UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File No. 000-51824

 

COMPUTER GRAPHICS INTERNATIONAL INC.

 (Exact name of Registrant as Specified in its Charter)

 

Nevada		98-0400189
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

Room 01B, 02/F, Podium Building,

Guodu Golf Garden, North of Xinsha Road

Futian District, Shenzhen, 518048 People’s Republic of China

(Address of Principal Executive Offices) (Zip Code)

 

+ (86)-755-22211114

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

 

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

 

As of August 4, 2012, there were outstanding 16,331,854 shares of the Registrant’s Common Stock.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

 

INDEX

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements.	F-1
	Consolidated Balance Sheets	F-2
	Consolidated Statements of Income and Comprehensive Income	F-3
	Consolidated Statements of Cash Flows	F-4
	Consolidated Statement of Stockholders’ Equity	F-5
	Notes to Consolidated Financial Statements	F-6-F-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2
Item 3.	Quantitative And Qualitative Disclosures About Market Risk.	9
Item 4.	Controls and Procedures.	9
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	9
Item 1A.	Risk Factors.	10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	10
Item 3.	Defaults Upon Senior Securities.	10
Item 4.	Mine Safe Disclosures.	10
Item 5.	Other Information.	10
Item 6.	Exhibits.	10
SIGNATURES		11

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

TABLE OF CONTENTS

 

Consolidated Balance Sheets (unaudited and audited)	F-2
Consolidated Statements of Income and Comprehensive Income (unaudited)	F-3
Consolidated Statements of Cash Flows (unaudited)	F-4
Consolidated Statements of Stockholders’ Equity (unaudited)	F-5
Notes to Consolidated Financial Statements (unaudited)	F-6 - F-22

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

 

						June 30,				September 30,
		Notes				2012				2011
						(Unaudited)				(Audited)
ASSETS
Current Assets
Cash and cash equivalents						$	30,862			$	779,132
Accounts receivable, net of provision of $159,542 (September 30, 2011 : $Nil)							885,113				307,109
Value-added tax recoverable							828				5,865
Income tax recoverable			6				188,824				-
Other receivables and deposits							137,603				45,274
Inventory			3				-				2,080
Total Current Assets							1,243,230				1,139,460
Property and equipment, net of accumulated depreciation of $313,242 (September 30, 2011 : $149,509)			3				903,672				871,051
Rental deposits			14(2)				56,325				53,093
Monies held by a legal firm			13				475,521				937,236
Deposit for acquisition of a leasehold property			14(1)				-				781,030
Total non-current assets							1,435,518				2,642,410
Total Assets						$	2,678,748			$	3,781,870
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable						$	6,501			$	29,291
Accrued expenses and other payable							289,668				225,235
Provision for employee benefits			13				154,094				-
Income tax payable			6				-				263,417
Total Current Liabilities							450,263				517,943
Amount due to a shareholder			4				872,306				1,845,380
Total Liabilities							1,322,569				2,363,323
Stockholders’ Equity
Common stock, US$0.0001 par value, 900,000,000 shares authorized, 16,291,854 shares issued and outstanding at June 30, 2012 and September 30, 2011 respectively			7				1,629				1,629
Additional paid-in capital							1,124,415				1,079,649
Common stock issued for prepaid service			8				(421,776	)			(677,742	)
Statutory reserves			9				656,900				500,088
Accumulated other comprehensive income			10				258,882				219,798
(Accumulated losses)/Retained earnings							(263,871	)			295,125
Total Stockholders’ Equity							1,356,179				1,418,547
Total Liabilities and Stockholders’ Equity						$	2,678,748			$	3,781,870

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2012				2011				2012				2011
Sales		$	1,752,329			$	2,234,219			$	4,706,083			$	8,033,040
Cost of sales			(515,276	)			(971,231	)			(2,021,575	)			(3,284,062	)
Gross profit			1,237,053				1,262,988				2,684,508				4,748,978
Selling, general and administrative expenses			(1,122,630	)			(560,189	)			(3,511,055	)			(1,180,644	)
Income/(loss) from operations			114,423				702,799				(826,547	)			3,568,334
Other income/(expenses)
Interest income			98				2,093				958				7,430
Exchange loss			-				(1,945	)			(914	)			(1,945	)
Bank charges			(1,522	)			(364	)			(3,859	)			(922	)
Total other (expenses)/income			(1,424	)			(216	)			(3,815	)			4,563
Income/(loss) before income taxes			112,999				702,583				(830,362	)			3,572,897
Income tax (expenses)/credit			(3,610	)			(132,387	)			428,178				(865,894	)
Net income/(loss)		$	109,389			$	570,196			$	(402,184	)		$	2,707,003
Weighted average common shares outstanding
Basic			16,291,854				15,983,447				16,291,854				14,971,261
Diluted			16,343,331				15,983,477				16,328,289				14,971,261
Net income/(loss) per common share
Basic		$	0.01			$	0.04			$	(0.02	)		$	0.18
Diluted		$	0.01			$	0.04			$	(0.02	)		$	0.18
Net income/(loss)		$	109,389			$	570,196			$	(402,184	)		$	2,707,003
Other comprehensive income - foreign currency translation adjustment			(207	)			59,723				39,084				99,978
Comprehensive income/(loss)		$	109,182			$	629,919			$	(363,100	)		$	2,806,981

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2012 AND 2011

(UNAUDITED)

 

		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income		$	(402,184	)		$	2,707,003
Adjustments to reconcile net income to net cash (used in)/ provided by operating activities :
Provision for employee benefits			154,094				-
Depreciation			161,097				52,603
Share-based payment expense			300,732				302,183
Impairment loss for accounts receivable			159,542				-
Changes in operating assets and liabilities
Monies held by a legal firm			470,436				-
Accounts receivable			(733,120	)			(30,451	)
Other receivables and deposits			(91,678	)			(13,946	)
Rental deposits			(2,450	)			-
Inventory			2,111				(2,051	)
Amount due to a shareholder			159,556				247,726
Accounts payable			(23,225	)			-
Accrued expenses and other payable			31,491				72,122
Value-added tax liability - net			34,912				(80,296	)
Income tax payable			(456,199	)			(306,550	)
Net cash (used in)/provided by operating activities			(234,885	)			2,948,343
CASH FLOWS FROM INVESTING ACTIVITIES
Refund of deposit for acquisition of a leasehold property			792,669				-
Purchase of property and equipment			(181,352	)			(572,204	)
Repayment of promissory notes			-				(2,363,401	)
Net cash provided by/(used in) investing activities			611,317				(2,935,605	)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment to)/advance from a shareholder			(1,141,444	)			1,237,815
Net cash (used in)/provided by financing activities			(1,141,444	)			1,237,815
Effect of exchange rate changes on cash and cash equivalents			16,742				79,455
Net (decrease)/increase in cash and cash equivalents			(748,270	)			1,330,008
Cash and cash equivalents, beginning balance			779,132				956,402
Cash and cash equivalents, ending balance		$	30,862			$	2,286,410

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

 

