The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the PRC GAAP). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities registered capital or members equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to the statutory public welfare fund. The subsidiaries of the Company elected not to made discretionary surplus reserves since its establishment. For the six months periods ended June 30, 2012 and 2011, appropriations to statutory reserves were $24,312 and $32,200, respectively. For the three months periods ended June 30, 2012 and 2011, appropriations to statutory reserves were $22,622 and $20,511, respectively.
Other than in the normal course of business, the Company did not have significant capital and other commitments, or significant guarantees as of June 30, 2012 and December 31, 2011.
The Company has performed an evaluation of subsequent events in accordance with ASC Topic 855 and the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements are projections of events, revenues, income, future economic performance or managements plans and objectives for future operations. In some cases, you can identify forward-looking statements by the use of terminology such as may, should, expects, plans, anticipates, believes , estimates, predicts, potential or continue or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this quarterly report on Form 10-Q include statements about:
our goal is that Yiyueqiji will transition its major revenue to be derived from system software development and re-assign its staff and expertise to Shenzhen operations in 2012;
our goal is to be a global leader in the design, development and manufacture of mobile devices and the strategies we anticipate will help us reach that goal;
our belief that we may build a strategic relationships with one or more leading telecom companies;
our subsidiary should operate the major smartphone and tablet product development center and product delivery business unit for the group of companies;
our expectation that the operating companies will sign with financing backup from the manufacturing partners to grow the output of the smartphone products to a larger scale our expectation that the demand for our products will eventually increase; and
our expectation that we will be able to raise capital when we need it.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including:
our ability to identify attractive products and negotiate their acquisition or licensing;
our ability to effectively develop and market products that we acquire or license;
competition for, among other things, capital, products and skilled personnel; and
any of which may cause our or our industrys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
While these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
This Managements Discussion and Analysis should be read in conjunction with the accompanying unaudited financial statements and related notes. The discussion and analysis of our financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions. The following discussion should be read in conjunction with our unaudited interim financial statements and the related notes that appear elsewhere in this quarterly report.
As used in this quarterly report, the terms we, us our and Ya Zhu Silk mean Ya Zhu Silk, Inc., a Nevada corporation and our wholly owned subsidiary, AMS-INT Asia Limited (AMS), a Hong Kong corporation. Unless otherwise stated, $ refers to United States dollars.
We were incorporated in the State of Nevada on July 22, 2008. Following incorporation, we commenced the business of importing and distributing high quality silk fabric made in China. We have subsequently changed our business and we now market mobile devices, specifically mobile phones, smartphones, and tablets. We are evolving our business to become a designer and manufacturer of mobile devices.
On June 29, 2011, we entered into a master agreement (the Master Agreement) with Kunekt Corporation (Kunekt), AMS-INT Asia Limited (AMS), Ferngrui Yue (Yue), Guangzhou XingWei Communications Technology Ltd. Inc. (XingWei), Matt Li (Li), Beijing Yiyueqiji Science and Technology Development Ltd. Inc. (Yiyueqiji), and Mark Bruk (Bruk). The Master Agreement requires us to issue and register up to 7,104,000 common shares, before a proposed 25 to 1 forward stock split (177,600,000 post-split shares), as consideration in exchange for all shares of AMS held by Li and Yue, and other valuable assets, including the rights to the trademarked brand name Kunekt. The Master Agreement contains several elements, including share exchange agreements, our assignment of registration rights for the shares to be issued, our purchase of assets held by Kunekt, and an agreement between us and a private party.
On January 18, 2012, we entered into an amending agreement (the Amending Agreement) with Kunekt, AMS, Yue, XingWei, Li, Yiyueqiji, and Bruk whereby all of the dates in the agreements entered into pursuant to the Master Agreement were extended by six months due to the failure to close those agreements. The terms below account for the changes pursuant to the Amending Agreement.
On the closing date, being February 20, 2012, we issued 480,000 common shares, before a proposed 25 to 1 forward stock split (12,000,000 post-split shares), to Yue;
On June 30, 2012, we shall issue 320,000 common shares, before a proposed 25 to 1 forward stock split (8,000,000 post-split shares), to Yue. These shares were not issued due to the delay of the closing date.
