The weighted-average assumptions used in estimating the fair value of stock options granted were as follows:
The fair value of options granted in the quarterly period ended September 30, 2009 was estimated at grant date
using a Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate at the time of grant
of 1.540%; dividend yield of 0%; expected weighted average option life of 2 years; and volatility based on an average of the volatilities
of two other companies in the same industry of 47.26%, since the volatility of the Company's stock as traded on Nasdaq is not
applicable due to the acquisition of Gold Lion.
Under ASC 718, previously SFAS No. 123-R, the Company's expected volatility assumption is based on the
historical volatilities of two other companies in the same industry. The expected life assumption is primarily based on historical exercise
patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Stock compensation expense recognized in the quarter ended September 30, 2009 was based on awards
expected to vest, and there were no estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised
in subsequent periods, if necessary, if actual forfeitures differ from those estimates.
On May 6, 2008, the Company entered into a project transfer agreement and transferred the digital project
department to 712. Such agreement was implemented before June 30, 2008. For the period before June 30, 2008, the statements of
operations of the Company reported the results of operations of the digital project department as discontinued operations. The digital
project department was sold at its net book value of $1,669,674.
TCB Digital and JS Leimone are governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% (33% before 2008) on income reported in the statutory financial
statements after appropriate tax adjustments.
JS Leimone is exempt from income tax in PRC for two years starting from the first profitable year or the year
2008, whichever is earlier, and is subject to a 50% discount on normal income tax rate for the following three years.
TCB Digital had pre-tax profit of approximately $913,100 and $1,529,900 for the nine months ended September
30, 2009 and 2008 respectively, while JS Leimone had pre-tax loss of approximately $63,700 and $22,000 for the nine months ended
September 30, 2009 and 2008 respectively, while Profit Harvest had pre-tax profit of approximately $5,015,900 and $147,000 for the
nine months ended September 30, 2009 and 2008 respectively.
The additional deducted expenses in 2008 were the additional 50% of R&D expenses deducted before income tax.
The following table summarizes the temporary differences which result in deferred tax assets and liabilities as at
September 30, 2009 and December 31, 2008:
(b) During the reporting period, the suppliers represented 10% or more of the Company's
condensed consolidated purchase are:
Nine months ended September 30, 2009
% to Total
Beijing Tianyu Communication Equipment Co.Ltd
CEC CoreCast Corporation Limited
Nine months ended September 30, 2008
% to Total
Beijing Xingwang Shidai Tech & Trading Co., Ltd.
Sichuan Moba Industrial Co., Ltd.
CEC CoreCast Corporation Limited
NOTE 23 - OPERATING RISK
- Industry risk
The industry in which we compete is a rapidly evolving, highly competitive and fragmented market
driven by consumer preferences and quickly evolving technology. Increased competition may result in price reductions, reduced gross
margin and loss of market share. Failure to compete successfully against current or future competitors could have a material adverse
effect on the Company's business, operating results and financial condition.
Product risk of obsolescence
From the second half of year 2007, the Company began to involve in the agent business of some
famous high-end smart phones. Because of the restructure of China Unicom, one type of smart phones could not be sold as expected
and inventory impairment loss arose. Such uncertain and unpredictable events could have a significant effect on the profits that the
Company will make in the future.
The Company cannot guarantee the Renminbi and US dollars exchange rate will remain steady,
therefore the Company could post the same profit in Renminbi for two comparable periods and post higher or lower profit in US dollars depending on the exchange
rate of Renminbi and US dollars. The exchange rate could fluctuate depending on changes in the political and economic environments
Currently, PRC is in a period of growth and is openly promoting business development in order to
bring more business into PRC. Additionally PRC currently allows a Chinese corporation to be owned by a United States corporation. If
the laws or regulations relating to ownership of a Chinese corporation are changed by the PRC government, the Company's ability to
operate the PRC subsidiaries could be affected.
