Attached files
file | filename |
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EX-31.2 - Sunway Global Inc. | v213288_ex31-2.htm |
EX-31.1 - Sunway Global Inc. | v213288_ex31-1.htm |
EX-32.1 - Sunway Global Inc. | v213288_ex32-1.htm |
EX-32.2 - Sunway Global Inc. | v213288_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 2
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
OR
¨
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE TRANSITION FROM _______ TO ________.
COMMISSION FILE NUMBER 000-27159
SUNWAY GLOBAL INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada
|
26-1650042
|
|
(State or other jurisdiction of
|
(I.R.S. Employer
|
|
incorporation or organization)
|
Identification No.)
|
Daqing Hi-Tech Industry Development Zone, Daqing, Heilongjiang, People’s Republic of China, 163316
(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: 86-459-604-6043
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
|
Smaller reporting company x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of November 15, 2010, there were 18,499,736 outstanding shares of the Registrant's Common Stock, $0.0000001 par value.
The Amendment No.2 to Sunway Global Inc.’s (the "Company", "Sunway") Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2009 amends certain of the financial information included in Part I, Item 1,; corrects typographical errors and clarifies disclosure details in Notes 1, 2, 4, 14 of the financial statements, andItems 2 and 4 of the Form 10-Q. No other information included in the original Form 10Q, as amended by Amendment No.1 to Form 10Q are amended hereby.
For convenience and ease of reference, the Company is filing the Quarterly Report in its entirety with applicable changes. Unless otherwise stated, all information contained in this amendment is as of May 13, 2009, the filing date of the original Quarterly Report and does not reflect events or transactions occurring after such filing.
Page
|
||||
PART I
|
||||
Item 1.
|
Financial Statements
|
3
|
||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operation
|
41
|
||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
45
|
||
Item 4.
|
Controls and Procedures
|
46
|
||
PART II
|
||||
Item 1.
|
Legal Proceedings
|
47
|
||
Item 1A.
|
Risk Factors
|
47
|
||
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
47
|
||
Item 3.
|
Defaults Upon Senior Securities
|
47
|
||
Item 4.
|
Removed and Reserved
|
47
|
||
Item 5.
|
Other Information
|
47
|
||
Item 6.
|
Exhibits
|
47
|
||
SIGNATURES
|
48
|
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNWAY GLOBAL INC.
CONTENTS
|
PAGES
|
|||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
4
|
|||
CONSOLIDATED BALANCE SHEETS
|
5 - 6
|
|||
CONSOLIDATED STATEMENTS OF INCOME
|
7
|
|||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
8
|
|||
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
9 - 10
|
|||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
11 – 40
|
3
ALBERT WONG & CO.
CERTIFIED PUBLIC ACCOUNTANTS
7th Floor, Nan Dao Commercial Building
359-361 Queen’s Road Central
Hong Kong
Tel : 2851 7954
Fax: 2545 4086
ALBERT WONG
B.Soc., Sc., LL.B., P.C.LL., Barrister-at-law, C.P.A.(Practising).
To: The board of directors and stockholders of Sunway Global Inc. (“the Company”)
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying interim consolidated balance sheets of Sunway Global Inc. as of March 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for the three-month periods then ended, in accordance with the standards of the Public Company Accounting Oversight Board (United States). All information included in these financial statements is the representation of the management of Sunway Global Inc.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with U.S. generally accepted accounting principles.
Since our previous report dated May 13, 2009, it was determined that the consolidated financial statements needed restatement to make corrections as described in note 19.
Hong Kong
|
Albert Wong & Co.
|
May 13, 2009
|
Certified Public Accountants
|
Except for note 19 which is dated February 14, 2011
|
4
SUNWAY GLOBAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2009 AND DECEMBER 31, 2008
(Stated in US Dollars)
Notes
|
March 31,
2009
|
December 31,
2008
|
|||||||||
(Unaudited
|
(Audited
|
||||||||||
Restated)
|
Restated)
|
||||||||||
ASSETS
|
|||||||||||
Current assets
|
|||||||||||
Cash and cash equivalents
|
2(k)
|
$
|
12,212,431
|
$
|
15,189,941
|
||||||
Trade receivables, net
|
5
|
2,702,440
|
2,953,919
|
||||||||
Inventories
|
8
|
1,022,032
|
590,738
|
||||||||
Advances to suppliers
|
1,502,484
|
547,952
|
|||||||||
Prepayments
|
750,564
|
-
|
|||||||||
Tender deposits
|
18,406
|
112,735
|
|||||||||
Travel advances to shareholders
|
6
|
57,483
|
38,733
|
||||||||
Advances to employees
|
7
|
331,588
|
429,804
|
||||||||
Total current assets
|
$
|
18,597,428
|
$
|
19,863,822
|
|||||||
Restricted cash
|
356,046
|
378,366
|
|||||||||
Amount due from a related company
|
4
|
830
|
830
|
||||||||
Property, plant and equipment, net
|
9
|
5,801,161
|
5,069,871
|
||||||||
Intangibles, net
|
10
|
9,702,976
|
6,576,769
|
||||||||
Deposit for acquisition of computer software
|
-
|
1,750,751
|
|||||||||
Deposit for technology-based design
|
3,505,902
|
-
|
|||||||||
Deposit for acquisition of subsidiary
|
-
|
7,725,445
|
|||||||||
TOTAL ASSETS
|
$
|
37,964,343
|
$
|
41,365,854
|
|||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|||||||||||
Current liabilities
|
|||||||||||
Accounts payable
|
$
|
712,325
|
$
|
59,912
|
|||||||
Income tax payable
|
211,410
|
632,893
|
|||||||||
Turnover and other taxes
|
89,834
|
406,839
|
|||||||||
Expected warranty liabilities
|
11
|
50,460
|
50,396
|
||||||||
Customers deposits
|
202,102
|
-
|
|||||||||
Accrued liabilities
|
293,480
|
301,461
|
|||||||||
Other payables
|
266,945
|
15,168
|
|||||||||
Total current liabilities
|
$
|
1,826,556
|
$
|
1,466,669
|
|||||||
Warrant liabilities
|
90,383,149
|
-
|
|||||||||
TOTAL LIABILITIES
|
$
|
92,209,705
|
$
|
1,466,669
|
See accompanying notes to consolidated financial statements
5
SUNWAY GLOBAL INC.
CONSOLIDATED BALANCE SHEETS (Continued)
AS AT MARCH 31, 2009 AND DECEMBER 31, 2008
(Stated in US Dollars)
Notes
|
March 31, 2009
|
December 31,
2008
|
|||||||||
(Unaudited)
|
(Audited)
|
||||||||||
(Restated)
|
(Restated)
|
||||||||||
Commitments and contingencies
|
16
|
$
|
-
|
$
|
-
|
||||||
STOCKHOLDERS’ EQUITY
|
|||||||||||
Series B Convertible Preferred Stock $0.0000001 par value; 400,000 shares authorized; 160,494 shares issued and outstanding at March 31, 2009 and December 31, 2008 respectively
|
12
|
$
|
1
|
$
|
1
|
||||||
Common stock at $0.0000001 par value; 100,000,000 shares authorized; 18,499,736 shares issued and outstanding at March 31, 2009 and December 31, 2008 respectively
|
2
|
2
|
|||||||||
Additional paid-in capital
|
13,833,383
|
17,824,325
|
|||||||||
Statutory reserves
|
3,033,855
|
2,127,978
|
|||||||||
(Accumulated deficit)/retained earning
|
(73,983,850
|
)
|
17,102,689
|
||||||||
Accumulated other comprehensive income
|
2,871,247
|
2,844,190
|
|||||||||
$
|
(54,245,362
|
)
|
$
|
39,899,185
|
|||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
37,964,343
|
$
|
41,365,854
|
See accompanying notes to consolidated financial statements
6
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
Three months ended March 31,
|
|||||||||||
2009
|
2008
|
||||||||||
Notes
|
(Restated)
|
||||||||||
Net revenues
|
17
|
$
|
2,933,573
|
$
|
3,604,034
|
||||||
Cost of net revenues
|
17
|
(893,980
|
)
|
(1,141,745
|
)
|
||||||
Gross profit
|
$
|
2,039,593
|
$
|
2,462,289
|
|||||||
Selling expenses
|
(180,349
|
)
|
(25,237
|
)
|
|||||||
General and administrative expenses
|
(631,894
|
)
|
(786,242
|
)
|
|||||||
Income from operation
|
$
|
1,227,350
|
$
|
1,650,810
|
|||||||
Interest income
|
23,577
|
143
|
|||||||||
Impairment on investment
|
18
|
(4,831,386
|
)
|
-
|
|||||||
Change in fair value of warrants
|
(20,481,276
|
)
|
-
|
||||||||
Income before (loss)/income taxes
|
$
|
(24,061,735
|
)
|
$
|
1,650,953
|
||||||
Income taxes
|
14
|
(207,996
|
)
|
(273,542
|
)
|
||||||
Net (loss)/income
|
$
|
(24,269,731
|
)
|
$
|
1,377,411
|
||||||
Net (loss)/income per share:
|
|||||||||||
-Basic
|
$
|
(1.31
|
)
|
$
|
0.16
|
||||||
-Diluted
|
$
|
(1.31
|
)
|
$
|
0.05
|
||||||
Weighted average number of common stock
|
|||||||||||
-Basic
|
13
|
18,499,736
|
8,360,349
|
||||||||
-Diluted
|
13
|
18,499,736
|
27,642,747
|
See notes to consolidated financial statements
7
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2008 AND THREE MONTHS ENDED
MARCH 31, 2009
(Stated in US Dollars)(Unaudited)(Restated)
Additional
|
Retained
|
Accumulated
|
||||||||||||||||||||||||||||||||||
Preferred
|
Preferred
|
No.