														Common												Retained
		Common				Common				Additional				Stock Issued								Other				Earnings/				Total
		Stock				Stock				Paid-in				For Prepaid				Statutory				Comprehensive				(Accumulated				Stockholders
		Outstanding				Amount *				Capital *				Service				Reserves				Income				Losses)				Equity
Balance September 30, 2010			14,462,684			$	1,446			$	283,109			$	-			$	146,429			$	127,355			$	215,423			$	773,762
Foreign currency translation adjustments			-				-				-				-				-				92,443				-				92,443
Distribution upon Group reorganization			-				-				(283,265	)			-				-				-				-				(283,265	)
Acquisition of CGII			447,276				45				(45	)			-				-				-				-				-
Issuance of promissory notes recorded as deemed distribution to stockholders			-				-				-				-				-				-				(2,368,471	)			(2,368,471	)
Issuance of common stock for prepaid service - note 8			1,341,894				134				1,023,731				(1,023,865	)			-				-				-				-
Issuance of common stock to employee - note 8			40,000				4				56,119				-				-				-				-				56,123
Record of amortization of prepaid services - note 8			-				-				-				346,123				-				-				-				346,123
Income for the year ended September 30, 2011			-				-				-				-				-				-				2,801,832				2,801,832
Transferred to statutory reserve			-				-				-				-				353,659				-				(353,659	)			-
Balance September 30, 2011			16,291,854				1,629				1,079,649			$	(677,742	)			500,088				219,798				295,125				1,418,547
Foreign currency translation adjustments			-				-				-				-				-				39,084				-				39,084
Record of amortization of prepaid services - note 8			-				-				-				255,966				-				-				-				255,966
Net loss for the nine months ended June 30, 2012			-				-				-				-				-				-				(402,184	)			(402,184	)
Recognition of share-based payments - note 8			-				-				44,766				-				-				-				-				44,766
Transferred to statutory reserve			-				-				-				-				156,812				-				(156,812	)			-
Balance June 30, 2012			16,291,854			$	1,629			$	1,124,415			$	(421,776	)		$	656,900			$	258,882			$	(263,871	)		$	1,356,179

 

 

* The above information has been restated to reflect the 1-for-2.18 reverse split of the Company's common stock effected on June 7, 2011.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 1 - ORGANIZATION

 

Computer Graphics International Inc. (“CGII” or “the Company”) was incorporated under the laws of the State of Nevada on February 27, 2003. China Digital Image Organization Co., Limited (“China Digital”) was incorporated in Hong Kong on August 5, 2009. China Digital holds 100% of Shenzhen Digital Image Technologies Co., Ltd. (“SDIT”), a company incorporated in Shenzhen, Peoples’ Republic of China (“PRC”), and ultimately holds 100% of Shenzhen Digital Image 3D Design & Development Co., Ltd. (“Shenzhen 3D Design”), a company also incorporated in Shenzhen, PRC.

 

Pursuant to a series of transactions completed in October, 2010, China Digital became the holding company of SDIT and Shenzhen 3D Design (the "Group Reorganization"). In October, 2010, China Digital acquired a 100% interest in SDIT (which directly holds a 100% interest in Shenzhen 3D Design at a consideration of CNY2,000,000 (equivalent to $283,265)). Prior to and after this acquisition, both China Digital and SDIT were controlled by the same party, Hua Zeng. Hua Zeng already controlled and held a 100% interest in Shenzhen 3D Design in January, 2007. In August, 2010, SDIT acquired a 100% interest of Shenzhen 3D Design. Prior to and after this acquisition, both SDIT and Shenzhen 3D Design were controlled by Hua Zeng.

 

Since China Digital, SDIT and Shenzhen 3D Design were under common control of the ultimate controlling party, Hua Zeng, both before and after the completion of the Group Reorganization, the Group Reorganization has been accounted for using merger accounting. The Consolidated Financial Statements have been prepared on the basis as if China Digital had always been the holding company of SDIT and Shenzhen 3D Design and the group structure had been in existence throughout the nine months ended June 30, 2012 and the year ended September 30, 2011 as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”.

 

On March 31, 2011, CGII entered into and closed a share purchase and exchange agreement (the “Share Exchange Agreement”) with China Digital, the shareholders of China Digital, and Thomas E. Mills, pursuant to which CGII acquired 100% of the issued and outstanding capital stock of China Digital (the “Share Exchange”) in exchange for (i) 14,462,684 shares of CGII’s common stock, representing 97% of the increased issued and outstanding stock of CGII, and (ii) payment (“the Cash Component”) of $2,368,471. The Cash Component was payable in full within 12 months after the closing of the Share Exchange.

 

In connection with the Share Exchange, Thomas E. Mills sold 260,124 shares of CGII’s common stock to Truth Giver Group Limited, a company incorporated under the laws of the British Virgin Islands and owned by Hua Zeng and Jing Wang, in exchange for an aggregate payment of $300,000.

 

On completion of the Share Exchange, CGII acquired all of the outstanding issued capital of China Digital. For accounting and financial reporting purposes, the acquisition has been treated as a reverse acquisition of CGII by China Digital. On completion of the reverse acquisition, the prior business of CGII was abandoned and all liabilities of CGII were paid off or assumed by Thomas E. Mills, the former director of CGII. For China Digital, the reverse acquisition is accounted for as a recapitalization. Consequently, the assets and liabilities of China Digital have been brought forward at their book value and no goodwill has been recognized on the reverse acquisition of CGII. The historical financial statements prior to March 31, 2011 are those of China Digital.

 

On September 26, 2011, the Company’s wholly owned subsidiary, SDIT entered into a Letter of Intent for Share Purchase (the “Acquisition Agreement”) with Li Dongxiang and Zeng Xianguang (together, the “Sellers”) with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd, the then recently formed start-up company involved in three dimensional technology (“Guangzhou”). Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to SDIT in exchange for CNY6,000,000 (equivalent to $937,236).  There is no prior relationship between the Company and its affiliates and Guangzhou and its affiliates.

 

A Supplemental Letter of Intent for Share Purchase Agreement (“Supplemental Agreement”) was entered into between Li Dongxiang and Zeng Xianguang (together, the “Sellers”) and three non-shareholder employees of Guangzhou Fanyutuo 3D Technology and SDIT on September 26, 2011.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 1 - ORGANIZATION (CONTINUED)

 

Extracts to the Supplemental Agreement are:

 

i)

The Sellers and three non-shareholder employees of Guangzhou guarantee themselves to work for SDIT;

 

ii)

5 working days after execution of the Supplemental Agreement 50% of the amount of $937,236 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction;

 

iii)

5 working days after completion of two years employment by the Sellers and the three non-shareholder employees with SDIT, 30% of the amount of $937,236 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction;

 

iv)

5 working days after completion of three years employment by the Sellers and the three non-shareholder employees with SDIT, 20% of the amount $937,236 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction;

 

v)

As the Supplemental Agreement forms part and parcel of the Acquisition Agreement, in accordance with the terms of the Acquisition Agreement, any dispute arising from the Agreement, both parties shall resolve by mutual negotiations or in the event of such negotiations fail, the dispute should be resolved by arbitrations or by Court Action in PRC;

 

vi)

In the event that any one of the Sellers and the three non-shareholder employees left employment with SDIT during the three years Agreement period, the acquisition price shall not establish.

 

The acquisition of Guangzhou was in essence to secure the long term employment of the Sellers and the three non-shareholder employees to work for SDIT.

 

Guangzhou was a start-up company with minimal assets and liabilities that were considered of no real value. Following the acquisition, Guangzhou was placed in dormancy with no business activities undergoing. In light of the aforesaid, the management considers that the acquisition is not a business combination, as defined under ASC Topic 805, in substance and therefore the purchase consideration is accounted for as employee benefits. The employee benefits so expensed are reported under Selling, general and administrative expenses in the Consolidated Statement of Income and Comprehensive Income as detailed in note 3.