The Company is exposed to interest rate risk arising from short-term variable rate borrowings from
time to time. The Company's future interest expense will fluctuate in line with any change in borrowing rates. The Company does not
have any derivative financial instruments as of September 30, 2009 and believes its exposure to interest rate risk is not
NOTE 24 - Commitment
Operating lease commitment
The Company has operating leases of the TCB Digital premises through
TCBGCL, a common shareholder of TCB Digital. Pursuant to these leases which rates of rent are all at Rmb 8 per
square meter per month for production facilities and dormitory space, the commitment of the Company as of September
30, 2009 is as follows:
12 months ending September 30, 2010
12 months ending September 30, 2011
12 months ending September 30, 2012
Total minimum lease payments
The lease will expire in the year 2012.
difficulty in engaging and retaining distributors and agents who are knowledgeable about, and can function effectively in, overseas
difficulty in designing products that are compatible with communications and product standards in foreign countries, and in attaining
the required certifications for those products;
longer accounts receivable collection periods and greater difficulty in accounts receivable collection;
increased costs associated with maintaining marketing and sales activities in various countries;
difficulty and costs relating to compliance with unexpected changes in regulatory requirements and different commercial and legal
requirements in the jurisdictions in which Gold Lion Group offers its products;
NOTE 25 - SUBSEQUENT EVENT
Subsequent to September 30, 2009 the Company completed a private sale of equity of
$10,005,000 in aggregate to institutional and accredited individual investors. Details of the transaction are available on the Company's
Form 8-K as filed with the SEC on October 21, 2009.
The first traunch of $4,967,696 was closed as of October 16, 2009 and the balance of $5,037,304 remains in
escrow until shareholders approve of the transaction at a Special Meeting of Shareholders scheduled for November 17, 2009, as
indicated in the Company's filing of definitive proxy information with the SEC on November 5, 2009.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Forward Looking Information
The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases
such as "anticipate", "intend", "expect", and words and phrases of similar import. We caution investors that forward-looking statements
are only predictions based on our current expectations about future events and are not guarantees of future performance. Actual
results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to
risks, uncertainties and assumptions that are difficult to predict. We encourage you to read those risk factors carefully along with the
other information provided in this current report on Form 8-K and in our other filings with the SEC before deciding to invest in our stock
or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any
reason, except as required by law.
You should read this Management's Discussion and Analysis in conjunction with the Consolidated Financial Statements and
Gold Lion was founded by Mr. Gu Lei in September 2002 in the British Virgin Islands, and Gu was the sole owner of
one issued and outstanding share of common stock. Through a resolution of Gold Lion on November 26, 2008, Gold Lion issued
705 shares to Gu and 294 shares to Mr. Du Songtao, resulting in a total of 1,000 issued and outstanding shares of common
stock. Pursuant to a pledge agreement dated November 26, 2008, Du pledged his 294 shares to Mr. Cao Wei, with all
rights to such shares including voting rights. Consequently, Gu and Cao jointly control 100% of Gold Lion.
On August 2, 2007, Gu founded Profit Harvest in Hong Kong, and in December 2008, 100% ownership of Profit
Harvest was transferred to Gold Lion. Profit Harvest is engaged in sale of mobile phone products and components to retailers and other
Pursuant to a capital injection agreement (the "Agreement") by and among Tianjin Communication and Broadcasting Group Co.,
Ltd. ("TCBGCL"), TCBGCL Labour Union, Hebei Leimone Science and Technology Co., Ltd.("Hebei Leimone"), Tianjin 712
Communication and Broadcasting Co., Ltd.("712"), Beijing Depu Investment Co., Ltd. and other natural person shareholders on
May 8, 2007 and a resolution of the shareholder's meeting on June 30, 2007, Hebei Leimone, a company controlled by
Gu, acquired 25.1333% of TCB Digital from TCBGCL Labour Union and various natural person shareholders for cash consideration of
RMB9,000,000. Pursuant to this Agreement, Hebei Leimone and Beijing Depu Investment Co., Ltd., a company controlled by Cao, were
to invest additional RMB15,928,700 and RMB10,377,600 respectively in TCB Digital, bringing the total investment from Hebei Leimone
and Beijing Depu Investment Co., Ltd to $4,679,111 (RMB35,306,300). After this additional investment was made as of June 30,
2007, Hebei Leimone and Beijing Depu held 36.03% and 15% equity interests respectively of TCB Digital, a total of 51.03% ownership
in TCB Digital. Pursuant to an agreement dated June 30, 2007, Cao irrevocably pledged his 15% equity interest in TCB Digital to Gu in
exchange for a 29.4% stake in Gu's company. TCB Digital is mainly engaged in research & development, processing,
manufacturing, servicing and marketing of mobile handsets, electronic products and communication equipment.