|
paid -
|
earnings/
|
other
|
|||||||||||||||||||||||||||||||
Series
|
Series
|
shares
|
Common
|
in
|
Statutory
|
(accumulated
|
comprehensive
|
|||||||||||||||||||||||||||||
A | B |
outstanding
|
stock
|
capital
|
reserves
|
deficit)
|
income
|
Total
|
||||||||||||||||||||||||||||
Balance, January 1, 2008
|
$ | 1 | $ | 1 | 223,658 | $ | 1 | $ | 11,244,325 | $ | 2,127,978 | $ | 8,043,920 | $ | 1,180,288 | $ | 22,596,514 | |||||||||||||||||||
Conversion of Preferred Series A into Common Stock
|
(1 | ) | - | 13,711,831 | - | 1 | - | - | - | - | ||||||||||||||||||||||||||
Conversion of Preferred Series B into Common Stock
|
- | - | 148,140 | - | - | - | - | - | - | |||||||||||||||||||||||||||
Conversion of Warrant Series J into Common Stock
|
- | - | 4,416,107 | 1 | 6,579,999 | - | - | - | 6,580,000 | |||||||||||||||||||||||||||
Net income
|
- | - | - | - | - | - | 9,058,769 | - | 9,058,769 | |||||||||||||||||||||||||||
Foreign currency translation adjustment
|
- | - | - | - | - | - | - | 1,663,902 | 1,663,902 | |||||||||||||||||||||||||||
Balance, December 31, 2008 (restated)
|
$ | - | $ | 1 | 18 ,499,736 | $ | 2 | $ | 17,824,325 | $ | 2,127,978 | $ | 17,102,689 | $ | 2,844,190 | $ | 39,899,185 | |||||||||||||||||||
Balance, January 1, 2009
|
$ | - | $ | 1 | 18,499,736 | $ | 2 | $ | 17,824,325 | $ | 2,127,978 | $ | 17,102,689 | $ | 2,844,190 | $ | 39,899,185 | |||||||||||||||||||
Net loss
|
- | - | - | - | - | - | (24,269,731 | ) | - | (24,269,731 | ) | |||||||||||||||||||||||||
Reclassification of warrants from equity to derivative liabilities
|
- | - | - | - | (3,990,942 | ) | - | (65,910,931 | ) | - | (69,901,873 | ) | ||||||||||||||||||||||||
Appropriations to statutory reserves
|
- | - | - | - | - | 905,877 | (905,877 | ) | - | - | ||||||||||||||||||||||||||
Foreign currency translation adjustment
|
- | - | - | - | - | - | - | 27,057 | 27,057 | |||||||||||||||||||||||||||
Balance, March 31, 2009 (restated)
|
$ | - | $ | 1 | 18 ,499,736 | $ | 2 | $ | 13,833,383 | $ | 3,033,855 | $ | (73,983,850 | ) | $ | 2,871,247 | $ | (54,245,362 | ) |
See notes to consolidated financial statements
8
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
Three months ended March 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Cash flows from operating activities
|
||||||||
Net (loss)/income
|
$
|
(24,269,731
|
)
|
$
|
1,377,411
|
|||
Depreciation
|
240,444
|
177,687
|
||||||
Amortization
|
253,803
|
196,280
|
||||||
Change in fair value of warrants
|
20,481,276
|
-
|
||||||
Impairment on investment
|
4,831,386
|
-
|
||||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Trade receivables, net
|
255,153
|
(620,159
|
)
|
|||||
Inventories
|
(430,489
|
)
|
(77,394
|
)
|
||||
Advances to suppliers
|
(776,077
|
)
|
964,951
|
|||||
Prepayments
|
(178,370
|
)
|
383,008
|
|||||
Tender deposits
|
94,457
|
-
|
||||||
Travel advances to shareholders
|
(18,699
|
)
|
(39,137
|
)
|
||||
Advances to employees
|
98,741
|
(398,153
|
)
|
|||||
Accounts payable
|
652,243
|
(254,484
|
)
|
|||||
Income tax payable
|
(422,216
|
)
|
118,380
|
|||||
Turnover and other taxes
|
(289,028
|
)
|
85,220
|
|||||
Loans from unrelated parties
|
-
|
1,572,360
|
||||||
Amount due from a director
|
-
|
(726,133
|
)
|
|||||
Customers deposits
|
202,073
|
(216,932
|
)
|
|||||
Accrued liabilities
|
(8,336
|
)
|
36,341
|
|||||
Other payables
|
324,750
|
(7,113
|
)
|
|||||
Net cash provided by operating activities
|
$
|
1,041,380
|
$
|
2,572,133
|
||||
Cash flows from investing activities
|
||||||||
Purchase of technology-based designs
|
(3,505,390
|
)
|
-
|
|||||
Purchase of intangibles assets
|
(596,754
|
)
|
-
|
|||||
Purchase of plant and equipment
|
(78,781
|
)
|
(939,630
|
)
|
||||
Used of restricted cash
|
22,320
|
23,095
|
||||||
Deposit for acquisition of computer software
|
-
|
(1,281,650
|
)
|
|||||
Net cash used in investing activities
|
$
|
(4,158,605
|
)
|
$
|
(2,198,185
|
)
|
||
Cash flows from financing activities
|
$
|
-
|
$
|
-
|
||||
Net cash provided by financing activities
|
$
|
-
|
$
|
-
|
9
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
Three months ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Net in cash and cash equivalents (used)/sourced
|
$
|
(3,117,225
|
)
|
$
|
373,948
|
|||
Effect of foreign currency translation on
|
||||||||
cash and cash equivalents
|
139,715
|
262,621
|
||||||
Cash and cash equivalents–beginning of period
|
15,189,941
|
5,820,100
|
||||||
Cash and cash equivalents–end of period
|
$
|
12,212,431
|
$
|
6,456,669
|
||||
Supplementary cash flow information:
|
||||||||
Tax paid
|
$
|
630,304
|
$
|
157,694
|
||||
Interest received
|
23,577
|
143
|
SUPPLEMENTAL NON-CASH DISCLOSURES:
1.
|
During the three months ended March 31, 2009 and 2008, an amount of $1,752,695 and nil were transferred from “deposit for the acquisition of computer software” to “property, plant and equipment”, respectively.
|
2.
|
During the three months ended March 31, 2009 and 2008, an amount of $7,725,445 and nil were transferred from “deposit for the acquisition of subsidiary” to “acquisition of subsidiary, net of cash acquisition”.
|
Regarding the non-cash disclosures of Liheng acquisition, the balance was transferred to the following assets, liabilities and statement of incomes:
Cash and cash equivalents
|
$ | 73,193 | ||
Property, plant and equipment
|
955,208 | |||
Land use rights
|
1,133,323 | |||
Other receivables
|
1,127,949 | |||
Turnover and other taxes
|
28,477 | |||
Other payables
|
(424,091 | ) | ||
Impairment on investment
|
4,831,386 | |||
$ | 7,725,445 |
See notes to consolidated financial statements
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
Sunway Global Inc. (the “Company”) was incorporated in the state of Nevada on October 18, 1971. Prior to June 6, 2007 the Company has only nominal operations and assets.
On June 6, 2007, the Company executed a reverse-merger with Rise Elite International Limited (“Rise Elite (BVI)”) by an exchange of shares whereby the Company issued 210,886 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0000001 per share in exchange for all shares in World Through Limited, a British Virgin Islands corporation (“World Through (BVI)”).
World Through (BVI) holds Sunway World Through Technology (Daqing) Co Ltd (“SWT” or “WFOE”), which entered into a series of agreements with Daqing Sunway Technology Co., Ltd (“Sunway”) including but not limited to management, loan, purchase option, consignment, trademark licensing, non-competition, etc. As a result of entering the abovementioned agreements, WFOE deems to control Sunway as a Variable Interest Entity as required by FASB Interpretation No. 46 (revised December 2003) Consolidated of Variable Interest Entities, an Interpretation of ARB No. 51 since SWT was the primary beneficiary. On March 16, 2008, SWT acquired Beijing Sunway New-force Medical Treatment Tech Co., Ltd (“Beijing Sunway”) as its wholly-owned subsidiary. Beijing Sunway was incorporated in Beijing, PRC on May 24, 2007.
On February 7, 2008, the Company changed its name from National Realty and Mortgage, Inc. to Sunway Global Inc.
On January 16, 2009, World Through (BVI) acquired Qingdao Liheng Textiles Co., Ltd (“Liheng”) as its wholly-owned subsidiary. Liheng was incorporated in PRC on June 6, 2003.
The Company, through its subsidiaries and Sunway, (hereinafter, collectively referred to as “the Group”), is now in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Method of Accounting
|
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America (“US GAAP”) and have been consistently applied in the presentation of financial statements.
11
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(a)
|
Method of Accounting (Continued)
|
The interim results of operations are not necessarily indicative of the results to be expected for the fiscal period ending March 31, 2009. The Company’s consolidation balance sheet as of December 31, 2008 has been taken from the Company’s consolidation balance sheet as of the date. All other financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the period presented.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC, the accounting standards used in the places of their domicile. The accompanying condensed interim consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company's subsidiaries to present them in conformity with US GAAP.
(b)
|
Principles of Consolidation
|
The consolidated financial statements, which include the Company and its subsidiaries, are complied in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly-owned subsidiaries.
The Company owned five subsidiaries since its reverse-merger on June 6, 2007. The detailed identities of the consolidating subsidiaries would have been as follows:
Place of
incorporation
|
Attributable
interest
|
|||||
World Through Ltd
|
British Virgin
Islands
|
100
|
%
|
|||
Sunway World Through Technology (Daqing) Co Ltd
|
PRC
|
100
|
%
|
|||
*Daqing Sunway Technology Co Ltd
|
PRC
|
100
|
%
|
|||
Beijing Sunway New-force Medical Treatment Tech Co., Ltd
|
PRC
|
100
|
%
|
|||
Qingdao Liheng Textiles Co., Ltd
|
PRC
|
100
|
%
|
*Note: Deemed variable interest entity
12
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(c)
|
Use of estimates
|
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
(d)
|
Economic and political risks
|
The Group’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Group’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Group’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
(e)
|
Intangibles
|
Intangibles are stated at cost less accumulated amortisation. Amortisation is provided over the respective useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:
Land use rights
|
Over lease terms
|
Technology-based design
|
10 years
|
13
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(f)
|
Property, plant and equipment
|
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
20 years
|
|
Machinery and equipment
|
6 years
|
Moldings
|
10 years
|
Computer software
|
3 - 10 years
|
Office equipment and motor vehicles
|
6 - 10 years
|
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income.
(g)
|
Maintenance and repairs
|
The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
(h)
|
Accounting for the impairment of long-lived assets
|
The Group periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognised based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
During the reporting period, there was no impairment loss.
(i)
|
Inventories
|
Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
14
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(j)
|
Trade receivables
|
Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.
Outstanding accounts balances are reviewed individually for collectability. The Company do not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
(k)
|
Cash and cash equivalents
|
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in the PRC and only HSBC in Hong Kong. The Company does not maintain any bank accounts in the United States of America.