If our revenue from October 31, 2011 to June 30, 2012 is greater than or equal to USD $9 million and less than or equal to USD$11.5 million, then within 5 business days we shall issue 133,334 common shares, before a proposed 25 to 1 forward stock split (3,333,350 post-split shares), to Yue;
If our revenue from October 31, 2011 to June 30, 2012 is greater than USD$11.5 million, then within 5 business days we shall issue 400,000 common shares, before a proposed 25 to 1 forward stock split (10,000,000 post-split shares), to Yue;
If our revenue from October 31, 2011 to September 30, 2012 is greater than or equal to USD$20 million and our revenue from October 31, 2011 to June 30, 2012 is greater than or equal to USD $9 million and less than or equal to USD$11.5 million, then within 5 business days we shall issue
266,666 common shares, before a proposed 25 to 1 forward stock split (6,666,650 post-split shares), to Yue; and
If our revenue from October 31, 2011 to September 30, 2012 is greater than or equal to USD$20 million and our revenue from October 31, 2011 to June 30, 2012 is less than $9 million, then within 5 business days we shall issue 400,000 common shares, before a proposed 25 to 1 forward stock split (10,000,000 post-split shares), to Yue.
Li Share Exchange Agreement: 3,384,000 Shares of Common Stock to be Issued
On the Effective Date, we entered into a share exchange agreement (the Li Share Exchange Agreement) with Li and Yiyueqiji whereby we purchased all shares of AMS held by Li in consideration for the issuance of up to 3,384,000 registered common shares, before a proposed 25 to 1 forward stock split (84,600,000 post-split shares), to Li. The exact number of common shares issued is dependent upon our revenue from October 31, 2011 to September 30, 2012 and subject to the following timeline:
On the closing date, being February 20, 2012, we issued 1,480,000 common shares, before a proposed 25 to 1 forward stock split (37,000,000 post-split shares), to Li;
On June 30, 2012, we shall issue 680,000 common shares, before a proposed 25 to 1 forward stock split (17,000,000 post-split shares), to Li; These shares were not issued due to the delay of the closing date.
If our revenue from October 31, 2011 to June 30, 2012 is greater than or equal to USD $9 million and less than or equal to USD$11.5 million, then within 5 business days we shall issue 408,000 common shares, before a proposed 25 to 1 forward stock split (10,200,000 post-split shares), to Li;
If our revenue from October 31, 2011 to June 30, 2012 is greater than USD$11.5 million, then within 5 business days we shall issue 1,224,000 common shares, before a proposed 25 to 1 forward stock split (30,600,000 post-split shares), to Li;
If our revenue from October 31, 2011 to September 30, 2012 is greater than or equal to USD$20 million and our revenue from October 31, 2011 to June 30, 2012 is greater than or equal to USD $9 million and less than or equal to USD$11.5 million, then within 5 business days we shall issue 816,000 common shares, before a proposed 25 to 1 forward stock split (20,400,000 post-split shares), to Li;
If our revenue from October 31, 2011 to September 30, 2012 is greater than or equal to USD$20 million and our revenue from October 31, 2011 to June 30, 2012 is less than $9 million, then within 5 business days we shall issue 1,224,000 common shares, before a proposed 25 to 1 forward stock split (30,600,000 post-split shares), to Li.
On February 20, 2012, we closed the Yue Share Exchange Agreement and Li Share Exchange Agreement and we own 100% of the issued and outstanding common shares of AMS (the Share Exchange Agreements Closing Date).