On November 30, 2007, Gold Lion and GD Industrial Company signed a share transfer agreement pursuant to which GD
Industrial Company transferred 60% equity of Nantong Zong Yi Kechuang Digital Camera Technology Co., Ltd. for
$10,273 to Gold Lion. In July 2008, the company's name was changed to Jiangsu Leimone Electronic Co., Ltd., or Jiangsu
Leimone. In January 2008, Gold Lion invested $5,074,226 (HK$38,800,000) in Jiangsu Leimone to increase Gold Lion's
ownership in Jiangsu Leimone to 80%. Pursuant to the share transfer agreement by and between Gold Lion and Nantong Zong Yi
Investment Co., Ltd. dated November 26, 2008, Gold Lion acquired the remaining 20% equity interest of Jiangsu Leimone from
Nantong Zong Yi Investment Co., Ltd. for cash consideration of $103,214 (HK$800,000). After this transaction, Gold Lion obtained
100% ownership of Jiangsu Leimone. Jiangsu Leimone is engaged in the R&D and production of electronic assemblies, 3G mobile
handsets, wireless communication modules, GPS receivers and computer software.
Pursuant to the share transfer agreement by and among Hebei Leimone, Beijing Depu Investment Co., Ltd and Jiangsu Leimone
dated December 15, 2008, Hebei Leimone and Beijing Depu Investment Co., Ltd. transferred their 51.03% equity interest of TCB
Digital to Jiangsu Leimone on December 30, 2008.
Plan of Operation
During the next twelve months, Gold Lion expects to take the following steps in connection with the development of its business
and the implementation of our plan of operations:
Gold Lion intends to continue with its marketing strategies to deliver its products and services in China;
Gold Lion will gradually shift its focus to the 2.5G-3G mobile communications business;
Gold Lion will develop high-end smart mobile phones in cooperation with international mobile communications companies, such as
China Telecom, SK Telecom, and others.
Critical Accounting Policies and Estimates
The preparation of Gold Lion's consolidated financial statements in conformity with accounting principles generally accepted in the
United States ("US GAAP") requires it to make estimates and judgments that affect its reported assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities. Gold Lion based its estimates and judgments on historical experience
and on various other assumptions that it believes to be reasonable under the circumstances. Future events, however, may differ
markedly from current expectations and assumptions. While there are a number of significant accounting policies affecting Gold Lion's
consolidated financial statements; Gold Lion believes the following critical accounting policies involve the most complex, difficult and
subjective estimates and judgments: allowance for doubtful accounts; income taxes; asset impairment.
In accordance with US GAAP, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief
descriptions of the product or service revenues that Gold Lion recognizes in the financial statements contained herein.
Sale of goods
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of Gold Lion exists and collectability is reasonably assured. Payments
received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
Allowance for doubtful accounts
Gold Lion maintains an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable
amount of judgment is required when Gold Lion assesses the realization of accounts receivables, including assessing the probability of
collection and the current credit-worthiness of each customer. If the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, an additional provision for doubtful accounts could be required. Gold Lion initially records
a provision for doubtful accounts based on its historical experience, and then adjust this provision at the end of each reporting period
based on a detailed assessment of its accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful
accounts, Gold Lion considers: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts
receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) its historical provision for doubtful
accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general
economic conditions, among other factors.
Gold Lion accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under this method,
deferred income taxes are recognized for the estimated tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts and each year-end based on enacted tax laws and statutory rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred
tax assets to the amount expected to be realized when, in management's opinion; it is more likely than not that some portion of the
deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the
period in deferred tax assets and liabilities. Gold Lion adopted FIN 48, Accounting for Uncertainty in Tax Positions.
Gold Lion periodically evaluates the carrying value of other long-lived assets, including, but not limited to, property and equipment
and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to
calculate expected future cash flows utilized in impairment analyses. Gold Lion also utilizes judgment to determine other factors within
fair value analyses, including the applicable discount rate.
