2008).
|
|
3.3
|
Articles
of Merger effecting name change filed with the Office of Secretary of
State of Delaware on December 16, 2010.
|
|
4.1
|
Form
of Warrant (incorporated by reference from Exhibit 4.1 to the Registration
Statement on Form 10-SB (File No. 000-53016) filed with the Securities and
Exchange Commission on January 16, 2008).
|
|
4.2
|
Form
of Warrant (incorporated by reference from Exhibit 4.1 to the Quarterly
Report on Form 10-Q (File No. 000-53016) filed with the Securities and
Exchange Commission on November 9, 2010).
|
|
10.1
|
Amended
and Restated Share and Warrant Cancellation Agreement dated December 6,
2010 entered into by and between the Registrant and
Stockholders.
|
|
10.2
|
Employment
Agreement by and between Cui
Xiaoling and Feigeda Electronic (SZ) Co., Ltd. dated June 11, 2010
(translated
to English).
|
|
10.3
|
Realty
Lease Agreement dated April 15, 2009 by and between Shenzhen Baishisha
Joint Stock Co., Ltd. and Feigeda Electronic (SZ) Co., Ltd. (translated to
English).
|
|
10.4
|
Entrusted
Loan Agreement dated June 15, 2009 by and between Feigeda Electronic (SZ)
Co., Ltd., Shenzhen Branch of Industrial Bank Co., Ltd. and Shenzhen Small
& Medium Enterprises Credit Guarantee Centre Co., Ltd. (translated to
English)
|
|
10.4(a)
|
Guaranty
Agreement dated June 15, 2009 by and among Shenzhen Branch of Industrial
Bank Co., Ltd. and Wu Zuxi, Xiao Qiongying, Bu Falin, Zhang Yunfang and
Jiangxi Yongsheng Electronic Co., Ltd., Shenzhen Small & Medium
Enterprises Credit Guarantee Centre Co., Ltd. and Feigeda Electronic (SZ)
Co., Ltd. (translated to English).
|
|
10.4(b)
|
Pledge
Agreement dated June 15, 2009 by and among Shenzhen Small & Medium
Enterprises Credit Guarantee Centre Co., Ltd., Wu Zuxi and Feigeda
Electronic (SZ) Co., Ltd. (translated to English).
|
|
10.4(c)
|
Mortgage
Agreement dated June 15, 2009 by and among Shenzhen Small & Medium
Enterprises Credit Guarantee Centre Co., Ltd., Bu Falin and Feigeda
Electronic (SZ) Co., Ltd. (translated to English).
|
|
10.5
|
Registration
Rights Agreement dated as of December 16, 2010 by and among the
Registrant, Immense Fortune Holdings Limited and
Stockholders.
|
|
16.1
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated
December 21, 2010.
|
|
21.1
|
List
of Subsidiaries.
|
82
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Feigeda
Electronic Technology, Inc.
|
|||
Date:
December 22, 2010
|
|||
By:
|
/s/ Wu
Zuxi
|
|
|
Name:
|
Wu
Zuxi
|
||
Title:
|
Chief
Executive
Officer
|
83