 

The Company operates in a single reportable segment. The principal activities of the Company are engaged in sales in majority of software promotion related products to customers in the nature of demonstration videos and motion pictures using the application of three-dimension vision technology.

 

Note 2 - GOING CONCERN

 

The accompanying unaudited Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying Consolidated Financial Statements, the Company incurred a net loss of $402,184 for the nine months ended June 30, 2012 and had accumulated losses of $263,871 at June 30, 2012. These create an uncertainty about the Company’s ability to continue as a going concern. In this regard, the Company’s Chairman has issued a letter of undertaking that he will provide financial support to the Company (Note 15). The Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

These Unaudited Consolidated Financial Statements were prepared by the Company pursuant to the rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to present fairly the operating results for the respective periods. Certain information and footnote disclosures normally present in Annual Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) were omitted pursuant to such rules and regulations. These Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and footnotes for the year ended September 30, 2011. The results for the nine months ended June 30, 2012, are not necessary indicative of the results to be expected for the full year ending September 30, 2012.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

These Consolidated Financial Statements present the Company and its subsidiaries on a historical basis.

 

Basis of Presentation

 

The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company adopted the new accounting guidance (“Codification”) on July 1, 2009. For the nine months ended June 30, 2012, all reference for periods subsequent to July 1, 2009 are based on the Codification. The Company's functional currency is the Chinese Renminbi; however the accompanying Consolidated Financial Statements have been translated and presented in United States Dollars.

 

Principles of Consolidation

 

For Group Reorganization under Common Control

 

The Consolidated Financial Statements incorporate the financial statement items of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party.

 

The net assets of the combining entities or businesses are combined using the existing book values from the controlling party’s perspective. No amount is recognized in respect of goodwill or excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest.

 

The Consolidated Statements of Income and Comprehensive Income include the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under common control, where this is a shorter period.

 

A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. Such business combinations are referred to as common control combinations, which is in line with U.S. GAAP.

 

For Reverse Acquisition

 

The Consolidated Financial Statements include the amounts of the Company and its subsidiaries. All inter-company accounts, transactions and profits have been eliminated in consolidation.

 

Employee Benefits

 

In respect of the Company’s acquisition of a subsidiary, Guangzhou as referred to in note 1, management considers that the amount of acquisition price of $937,236 (CNY6,000,000), should be accounted for as employee benefits under Selling, general and administrative expenses in the Consolidated Statement of Income and Comprehensive Income on the following basis:

 

i)

50% of the amount $937,236 i.e. $471,350 (CNY3,000,000) paid to the Sellers 5 working days after execution of the Supplemental Agreement was in the nature of inducement fee for securing the employment of the Sellers and the three non-shareholder employees. The payment should be accounted for as employee benefits and charged to the Consolidated Statement of Income and Comprehensive Income upon payment.

 

ii)

50% of the amount $937,236 i.e. $471,350 (CNY3,000,000) will continue to be held under escrow as monies held by a legal firm for meeting future contingent payment under the terms of payment as set out in note 1 :-

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

$282,810 (CNY1,800,000) (September 30, 2011 : $281,171 (CNY1,800,000) is payable to the Sellers on completion of the two years employment by the Sellers and the three non-shareholder employees with SDIT. This contingent payment will therefore be expensed in a systematic basis over the period of two years commencing from September 26, 2011.

 

The remaining amount of $188,540 (CNY1,200,000) (September 30, 2011 : $187,447 (CNY1,200,000) is payable to the Sellers on completion of the three years employment by the Sellers and the three non-shareholder employees with SDIT. This contingent payment will therefore be expensed in a systematic basis over the period of three years commencing from September 26, 2011.

 

Pursuant to a letter of confirmation dated 10 February, 2012 executed by the two Selling shareholders, should any of the Sellers and the three non-shareholder employees cease employment with SDIT before the expiry of the three-years period, the balance consideration of CNY3,000,000 will be reduced by CNY600,000 for any one of the Sellers and the three non-shareholder employees each.

 

Translation Adjustment

 

As of June 30, 2012 and September 30, 2011, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars (“USD”) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, included in the Codification as ASC830, Foreign Currency Matters, with the CNY as the functional currency. According to the Codification, all assets and liabilities were translated at the current exchange rate, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the Codification, as a component of stockholders’ equity. Transaction gains and losses are reflected in the income statement.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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 period. Actual results could differ from those estimates.

 

Comprehensive Income

 

The Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the nine months and three months ended June 30, 2012 and 2011 included net income and foreign currency translation adjustments.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Risks and Uncertainties

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. There were no contingencies of this type as of June 30, 2012 and September 30, 2011.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. There were no contingencies of this type as of June 30, 2012 and September 30, 2011.

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

 

Accounts Receivable

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded based on the Company’s historical collection history. Allowances for doubtful accounts as of June 30, 2012 and September 30, 2011 were $159,542 and $Nil, respectively.

 

Inventories

 

The Company engages in sales in majority of software promotion related products to customers in the nature of demonstration video and motion pictures using the application of three dimension vision technology and in addition the Company also sourced hardware as part of the production project, procured for customers. The Company normally does not hold inventory, as productions are made when customized orders are placed by customers.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

At June 30, 2012, the Company did not have inventory of hardware acquired for customers that had not yet been delivered to the customers (September 30, 2011 : hardware were acquired for a customer that had not yet been delivered to that customer in the amount of $2,080 that was valued at the lower of cost or market. Costs related to the cost of procurement of hardware for customer were capitalized as incurred).

 

Property and Equipment

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

 

Furniture and fixtures	5 years
Leasehold improvement	5 years
Motor vehicles	10 years
Office equipment	5 years

 

As of June 30, 2012 and September 30, 2011 Property and Equipment consist of the following:

 

		06/30/2012				09/30/2011
Furniture and fixtures		$	161,184			$	113,422
Leasehold improvement			475,521				468,619
Motor vehicles			40,058				39,476
Office equipment			540,151				399,043
Total		$	1,216,914			$	1,020,560
Accumulated depreciation			(313,242	)			(149,509	)
		$	903,672			$	871,051

 

Depreciation expense for the nine months ended June 30, 2012 and 2011 was $161,097 and $52,603, respectively.

 

Depreciation expense for the three months ended June 30, 2012 and 2011 was $55,581 and $33,475, respectively.

 

Share-Based Payment

 

Share-based payment is accounted for based on the FASB Statement No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (“FAS No. 123R”) and Emerging Issue Task Force 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”) and Emerging Issue Task Force 00-18 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” (“EITF 00-18”) (codified in FASB ASC Topic 505-50). The Company recognized in the Consolidated Statement of Income and Comprehensive Income the fair value of shares, stock options and other equity-based compensation issued to non-employees when the service provided by non-employees is completed, or the date when the shares were issued (provided that the shares issued are fully vested and not subject to forfeiture) with the prepaid services presented as contra equity. This is in accordance with the consensus reached in EITF 00-18 that in the event that a note or receivable is acquired in exchange for the fully vested, nonforfeitable equity instruments, the note or receivable should be displayed as contra-equity by the grantor. The Company as grantor interprets that the term “receivable” also embraces prepaid service fees. For employees, the Company recognized in the Consolidated Statement of Income and Comprehensive Income the grant date of the shares, stock options and other equity-based compensation over the requisite service period.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

In the case of stock-based compensation expense on stocks, options and other equity based compensation to employees awarded by different tranches over the requisition service period, the expense is accounted for using the “graded vesting method”.  Under the “graded vesting method”, each of the shares in different tranches would be accounted for as a separate award and the grant date fair value of each tranche would be recognized over the requisite service period for that tranche.  The requisite service period for each of the tranches would begin on the grant date and ends on the date that the tranche is earned.