March 31, 2009
|
December 31,
2008
|
|||||||
Bank of Communications, Branch of Daqing
|
||||||||
City Economic Zone
|
$
|
11,858,175
|
$
|
9,606,188
|
||||
Daqing City Commercial Bank
|
-
|
4,536,667
|
||||||
Agricultural Bank of China
|
82,434
|
930,332
|
||||||
China Construction Bank, Beijing Branch
|
180,115
|
-
|
||||||
HSBC
|
70,148
|
109,151
|
||||||
Cash on hand
|
21,559
|
7,603
|
||||||
$
|
12,212,431
|
$
|
15,189,941
|
(l)
|
Restricted cash
|
Restricted cash are pledged deposits in an escrow account for investor relations purpose.
(m)
|
Revenue recognition
|
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable; and
- Collection is reasonably assured.
Contract revenues are recognized when the manufacturing and installation of the medical equipments is completed. Generally, the company receives total contract sum from clients in 4 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. Third payment of 35% is received after the construction is completed within 4 months. The final sum of the remaining portion is received after the construction is completed until one year.
15
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(n)
|
Expected warranty liabilities
|
The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.
(o)
|
Cost of net revenues
|
Cost of net revenues consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. All inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of distribution network are also included. Write-down of inventory to lower of cost or market is also recorded in cost of revenues.
(p)
|
Leases
|
The Group did not have lease which met the criteria of capital lease. Leases which do not qualify as capital lease are classified as operating lease. Operating lease rental payment included in general and administrative expenses were $26,333 and $4,853 and cost of sales were $6,297 and nil for the three months ended March 31, 2009 and 2008 respectively.
(q)
|
Advertising
|
The Group expensed all advertising costs as incurred. Advertising expenses included in selling expenses were nil and $20,979 for the three months ended March 31, 2009 and 2008 respectively.
(r)
|
Shipping and handling
|
All shipping and handling are expensed as incurred. Shipping and handling expenses included in selling expenses, general and administrative expenses, cost of net revenues and were $5,728 and $3,881 for the three months ended March 31, 2009 and 2008 respectively.
(s)
|
Research and development
|
All research and development costs are expensed as incurred. The research and development costs included in general and administrative expenses were $20,534 and $377 for the three months ended March 31, 2009 and 2008 respectively.
(t)
|
Retirement benefits
|
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred. The retirement benefit expenses included in general and administrative expenses and selling expenses were $26,719 and $10,118 for the three months ended March 31, 2009 and 2008 respectively.
16
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(u)
|
Income taxes
|
The Group accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future realization is uncertain.
(v)
|
Foreign currency translation
|
The accompanying financial statements are presented in United States dollars. The reporting currency of the Group is the U.S. dollar ($). SWT, Sunway, Beijing Sunway and Liheng use its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Group because it has not engaged in any significant transactions that are subject to the restrictions.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
March 31,
2009
|
December
31, 2008
|
March 31,
2008
|
||||||||||
Twelve months ended
|
||||||||||||
RMB : USD exchange rate
|
-
|
6.8542
|
-
|
|||||||||
Three months ended
|
||||||||||||
RMB : USD exchange rate
|
6.8456
|
-
|
7.0222
|
|||||||||
Average three months ended
|
||||||||||||
RMB : USD exchange rate
|
6.8466
|
-
|
7.1757
|
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
17
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(w)
|
Statutory reserves
|
As stipulated by the PRC’s Company Law and as provided in the SWT, Sunway and Liheng’s Articles of Association, SWT, Sunway and Liheng’s net income after taxation can only be distributed as dividends after appropriation has been made for the following:
|
(i)
|
Making up cumulative prior years’ losses, if any;
|
|
(ii)
|
Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital, which is restricted for set off against losses, expansion of production and operation or increase in registered capital; and
|
|
(iii)
|
Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting.
|
(x)
|
Comprehensive income
|
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Group’s current component of other comprehensive income is the foreign currency translation adjustment.
(y)
|
Recent accounting pronouncements
|
In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 161 “Disclosures about Derivative Instruments and Hedging Activities”. SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements but does not expect it to have a material effect.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Application of this FSP is not currently applicable to the Company as the Company’s intangible assets consist of land used rights which has a fixed useful life of 47 years.
18
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
(y)
|
Recent accounting pronouncements(continued)
|
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 (SFAS 163). This statement clarifies accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for fiscal years and interim periods within those years, beginning after December 15, 2008. Because the Company does not issue financial guarantee insurance contracts, it does not expect the adoption of this standard to have an effect on its financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to remove the GAAP hierarchy from the auditing standards. SFAS 162 is not expected to have a material impact on the Company’s financial statements.
19
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
3.
|
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
|
Financial instruments which potentially expose the Group to concentrations of credit risk, consists of cash and trade receivables as of March 31, 2009 and December 31, 2008. The Group performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.
As of March 31, 2009 and December 31, 2008, the Group’s bank deposits were all placed with banks in the PRC where there is currently no rule or regulation in place for obligatory insurance of bank accounts.
For the three months ended March 31, 2009 and 2008, all of the Group’s sales were generated from the PRC. In addition, all trade receivables as of March 31, 2009 and December 31, 2008 also arose in the PRC.
The maximum amount of loss due to credit risk that the Group would incur if the counter parties to the financial instruments failed to perform is represented the carrying amount of each financial asset in the balance sheet.
Normally the Group does not obtain collateral from customers or debtors.
Details of the customers accounting for 10% or more of the Group’s revenue are as follows:
For the three months ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Customer B
|
$
|
398,738
|
$
|
378,799
|
||||
Customer E
|
-
|
448,577
|
||||||
Customer I
|
-
|
541,141
|
||||||
Customer J
|
-
|
463,530
|
||||||
Customer K
|
552,099
|
-
|
||||||
Customer L
|
350,539
|
-
|
Details of customers accounting for 10% or more of the Group’s trade receivables are as follows:
March 31,
2009
|
December 31,
2008
|
|||||||
Customer A
|
$
|
-
|
$
|
499,583
|
||||
Customer B
|
277,549
|
-
|
||||||
Customer C
|
-
|
387,263
|
||||||
Customer D
|
358,917
|
-
|
||||||
Customer E
|
498,043
|
396,822
|
||||||
Customer F
|
300,459
|
371,218
|
||||||
Customer G
|
-
|
325,129
|
||||||
Customer H
|
410,190
|
-
|
20
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
4.
|
AMOUNT DUE FROM A RELATED COMPANY
|
As at December 31, 2008, the mount due from Rise Elite International Ltd (Rise Elite), a related company where Mr. Liu Bo, the director of the Company is a shareholder. The amount is unsecured, interest free and repayable on demand. The amount was held by Rise Elite for the initial setup expenses.
5.
|
TRADE RECEIVABLES, NET
|
March 31,
2009
|
December 31,
2008
|
|||||||
Trade receivables, gross
|
$
|
2,710,864
|
$
|
2,962,333
|
||||
Provision for doubtful debts
|
(8,424
|
)
|
(8,414
|
)
|
||||
$
|
2,702,440
|
$
|
2,953,919
|
All of the above trade receivables are due within one year of aging.
An analysis of the allowance for doubtful accounts for the three months ended March 31, 2009 and December 31, 2008 is as follows:
March 31,
2009
|
December
31, 2008
|
|||||||
Balance at beginning of period/year
|
$
|
8,414
|
$
|
7,884
|
||||
Foreign exchange adjustment
|
10
|
530
|
||||||
Balance at end of period/year
|
$
|
8,424
|
$
|
8,414
|
Allowance was made when collection of the full amount is no longer probable. Management reviews and adjusts this allowance periodically based on historical experience, current economic climate as well as its evaluation of the collectability of outstanding accounts. The Group evaluates the credit risks of its customers utilizing historical data and estimates of future performance.
6.
|
TRAVEL ADVANCES TO SHAREHOLDERS
|
Travel advances were made to Shareholders. These shareholders are also the management of the company and these advances are used to enable their execution of operational duties such as marketing and sales promotion. The following table provides an analysis of the outstanding accounts.
March 31,
2009
|
December
31, 2008
|
|||||||
Bo Liu
|
$
|
33,020
|
$
|
23,495
|
||||
Deli Liang
|
24,463
|
15,238
|
||||||
$
|
57,483
|
$
|
38,733
|
21
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
7.
|
ADVANCES TO EMPLOYEES
|
Advances to employees are advances for purchases and travelling. They are unsecured, interest free and repayable on demand. The following table provides the rollforward of the activity in the advances to employees:
March 31,
2009
|
December
31, 2008
|
|||||||
Beginning balance, January 1
|
$
|
429,804
|
$
|
548,364
|
||||
Add: Advanced during the period/year
|
142,460
|
659,177
|
||||||
Less: Transferred to income statement
|
(77,639
|
)
|
(406,262
|
)
|
||||
Recollected from employees
|
(163,037
|
)
|
(371,475
|
)
|
||||
Ending balance
|
$
|
331,588
|
$
|
429,804
|
8.
|
INVENTORIES
|
Inventories comprise the followings:
March 31,
2009
|
December
31, 2008
|
|||||||
Finished goods
|
$
|
459,889
|
$
|
218,448
|
||||
Work in progress
|
41,187
|
188,855
|
||||||
Raw materials
|
520,956
|
183,435
|
||||||
$
|
1,022,032
|
$
|
590,738
|
22
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
9.
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment, net comprise the followings:
March 31,
2009
|
December 31,
2008
|
|||||||
At cost
|
||||||||
Buildings
|
$
|
1,449,221
|
$
|
1,447,402
|
||||
Machinery and equipment
|
1,119,996
|
1,116,941
|
||||||
Moldings
|
4,160,819
|
4,155,598
|
||||||
Computer software
|
2,098,260
|
2,073,181
|
||||||
Office equipment and motor vehicles
|
369,799
|
288,736
|
||||||
$
|
9,198,095
|
$
|
9,081,858
|
|||||
Less: accumulated depreciation
|
(4,264,904
|
)
|
(4,011,987
|
)
|
||||
$
|
4,933,191
|
$
|
5,069,871
|
|||||
Construction in progress
|
867,970
|
-
|
||||||
$
|
5,801,161
|
$
|
5,069,871
|
Construction in progress represents direct costs of construction incurred for factory infrastructure. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use.