Results of Operations for the Quarter ended September 30, 2009
Gold Lion's revenues were $55,290,880 for the quarter ended September 30, 2009, an increase of
204% or $37,127,229 compared to $18,163,651 in the corresponding period in 2008. The increase of revenues in 2009
as compared to 2008 was mainly due to the addition of activities from Jiangsu Leimone Electronics Co., Ltd. and Profit
Harvest which were both in ramp up phases in 2008, and a significant increase in orders from one of Gold Lion's existing
customers, a major mobile communications original equipment manufacturer in China. For the nine months ended
September 30, 2009 and 2008, revenues were $137,240,898 and $41,144,293 respectively, representing a 234%
Cost of sales
For the third quarter of 2009, Gold Lion's cost of sales was $52,262,849 or 94.5% of revenues, while cost of
sales for the corresponding period in 2008 was $16,210,431 or 89.2% of revenues. For the nine months ended
September 30, 2009, our cost of sales was $128,412,782 or 93.6% of revenues, while cost of sales for the
corresponding nine months in 2008 was $35,786,102 or 87.0% of revenues. Our competitive pricing for the contract
manufacturing was instrumental in capturing significantly increased business activities.
Gross profit for the third quarter of 2009 rose 55% to $3,028,031 compared to $1,953,220 for the 2008 quarter. Gross profit as a
percentage of revenues for the third quarter of 2009 was 5.5%, compared to 10.8% for the 2008 quarter. The decline in
gross margins is primarily due to the low gross margin of the increased business volume from a large existing customer as mentioned
Selling, general and administrative expenses
Sales and marketing expenses mainly represent salaries of sales personnel, and marketing and transportation costs; and this
was $36,431 for the third quarter in 2009 compared to $30,375 for the 2008 period. The relative stability in such
costs is attributed to on-going business activities carried over from the last quarter.
General and administrative expenses primarily consisted of compensation for personnel, depreciation, travel expenses, rental,
materials expenses related to ordinary administration, and fees for professional services; and this amounted to $255,122 for the third
quarter of 2009 compared to $214,637 for the 2008 period.
For the third quarter of 2009, total operating expenses were $291,553 or 0.5% of revenues, which was an increase of $46,541 from
$245,012 but a reduction from 1.3% of revenues for the 2008 period. This was a result of management's continued emphasis on cost
control and operational efficiency.
Research and development expense
Gold Lion did not itemize R&D expenses for the third quarters of 2009 and 2008 due to recent PRC tax rules which stipulate
that pre-approved R&D expenses can be applied as a credit against taxes, and we did not have such R&D expenses during
these quarters. Beginning with next year, management plans to set up internal accounting guidelines to more
appropriately reflect R&D activities for U.S. financial reporting.
Gold Lion's other expenses-net was $319,351 for the third quarter of 2009, which was mainly comprised of interest expense of
$380,096. For the corresponding 2008 period, other expenses-net was $339,714 which mainly included interest expense of
For the quarter ended September 30, 2009, Gold Lion's net income from operations was
$1,734,056 or an increase of $1,004,183 or 138% as compared to $729,873 for the 2008 period. Net margins, the ratio
of net income over revenues, for the third quarter of 2009 and 2008 were 3.1% and 4.0% respectively. For the nine
month periods ended September 30, 2009 and 2008, net incomes were $4,354,153 and $713,681 respectively; while net
margins were 3.2% and 1.7% respectively.
Other comprehensive income/(loss)
For the third quarter of 2009, Gold Lion's other comprehensive income was $10,817 as compared to a loss of ($381,315) for the
2008 period. Other comprehensive income/(loss) in 2009 and 2008 resulted from foreign currency exchange changes particularly
the Renminbi's appreciation against the U.S. dollar. This gain for the third quarter of 2009 can result in a loss in future
periods if the trend in the exchange rate of the Reminbi to the U.S. dollar reverses.
Liquidity and Capital Resources
Gold Lion generally finances its operations from cash flow generated internally, interest-free credit lines in the form of banker
acceptances and short-term loans from domestic banks. As of September 30, 2009, Gold Lion had cash and cash equivalents of
$2,472,305. This represented an increase of $1,659,536 from $812,769 as of December 31, 2008.