 

Long-Lived Assets

 

The Company adopted the Property, Plant and Equipment Topic of the Codification, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes previous accounting guidance, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2012, there were no impairments of its long-lived assets.

 

Fair Value of Financial Instruments

 

The Financial Instrument Topic of the Codification requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the Consolidated Balance Sheet for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

 

Revenue Recognition

 

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized at the completion of delivery to customers when a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured at the date of completion of delivery. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

Advertising

 

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred. For the nine months ended June 30, 2012 and 2011, the Company incurred advertising expenses of $39,472 and $585, respectively.

 

For the three months ended June 30, 2012 and 2011, the Company incurred advertising expenses of $25,981 and $585, respectively.

 

Shipping and Handling Fees

 

The Company follows FASB ASC Topic 605-45, “Handling Costs, Shipping Costs”. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling fees as part of selling, general and administrative expenses. For the nine months ended June 30, 2012 and 2011, the Company incurred shipping and handling fees of $12,466 and $3,642, respectively.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

For the three months ended June 30, 2012 and 2011, the Company incurred shipping and handling fees of $3,932 and $1,920, respectively.

 

Income Taxes

 

The Company utilizes the accounting standards (“SFAS”) No. 109, “Accounting for Income Taxes,” codified in Financial Accounting Standard Board Accounting Standards Codification (“ASC”) Topic 740 which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), codified in FASB ASC Topic 740. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements. At June 30, 2012 and September 30, 2011, the Company did not take any uncertain positions that would necessitate recording a tax related liability.

 

Statement of Cash Flows

 

In accordance with SFAS 95 “Statement of Cash Flows”, codified in FASB ASC Topic 230, cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

 

Basic and Diluted Earnings per Share

 

Earnings per share are calculated in accordance with FASB ASC Topic 260, “Earnings per Share”. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base. The majority of sales are either cash receipt in advance or cash receipt upon delivery. During the nine months ended June 30, 2012 and 2011, one and no customer accounted for more than 10% of net sales revenue. As of June 30, 2012 and September 30, 2011, five and six customers accounted for more than 5% of net accounts receivable respectively (Note 12). For those credit sales, the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

Recent Accounting Pronouncements

 

In December, 2011, the FASB issued Accounting Standards Update No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” (“ASU 2011-11”). ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This new guidance is to be applied retrospectively. The adoption of these provisions does not have a material impact on the Company’s consolidated statements.

 

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

As of June 30, 2012, there are no recently issued accounting standards not yet adopted that would have a material effect on the Company’s financial statements.

 

Note 4 - DUE TO A SHAREHOLDER

 

As of June 30, 2012 and September 30, 2011, the Company has amount due to a shareholder of $872,306 and $1,845,380, respectively. The amount due to a shareholder is unsecured, interest-free and will not be required to repay to the shareholder until such time that the Company has the necessary financial resources to repay the amount due.

 

Note 5 - COMPENSATED ABSENCES

 

Regulation 45 of the local labor law of the People’s Republic of China (“PRC”) entitles employees to annual vacation leave after one year of service. In general, all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 6 - INCOME TAXES

 

The Company operates in more than one jurisdiction with its main operations conducted in PRC and virtually no activities in USA, with complex regulatory environments subject to different interpretations by the taxpayer and the respective governmental taxing authorities. The Company evaluates its tax positions and establishes liabilities, if required.

 

The reconciliation of the U.S. statutory income tax rate to the Company’s effective income tax rate is as follows :

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2012				2011				2012				2011
Income tax at USA statutory rate (34%)		$	38,420			$	238,878			$	(282,323	)		$	1,214,785
State tax, net of federal effect			-				-				-				-
Foreign rate differential			(24,295	)			(63,232	)			178,528				(321,561	)
Expenses not deductible for tax			19,770				31,676				57,874				75,546
Tax effect of tax losses utilized			(56,519	)			-				-				-
Tax effect of unrecognised temporary difference			32,501				-				3,936				-
Over-provision in respect of prior year			-				-				(460,554	)			-
Others			(6,267	)			(74,935	)			74,361				(102,876	)
Income tax (credit)/expenses		$	3,610			$	132,387			$	(428,178	)		$	865,894

 

Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) through December 31, 2007 is at a statutory rate of 33%, which is comprised of 30% national income tax and 3% local income tax. As from January 1, 2008 onwards, the EIT is at a statutory rate of 25%.

 

On April 6, 2012, the Company obtains the approval from the tax authority of PRC that it fulfills certain tax requirements of a company engaging in the design of software and integrated circuit and thereby it is entitled to preferential tax relief for EIT. The Company is exempted from EIT in the first two profitable financial years of operation and is further granted a 50% relief from the EIT for the following three financial years. As the approval is officially given to the Company in April, 2012, no refund of tax would be made in respect of the EIT paid by the Company for the fiscal years ended December 31, 2010 and 2011, with the 50% relief from EIT becomes effective from the financial year commencing on January 1, 2011.

 

Provision for income taxes for each of the nine months and three months ended June 30, 2012 and 2011 consists entirely of current taxes for the operations in PRC. There were no significant deferred tax differences in both periods.

 

Deferred U.S. income taxes have not been provided on the undistributed income of the Company’s foreign subsidiaries because the Company does not plan to initiate any action that would require the payment of U.S. income taxes.

 

Uncertain Tax Positions

 

Interest associated with unrecognized tax benefits is classified as interest expense and penalties in selling, general and administrative expenses in the statements of income and comprehensive income.

 

For the nine months and three months ended June 30, 2012 and 2011, the Company had no unrecognized tax benefits and related interest and penalties expenses. Currently, the Company has not received any notice of examination by any tax authority in major tax jurisdictions, but the tax authority in PRC has the right to examine the Company’s tax positions in all past years.

 

Income tax recoverable/(payable) in the Consolidated Balance Sheets is comprised as follows:

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

		06/30/2012				09/30/2011
Balance brought forward		$	(263,417	)		$	(425,458	)
Current tax provision for the period/year			(3,610	)			(1,132,175	)
Over-provision of current tax for the period/year			460,554				-
Tax paid during the period/year			-				1,294,216
Others			(4,703	)			-
Balance carried forward		$	188,824			$	(263,417	)

 

Note 7 - COMMON STOCK AND PREFERRED STOCK

 

The Company is authorized to issue up to 900,000,000 shares of common stock of par value of $0.0001 per share.

 

As detailed in Note 1 above, on March 31, 2011, China Digital became a wholly-owned subsidiary of CGII through issuance of 14,462,684 shares of common stock of par value of $0.0001 per share pursuant to the Share Exchange Agreement.

 

For accounting purposes, this transaction was treated as reverse acquisition and the CGII’s equity accounts at September 30, 2010 prior to the acquisition are restated based on the ratio of the exchange of 14,462,684 of CGII’s shares for 10,000 of China Digital’s shares. As the par value of each share of CGII and China Digital are $0.0001 and $0.129, respectively, the difference in capital of $1,863 arising from this reverse acquisition is reallocated from additional paid-in capital to common stock.