Depreciation is included in the statement of income and as follows:
For the three months ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Cost of net revenues
|
$
|
219,089
|
$
|
163,266
|
||||
General and administrative expenses
|
11,702
|
14,421
|
||||||
Selling expenses
|
9,653
|
-
|
||||||
$
|
240,444
|
$
|
177,687
|
23
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
10.
|
INTANGIBLE ASSETS, NET
|
Intangible assets, net are as follows:
March 31,
2009
|
December 31,
2008
|
|||||||
Land use rights, at cost
|
$
|
2,484,712
|
$
|
1,354,308
|
||||
Technology-based design, at cost
|
8,519,706
|
6,320,577
|
||||||
$
|
11,004,418
|
$
|
7,674,885
|
|||||
Less: accumulated amortization
|
(1,301,442
|
)
|
(1,098,116
|
)
|
||||
|
$
|
9,702,976
|
$
|
6,576,769
|
Patent of the Pneumatic Tube System has been registered with the PRC government under Serial No. 264-2004 2005 with a registration fee of $347 (RMB 2,800) which was expensed in 2003. This amount was immaterial for capitalization.
The Group acquired the rights to use a parcel of land totaling 26,522 square meters, for a consideration of $1,149,788 (RMB 9,282,700), located at Daqing Hi-Tech Industry Development Zone, Daqing, Heilongjiang in the People’s Republic of China 163316 for a term of 46 years from September 16, 2005 to June 13, 2052. The land has been used to build the Group’s facility.
The Group acquired the rights to use a parcel of land totaling 9,082 square meters, for a consideration of $89,552 (RMB613,035), located at Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China for a term of 48 years from November 3, 2006 to July 24, 2053. The land has been used to build the Liheng’s facility.
The Group acquired the rights to use a parcel of land totaling 10,841 square meters, for a consideration of $ 106,709 (RMB730,485), located at Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China. The land has been used to build the Liheng’s facility. We already paid fully in cash but the issuance of land certificate is in progress. It is believed that the land certificate will be issued within the current year.
Amortization expense included in the general and administrative expenses for the three months ended 2009 and 2008 were $253,803 and $196,280 respectively.
24
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
11.
|
EXPECTED WARRANTY LIABILITIES
|
An analysis of the expected warranty liabilities as at March 31, 2009 and December 31, 2008 is as follows:
March 31,
2009
|
December
31, 2008
|
|||||||
Balance at beginning of period/year
|
$
|
50,396
|
$
|
55,351
|
||||
Warranty expense for the period/year
|
-
|
(8,533
|
)
|
|||||
Foreign currency difference
|
64
|
3,578
|
||||||
Balance at end of period/year
|
$
|
50,460
|
$
|
50,396
|
12.
|
SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS
|
On June 5, 2007, the Company entered into a purchase agreement, whereby the company agreed to sell 165,432 shares of the Company’s Series B Preferred shares and various stock purchases warrants to purchase up to 18,686,054 shares of the Company’s common shares. The exercise price, expiration date and number of share eligible to be purchased with the warrants are summary in the following table:
Investment
Amount
|
Preferred
B
|
A
Warrant
|
B
Warrant
|
J
Warrant
|
C
Warrant
|
D
Warrant
|
|||||||||||||
Vision Opportunity Master Fund, Ltd.
|
6,500,000
|
160,494
|
4,814,815
|
2,407,407
|
4,362,416
|
4,362,416
|
2,181,208
|
||||||||||||
Columbia China Capital Group, Inc.
|
200,000
|
4,938
|
148,148
|
74,074
|
134,228
|
134,228
|
67,114
|
Series of Warrant
|
Number of
shares
|
Exercise
Price
|
Expiry Date
|
||||||
Series A
|
4,962,963
|
$
|
1.76
|
6 /5 /2012
|
|||||
Series B
|
2,481,481
|
2.30
|
6 /5 /2012
|
||||||
Series J
|
4,496,644
|
1.49
|
6 /5 /2008
|
||||||
Series C
|
4,496,644
|
1.94
|
6 /5 /2012
|
||||||
Series D
|
2,248,322
|
2.53
|
6 /5 /2012
|
The Series B preferred stock has liquidation rights senior to common stock and Series A preferred stock. In the event of a liquidation of the Company, holders of Series B preferred stock are entitled to receive a distribution equal to $40.50 per share of Series B preferred stock prior to any distribution to the holders of common stock and Series A preferred stock. The Series B preferred stock is entitled to non-cumulative dividends only upon declaration of dividends by the Company. To date, no dividends have been declared or accrued. The Series B preferred stock will participate based on their respective as-if conversion rates if the Company declares any dividends. After the Amendment were filed effect the Reverse Split, each share of Series B preferred stock would be convertible into 30 shares of Common Stock for $1.35 each, which both may be adjusted from time to time pursuant to the conversion rate. The holders of Series B preferred stock shall be entitled to voting rights by applicable law and the right to vote together with the holders of Common and Series A Preferred Stock.
25
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
12.
|
SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS (CONTINUED)
|
The gross proceeds of the transaction were $6.7 million. The proceeds from the transaction were allocated to the Series B preferred stock, warrants and beneficial conversion feature based on the relative fair value of the securities. The value of the Preferred Series B was determined by reference to the market price of the common shares into which it converts, and the gross value of the warrants was calculated using the Black –Scholes model with the following assumptions: expected life of 1 year, volatility of 117% and an interest rate of 4.99%.
The Company recognized a beneficial conversion feature discount on the Series B preferred stock at its intrinsic value, which was the fair value of the common stock at the commitment date for the Series B preferred stock investment, less the effective conversion price but limited to the $6.7 million of proceeds received from the sale. The Company recognized the $6.7 million beneficial conversion feature as an increase in paid in capital in the accompanying consolidated balance sheets on the date of issuance of the Series B preferred shares since the Series B preferred shares were convertible at the issuance date.
The agreement, also provided that if a Registration Statement is not effective within a certain period of time or the common shares are not listed on the NASDAQ or American exchange by December 31, 2008, the Company will pay the holders of the shares a penalty that can range from $67,000 to $670,000 and certain principal shareholders would issue up to 1,000,000 additional shares to the purchasers of the Preferred Series B shares. The company is accounting for these penalties in accordance with FAS 5 - Accounting for Contingencies, whereby the penalty will not be recorded as a liability until and if it is probable the penalty will be incurred. No penalty has been recorded in the accompanying financial statements for this contingency.
Under the agreement, Warrant J was expired on June 5, 2008. On that day, Vision Opportunity Master Fund Ltd. converted all the Warrant J, totally 4,362,416 shares into 4,362,416 of common stock.
On February 7, 2008, 12 shareholders of Preferred Series A converted 228,530 shares into 13,711,831 shares of common stock, in which Rise Elite International Limited, Vision Opportunity Master Fund, Ltd and Kuhns Brothers, Inc converted 210,886, 7,990 and 2,647 shares of Preferred Series A into 12,653,160, 479,400 and 158,820 shares of common stock respectively._
On June 18, 2008, Columbia China Capital Group, Inc. converted 4,938 shares of Preferred Series B into 148,140 shares of common stock.
On November 10, 2008, Columbia China Capital Group, Inc. converted the Warrant J, totally 53,691 shares into 53,691 of common stock.
26
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
13.
|
(LOSS)/EARNINGS PER SHARE
|
The calculation of the basic and diluted earnings per share attributable to the common stock holders is based on the following data:
For the three months ended March
31,
|
||||||||
2009
|
2008
|
|||||||
Earnings:
|
||||||||
(Loss)/earnings for the purpose of Basic (loss)/earnings per share
|
$
|
(24,269,731
|
)
|
$
|
1,377,411
|
|||
Effect of dilutive potential common
|
||||||||
Stock
|
-
|
-
|
||||||
(Loss)/earnings for the purpose of Dilutive (loss)/earnings per share
|
$
|
(24,269,731
|
)
|
$
|
1,377,411
|
|||
Number of shares:
|
||||||||
Weighted average number of common stock for the purpose of basic earnings per share
|
18,499,736
|
8,360,349
|
||||||
Effect of dilutive potential common stock
|
||||||||
-conversion of Series A
|
||||||||
convertible preferred stock
|
-
|
5,575,140
|
||||||
-conversion of Series B
|
||||||||
convertible preferred stock
|
-
|
4,962,960
|
||||||
-conversion of Warrant Series A
|
-
|
2,520,496
|
||||||
-conversion of Warrant Series B
|
-
|
885,551
|
||||||
-conversion of Warrant Series J
|
-
|
2,623,161
|
||||||
-conversion of Warrant Series C
|
-
|
2,057,343
|
||||||
-conversion of Warrant Series D
|
-
|
657,747
|
||||||
Weighted average number of common stock for the purpose of dilutive earnings per share
|
18,499,736
|
27,642,747
|
27
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
14.
|
INCOME TAXES
|
The Company is registered in the State of Nevada whereas its subsidiary, WTL being incorporated in the British Virgin Islands is not subject to any income tax and conducts all of its business through its PRC subsidiary, SWT, Sunway and Liheng. (see note 1).
SWT, Sunway and Liheng, being registered in the PRC, are subject to PRC’s Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income Taxes (“EIT”) is generally imposed at a statutory rate of 25%.
However, Sunway is a high technology company, and in accordance with the relevant regulations regarding the favorable tax treatment for high technology companies, Sunway is entitled to a reduced tax rate of 15% as long as Sunway located and registered in the high and advance technology development zone.
A reconciliation between the income tax computed at the U.S. statutory rate and the Group’s provision for income tax is as follows:
Three months ended March 31,
|
||||||||
2009
|
2008
|
|||||||
U.S. statutory rate
|
34
|
%
|
34
|
%
|
||||
Foreign income not recognized in the U.S.
|
(34
|
)%
|
(34
|
)%
|
||||
PRC Enterprise Income Tax
|
25
|
%
|
25
|
%
|
||||
Tax holiday
|
(10
|
)%
|
(10
|
)%
|
||||
Provision for income tax
|
15
|
%
|
15
|
%
|
The provision for income taxes consists of the following:
Three months ended
March 31,
|
||||||||
2009
|
2008
|
|||||||
Current tax – PRC EIT
|
$
|
207,996
|
$
|
273,542
|
||||
Deferred tax provision
|
-
|
-
|
||||||
Income tax expenses
|
$
|
207,996
|
$
|
273,542
|
The Reconciliation of non-taxable and non-tax deductible items is as follows:
Three months ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Income (Loss) before taxation
|
$ | (24,061,735 | ) | $ | 1,650,953 | |||
Add: Impairment on investment
|
4,831,386 | - | ||||||
Other non-tax deductible items
|
135,713 | 172,660 | ||||||
Change in fair value of warrants
|
20,481,276 | - | ||||||
Adjusted PRC EIT taxable income
|
$ | 1,386,640 | $ | 1,823,613 |
15.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, trade receivables, other receivables, accounts payable, and other payables, approximate their fair values because of the short maturity of these instruments and the availability of the market rates of interest.