Net cash used in operating activities for the nine months ended September 30, 2009 was $6,934,078 as compared to net
cash used in operating activities for the 2008 period of $7,954,576. In the first nine months of 2009, operational use of funds included
an increase in accounts receivable of $5,909,296 and an increase in advances to suppliers of $20,283,253 while offset by a reduction in
inventories of $2,015,176 and an increase in advances from customers of $11,528,554. Other operational uses of cash
included a decrease in accounts payable of $860,014 and an increase in advances to related parties of $790,359; while other inflows of
cash included a reduction in prepaid expenses of $932,518 and an increase in accrued expenses of $492,578.
Net cash used for investing activities was to $3,345,574 in the first three
quarters of 2009 which was primarily cash used as deposits in the amount of
$3,215,194 for securing interest free credit facilities such as banker
Net cash provided by financing activities was $11,945,268 in the first three
quarters of 2009 which included proceeds from short-term loans of $18,414,296
and proceeds from notes payable of $6,430,389 and also collection on advances to
related parties in the amount of $11,671,204. During this period, there was an
outflow due to advance to related parties of $9,846,445 and repayment of
short-term loans of $15,067,570 and also an outflow of $1,169,162 for repayment of
On a going-forward basis over the next 12 months, Gold Lion intends to continue to rely on short-term loans and notes to fund its
operational cash needs. Following the merger with and the change of control of Zoom, and subsequent to the quarter
ended September 30, 2009 the Company completed a private sale of equity of $10,005,000 in aggregate to institutional and accredited
individual investors. The first traunch of $4,967,696 was closed as of October 16, 2009 and the balance of $5,037,304 remains in
escrow until shareholders approve of the transaction at a Special Meeting of Shareholders scheduled for November 17, 2009, as
indicated in the Company's filing of definitive proxy information with the SEC on November 5, 2009.
The Company believes it has sufficient funds for its operations over the next 12 months.
Off Balance Sheet Arrangements
As of September 30, 2009, Gold Lion had no off balance sheet arrangements.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures.
Disclosure Controls and Procedures. The Company's disclosure controls and procedures are designed to ensure that
information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules and forms, including, without limitation, that such
information is accumulated and communicated to Company management, including the Company's principal executive and financial
officer, as appropriate to allow timely decisions regarding required disclosures.
Limitations on the Effectiveness of Disclosure Controls. In designing and evaluating the Company's disclosure controls
and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, Company management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is
based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Evaluation of Disclosure Controls and Procedures. The Company's principal executive and financial officers have
evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Exchange
Act Rules 13a-14(c) and 15d-14(c) as of September 30, 2009, and have determined that they are reasonably effective, taking into
account the totality of the circumstances, including the limitations described above.
(b) Internal Control over Financial Reporting.
Our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide
reasonable assurance regarding the reliability of our financial reporting and preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles. There were no significant changes in the Company's internal
control over financial reporting that occurred during the third quarter of fiscal 2009 that have materially affected, or are reasonably likely
to materially affect, such control.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 1A. Risk Factors.
Risks Related to Gold Lion's Business
Gold Lion's ownership of businesses, inclusive of TCB Digital, Jiangsu Leimone and Profit Harvest (collectively "Gold Lion
Group") including sales, results of operations, and reputation could be materially adversely affected if it fails to efficiently manage its
manufacturing operations without interruption, or fails to ensure that its products meet the expectations of its distributors and end-user
Operation of Gold Lion Group requires successful execution of complex manufacturing processes. The disruption of any of these
could interrupt its revenue generation and have a material and adverse effect on Gold Lion Group's relationships with distributors and
end-user customers, TCB Digital and Jiangsu Leimone's brand names, and its financial performance. TCB Digital and Jiangsu
Leimone's manufacturing operations involve raw material and component sourcing from third parties, internal assembly processes, and
distribution processes. These operations are modified on a regular basis in an effort to improve manufacturing and distribution
efficiency and flexibility. Gold Lion Group may experience difficulties in coordinating its supplies of components and raw materials to
meet the demand for its products, increasing or decreasing production at its facilities in response to demand, adopting new
manufacturing processes, finding a timely way to develop the best technical solutions for new products, or achieving manufacturing
efficiency and flexibility. Gold Lion Group may experience delays in adjusting or upgrading production at its facilities when it introduces
new models, delays in expanding manufacturing capacity, failure in its manufacturing processes, or failure by its business partners to
adequately perform the services it has outsourced to them, which in turn may have a material adverse effect on Gold Lion Group's
sales and results of operations. In addition, a failure or an interruption could occur at any stage of Gold Lion Group's product
development, manufacturing and delivery processes, resulting in products not meeting the expectations of its distributors and end
customers, which could have a material adverse effect on Gold Lion Group's sales, results of operations, and reputation.