Purchase of Kunekt Assets
Registration Agreement: Registration of the 7,104,000 Shares of Common Stock
In connection with the other agreements pursuant to the Master Agreement, we entered into a registration rights agreement whereby we agreed to register all common shares issued pursuant to the Master Agreement or agreements entered into pursuant to the Master Agreement within 120 days of December 31, 2011. We agreed to pay a penalty provision of 1.5% of the deemed value of the common shares, being $1.00 per common share, per month if the common shares are not registered within 120 days of December 31, 2011. We also agreed to the following:
prepare and file with the SEC such amendments and supplements to a registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of the shares issued in this exchange;
furnish to Kunekt, AMS, Li, Yue, Yiyueqiji, XinWei, and Mark Bruk (the Holders) such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents (including, without limitation, prospectus amendments and supplements as are prepared by our company) as they may reasonably request in order to facilitate the disposition of the shares issued to them under the Share Exchange Agreements;
use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC under the Securities Act of 1933 (the Securities Act) and the Securities and Exchange Act of 1934 (the Exchange Act) (including, without limitation, Rule 172 under the Securities Act), file any final prospectus, including any supplement or amendment thereof, with the SEC pursuant to Rule 424 under the Securities Act, and to promptly notify the Holders in writing if, at any time between issuance of the shares and either (i) the date as of which the Holders may sell all of the issued shares without volume or manner of sale restriction pursuant to rule 144 or (ii) the date as of which all the shares issued have been sold, we do not satisfy the conditions specified in Rule 172 of the Securities Act, and, as a result thereof the Holders are required to deliver a prospectus in connection with any disposition of the shares issued to them under the Share Exchange Agreements;
notify the Holders of the occurrence of any event as a result of which the prospectus included in or relating to a registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading; and, thereafter, subject to certain conditions, we will promptly prepare (and, when completed, give notice and provide a copy thereof to both the Holders) a supplement or amendment to such prospectus so that such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; provided that upon such notification by us the Holders will not offer or sell the issued shares until we have notified them that we have prepared a supplement or amendment to such prospectus and filed it with the SEC or, if we do not then meet the conditions for the use of Rule 172, delivered copies of such supplement or amendment to the Holders (it being understood and agreed by us that the foregoing proviso shall in no way diminish or otherwise impair our obligation to promptly prepare a prospectus amendment or supplement and deliver copies of same; and
use commercially reasonable efforts to register and qualify the issued shares under such other securities or Blue Sky laws of such states as shall be reasonably appropriate in our opinion, provided that we shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, and provided further that if any jurisdiction in which any of such issued shares shall be qualified shall require that expenses incurred in connection with the qualification therein of any such registrable securities be borne by the Holders , then they shall, to the extent required by such jurisdiction, pay their pro rata share of such qualification expenses.
use our commercially reasonable efforts, subject to the terms and conditions of the Master Agreement, to (i) prevent the issuance of any stop order or other suspension of effectiveness of the issued shares, or the suspension of the qualification of any of the issued shares for sale in any jurisdiction in the United States, and (ii) if such an order or suspension is issued, obtain the withdrawal of such order or suspension at the earliest practicable moment and notify the Holders of the issuance of such order and the resolution thereof or its receipt of notice of the initiation or threat of any proceeding such purpose.
(i) comply with all requirements of the Financial Industry Regulatory Authority, Inc. with regard to the issuance of the stock offered as consideration and the listing thereof on the OTC Bulletin Board and such other securities exchange or automated quotation system, as applicable, and (ii) engage a transfer agent and registrar to maintain our stock ledger for all shares issued under this agreement not later than the effective date of a registration statement.
We have also agreed to furnish relevant information to Xing Wei and Li as provided for in section 5 of the registration rights agreement. Further, we have agreed to cover expenses of registration subject to conditions established in section 6 of the registration rights agreement. Additionally, we have agreed to certain indemnifications to benefit the Holders under section 8 of the registration agreement. Finally, we have agreed to perform duties in order to allow the Holders to benefit from unrestricted sale of the issued shares, if available, under Rule 144 and any other rule or regulation of the SEC that may at any time permit them to sell their issued shares without registration under section 9 of the registration agreement.
As at June 30, 2012, we had cash and cash equivalents of 1,600,395 and working capital of $1,750,598, compared to cash and cash equivalents of $1,622,,750 and working capital of $87,136 as at December 31, 2011. We have incurred operating losses since inception, and this is likely to continue in the foreseeable future.
We require funds to enable us to address our minimum current and ongoing expenses. Presently, our revenue is not sufficient to meet our operating and capital expenses. Management projects that we may require an additional $0.5million USD to fund our operating expenditures for the next twelve month period.