 

On April 19, 2011, the Company issued 1,341,894 shares of common stock to Well Trend Consultant Limited (“Well Trend”) - Note 8.

 

On June 7, 2011, the Company effected a 1-for-2.18 reverse stock split of its outstanding common stock. The information contained herein gives retroactive effect to the reverse stock split for all periods presented.

 

On July 26, 2011 and July 25, 2012, the Company issued 40,000 shares of common stock each to the Company’s Chief Financial Officer, Yongqing Ma - Note 8.

 

The Company is authorized to issue up to 100,000,000 shares of preferred stock, par value $0.0001 per share. As of June 30, 2012, no preferred stock was issued.

 

Note 8 - SHARE BASED PAYMENTS

 

On April 19, 2011, the Company issued 1,341,894 shares of the Company’s common stock to Well Trend, an independent party, in exchange for certain consulting services pursuant to the terms of a consultancy agreement dated September 25, 2010 between Well Trend and China Digital (“Consultancy Agreement”). The consultancy services are to be performed for three years after signing the Consultancy Agreement. The shares were fully vested and not subject to forfeiture when issued. The fair value of the shares issued was $0.763 per share (adjusted for the effect on 1-for-2.18 reverse stock split) and the total fair value of the shares issued was $1,023,865. The fair value of the shares issued per share was based on the quoted market price of CGII’s shares. The total fair value of the shares issued would be recognized as share-based payment expense over the period that the consultancy services are performed. For the nine months ended June 30, 2012 and 2011, the Company amortized share-based payment expenses of $255,966 and $Nil respectively. For the three months ended June 30, 2012 and 2011, the Company amortized share-based payment expenses of $85,322 and $Nil respectively. The unrecognized share-based payment expense of $421,776 as of June 30, 2012 (2011: $Nil) will be amortized up to September 2013. There is no tax benefit related to the share-based payment expense recognized.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 8 - SHARE BASED PAYMENTS (CONTINUED)

 

On June 24, 2011, the Company signed an employment agreement with Yongqing Ma pursuant to which the Company agreed to issue to Yongqing Ma 40,000 shares of its restricted common stock on each of June 30, 2011, 2012 and 2013 (totalling 120,000 shares), as partial remuneration to Yongqing Ma for acting as the chief financial officer of the Company. The fair value of the shares issued was $1.01 per share at the grant date and the total fair value based on grant date fair value of the 120,000 shares issued is $121,200. The fair value of the shares issued per share is based on the quoted market price of CGII’s shares. As of June 30, 2012, 80,000 shares with a grant date fair value of $80,800 were vested. 40,000 shares were issued on July 26, 2011, with the other 40,000 shares issued on July 25, 2012. The remaining 40,000 shares are unvested. For the nine months ended June 30, 2012 and 2011, the Company recognized $44,766 and $41,382 respectively as share-based payment expense. For the three months ended June 30, 2012 and 2011, the Company recognized $15,284 and $41,382 respectively as share-based payment expense. The total cost related to non-vested shares not yet recognized as of June 30, 2012 and September 30, 2011 was $20,311 and $65,077, respectively and will be recognized and accounted for as separate awards based on the grant date value of the shares to be issued in each tranche over the requisite service period up to June 2013.

 

The Company therefore recognized share-based payment expenses to non-employees and employees in the aggregate amounts of $300,732 and $126,704 for the nine months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, the Company recognized share-based payment expenses to non-employees and employees in the aggregate amounts of $100,606 and $126,704.

 

Note 9 - STATUTORY RESERVES

 

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprise’s income, after the payment of the PRC income taxes, shall be allocated to the statutory reserves. The allocation is 10 percent of income after tax and the cumulative allocations are not to exceed 50 percent of registered capital. However, voluntary allocations to statutory reserves are not prohibited. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of June 30, 2012 and September 30, 2011, the Company had allocated $656,900 and $500,088 in aggregate to these non-distributable reserve funds, respectively.

 

Note 10 - OTHER COMPREHENSIVE INCOME

 

Balance of related after-tax components comprising accumulated other comprehensive income, included in stockholders’ equity, at June 30, 2012 and September 30, 2011, are as follows:

 

		Foreign Currency Translation Adjustment				Accumulated Other Comprehensive Income
Balance at September 30, 2010		$	127,355			$	127,355
Change for the year			92,443				92,443
Balance at September 30, 2011			219,798				219,798
Change for 2012 Q1			14,017				14,017
Balance at December 31, 2011			233,815				233,815
Change for 2012 Q2			25,274				25,274
Balance at March 31, 2012			259,089			$	259,089
Change for 2012 Q3			(207	)			(207	)
Balance at June 30, 2012		$	258,882				258,882

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 11 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and by the general state of the PRC's economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 12 - MAJOR CUSTOMERS AND CREDIT RISK

 

Five and six customers accounted for more than 5% of accounts receivable at June 30, 2012 and September 30, 2011, totaling 39% and 64%, respectively. For the nine months ended June 30, 2012 and 2011, one and no customer accounted for more than 10% of total sales, amounting to 17% and nil, respectively. For the three months ended June 30, 2012 and 2011, one and one customer accounted for more than 10% of total sales, amounting to 17% and 10%, respectively.

 

Note 13 - MONIES HELD BY A LEGAL FIRM AND PROVISION FOR EMPLOYEE BENEFITS

 

On September 26, 2011, the Company’s wholly-owned subsidiary Shenzhen Digital Image Technologies Co., Ltd. (“SDIT”) entered into a Letter of Intent for Share Purchase (the “Acquisition Agreement”) with Li Dongxiang and Zeng Xianguang (together, the “Sellers”) with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd. (“Guangzhou”), a recently formed start-up company involved in three dimensional technology. Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to SDIT in exchange for $937,236 (CNY6,000,000).

 

A Supplemental Letter of Intent for Share Purchase Agreement (“Supplemental Agreement”) was entered into on September 26, 2011. Extracts to the Supplemental Agreement are:

 

i)

The Sellers and three non-shareholder employees of Guangzhou guarantee themselves to work for SDIT;

 

ii)

5 working days after execution of the Supplemental Agreement 50% of the amount of $937,236 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction;

 

iii)

5 working days after completion of two years employment by the Sellers and the three non-shareholder employees with SDIT, 30% of the amount of $937,236 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction;

 

iv)

5 working days after completion of three years employment by the Sellers and the three non-shareholder employees with SDIT, 20% of the amount $937,236 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction;

 

v)

As the Supplemental Agreement forms part and parcel of the Acquisition Agreement, in accordance with the terms of the Acquisition Agreement, any dispute arising from the Agreement, both parties shall resolve by mutual negotiations or in the event of such negotiations fail, the dispute should be resolved by arbitrations or by Court Action in PRC;

 

vi)

In the event that any one of the Sellers and the three non-shareholder employees left employment with SDIT during the three years Agreement period, the acquisition price shall not establish.