Gold Lion Group's results of operations, particularly its profitability, may be materially adversely affected if it does not
successfully manage price erosion and is not able to manage costs related to its products and operations.
Selling price erosion is a characteristic of the mobile handset and electronics industries, and the products offered by Gold Lion
Group are subject to natural price erosion over time. If Gold Lion Group is not able to lower its costs at the same rate or faster than this
selling price erosion, and to introduce new cost-efficient products with higher prices in a timely manner, as well as manage costs related
to its products and operations generally, this will have a material adverse effect on its business and results of operations, particularly its
Gold Lion Group relies primarily on its distributors for marketing and sale of its products at the provincial and local levels
and for after-sales support of its products. Because Gold Lion Group has limited influence over its distributors, it cannot be certain that
their marketing and after-sale support of its products will be adequate to meet Gold Lion Group's sales requirements and to protect
Gold Lion Group's brand and reputation.
Gold Lion Group now has distributors and after-sales service centers at the national level, provincial
level and municipal level in 31 provinces in China. Gold Lion Group grants its distributors the right to use its brand name and logo when
they market Gold Lion Group's products within their respective sales territories or channels and when they provide after-sales support
to Gold Lion Group's end-user customers. However, Gold Lion Group's contractual arrangements with its distributors do not provide
Gold Lion Group with control over their everyday business activities, and one or more of its distributors may engage in activities that are
prohibited under Gold Lion Group's contractual arrangements with them, that violate Peoples' Republic of China ("PRC") laws and
regulations governing the mobile handset industry or other PRC laws and regulations generally, or that are otherwise harmful to Gold
Lion Group's business or reputation in the industry.
Gold Lion Group maintains inventories of raw materials, components and handsets, and its inventories may decline in value
or become obsolete.
The rapid technological change in Gold Lion Group's industry, the short product life cycle of its handsets, its limited forecasting
experience and processes, and the competitive nature of its target markets make forecasting Gold Lion Group's future sales and
operating results difficult. Gold Lion Group's expense levels are based, in part, on its expectations regarding future sales. In addition, to
enable Gold Lion Group to promptly fill orders, it maintains inventories of raw materials, components and handsets. As a result, Gold
Lion Group has to commit to considerable costs in advance of anticipated sales. Any significant shortfall of sales may result in Gold
Lion Group maintaining higher levels of inventories of raw materials, components, and finished goods than it requires, thereby
increasing its risk of inventory obsolescence and corresponding inventory write-downs and write-offs. Gold Lion Group cannot
guarantee that such write-downs will be adequate to cover all losses resulting from inventory obsolescence.
Gold Lion Group plans to market its products to countries outside of China, which may subject it to various economic,
political, regulatory, legal and foreign exchange risks.
Gold Lion Group currently sells substantially all of its products in China. Gold Lion Group also plans to selectively enter into
markets outside China where it identifies an opportunity to sell differentiated products and where it believes it will be able to realize a
reasonable return on investment. The marketing, distribution and sale of its mobile handsets overseas exposes Gold Lion Group to a
number of risks, including:
- fluctuations in currency exchange rates of the U.S. dollar and other foreign currencies against the Renminbi;
- inability to obtain, maintain or enforce intellectual property rights; and
- changes to import and export regulations, including quotas, tariffs and other trade barriers, delays or difficulties in obtaining export
and import licenses, potential foreign exchange controls and repatriation controls on foreign earnings, exchange rate fluctuations, and
currency conversion restrictions.