Due to continued research and development investment, we anticipate that we will require $0.5 million as a minimum operating budget as additional funds to implement our business plan for the next twelve months.
We anticipate that our cash on hand and the revenue that we anticipate generating going forward from our operations will not be sufficient to satisfy all of our cash requirements for the next twelve month period. We currently do not have committed sources of additional financing and may not be able to obtain additional financing, particularly, if the volatile conditions in the stock and financial markets persist. If we require any additional financing, we plan to raise any such additional capital primarily through equity financing and loans from our directors, provided that such funding continues to be available to our company. We plan to continue to seek additional funds from our directors to fund our day-to-day operations until equity financing can be pursued. We have no guarantee that our directors will continue to fund our day-today operations. The issuance of additional equity securities by our company may result in a significant dilution in the equity interests of our current stockholders. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing as required on a timely basis, we will not be able to meet certain obligations as they become due and we will be forced to scale down or perhaps even cease our operations.
Cash flows used by our operating activities increased from $172,121 for the three month ended June 30, 2011 to $224,595 for the three month period ended June 30, 2012. The $523,384 increase is primarily due to a significant increase in design, development and manufacturing activities related to our smart phone and 3G mobile devices.
Cash flows provided by our financing activities decreased by $128,745 primarily as the company has not received any capital injection during the period.
We may seek additional funding through public or private financings to fund our operations beyond 2012. However, if we are unable to raise additional capital when required or on acceptable terms, or achieve cash flow positive operations, we may have to significantly delay product development and scale back operations both of which may affect our ability to continue as a going concern
During the next twelve months and in the long term, to remedy the deficiency in financing for proposed future operations, we intend to raise funds from equity and/or debt financings. In the short term, we intend to fund future cash shortfalls from loans from directors.
We do not anticipate that we will expend any significant amount on equipment over the next 12 months but that may change depending on the type of business that we acquire in the event that we are successful in doing so.
Due to our being a development stage company and only begun to generate revenues, in their Notes to our financial statements for the year ended December 31, 2011, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern.
We have generated a net income of $226,040 for the three months ending as June 30th, 2012. But we have historically incurred losses from our inception. If we want to further expand our business, we will require additional working capital to develop our business operations. We intend to raise additional working capital through private placements, and/or advances from related parties or shareholder loans.
The continuation of our business is dependent upon obtaining further financing, acquiring a new business and achieving a break even or profitable level of operations in that new business. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current or future stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
There are no assurances that we will be able to obtain additional financing through either private placements, and/or bank financing or other loans necessary to support our working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us.
These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through issuance of additional shares of our common stock.
We may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders may further dilute common stock book value, and that dilution may be material.
Risks Related To Our Operations
If we are unsuccessful in establishing and increasing awareness of our brand and recognition of our products, or if we incur excessive expense promoting and maintaining our brand or our products, our potential revenues could be limited, our costs could increase and our operating results and financial condition would be harmed.
We believe that acceptance of our mobile device products by an expanding customer base depends in large part on increasing awareness of the Kunekt brand and that brand recognition will be even more important as competition in our market increases. Successful promotion of our brand depends largely on the effectiveness of our marketing efforts and on our ability to develop reliable and quality products at competitive prices. In addition, globalizing and extending our brand and recognition of our products and services is costly and involves extensive management time to execute successfully. Further, the markets in which we intend to operate are highly competitive and many of our competitors have greater marketing resources than we do. Our future brand promotion activities may involve significant expense and may not generate desired levels of increased revenue, and even if such activities generate some increased revenue, such increased revenue may not offset the expenses we incurred in endeavoring to build our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in our attempts to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and as a result our operating results and financial condition would suffer.
We may be unable to complete the purchase of the Kunekt Assets.
We have entered into the Kunekt Asset Purchase Agreement whereby we will purchase the Kunekt Assets, including various trademarks (the Trademarks). The Kunekt Asset Purchase Agreement contains conditions that are beyond our control, such as Kunekt must receive the approval of its shareholders. Pursuant to a license agreement, we are currently selling minimal product using the Trademarks. If we are unable to complete the Kunekt Asset Purchase Agreement, our efforts to market the Trademarks will be wasted. Further, our business plan assumes we will be able to complete the Kunekt Asset Purchase Agreement. If we are unable to complete the purchase, we will need to adjust our business plan and develop a different brand.