28
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
16. COMMITMENTS AND CONTINGENCIES
The Group has entered into a tenancy agreement for factory expiring through 2010. Total rental expenses for the three months ended March 31, 2009 and for the year ended December 31, 2008 amounted to $32,630 and $70,922 respectively.
As at March 31, 2009, the Group’s commitments for minimum lease payments under these leases for the next one year and thereafter are as follows:
March 31,
|
||||
2010
|
$
|
70,001
|
||
2011 and thereafter
|
-
|
|||
$
|
70,001
|
17. SEGMENT INFORMATION
The Group currently is engaged in the manufacturing and selling of logistic transport systems. The Group has contracted with customers with four types of product altogether, workstation type A, workstation type B, workstation type C and Sunway Automatic Dispensing and Packing (“SADP”). These three types of workstation are of the same function but with different product design.
Net revenues and cost of revenues by product are as follows:
For the three
months ended
March 31,
2009
|
Workstation
|
Workstation
|
Workstation
|
|||||||||||||||||
Type A
|
Type B
|
Type C
|
SADP
|
Consolidated
|
||||||||||||||||
Net revenues
|
$
|
1,088,862
|
$
|
368,066
|
$
|
1,476,645
|
$
|
-
|
$
|
2,933,573
|
||||||||||
Cost of net revenues
|
(307,439
|
)
|
(101,667
|
)
|
(484,874
|
)
|
-
|
(893,980
|
)
|
|||||||||||
$
|
781,423
|
$
|
266,399
|
$
|
991,771
|
$
|
-
|
$
|
2,039,593
|
For the three
months ended
March 31,
2008
|
Workstation
|
Workstation
|
Workstation
|
|||||||||||||||||
Type A
|
Type B
|
Type C
|
SADP
|
Consolidated
|
||||||||||||||||
Net revenues
|
$
|
653,597
|
$
|
2,024,198
|
$
|
356,064
|
$
|
570,175
|
$
|
3,604,034
|
||||||||||
Cost of net revenues
|
(177,442
|
)
|
(628,720
|
)
|
(134,920
|
)
|
(200,663
|
)
|
(1,141,745
|
)
|
||||||||||
$
|
476,155
|
$
|
1,395,478
|
$
|
221,144
|
$
|
369,512
|
$
|
2,462,289
|
29
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
17. SEGMENT INFORMATION (Continued)
The Group’s operations are located in the PRC. All revenue is from customers in the PRC. All of the Group’s assets are located in the PRC. Sales of workstations are carried out in the PRC. Accordingly, no analysis of the Group's sales and assets by geographical market is presented.
18. ACQUISITION
In order to expand, on August 31, 2008, the Group entered an agreement with a third party, Qingdao Liheng Textiles Co., Ltd, to acquire its 100% interest of it, for a cash consideration of approximately $7.29 million (RMB$50,000,000). The whole amount of $7,725,445 was paid and classified as “Deposit for the acquisition of subsidiary” as at December 31, 2008. The transaction was planned to be finished at December 1, 2008, but due to the PRC authority processing delay, was completed on January 16, 2009.
Purchase consideration
|
$
|
7,725,445
|
||
Less: Fair value of net assets acquired (see below)
|
(2,894,059
|
)
|
||
Impairment on investment
|
$
|
4,831,386
|
The assets and liabilities arising from the acquisition, provisionally determined, are as follows:
Fair value
|
||||
Cash and cash equivalents
|
$
|
73,193
|
||
Property, plant and equipment
|
955,208
|
|||
Land use rights
|
1,133,323
|
|||
Other receivables
|
1,127,949
|
|||
Turnover and other taxes
|
28,477
|
|||
Other payables
|
(424,091
|
)
|
||
Net assets acquired
|
$
|
2,894,059
|
30
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
18. ACQUISITION (Continued)
The following tabulations were retroactive restatements of pro forma consolidated income statements for the year ended December 31, 2008. The retroactive restatements were based on the assumption that the acquisition of Qingdao Liheng Textiles Co., Ltd was made at the beginning of 2008 for the purpose of comparative analysis.
SUNWAY GLOBAL INC
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2008
Registrant
(Historical)
|
Target
(Historical)
|
Pro forma
adjustments
|
Pro forma
Combined
|
|||||||||||||
ASSETS
|
||||||||||||||||
Current assets
|
||||||||||||||||
Cash and cash equivalents
|
$
|
15,189,941
|
$
|
869
|
$
|
$
|
15,190,810
|
|||||||||
Trade receivables, net
|
2,953,919
|
-
|
2,953,919
|
|||||||||||||
Inventories
|
590,738
|
-
|
590,738
|
|||||||||||||
Advances to suppliers
|
547,952
|
-
|
547,952
|
|||||||||||||
Tender deposits
|
112,735
|
-
|
112,735
|
|||||||||||||
Travel advances to shareholders
|
38,733
|
-
|
38,733
|
|||||||||||||
Advances to employees
|
429,804
|
-
|
429,804
|
|||||||||||||
Advances to a shareholder
|
-
|
1,074,640
|
(432,298
|
)
|
642,342
|
|||||||||||
Other receivables
|
-
|
6,954
|
6,954
|
|||||||||||||
Total current assets
|
$
|
19,863,822
|
$
|
1,082,463
|
$
|
$
|
20,513,987
|
|||||||||
Restricted cash
|
|
$
|
378,366
|
|
|
$
|
-
|
|
|
$
|
|
$
|
378,366
|
|||
Amount due from a related company
|
830
|
-
|
830
|
|||||||||||||
Property, plant and equipment, net
|
5,069,871
|
555,005
|
5,624,876
|
|||||||||||||
Intangible assets, net
|
6,576,769
|
196,014
|
6,772,783
|
|||||||||||||
Deposit for acquisition of computer software
|
1,750,751
|
-
|
1,750,751
|
|||||||||||||
Deposit for acquisition of subsidiary
|
7,725,445
|
-
|
(7,725,445
|
)
|
-
|
|||||||||||
Impairment on investment
|
|
-
|
|
|
|
-
|
|
6,598,351
|
|
6,598,351
|
||||||
TOTAL ASSETS
|
$
|
41,365,854
|
$
|
1,833,482
|
$
|
$
|
41,639,944
|
31
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
18. ACQUISITION (Continued)
SUNWAY GLOBAL INC
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2008
Registrant
(Historical )
|
Target
(Historical)
|
Pro forma
adjustments
|
Pro forma
Combined
|
|||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||
Current liabilities
|
||||||||||||||||
Short-term bank loans
|
$
|
-
|
$
|
277,202
|
$
|
$
|
277,202
|
|||||||||
Accounts payable
|
59,912
|
25,298
|
85,210
|
|||||||||||||
Income tax payable
|
632,893
|
(28,410
|
)
|
604,483
|
||||||||||||
Turnover and other taxes
|
406,839
|
-
|
406,839
|
|||||||||||||
Expected warranty
|
||||||||||||||||
liabilities
|
50,396
|
-
|
50,396
|
|||||||||||||
Accrued liabilities
|
301,461
|
-
|
301,461
|
|||||||||||||
Other payables
|
15,168
|
432,298
|
(432,298
|
)
|
15,168
|
|||||||||||
Total current liabilities
|
$
|
1,466,669
|
$
|
706,388
|
$
|
|
$
|
1,740,759
|
||||||||
TOTAL LIABILITIES
|
$
|
1,466,669
|
$
|
706,388
|
$
|
|
$
|
1,740,759
|
||||||||
Commitments and contingencies
|
$
|
-
|
$
|
-
|
$
|
|
$
|
-
|
32
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
18. ACQUISITION (Continued)
SUNWAY GLOBAL INC
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2008
Registrant
(Historical)
|
Target
(Historical)
|
Pro forma
adjustments
|
Pro forma
Combined
|
|||||||||||||
SHAREHOLDERS’ EQUITY
|
||||||||||||||||
Series B convertible preferred stock at $0.000001 par value; 400,000 shares authorized; 160,494 shares issued and outstanding
|
$
|
1
|
$
|
-
|
$
|
|
$
|
1
|
||||||||
Common Stock at $0.000001 par value; 100,000,000 shares authorized, 18,499,736 shares issued and outstanding
|
2
|
1,237,076
|
(1,237,076
|
)
|
2
|
|||||||||||
Additional paid-in capital
|
17,824,325
|
-
|
17,824,325
|
|||||||||||||
Statutory reserves
|
2,127,978
|
-
|
2,127,978
|
|||||||||||||
Retained earnings/ (accumulated losses)
|
17,102,689
|
(109,982
|
)
|
109,982
|
17,102,689
|
|||||||||||
Accumulated other comprehensive income
|
2,844,190
|
-
|
2,844,190
|
|||||||||||||
$
|
39,899,185
|
$
|
1,127,094
|
$
|
|
$
|
39,899,185
|
|||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
41,365,854
|
$
|
1,833,482
|
$
|
|
$
|
41,639,944
|
33
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
18. ACQUISITION (Continued)
SUNWAY GLOBAL INC
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2008
Registrant
(Historical)
|
Target
(Historical)
|
Pro forma
adjustments
|
Pro forma
Combined
|
||||||||||||||
Net revenues
|
$ | 19,845,882 | $ | - | $ | $ | 19,845,882 | ||||||||||
Cost of net revenues
|
(5,634,143 | ) | - | (5,634,143 | ) | ||||||||||||
Gross profit
|
$ | 14,211,739 | $ | - | $ | $ | 14,211,739 | ||||||||||
Selling expenses
|
(425,050 | ) | - | (425,050 | ) | ||||||||||||
General and administrative expenses
|
(3,068,027 | ) | (5,167 | ) | (3,073,194 | ) | |||||||||||
Income(loss) from operation
|
$ | 10,718,662 | $ | (5,167 | ) | $ | $ | 10,713,495 | |||||||||
Interest income
|
66,935 | 244 | 67,179 | ||||||||||||||
Interest expenses
|
- | (27,229 | ) | (27,229 | ) | ||||||||||||
Income(loss) before income taxes
|
$ | 10,785,597 | $ | (32,152 | ) | $ | $ | 10,753,445 | |||||||||
Income taxes
|
(1,726,828 | ) | - | (1,726,828 | ) | ||||||||||||
Net income(loss)
|
$ | 9,058,769 | $ | (32,152 | ) | $ | $ | 9,026,617 | |||||||||
Other comprehensive income income: Foreign currency translation adjustment
|
1,663,902 | - | 1,663,902 | ||||||||||||||
Comprehensive income(loss)
|
$ | 10,722,671 | $ | (32,152 | ) | $ | $ | 10,690,519 |
34
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Stated in US Dollars)(Unaudited)
18. ACQUISITION (Continued)
SUNWAY GLOBAL INC
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2008
Earnings per common share
|
||||
- Basic
|
$
|
0.60
|
||
- Fully diluted
|
$
|
0.31
|
||
Common shares outstanding
|
||||
- Basic
|
15,127,645
|
|||
- Fully diluted
|
28,870,595
|
19. RESTATEMENTS
On June 5, 2007 and as discussed in Note 12 above, the Company issued a number of series of warrants to certain investors. Each warrant is convertible into 1 share of common stock or a total of 14,068,605 shares of common stock. The warrants have a three year life and the Series A warrants are exercisable at an equivalent price of $1.76 per share, the Series B are exercisable at an equivalent price of $2.30 per share, the Series C are exercisable at an equivalent price of $1.94 per share and the Series D are exercisable at an equivalent price of $2.53 per share.