If Gold Lion Group is unable to effectively manage these risks, its ability to conduct or expand its business abroad would be
impaired; and this may in turn have a material adverse effect on Gold Lion Group's business, financial condition, results of operations,
Gold Lion Group's operating results are difficult to predict and may fluctuate significantly from period to period in the
Gold Lion Group's operating results are difficult to predict and may fluctuate significantly from period to
period based on a number of factors such as the launch of new products in a given period, the seasonality of its mobile handset sales,
the short life-cycle of any given handset model due to rapid technological advances, a possible deterioration of economic conditions in
China, and potential changes to the regulation of the mobile handset industry in China. As a result, you may not be able to rely on
period-to-period comparisons of Gold Lion Group's operating results as an indication of its future performance. If its revenues for a
particular period are lower than Gold Lion Group expects, its may be unable to reduce its fixed costs and operating expenses for that
period by a corresponding amount, which would negatively impact its operating results for that period relative to its operating results for
Gold Lion Group has not applied for patents or registered copyrights for most of its intellectual property; and its failure to
adequately protect its intellectual property rights may undermine its competitive position. In addition, litigation to protect Gold Lion
Group's intellectual property rights may be costly.
Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in PRC
laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as
effective as in the United States or other countries. Gold Lion Group relies primarily on trade secrets and other contractual restrictions
to protect its intellectual property. Gold Lion Group has not applied for patents or registered copyrights in China for most of its
inventions, original works of authorship, developments, and improvements relating to the mobile handsets it produces. The actions Gold
Lion Group has taken to protect its intellectual property rights may not be adequate to provide it with meaningful protection or
commercial advantage. As a result, third parties may use the technologies that it has developed and compete with Gold Lion Group,
which could have a material adverse effect on its business, financial condition and operating results.
In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be
necessary to enforce Gold Lion Group's intellectual property rights and the outcome of any such litigation may not be in Gold Lion
Group's favor. Given the relative unpredictability of China's legal system and potential difficulties in enforcing a court judgment in China,
there is no guarantee that Gold Lion Group would be able to halt the unauthorized use of its intellectual property through litigation in a
Furthermore, any such litigation may be costly and may divert management attention away from Gold Lion Group's business and
cause it to expend significant resources. An adverse determination in any such litigation will impair Gold Lion Group's intellectual
property rights and may harm its business, prospects and reputation. In addition, Gold Lion Group has no insurance coverage against
litigation costs and would have to bear all costs arising from such litigation to the extent it is unable to recover them from other parties.
The occurrence of any of the foregoing could have a material adverse impact on Gold Lion Group's business, financial condition and
results of operations.
Gold Lion Group may be exposed to infringement or misappropriation claims by third parties which, if determined adversely
against it, could disrupt its business and subject it to significant liability to third parties, as well as have a material adverse effect on its
financial condition and results of operations.
Gold Lion Group's success depends, in large part, on its ability to use and develop its technology, know-how and product designs
without infringing upon the intellectual property rights of third parties.
Gold Lion Group's products include increasingly complex technology and, as the amount of such technologies and the number of
parties claiming rights continue to increase; the possibility of alleged infringement and related intellectual property claims against it
continues to rise. The holders of patents and other intellectual property rights potentially relevant to Gold Lion Group's product offerings
may be unknown to Gold Lion Group, or may otherwise make it difficult for Gold Lion Group to acquire a license on commercially
acceptable terms. There may also be technologies licensed to and relied on by Gold Lion Group that are subject to infringement or
other corresponding allegations or claims by others which could damage its ability to rely on such technologies. In addition, although
Gold Lion Group endeavors to ensure that companies that work with it possess appropriate intellectual property rights or licenses, Gold
Lion Group cannot fully avoid the risks of intellectual property rights infringement created by suppliers of components used in its
products or by companies with which it works in cooperative research and development activities. Since technology standards,
including those used and relied on by Gold Lion Group, typically involve intellectual property rights, Gold Lion Group cannot fully avoid
risks of a claim for infringement of such rights due to its reliance on such standards. Gold Lion Group believes that the number of third
parties declaring their intellectual property to be relevant to these standards - for example, those standards related to 3G mobile
communication technologies as well as other advanced mobile communications standards - is increasing, which may increase the
likelihood that Gold Lion Group will be subject to such claims in the future. While Gold Lion Group believes that any such intellectual
property rights declared and found to be essential to a given standard carry with them an obligation to be licensed on fair, reasonable
and non-discriminatory terms, not all intellectual property owners agree on the meaning of that obligation and, thus, costly and time-
consuming litigation over such issues may result in the future.