We are subject to rapidly declining average selling prices, which may harm our results of operations.
Mobile devices such as those we offer are subject to rapid declines in average selling prices due to rapidly evolving technologies, industry standards and consumer preferences. Mobile device products are subject to rapid technological changes which often cause product obsolescence. Companies within the mobile device industry are
continuously developing new products with heightened performance and functionality. This puts pricing pressure on existing products and constantly threatens to make them, or causes them to be, obsolete. Our typical products life cycle is expected to be extremely short, thereby generating lower average selling prices as the cycle matures. If we fail to accurately anticipate the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than we anticipated. In addition, if we fail to accurately anticipate the introduction of new technologies, we may be unable to compete effectively due to our failure to offer products most demanded by the marketplace. If any of these failures occur, our sales, profit margins and profitability will be adversely affected.
In addition, mobile device distributors expect suppliers, such as our company, to cut their costs and lower the price of their products to lessen the negative impact on the mobile device distributors own profit margins. As a result, we may have to reduce the price of some of our mobile device products and could expect to continue to face market-driven downward pricing pressures in the future. Our results of operations will suffer if we are unable to offset any declines in the average selling prices of our products by developing new or enhanced products with higher selling prices or gross profit margins, increasing our sales volumes or reducing our production costs.
We are subject to intense competition in the industry in which we operate, which could cause material reductions in the selling price of our products or losses of our market share.
The mobile devices industry is highly competitive, especially with respect to pricing and the introduction of new products and features. Our products will compete in the low-to-medium priced sector of the mobile devices market and will compete primarily on the basis of:
consumer acceptance of our brand; and
quality of service and support to retailers and our customers.
In recent years, many of our anticipated competitors have regularly lowered prices, and we expect these pricing pressures to continue. If these pricing pressures are not mitigated by increases in volume, cost reductions from our suppliers or changes in product mix, our revenues and profits could be substantially reduced. As compared to us, many of our anticipated competitors have:
significantly longer operating histories;
significantly greater managerial, financial, marketing, technical and other competitive resources; and
stronger brand recognition.
As a result, our competitors may be able to:
adapt more quickly to new or emerging technologies and changes in customer requirements;
devote greater resources to the promotion and sale of their products and services; and
respond to pricing pressure more effectively.
These factors could affect our operations and financial condition in a materially adverse manner. In addition, competition could increase if:
new companies enter the market; or
competitors expand their product mix.
An increase in competition could result in material price reductions or loss of our market share.
Our revenues and earnings could be materially and adversely affected if we cannot anticipate market trends or enhance existing products or achieve market acceptance of new products.
Consumers for mobile devices have many products to choose from and we must compete with these products in order to sell our products and generate revenues. Our success will be dependent on our ability to successfully anticipate and respond to changing consumer demands and trends in a timely manner, as well as expanding into new markets and developing new products. In addition, to gain footholds in new markets for our products, we must maintain our existing products as well as integrate them with new products. We may not be successful in developing, marketing and releasing new products that respond to technology developments or changing customer needs and preferences. We may also experience difficulties that could delay or prevent the successful development, introduction and sale of these new products. In addition, these new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If release dates of any future products or enhancements to our products are delayed, or if these products or enhancements fail to achieve market acceptance when released, our sales volume may decline and earnings would be materially and adversely affected. In addition, new products or enhancements by our competitors may cause customers to defer or forego purchases of our products, which could also materially and adversely affect our revenues and earnings.
If we do not correctly forecast demand for our products, we could have costly excess production or inventories and we may not be able to secure sufficient or cost effective quantities of our products or production materials and our revenues, cost of revenues and financial condition could be adversely affected.