 

Management considers that in the event that any one of the Sellers or the three non-shareholder employees terminates employment with SDIT before completion of the three years Agreement period, any payment that had paid to the Sellers under the terms of the Supplemental Agreement will not be repaid back to the Company. The unpaid balance in respect of the remaining Agreement period, shall cease to be payable to the Sellers and that the Acquisition price shall then be reduced in proportion to the number of Sellers and the three non-shareholder employees left employment before completion of the three years Agreement period.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

Note 13 - MONIES HELD BY A LEGAL FIRM AND PROVISION FOR EMPLOYEE BENEFITS (CONTINUED)

 

Management also considers that the acquisition is in fact to secure three years continuing employment of the Sellers and three non-shareholder employees of Guangzhou by SDIT.

 

On September 28, 2011, SDIT paid the full amount of $937,236 (CNY6,000,000) to the legal firm witnessing the transaction under Escrow.

 

50% of the amount $937,236 i.e. $471,350 (CNY3,000,000) was then paid to the Sellers following execution of the Supplemental Agreement and that the remaining balance $471,350 (CNY3,000,000) remains under the custody of the legal firm witnessing the transaction under Escrow for future payments to the Sellers in accordance with the terms of the Supplemental Agreement.

 

The Company therefore accounts for:

 

(a)

50% of the amount, $471,350 (CNY3,000,000) that was paid to the Sellers following execution of the Supplemental Agreement as employee benefits and expensed to consolidated statement of income and comprehensive income;

 

(b)

30% of the amount, $282,810 (CNY1,800,000) is expensed over the two years Agreement period with the corresponding entry credited to provision for employee benefits in the balance sheet.

 

(c)

20% of the amount, $188,540 (CNY1,200,000) is expensed over the three years Agreement period with the corresponding entry credited to provision for employee benefits in the balance sheet.

 

In total, the Company incurred employee benefits of US$624,531 and $Nil for the nine months ended June 30, 2012 and 2011 respectively under the Acquisition Agreement and the Supplemental Agreement.

 

In total, the Company incurred employee benefits of US$51,524 and $Nil for the three months ended June 30, 2012 and 2011 respectively under the Acquisition Agreement and the Supplemental Agreement.

 

Note 14 - NON-FINANCIAL IMPACT OF THE COMPANY

 

1)

Capital commitment

 

As at June 30, 2012 and September 30, 2011, the Company had total capital commitment as follows:

 

		06/30/2012				09/30/2011
Total consideration for the leasehold property		$	-			$	10,403,324
Less: Deposit paid			-				(781,030	)
Total capital commitment		$	-			$	9,622,294

 

On September 22, 2011, the Company entered into an agreement to purchase a leasehold property situated in Shenzhen, PRC as its office premise. The acquisition of the leasehold property was expected to be completed by early 2012. However, the acquisition did not materialize and that the purchase arrangement was cancelled. The whole amount of deposit paid of US$793,953 was refunded by the vendor on February 13, 2012.

 

 

COMPUTER GRAPHICS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(UNAUDITED)

 

2)

Leases commitment and rental deposits

 

 

As at June 30, 2012 and September 30, 2011, the Company had total future aggregate minimum lease payments under non-cancellable operating leases for the Company’s office premises located in PRC as follows:

 

		06/30/2012				09/30/2011
Within 1 year		$	489,397			$	122,946
1 - 2 years			453,670				36,656
2 - 3 years			456,340				-
3 - 4 years			430,148				-
4 - 5 years			161,416				-
		$	1,990,971			$	159,602

 

Note 14 - NON-FINANCIAL IMPACT OF THE COMPANY (CONTINUED)

 

Rental deposits paid for leasing of the office premises in the sum of $56,325 (September 30, 2011 : $53,093) are recorded as non-current asset (September 30, 2011: as non-current asset) as the lease expires over 1 year (September 30, 2011: over 1 year).

 

Note 15 - CHAIRMAN FINANCIAL UNDERTAKING

 

On August 14, 2012, the Chairman issued an undertaking that the Chairman will give his every endeavor and effort to obtain necessary and adequate fundings to meet the Company’s financial obligations as when they are required thereby warranting that the operations of the Company will not be affected.

 

Note 16 - SUBSEQUENT EVENTS

 

For the nine months ended June 30, 2012, the Company has evaluated subsequent events for potential recognition disclosure. There were no significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our consolidated financial statements.

 

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on December 29, 2011.

 

Note Regarding Forward-Looking Statements

  

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the U.S. federal securities laws.  These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “likely,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology.  These forward-looking statements are subject to a number of risks that could cause them to differ from our expectations. These include, but are not limited to, risks relating to:

 

·

our ability to expand domestically by 2011 and internationally in 2012;

 

·

our ability to create standardized and centralized production procedures and standards;

 

·

our ability to attract key technology and management personnel;

 

·

our ability to strengthen our existing technology in efficiency and technology integration, and create a high-standard internal procedure and quality monitoring system;

 

·

the market for 3D technology and our ability to achieve market share and develop new sales channels or other industry sales opportunities;

 

·

our ability to obtain additional capital in future years to fund our planned expansion;

 

·

economic, political, regulatory, legal and foreign exchange risks associated with our operations; or

 

·

the loss of key members of our senior management and our qualified sales personnel.

 

You should not place undue reliance on these forward-looking statements, which are based on our current views and assumptions.  In evaluating these statements, you should specifically consider various factors, including the foregoing risks and those outlined under “Risk Factors” in our Annual Report on Form 10-K as filed with the SEC on December 29, 2011.  Many of these factors are beyond our control.   Our forward-looking statements represent estimates and assumptions only as of the date of this quarterly report on Form 10-Q.  Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this quarterly report on Form 10-Q.

 

Company Overview

 

Business Overview

 

We are a 3D digital visual service provider founded in 2006 based in China, specialized in providing one-stop-shop service and systems based on 3D image technology to domestic governments, real estate developers, game developers, the automotive industry and other commercial customers.  We operate through our wholly-owned subsidiary Shenzhen Digital Image Technology Co., Limited.

 

 

Our headquarters are located in Shenzhen, China. We operate both domestically and overseas, with eleven branches in the PRC, including our Xi’an office, Wuhan office, Hunan office, Chengdu office, Chongqing office, Hefei office, Guangzhou office, Yun’nan office, Xiamen office, Hainan office and Beijing office. Our international branch is located in Hong Kong. Through our 3D imaging technology, we participate in the visual expression of construction-related industries and help our customers complete visual technological changes from hand painting to computer-aided visual displays. We endeavor to provide our customers with the most cost-effective 3D digital visual communication products and services through the combination of the latest visual technology and terminal display equipment.

 

Our Corporate History and Background

 

Computer Graphics International Inc., or the “Company”, was incorporated under the laws of the State of Nevada on February 27, 2003 under the name AMP Productions, Ltd. (“AMP”), with the business purpose of developing, producing, marketing, and distributing low-budget feature-length films to movie theaters and ancillary markets.  From inception until the reverse acquisition transaction described below, we earned no revenue and suffered recurring losses and net cash outflows from operations.

 

On July 30, 2010, our controlling shareholders consented to a proposed 1-for-10 reverse split of our issued and outstanding common stock, an increase in our authorized common stock to 900,000,000 shares, and the authorization of 100,000,000 shares of preferred stock.  The corporate action was approved by FINRA on September 17, 2010 and effective in the State of Nevada on September 23, 2010.

 

Acquisition of China Digital

 

On March 31, 2011, we completed a reverse acquisition transaction through a share exchange (the “Share Exchange”) with China Digital Image Organization Co., Limited, a Hong Kong company (“China Digital”), and its shareholders, whereby we acquired 100% of the issued and outstanding capital stock of China Digital in exchange for (i) 31,528,651shares of our Common Stock, which collectively constituted approximately 97% of our issued and outstanding capital stock as of and immediately after the consummation of the Share Exchange, and (ii) payment (the “Cash Component”) of $2,368,471.35.  The Cash Component was payable in full within 12 months after the Closing.