During the year-end audit of December 31, 2009 financial statements, the Company had discovered that the warrants prescribed above were not appropriately accounted in accordance with the provisions of FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) (previously EITF 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”) which was effective January1, 2009. For quarterly reporting periods during 2009 or effective January 1, 2009, the Company incorrectly recorded these warrants under equity treatment. These warrants contained down-round protection (full-ratchet down round protection) and were not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these warrants should have been recognized in earnings for all reporting periods effective January 1, 2009 until such time as the warrants are exercised or expire.
As a result of the amendment 1, the Company restated its financial statements by appropriately adopting ASC 815 whereby recording these warrants from equity to liability measured at fair value with changes in fair value recognized in earnings for each reporting periods and recording a cumulative-effect adjustment to the opening balance of retained earnings.
As a result of the restatement of the consolidated balance sheet as of December 31, 2007 that has carryover effect to December 31, 2008 and March 31, 2009, the amendment 2 further decreased the additional paid-in capital from $18,689,023 to $13,833,383. The retained earnings/(accumulated deficit) decreased from $(78,839,490) to $(73,983,850). The assets, liabilities and total stockholders’ equity have no changes.
The changes from amendment 1 and amendment 2 are listed in separate columns in the following:
35
SUNWAY GLOBAL INC.
BALANCE SHEETS
ITEMS
|
Original
|
Amendment 1
|
Amendment 2
|
Restated
|
||||||||||||
March 31, 2009
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
ASSETS
|
||||||||||||||||
Current assets
|
||||||||||||||||
Cash and cash equivalents
|
$ | 12,212,431 | $ | 12,212,431 | ||||||||||||
Trade receivables, net
|
2,702,440 | 2,702,440 | ||||||||||||||
Inventories
|
1,022,032 | 1,022,032 | ||||||||||||||
Advances to suppliers
|
1,502,484 | 1,502,484 | ||||||||||||||
Prepayments
|
750,564 | 750,564 | ||||||||||||||
Tender deposits
|
18,406 | 18,406 | ||||||||||||||
Travel advances to shareholders
|
57,483 | 57,483 | ||||||||||||||
Advances to employees
|
331,588 | 331,588 | ||||||||||||||
Total current assets
|
$ | 18,597,428 | $ | 18,597,428 | ||||||||||||
Restricted cash
|
356,046 | 356,046 | ||||||||||||||
Amount due from a related company
|
830 | 830 | ||||||||||||||
Property, plant and equipment, net
|
5,801,161 | 5,801,161 | ||||||||||||||
Intangibles, net
|
9,702,976 | 9,702,976 | ||||||||||||||
Deposit for acquisition of computer software
|
- | - | ||||||||||||||
Deposit for technology-based design
|
3,505,902 | 3,505,902 | ||||||||||||||
Deposit for acquisition of subsidiary
|
- | - | ||||||||||||||
Goodwill
|
4,831,386 | ( 4,831,386 | ) | - | ||||||||||||
TOTAL ASSETS
|
$ | 42,795,729 | (4,831,386 | ) | 0 | $ | 37,964,343 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||
Current liabilities
|
||||||||||||||||
Accounts payable
|
$ | 712,325 | $ | 712,325 | ||||||||||||
Income tax payable
|
211,410 | 211,410 | ||||||||||||||
Turnover and other taxes
|
89,834 | 89,834 | ||||||||||||||
Expected warranty liabilities
|
50,460 | 50,460 | ||||||||||||||
Customers deposits
|
202,102 | 202,102 | ||||||||||||||
Accrued liabilities
|
293,480 | 293,480 | ||||||||||||||
Other payables
|
266,945 | 266,945 | ||||||||||||||
Total current liabilities
|
$ | 1,826,556 | $ | 1,826,556 | ||||||||||||
Warrant liabilities
|
- | 90,383,149 | 0 | 90,383,149 | ||||||||||||
TOTAL LIABILITIES
|
$ | 1,826,556 | 90,383,149 | 0 | $ | 92,209,705 |
36
SUNWAY GLOBAL INC.
BALANCE SHEETS (Continued)
ITEMS
|
Original
|
Amendment 1
|
Amendment 2
|
Restated
|
||||||||||||
March 31, 2009
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
STOCKHOLDERS’ EQUITY
|
||||||||||||||||
Series B Convertible Preferred Stock $0.0000001 par value; 400,000 shares authorized; 160,494 shares issued and outstanding at March 31, 2009
|
$ | 1 | $ | 1 | ||||||||||||
Common stock at $0.0000001 par value; 100,000,000 shares authorized; 18,499,736 shares issued and outstanding at March 31, 2009
|
2 | 2 | ||||||||||||||
Additional paid-in capital
|
22,679,965 | (3,990,942 | ) | (4,855,640 | ) | 13,833,383 | ||||||||||
Statutory reserves
|
3,033,855 | 3,033,855 | ||||||||||||||
Retained earnings/(accumulated deficit)
|
12,384,103 | (91,223,593 | ) | 4,855,640 | (73,983,850 | ) | ||||||||||
Accumulated other comprehensive income
|
2,871,247 | 2,871,247 | ||||||||||||||
$ | 40,969,173 | (95,214,535 | ) | 0 | $ | (54,245,362 | ) | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 42,795,729 | (4,831,386 | ) | 0 | $ | 37,964,343 |
ITEMS
|
Original
|
Amendment 1
|
Amendment 2
|
Restated
|
||||||||||||
December 31, 2008
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
STOCKHOLDERS’ EQUITY
|
||||||||||||||||
Series B Convertible Preferred Stock $0.0000001 par value; 400,000 shares authorized; 160,494 shares issued and outstanding at December 31, 2008
|
$ | 1 | $ | 1 | ||||||||||||
Common stock at $0.0000001 par value; 100,000,000 shares authorized; 18,499,736 shares issued and outstanding at December 31, 2008
|
2 | 2 | ||||||||||||||
Additional paid-in capital
|
22,679,965 | 0 | (4,855,640 | ) | 17,824,325 | |||||||||||
Statutory reserves
|
2,127,978 | 2,127,978 | ||||||||||||||
Retained earnings
|
12,247,049 | 0 | 4,855,640 | 17,102,689 | ||||||||||||
Accumulated other comprehensive income
|
2,844,190 | 2,844,190 | ||||||||||||||
$ | 39,899,185 | 0 | 0 | $ | 39,899,185 | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 41,365,854 | 0 | 0 | $ | 41,365,854 |
37
SUNWAY GLOBAL INC.
STATEMENT OF INCOME
ITEMS
|
Original
|
Amendmenr 1
|
Amendment 2
|
Restated
|
||||||||||||
Three months ended March 31, 2009
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Net revenues
|
$ | 2,933,573 | $ | 2,933,573 | ||||||||||||
Cost of net revenues
|
(893,980 | ) | (893,980 | ) | ||||||||||||
Gross profit
|
$ | 2,039,593 | $ | 2,039,593 | ||||||||||||
Selling expenses
|
(180,349 | ) | (180,349 | ) | ||||||||||||
General and administrative expenses
|
(631,894 | ) | (631,894 | ) | ||||||||||||
Income from operation
|
$ | 1,227,350 | $ | 1,227,350 | ||||||||||||
Interest income
|
23,577 | 23,577 | ||||||||||||||
Impairment on investment
|
- | (4,831,386 | ) | 0 | (4,831,386 | ) | ||||||||||
Change in fair value of warrants
|
- | (20,481,276 | ) | 0 | (20,481,276 | ) | ||||||||||
- | ||||||||||||||||
Income/(loss) before income taxes
|
$ | 1,250,927 | (25,312,662 | ) | 0 | (24,061,735 | ) | |||||||||
Income taxes
|
(207,996 | ) | (207,996 | ) | ||||||||||||
Net income/(loss)
|
$ | 1,042,931 | (25,312,662 | ) | 0 | $ | (24,269,731 | ) | ||||||||
Net income/(loss) per share:
|
||||||||||||||||
-Basic
|
$ | 0.06 | (1.37 | ) | 0 | $ | (1.31 | ) | ||||||||
-Diluted
|
$ | 0.03 | (1.34 | ) | 0 | $ | (1.31 | ) | ||||||||
Weighted average number of common stock
|
||||||||||||||||
-Basic
|
18,499,736 | 18,499,736 | ||||||||||||||
-Diluted
|
31,578,154 | (13,078,418 | ) | 0 | 18,499,736 |
38
SUNWAY GLOBAL INC.