The demand for our products will depend on many factors, including pricing and inventory levels, and it is difficult to forecast due in part to variations in economic conditions, changes in consumer and business preferences, relatively shorter product life cycles, changes in competition, seasonality and reliance on key third party retailers, distributors and telecommunication carriers. It is particularly difficult to forecast demand for an individual product. Significant unanticipated fluctuations in demand, the timing and disclosure of new product releases, or the timing of key sales orders could result in costly excess production or inventories or the inability to secure sufficient, cost-effective quantities of our products or production materials. This could adversely impact our revenues, cost of revenues and financial conditions.
Our products may contain errors or defects, which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased service costs, warranty claims and litigation.
Our products are complex and must meet stringent user requirements. In addition, we must develop our products to keep pace with the rapidly changing mobile device market. Sophisticated electronic products like ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products and jeopardize our relationship with retailers, distributors and telecommunication carriers. End users may also reject or find issues with our products and have a right to return them even if the products are free from errors or defects. In either case, returns or quality issues could result in damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs, and warranty claims and litigation which could harm our business, results of operations and financial conditions.
We will depend on a limited number of suppliers for components for our products. The inability to secure components for our products could reduce our revenues and adversely affect our relationship with our customers.
We will rely on a limited number of suppliers for our component parts and raw materials. Although there are many suppliers for each of our component parts and raw materials, we expect we will be dependent on a limited number of suppliers for many of the significant components and raw materials. This reliance involves a number of significant potential risks, including:
lack of availability of materials and interruptions in delivery of components and raw materials from our suppliers;
manufacturing delays caused by such lack of availability or interruptions in delivery;
fluctuations in the quality and the price of components and raw materials, in particular due to the petroleum price impact on such materials; and
risk related to foreign operations.
We do not currently have any long-term or exclusive purchase commitments with any suppliers. Our failure to establish relationships could negatively affect our ability to obtain our components and raw materials used in our products in a timely manner. If we are unable to obtain ample supply of products from suppliers, we may be unable to satisfy our customers orders which could materially and adversely affect our revenues and our relationship with our customers.
Certain disruptions in supply of and changes in the competitive environment for raw materials integral to our products may adversely affect our profitability.
We intend to use a broad range of materials and supplies, including displays, control ICs, Wifi modules, GPS modules and other electronic components in our products. A significant disruption in the supply of these materials could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we intend to purchase materials, components and supplies for the production of our products, in each case may adversely affect our ability to maintain production of our products and sustain profitability. If we were to experience a significant or prolonged shortage of critical components from any supplier and could not procure the components from other sources, we would be unable to meet our production schedules for some of our products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, margins and customer relations.
Substantial defaults by our customers on accounts receivable or the loss of significant customers could have a material adverse effect on our business.
We expect that a significant portion of our working capital will consist of accounts receivable from customers. If customers were to become insolvent or otherwise unable to pay for products and services, or become unable to make payments in a timely manner, our business, results of operations, or financial condition could be affected in a materially adverse manner. An economic or industry downturn could also affect the servicing of these accounts receivable in a materially adverse manner, which could result in longer payment cycles, increased collection costs and defaults in excess of managements expectations. A significant deterioration in our ability to collect on accounts receivable could also impact the cost or availability of financing available to us.
Our operations would be materially adversely affected if third-party carriers were unable to transport our products on a timely basis.
All of our products will be shipped through third-party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers may be unavailable or may not have the capacity to
deliver our products to customers. If adequate third-party sources to ship our products were unavailable at any time, our business would be affected in a materially adverse manner.
The seasonality of our industry, as well as changes in consumer spending and economic conditions, may cause our quarterly operating results to fluctuate and cause our stock price to decline.
Our net revenues and operating results may vary significantly from quarter to quarter. The main factors that may cause these fluctuations are:
seasonal variations in operating results;
variations in the sales of our products to customers;
variations in manufacturing and supplier relationships;
if we are unable to correctly anticipate and provide for inventory requirements from quarter to quarter, we may not have sufficient inventory to deliver our products to our customers in a timely fashion or we may have excess inventory that we are unable to sell;
the discretionary nature of customers demands and spending patterns;
changes in market and economic conditions; and
In addition, our quarterly operating results could be materially adversely affected by political instability, war, acts of terrorism or other disasters.