 

As a result of the reverse acquisition, China Digital became our wholly-owned subsidiary and the former shareholders of China Digital became our controlling stockholders.  The share exchange transaction with China Digital and the Shareholders was treated as a reverse acquisition, with China Digital as the acquirer and AMP as the acquired party. Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of China Digital and its consolidated subsidiaries.

 

As a result of our acquisition of China Digital, we now own all of the issued and outstanding capital stock of China Digital, which in turn owns all of the issued and outstanding capital stock of Shenzhen Digital Image Technologies Co., Ltd, which in turn owns all of Shenzhen Digital Image 3D Design and Development Co., Ltd. and Guangzhou Digital Image Technologies Co., Ltd.

 

On May 31, 2011, we filed a certificate of amendment with the Secretary of State of Nevada changing our name to “Computer Graphics International Inc.” and effected a 1-for-2.18 reverse stock split of our common stock (the “Reverse Stock Split”).  The Reverse Stock Split took effect when approved by FINRA on June 7, 2011.  As a result of the Reverse Stock Split, the number of our shares outstanding was reduced from 35,428,981 shares immediately before the Reverse Stock Split to 16,251,846 shares immediately after the Reverse Stock Split.

 

Recent Developments

 

On September 22, 2011, the Company entered into an agreement to purchase a leasehold property situated in Shenzhen, PRC as its office premise. The acquisition of the leasehold property was expected to be completed by early 2012. However, subsequent to December 31, 2011, the acquisition did not materialize and that the purchase arrangement was cancelled. The whole amount of deposit paid of US$793,953 was refunded by the vendor on February 13, 2012.

 

 

On September 26, 2011, the Company’s wholly owned subsidiary Shenzhen Holding Company entered into a Letter of Intent for Share Purchase (the “Acquisition Agreement”) with Li Dongxiang and Zeng Xianguang (together, the “Sellers”) with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd. (“Guangzhou”).  Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to Shenzhen Holding Company in exchange for RMB six million (approximately $937,236).  Guangzhou is a recently formed start-up company involved in three-dimensional technology.  On December 27, 2011, the parties closed the purchase and sale of shares of Guangzhou pursuant to terms of the Acquisition Agreement.  In connection with the closing, Guangzhou's name was changed to "Guangzhou Digital Image Technologies Co., Ltd."

 

Principal Factors Affecting Our Financial Performance

 

We believe our operating results will be primarily affected by the following factors:

 

	¨	Our ability to expand our presence in the PRC market as we plan, including the client base, and our industry presence.
	¨	Our ability to maintain a good relationship with our suppliers for continued supply of hardware equipment at a competitive price and quality in order to continue carrying out our current pricing strategy.
	¨	Our ability to attract and retain key management personnel as well as technical staff for technology integration and new product development in this competitive market.

 

Taxation

 

United States and Hong Kong

 

We are subject to United States federal income tax at a tax rate ranging from 15% to 35%. No provision for income taxes in the United States has been made as we have no taxable income derived from business effectively connected to the United States.

 

China Digital is incorporated in Hong Kong and is subject to Hong Kong profits tax.  In accordance with the relevant tax laws and regulations of Hong Kong, a company, irrespective of its residential status, is subject to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong.  No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.  Therefore, China Digital is exempt from Hong Kong income tax since all the profits were derived from subsidiaries in the PRC and there were no assessable profits generated in Hong Kong.  The income tax rate in Hong Kong is 16.5%.

 

People’s Republic of China

 

Because all of our operations are conducted in the PRC, we are governed by the Enterprise Income Tax Law of the PRC (the "EIT Law"). This law and its implementing rules impose a unified EIT rate of 25% on all enterprises, unless they qualify for certain limited exceptions.

 

On April 6, 2012, the Company obtains the approval from the tax authority of PRC that it fulfills certain tax requirements of a company engaging in the design of software and integrated circuit and thereby it is entitled to preferential tax relief of EIT. The Company is exempted from EIT in the first two profitable financial years of operation and is further granted a 50% relief from the EIT for the following three financial years. As the approval is officially given to the Company in April, 2012, no refund of tax would be made in respect of the EIT paid by the Company for the fiscal years ended December 31, 2010 and 2011, with the 50% relief from EIT becomes effective from the financial year commencing on January 1, 2011.

 

 

Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax at the rate of 25%. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Since 2008, we have been subject to tax at a statutory rate of 25% on income reported in our statutory financial statements filed after appropriate tax adjustments in the relevant periods. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred.

 

Value Added Taxes – We are also subject to value added tax, or VAT, on the sale of our products. The applicable VAT rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice in the PRC, we pay VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes which are determined to be late or deficient. Any tax penalty assessed is expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due. As of June 30, 2012 and 2011, we prepaid VAT $828 and accrued $4,504, respectively.

 

Results of Operations

 

The following table sets forth the key components of our results of operations for the three months and nine months ended June 30, 2012 and 2011, both in dollars and as a percentage of our net sales.

 

		Nine Months Ended								Nine Months Ended
		June 30, 2012								June 30, 2011
						% of Net								% of Net
		Amount				Sales				Amount				Sales
Net Sales		$	4,706,083				100	%		$	8,033,040				100	%
Cost of sales			2,021,575				43	%			3,284,062				41	%
Gross profit			2,684,508				57	%			4,748,978				59	%
Selling, General and Administrative Expenses			3,511,055				75	%			1,180,644				15	%
Operating Income			(826,547	)			(18	%)			3,568,334				44	%
Other income & interest expense			(3,815	)			0	%			4,563				0	%
(Loss)/Income Before Income Taxes			(830,362	)			(18	%)			3,572,897				44	%
Provision for income taxes			(428,178	)			(9	%			865,894				11	%
Net (loss)/income			(402,184	)			(9	%)			2,707,003				33	%

 

		Three Months Ended								Three Months Ended
		June 30, 2012								June 30, 2011
						% of Net								% of Net
		Amount				Sales				Amount				Sales
Net Sales		$	1,752,329				100	%		$	2,234,219				100	%
Cost of sales			515,276				29	%			971,231				43	%
Gross profit			1,237,053				71	%			1,262,988				57	%
Selling, General and Administrative Expenses			1,122,630				64	%			560,189				25	%
Operating Income			114,423				6	%			702,799				32	%
Other income & interest expense			(1,424	)			0	%			(216	)			0	%
Income Before Income Taxes			112,999				6	%			702,583				32	%
Provision for income taxes			3,610				0	%			132,387				6	%
Net income			109,389				6	%			570,196				26	%

 

 

Net Sales. Our net sales decreased to $1,752,329 for the three months ended June 30, 2012 from $2,234,219 for the three months ended June 30, 2011, representing a 22% decrease. Our net sales decreased to $4,706,083 for the nine months ended June 30, 2012 from $8,033,040 for the nine months ended June 30, 2011, representing a 41% decrease. The decrease is primarily due to the overall market decline in current Chinese real estate industry. The company’s business is in transition from a majority of the real estate market to a full commercial CG industry, but it takes time to get new industry customers.