STATEMENT OF CASH FLOWS
ITEMS
|
Original
|
Amendment 1
|
Amendment 2
|
Restated
|
||||||||||||
Three months ended March 31, 2009
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Cash flows from operating activities
|
||||||||||||||||
Net income/(loss)
|
$ | 1,042,931 | (25,312,662 | ) | 0 | $ | (24,269,731 | ) | ||||||||
Depreciation
|
240,444 | 240,444 | ||||||||||||||
Amortization
|
253,803 | 253,803 | ||||||||||||||
Change in fair value of warrants
|
- | 20,481,276 | 0 | 20,481,276 | ||||||||||||
Impairment on investment
|
- | 4,831,386 | 0 | 4,831,386 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||||||
Trade receivables, net
|
255,153 | 255,153 | ||||||||||||||
Inventories
|
(430,489 | ) | (430,489 | ) | ||||||||||||
Advances to suppliers
|
(953,755 | ) | 177,678 | 0 | (776,077 | ) | ||||||||||
Prepayments
|
377,494 | (555,864 | ) | 0 | (178,370 | ) | ||||||||||
Tender deposits
|
94,457 | 94,457 | ||||||||||||||
Travel advances to shareholders
|
(18,699 | ) | (18,699 | ) | ||||||||||||
Advances to employees
|
98,741 | 98,741 | ||||||||||||||
Accounts payable
|
652,243 | 652,243 | ||||||||||||||
Income tax payable
|
(393,739 | ) | (28,477 | ) | 0 | (422,216 | ) | |||||||||
Turnover and other taxes
|
(317,470 | ) | 28,442 | 0 | (289,028 | ) | ||||||||||
Loans from unrelated parties
|
- | - | ||||||||||||||
Amount due from a director
|
- | - | ||||||||||||||
Customers deposits
|
202,073 | 202,073 | ||||||||||||||
Accrued liabilities
|
(8,336 | ) | (8,336 | ) | ||||||||||||
Other payables
|
(172,370 | ) | 497,120 | 0 | 324,750 | |||||||||||
Net cash provided by operating activities
|
$ | 922,481 | 118,899 | 0 | $ | 1,041,380 | ||||||||||
Cash flows from investing activities
|
||||||||||||||||
Purchase of technology-based designs
|
(3,505,390 | ) | (3,505,390 | ) | ||||||||||||
Purchase of intangibles assets
|
(485,275 | ) | (111,479 | ) | 0 | (596,754 | ) | |||||||||
Purchase of plant and equipment
|
(10,051 | ) | (68,730 | ) | 0 | (78,781 | ) | |||||||||
Used of restricted cash
|
22,320 | 22,320 | ||||||||||||||
Acquisition of subsidiary, net of cash acquired
|
(7,652,252 | ) | 7,652,252 | 0 | - | |||||||||||
Reversal of deposit for acquisition of subsidiary
|
7,725,445 | (7,725,445 | ) | 0 | - | |||||||||||
Net cash used in investing activities
|
$ | (3,905,203 | ) | (253,402 | ) | 0 | $ | (4,158,605 | ) | |||||||
Cash flows from financing activities
|
$ | - | $ | - | ||||||||||||
Net cash provided by financing activities
|
$ | - | $ | - |
39
SUNWAY GLOBAL INC.
CASH FLOWS
ITEMS
|
Original
|
Amendment 1
|
Amendment 2
|
Restated
|
||||||||||||
Three months ended March 31, 2009
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Net in cash and cash equivalents used
|
$ | (2,982,722 | ) | (134,503 | ) | 0 | $ | (3,117,225 | ) | |||||||
Effect of foreign currency translation on cash and cash equivalents
|
5,212 | 134,503 | 0 | 139,715 | ||||||||||||
Cash and cash equivalents–beginning of period
|
15,189,941 | 0 | 0 | 15,189,941 | ||||||||||||
Cash and cash equivalents–end of period
|
$ | 12,212,431 | 0 | 0 | $ | 12,212,431 | ||||||||||
Supplementary cash flow information:
|
||||||||||||||||
Tax paid
|
$ | 630,304 | $ | 630,304 | ||||||||||||
Interest received
|
23,577 | 23,577 |
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Overview
Since June 27, 2007, the Company has operated as a holding company for entities that, through contractual relationships, control the business of Daqing Sunway Technology Co., Ltd (“Daqing Sunway”), a company organized under the laws of the PRC that designs, manufactures and sells logistic transport systems and medicine dispensing systems and equipment that are principally used by hospitals and other medical facilities in the PRC. Now our Company is the only producer of two products in the PRC. We have served approximately 300 customers in the PRC from our facilities in Daqing. We generate our revenue from sales in two product categories: pneumatic transport systems (“PTS”) and Sunway Automatic Dispensing and Packing (“SADP”).
Affected by the financial crisis and affected by equivocal reform of the medical institutions in the PRC, bring about hospital’s investment declines, the company sales declined quickly in the first quarter of 2009, but we believe the global liquidity crisis will affect all businesses. However, our strong balance sheet and liquidity position should allow us to not only weather the current economic environment but potentially benefit and continue to execute growth strategies and pursue the numerous opportunities.
This discussion and analysis focuses on the business results of Daqing Sunway, comparing its results in the three months period ended March 31, 2009 to the three months period ended March 31, 2008.
Three-month periods ended March 31, 2009 and March 31, 2008
Results of Operations
In the three months ended March 31, 2009, the Company’s net revenues, gross profit and net income decreased significantly as compared with the same period in the same period of 2008, but operating expenses increased slightly during these periods. These decreases are primarily attributable to (i) adverse effects of the global financial crisis; (ii) a decline in hospital-related investment due to expected governmental reforms requiring pharmacies to be operated outside of and separate from hospitals in the PRC; and (iii) the departure of one of our sales managers, who left to set up his own company.
The following table summarizes the results of our operations during the three months ended March 31, 2009 and 2008, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the three months ended March 31, 2009 and 2008.
Three Months Ended March 31,
|
||||||||||||||||
2009
|
2008
|
Change
|
Change rate
|
|||||||||||||
Net Revenue
|
$ | 2,933,573 | $ | 3,604,034 | $ | (670,461 | ) | (18.60 | ) % | |||||||
Cost of net revenue
|
$ | 893,980 | $ | 1,141,745 | $ | (247,765 | ) | (21.70 | ) % | |||||||
Gross Profit
|
$ | 2,039,593 | $ | 2,462,289 | $ | (422,696 | ) | (17.17 | ) % | |||||||
Gross Margin
|
69.53 | % | $ | 68.32 | % | - | 1.21 | % | ||||||||
Operating Income
|
$ | 1,227,350 | $ | 1,650,810 | $ | (423,460 | ) | (25.65 | ) % | |||||||
Changes in fair value of warrants
|
$ | 20,481,276 | $ | - | $ | 20,481,276 | - | |||||||||
Impairment on investment
|
$ | 4,831,386 | $ | - | $ | 4,831,386 | - | |||||||||
Net Loss/income
|
$ | (24,269,731 | ) | $ | 1,377,411 | $ | (25,647,142 | ) | - | |||||||
Net profit margin
|
- | 38.22 | % | - | - |
41
Net Revenue
Net revenue for the three months ended March 31, 2009, which resulted entirely from sales were $2,933,573, a decrease of 18.60% as compared with net revenue of $3,604,034 for the three months ended March 31, 2008. In the three months ended March 31, 2009, we sold 566 workstations, a decrease of 9.0% as compared with 622 workstations sold in the three months ended March 31, 2008. The decrease was due primarily to three factors, (i) adverse effects of the global financial crisis; (ii) a decline in hospital-related investment due to expected governmental reforms requiring pharmacies to be operated outside of and separate from hospitals in the PRC; and (iii) the departure of one of our sales managers, who left to set up his own company.
The following table breaks down application categories as percentage of total net revenue.
Three Months Ended March 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
sales
|
% of total sales
|
sales
|
% of total sales
|
|||||||||||||
PTS
|
$ | 2,933,573 | 100.00 | % | $ | 3,033,859 | 84.18 | % | ||||||||
SADP
|
$ | - | - | % | $ | 570,175 | 15.82 | % | ||||||||
Total net revenue
|
$ | 2,933,573 | 100.00 | % | $ | 3,604,034 | 100.00 | % |
Gross Profit
Gross profit decreased 17.17% to $2,039,593 for the three months ended March 31, 2009, as compared to $2,462,289 for the three months ended March 31, 2008. Our gross profit margin rose 1.21% from 68.32% as of the three months ended March 31, 2008 to 69.53% as of the same period of 2009, mainly due to a drop in raw material prices and lower costs of initial inventory.
The table below presents information about our gross profit for the periods indicated:
Three Months Ended March 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
US$
|
Gross profit
margin
|
US$
|
Gross profit
margin
|
|||||||||||||
Gross Profit
|
$
|
2,039,593
|
69.53
|
%
|
$
|
2,462,289
|
68.32
|
%
|
Income from Operations
Operating income decreased 25.65% to $1,227,350 for the three months ended March 31, 2009, as compared with $1,650,810 for the three months ended March 31, 2008. The decrease was primarily attributable to a drop in sales and slight increase in operating expenses.
Cost of Net Revenue
Cost of net revenue decreased to $893,980 for the three months ended March 31, 2009, representing a 21.70% decrease as compared with $1,141,745 for the same period of 2008. The decrease is primarily due to a decrease in sales during this period.
The table below presents information about our cost of net revenue for the periods indicated:
Three Months Ended March 31,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Cost of net revenue
|
$
|
893,980
|
$
|
1,141,745
|
21.70
|
%
|
Operating Expenses
Operating expenses were $812,243 for the three months ended March 31, 2009, an increase of 0.09% as compared to $811,479 for the same period of 2008. The increase was primarily attributable to two factors: (1) selling expenses increased $155,112, or 614.62% to $180,349 in the three months ended March 31, 2009 from $25,237 for the same period of 2008; and (2) general and administration expenses decreased $154,348, or 19.63% to $631,894 in the three months ended March 31, 2009 from $786,242 for the same period of 2008. In the three months ended March 31, 2009, we decreased the salary and benefits of our management. Reflecting this change, costs related to salary and benefits decreased 6.95%, as compared with the same period of 2008.
Three Months Ended March 31,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Selling expenses
|
$
|
180,349
|
$
|
25,237
|
614.62
|
%
|
||||||
General & Administrative expenses
|
$
|
631,894
|
$
|
786,242
|
(19.63
|
)%
|
||||||
Total operating expenses
|
$
|
812,243
|
$
|
811,479
|
0.09
|
%
|
42
Changes in fair value of warrants
Changes in fair value of warrants were $20,481,276 for the three months ended March 31, 2009. This is recorded as a non-cash income, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FASB ASC Topic 815, “Derivative and Hedging” (ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. On March 18, 2010, the Company entered into a Security Exchange Agreement intending to exchange all warrants into common stock. As a result of this agreement, on the closing date of the agreement, the Company will issue 2,000,000 shares of common stock in exchange for the retirement of all of the outstanding warrants owned by Vision Opportunity Master Fund Ltd. and its affiliates. The closing of the agreement is conditioned upon a closing of a financing with minimum proceeds of $10 million to the Company.
Impairment on investment
Impairment on investment was $4,831,386 for the three months ended March 31, 2009. Originally, it was showed on goodwill, it represents the excess of the cost of an acquisition over the fair value of the net acquired identifiable assets at the date of acquisition. In the first quarter of 2010, after performing extended analysis into the definition of a business as set forth in the paragraph 805-10-20 of the FASB Accounting Standards Codification, we recognized the acquisitions based on the fair value of net assets obtained. For the amount over the fair value of the net assets obtained, we wrote them off as expenses at the time of acquisition.