Sales of our products will be somewhat seasonal due to consumer spending patterns, which should tend to result in significantly stronger sales in our fourth and first fiscal quarters, especially as a result of the holiday season. Although we believe that the seasonality of our industry is based primarily on the timing of consumer demand for products, fluctuations in operating results can also result from other factors affecting us and our competitors, including new product developments or introductions, availability of products for resale, competitive pricing pressures, changes in product mix, pricing and product reviews and other media coverage. Due to the seasonality of our industry, our results for interim periods may not necessarily be indicative of our results for the year.
As a result of these and other factors, revenues for any quarter are subject to significant variation, which may adversely affect our results of operations and the market price for our common stock.
We may rely on trade secret protections through confidentiality agreements with our employees, customers and other parties; the breach of such agreements could adversely affect our business and results of operations.
We may rely on trade secrets, which we will seek to protect, in part, through confidentiality and non-disclosure agreements with employees, customers and other parties. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our proposed projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. We may be involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such litigation could result in substantial cost and diversion of effort by our management and technical personnel.
Since we lack an operating history, we face a high risk of business failure, which may result in the loss of your investment.
We are a development-stage company and recently began marketing our mobile device products. Thus we have no way to evaluate the likelihood that we will be able to operate our business successfully.
We cannot guarantee that in the future we will be successful in generating revenue or raising funds through the sale of shares or through debt financing to pay for manufacturing, sales and marketing expenses. As of the date of this annual report on Form 10-K, we have earned minimal revenue. Failure to generate revenue may cause us to go out of business, which will result in the complete loss of your investment.
We will be dependent on a technically trained workforce and an inability to retain or effectively recruit such employees could have a material adverse effect on our business, financial condition and results of operations.
We must attract, recruit and retain a workforce of technically competent employees to design, develop and manufacture our products and provide service support. Our ability to implement effectively our business strategy will depend upon, among other factors, the successful recruitment and retention of highly skilled and experienced engineering and other technical and marketing personnel. There is significant competition for technologically qualified personnel in our industry and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our operational needs.
We do not carry any business interruption insurance, products liability insurance or any other insurance policy except for a limited property insurance policy. As a result, we may incur uninsured losses, increasing the possibility that you would lose your entire investment in our company.
We could be exposed to liabilities or other claims for which we would have no insurance protection. We do not currently maintain any business interruption insurance, products liability insurance, or any other comprehensive insurance policy. As a result, we may incur uninsured liabilities and losses as a result of the conduct of our business. There can be no guarantee that we will be able to obtain insurance coverage in the future, and even if we are able to obtain coverage, we may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, any purchasers of our common stock could lose their entire investment.
Because we do not carry products liability insurance, a failure of any of the products marketed by us may subject us to the risk of product liability claims and litigation arising from injuries allegedly caused by the improper functioning or design of our products. We cannot assure that we will have enough funds to defend or pay for liabilities arising out of a products liability claim. To the extent we incur any product liability or other litigation losses, our expenses could materially increase substantially. There can be no assurance that we will have sufficient funds to pay for such expenses, which could end our operations and you would lose your entire investment.
In addition, we intend to utilize third-party distributors to act as our representative for the geographic region that they will be assigned. Significant terms and conditions of distributor agreements will include FOB source, net 30 days payment terms, with no return or exchange rights, and no price protection. Since the product transfers title to the distributor at the time of shipment by us, the products will not be considered inventory on consignment. Our success will be dependent on these distributors finding customers and receiving orders.
Our information systems could be damaged as a result of disasters or unpredictable events, which could have an adverse effect on our business operations.
Our information systems are stored on servers in the United States. If major disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters or other events occur, our information systems may be seriously damaged, and we may have to stop or delay sales and marketing of our products. We may incur expenses or loss of revenues relating to such damages.
Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.
Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of our securities. Quarterly operating results may fluctuate in the
future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
vulnerability of our industry to a general economic downturn globally;
fluctuation and unpredictability of costs related to the raw material used to manufacture our products;
seasonality of our industry;
competition from our competitors; and
our ability to obtain necessary government certifications and/or licenses to conduct our business.
Risks Related to our Management
Our president is a non-resident of the United States.