 

Cost of Sales. Our cost of sales decreased to $515,276 for the three months ended June 30, 2012 from $971,231 for the three months ended June 30, 2011. Our cost of sales decreased to $2,021,575 for the nine months ended June 30, 2012 from $3,284,062 for the nine months ended June 30, 2011, mainly due to the decreased sales. The cost of goods sold per sales ratio increased to 43% for the nine months ended June 30, 2012 from 41% for the nine months ended June 30, 2011. The cost of goods sold per sales ratio decreased to 29% for the three months ended June 30, 2012 from 43% for the three months ended June 30, 2011, mainly due to the decreased outsourcing cost and hardware purchase cost.  

 

Gross Profit. Our gross profit decreased to $1,237,053 for the three months ended June 30, 2012 from $1,262,988 for the three months ended June 30, 2011, representing a 2% decrease.  Our gross profit decreased to $2,684,508 for the nine months ended June 30, 2012 from $4,748,978 for the nine months ended June 30, 2011, representing a 43% decrease. This decrease was primarily due to the decreased sales and the increased cost of production.

 

Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased to $1,122,630 for the three months ended June 30, 2012 from $560,189 for the three months ended June 30, 2011.  Our selling, general and administrative expenses increased to $3,511,055 for the nine months ended June 30, 2012 from $1,180,644 for the nine months ended June 30, 2011. The Selling, General and Administrative Expense per sales ratio changed to 64% for the three months ended June 30, 2012 from 25% for the three months ended June 30, 2011, mainly due to employee benefits related to the Company’s acquisition of Guangzhou Subsidiary, increased share-based payment expense for consulting services, increased salary due to rapid growth of sales staff and additional depreciation charge on leasehold improvements to office premises that were rented in April 2011.

 

Other Income. Other income decreased to $(1,424) for the three months ended June 30, 2012 from ($216) for the three months ended June 30, 2011. Other income decreased to $(3,815) for the nine months ended June 30, 2012 from $4,563 for the nine months ended June 30, 2011. This decrease was mainly due to the increased bank charges and decreased interest income.

 

(Loss)/Income Before Income Taxes. Our income before income taxes decreased to $112,999 for the three months ended June 30, 2012 from $702,583 for the three months ended June 30, 2011, representing a 84% decrease.  Our income before income taxes decreased to $(830,362) for the nine months ended June 30, 2012 from $3,572,897 for the nine months ended June 30, 2011, representing a 123% decrease. The decrease was mainly due to the decrease in sales and increase in cost of sales and selling, general and administrative expenses.

 

Provision for income taxes. Our income tax expense was $3,610 for the three months ended June 30, 2012, compared to income tax expense $132,387 for the three months ended June 30, 2011. Our income tax credit was $(428,178) for the nine months ended June 30, 2012, compared to income tax expense $865,894 for the nine months ended June 30, 2011. This change was mainly due to the loss before income taxed for the nine months ended June 30, 2012.

 

 

Liquidity and Capital Resources

 

As of June 30, 2012 and June 30, 2011, we had cash and cash equivalents of $30,862 and $2,286,410 respectively, primarily consisting of cash on hand and demand deposits. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily through cash flows from operations and equity contributions by our shareholders.

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

Cash Flow

(all amounts in U.S. dollars)

		Nine Months Ended
		June 30,
		2012				2011
Net cash (used in)/provided by operating activities		$	(234,885	)		$	2,948,343
Net cash provided by/ (used in) investing activities			611,317				(2,935,605	)
Net cash (used in)/provided by financing activities			(1,141,444	)			1,237,815
Effects of Exchange Rate Change in Cash and Cash Equivalents			16,742				79,455
Net (Decrease)/ Increase in Cash and Cash Equivalents			(748,270	)			1,330,008
Cash and Cash Equivalents at Beginning of the Period			779,132				956,402
Cash and Cash Equivalent at End of the Period			30,862				2,286,410

 

Operating activities

 

Net cash used in operating activities was $234,885 for the nine months ended June 30, 2012, as compared to net cash provided by operating activities of $2,948,343 for the nine months ended June 30, 2011. The change is attributable to the decrease in net income of $3,109,187, the decrease of $470,436 in monies held by a legal firm, the increase of $733,120 in accounts receivable, the increase of $91,678 in other receivables and deposits, the increase of $2,450 in rental deposits, the decrease of $2,111 in inventory, the increase of $159,556 in amount due to a shareholder, the decrease of $23,225 in accounts payable, the increase of $31,491 in accrued expenses and other payable, the increase of $34,912 in value-added tax liability, and the decrease of $456,199 in income tax payable.

 

To cater with any short term liquidity issue, the chairman, on Aug 14, 2012, issued an undertaking that the chairman will give his every endeavor and effort to obtain necessary and adequate funds to meet the Company’s financial obligations as when they are required thereby warranting that the operations of the Company will not be affected.

 

Investing activities

 

Net cash provided by investing activities for the nine months ended June 30, 2012 was $611,317 compared to $2,935,605 net cash used in investing activities for the nine months ended June 30, 2011. The change was mainly attributable to the refund of deposit for acquisition of a leasehold property.

 

Financing activities

 

Net cash used in financing activities for the nine months ended June 30, 2012 was due to a repayment of $1,141,444 made to a shareholder.

 

Inflation

 

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the digital video service industry and strives to continually maintain effective cost control in operations.

 

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

 

Critical Accounting Policies

 

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized at the completion of delivery to customers when a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured at the date of completion of delivery. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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 period. Actual results could differ from those estimates.

 

Accounts Receivable

 

The Company maintains reserves for potential credit losses on accounts receivable.   Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded based on the Company’s historical collection history.  Allowance for doubtful accounts as of June 30, 2012 and 2011 were $159,542 and $nil, respectively.

 

Impairment of Long-Lived Assets

 

The Company adopted the Property, Plant and Equipment Topic of the Codification, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes previous accounting guidance, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2012, there were no impairments of its long-lived assets.

 

Comprehensive Income

 

The Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the three- and nine-month periods ended June 30, 2012 and 2011 included net income and foreign currency translation adjustments.

 

 

Foreign Currency Translation

 

As of June 30, 2012 and 2011, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”).  Such financial statements were translated into U.S. Dollars (“USD”) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency translation”, included in the Codification as ASC830, Foreign Currency Matters, with the CNY as the functional currency.  According to the Codification, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the Codification, as a component of stockholders’ equity.  Transaction gains and losses are reflected in the income statement.

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures.

 

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.  Controls and Procedures.

 

(a)	Evaluation of Disclosure Controls and Procedures.

 

As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, the Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation these officers have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were adequate to insure that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act were recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms.

 

(b)	Changes in Internal Control Over Financial Reporting.

 

During the quarter ended June 30, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

 

Item 1A.   Risk Factors.

 

There have been no material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on December 29, 2011.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.   Defaults Upon Senior Securities.

 

None.

 

Item 4.   Mine Safety Disclosures.

 

Not applicable.

 

Item 5.   Other Information.

 

None.

  

Item 6.  Exhibits.

 

Exhibits:
31.1		Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002.
32.2		Certification of Principal Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	COMPUTER GRAPHICS
	INTERNATIONAL INC.
Date:  August 20, 2012	By:	/s/ Jing Wang
		Jing Wang
		Chief Executive Officer
		(Principal Executive Officer)

 

Date:  August 20, 2012	By:	/s/ Yongqing Ma
		Yongqing Ma
		Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)