Net Loss
Net loss was $24,269,731 for the three months ended March 31, 2009, representing a decrease of 1,861.98% from $1,377,411 for the same period of 2008. In the first quarter of 2009 our net loss was impacted by a non-cash charges of $25,312,662 unrelated to the Company’s operations, mainly consisting of charge in fair value of warrants and impairment on investment was $20,481,276 and $4,831,386 respectively. Excluding the $25,312,662 in non-cash charges, the Company’s net income from operations for the three months ended March 31, 2009 would have been $1,042,931, representing a decrease of 24.48% from the first quarter of 2008 to the first quarter of 2009. The decrease is primarily due to the drop in sales and slight increase in operating expenses.
Earnings Per Share
Basic and diluted net loss per share for the three months ended March 31, 2009 were $1.31 and $1.31 compared to earnings per share for the three months ended March 31, 2008 were $0.16 and $0.05. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 8,360,349 for the three months ended March 31, 2009 and March 31, 2008, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 18,499,736 and 27,642,747 for the three months ended March 31, 2009 and March 31, 2008.
Trade Receivables, net
Trade receivables, net decreased 8.51% to $2,702,440 as of March 31, 2009, compared with $2,953,919 as of December 31, 2008. The decrease in trade receivables was primarily attributable to the decrease in sales.
Inventory
Inventory consists of raw materials, finished goods and work in progress. As of March 31, 2009, the recorded value of our inventory has increased 73.01% to $1,022,032 from $590,738 as of December 31, 2008. The increase is mainly due to an increase in finished goods from $218,448 as of December 31, 2008 to $459,889 as of March 31, 2009, an increase of 110.53%. Raw material inventory increased from $183,435 as of December 31, 2008 to $520,956 as of March 31, 2009, an increase of 184.0%. Work in progress inventory decreased from $188,855 as of December 31, 2008 to $41,187 as of March 31, 2009, a decrease of 78.19%. The increase was primarily attributable to management’s overestimated demands of the market.
Item
|
March 31,
2009
|
December 31,
2008
|
Change
|
|||||||||
Finished goods
|
$ | 459,889 | $ | 218,448 | 110.53 | % | ||||||
Work in progress
|
$ | 41,187 | $ | 188,855 | (78.19 | )% | ||||||
Raw material
|
$ | 520,956 | $ | 183,435 | 184.00 | % | ||||||
Total
|
$ | 1,022,032 | $ | 590,738 | 73.01 | % |
43
Accounts Payable
Accounts payable amounted to $712,325 as of March 31, 2009, an increase of 1,088.95% from $59,912 as of December 31, 2008. The increase is mainly due to our management’s over estimation demand of the market, which resulted of an increase in purchases of raw material.
Liquidity and Capital Resources
We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings and cash provided by operations.
The table below presents information about our cash flow for the periods indicated:
Three months ended March 31,
|
||||||||||||
2009
|
2008
|
Change
|
||||||||||
Net cash provided by (used in) operating activities
|
$
|
1,041,380
|
$
|
2,572,133
|
$
|
(1,530,753
|
)
|
|||||
Net cash provided by (used in) investing activities
|
$
|
(4,158,605
|
) |
$
|
(2,198,185
|
) |
$
|
(1,960,420
|
)
|
|||
Net cash provided by (used in) financing activities
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Effect of foreign currency translation on cash and cash equivalents
|
$
|
139,715
|
$
|
262,621
|
$
|
(122,906
|
)
|
|||||
Beginning cash and cash equivalent
|
$
|
15,189,941
|
$
|
5,820,100
|
$
|
9,369,841
|
||||||
Ending cash and cash equivalent
|
$
|
12,212,431
|
$
|
6,456,669
|
$
|
5,755,762
|
Operating Activities
For the three months ended March 31, 2009, net cash provided by operating activities was $1,041,380. This was primarily attributable to our net loss of $24,269,731, adjusted by an add-back of non-cash charges mainly consisting of depreciation, amortization, impairment on the purchase of Qingdao Liheng Textiles Co., Ltd, and charges in fair value of warrants of $240,444, $253,803, $4,831,386, and $20,481,276 respectively, offset by a $495,798 decrease in working capital. Specifically, decrease in working capital was primarily due to: i) a $255,153 trade receivables decrease driven by a drop in revenue; ii) a $430,489 increase in inventories, principally of raw material and work in progress inventory, due to our over estimation of market demand; iii) a $776,077 increase in advances to suppliers to buy raw materials; iv) a $3,871 increase in prepayments, travel advances to shareholders, other receivables, tender deposits and advances to employees, consisting primarily of prepayments for raw materials and other supplies in advance of shipment, working capital for sales staff and payment of client deposits; partially offset by a $459,486 decrease in accounts payable, tax payable, loans from unrelated parties, amount due from a director, customer deposits, accrued liabilities and other payables.
Investing Activities
For the three months ended March 31, 2009, net cash used in investing activities was $4,158,605. This was primarily attributable to: i) a $78,781 capital expenditure for purchase of new plant and equipment; ii) a $596,754 capital expenditure for purchase of new intangible assets; iii) a $3,505,390 capital expenditure for the purchase of technology-based designs, and $22,320 in restricted cash.
Cash and Cash Equivalents
Our cash and cash equivalents as at the beginning of March 31, 2009, were $15,189,941 and decreased to $12,212,431 by the end of the period.
In future periods, we believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 8 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue.
Trends
We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.
Inflation
We believe that inflation has not had a material or significant impact on our revenue or our results of operations.
Obligations under Material Contracts
We do not have any material contractual obligations as of March 31, 2009.
44
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of operations is based upon Sunway’s consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The Company’s financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following reflect the more critical accounting policies that currently affect Sunway’s financial condition and results of operations.
Impairment of long-lived assets . We account for impairment of property, plant and equipment and amortizable intangible assets in accordance with FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting years, there was no impairment loss incurred. Competitive pricing pressure and changes in interest rates, could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets.
Inventories . Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
Trade receivable . Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.
Outstanding accounts balances are reviewed individually for collectability. The Company do not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
Revenue recognition . Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable, and
- Collection is reasonably assured.
Contract revenues are recognized when the manufacturing and installation of the medical equipments is completed. Generally, the company receives total contract sum from clients in 3 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. The final sum of the remaining portion is received after the construction is completed within 4 months.
Expected warranty liabilities. The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of March 31, 2009.
N/A.
45
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
During the course of internal evaluation of the Company’s disclosure controls and procedures for the year ended December 31, 2009, our accounting staff found the following misstatements in our previously reported financial statements for the fiscal quarter ended March 31, 2009 that required correction, relating to changes in fair value of warrants and impairment on investment:
|
1.
|
Changes in fair value of warrants is a non-cash income, which resulted from the change in fair values of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FASB ASC Topic 815, “Derivative and Hedging”(ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. On March 18, 2010, the Company entered into an agreement with Vision Opportunity Master Fund, Ltd. to exchange the Series A, B, C and D warrants into 2,000,000 shares of common stock of the company (the “Warrant Exchange”). The closing of the Warrant Exchange is conditional upon a closing of a financing with minimum proceeds of $10 million to the Company. On April 5, 2010, the Company entered into a Security Escrow Agreement as an inducement to the holders of warrants to enter into the Security Exchange Agreement, the principal shareholders of the Company have agreed to place an amount of common stock equal to one million shares into escrow for the benefit of the holders in the event the Company fails to achieve certain milestones by December 31, 2010.
|
|
Originally, Impairment on investment was listed on goodwill in the first quarter of 2009 and represented the excess of the cost of an acquisition over the fair value of the net acquired identifiable assets at the date of acquisition. In the first quarter of 2010, after extensive analysis into the definition of a business as set forth in the paragraph 805-10-20 of the FASB Accounting Standards Codification, we recognized the acquisitions based on the fair value of net assets obtained. For the amount over the fair value of the net assets obtained, we have written them off as expenses at the time of acquisition.
|
In addition, management identified an improper classification of additional paid in capital items for the year ended December 31, 2007; which required overstated additional paid-in capital to be adjusted down by $4,855,640, and understated retained earnings to be adjusted up by $4,855,640. These adjustments will be made to the financial statements for the year ended December 31, 2008 and the three months ended March 31, 2009.
Based upon their evaluation as of the end of the period covered by this quarterly report, the Company’s chief executive officer and chief financial officer concluded that, due to the significant deficiencies in internal control over financial reporting described below, the Company’s disclosure controls and procedures are not effective as of March 31, 2009.
Our management identified that the misstatements identified above was due to not having internal personnel with sufficient expertise and knowledge of the requirements for disclosure of the information that have been collected and reported, as required under the securities laws and disclosures required under U.S. GAAP.
We plan to take the following steps to remediate the deficiencies in disclosure controls and procedures that are identified above:
1. Hiring additional accounting and operations personnel, as needed, and reorganizing the accounting and finance department to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.
2. Requiring senior accounting personnel and the principal accounting officer to review complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions.
3. Interviewing prospective new Directors for our Board, including a member who is appropriately credentialed as a financial expert with a goal to establish both an Audit and Compensation committee as well as sufficient independent Directors.
We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
Changes in internal controls
Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the three months ended March 31, 2009. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, other than as disclosed above, no change occurred in the Company's internal controls over financial reporting during the three months ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
46
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To our knowledge, there is no material litigation pending or threatened against us.
ITEM 1A. RISK FACTORS
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
To our knowledge, there are no material defaults upon senior securities.
ITEM 4. (REMOVED AND RESERVED)
None.
Except for the pro-forma consolidated balance sheets of the Company reflecting the January 2009 acquisition of Qingdao Liheng Textiles Co., Ltd and the audited financial statements of Qingdao Liheng Textiles Co., Ltd thereto, which the Company filed with the Commission on a Form 8-K on August 4, 2009, there were no matters required to be disclosed on a Form 8-K during the three months ended March 31, 2009 which were not disclosed on such form.
Exhibit No.
|
Description of Exhibit
|
|
31.1
|
Certification by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.
|
|
31.2
|
Certification by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.
|
|
32.1
|
Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.
|
|
32.2
|
Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.
|
47
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SUNWAY GLOBAL, INC.
|
|||
Dated: May 12, 2011
|
By:
|
/s/ Liu Bo
|
|
Name: Liu Bo
|
|||
Title: Chief Executive Officer
|
Dated: May 12, 2011
|
By:
|
/s/ Samuel Sheng
|
|
Name: Samuel Sheng
|
|||
Title: Chief Financial Officer
|
48