As Gold Lion Group continues to market and sell its products throughout China, and as litigation becomes more common in China,
Gold Lion Group may face a higher risk of becoming subject to claims for intellectual property infringement. While Gold Lion Group has
not, to date, become subject to these types of claims, it is possible that it may, in the future, become subject to such intellectual
property infringement claims. Regardless of whether such claims have merit or are decided in its favor, any such litigation could have a
negative impact on Gold Lion Group brand, reputation and ability to conduct its business and sell some or all of its products.
Gold Lion Group's sales and profitability depend on the continued growth of the mobile telecommunications industry,
especially in China, and if the mobile telecommunications industry does not grow as Gold Lion Group expects or grows at a slower
speed than Gold Lion Group expects, its sales and profitability may be materially adversely affected.
Gold Lion Group derives substantially all of its revenues from sales of mobile handsets in China. The continued development of its
business depends, in large part, on continued growth in the mobile telecommunications industry, especially in China, in terms of the
number of existing mobile subscribers who upgrade or replace their existing mobile handsets, the number of new subscribers, and
increased usage. Although China's wireless telecommunication industry has grown rapidly in the past, and although China government
has granted 3G licenses to operators, the wireless telecommunication industry may not continue to grow at the same growth rate in the
future or to grow at all.
Furthermore, Gold Lion Group's sales and profitability are also affected by the extent to which there is increasing demand for, and
development of, value-added services, leading to opportunities for it to successfully market mobile handsets that feature those services.
To a certain extent, Gold Lion Group is dependent on third-party mobile telecommunication operators to successfully introduce these
value-added services that encourage end users to upgrade or replace their mobile handsets. For instance, mobile telecommunication
operators in China are upgrading their networks to offer 3G wireless telecommunication services, which will lead to increased demand
for enhanced wireless value-added services and, therefore, increased demand for mobile handsets with more advanced technologies in
China. Therefore, if mobile telecommunication operators are not successful in their attempts to introduce new services, increase the
number of subscribers, stimulate increased usage and drive replacement sales, its business and results of operations could be
materially adversely affected.
These developments in its industry are, to a large extent, outside of Gold Lion Group's control; and
any reduced demand for wireless voice and data services, any other downturn, or other adverse changes in China's wireless
telecommunication industry could severely harm its business.
Changes in the regulatory environment for telecommunications systems and services, especially in China, could negatively
impact Gold Lion Group's business.
The telecommunications industry in China is heavily regulated, and regulatory changes may affect both Gold Lion Group and its
customers. For example, changes in regulations that impose more stringent standards for the production of mobile handsets could
adversely affect Gold Lion Group business. Similarly, tariff regulations that affect the pricing of new services offered by mobile
telecommunication operators could also affect their ability to invest in network infrastructure, which in turn could affect the sales of Gold
Lion Group's mobile handsets. License fees, environmental, health and safety, privacy and other regulatory changes may increase
costs and restrict operations of mobile telecommunication network operators and service providers. The indirect impact of such
changes could affect Gold Lion Group's business adversely even though the specific regulations may not directly apply to it or its
China Ministry of Industry and Information Technology ("MIIT") has broad discretion and authority to regulate all aspects of the
telecommunications and information technology industries in China, including managing spectrum, setting mobile handset
specifications and standards, approving the adoption of new technologies such as 3G, and drafting laws and regulations. MIIT also
determines the forms and types of services that may be offered by telecommunication companies to the public, the rates that are
charged to subscribers for those services, and the content of material available in China over wireless services, including Internet
content. In addition, China's telecommunication regulatory framework is still at a relatively early stage of development, and prone to
directional shifts and major structural changes. The PRC government is in the process of drafting a national telecommunication law,
which may include new legislation governing the mobile handset industry. If MIIT sets standards with which Gold Lion Group is unable
to comply or which would render Gold Lion Group's products uncompetitive, its ability to sell products could be severely limited,
resulting in substantial harm to Gold Lion Group's operations.
Gold Lion Group depends on its key personnel, and its business and growth may be severely disrupted if it loses their
services. Gold Lion Group may also have difficulty attracting and retaining qualified management and research and development
Gold Lion Group's future success depends substantially on the continued services of its key personnel. Gold Lion Group relies on
key personnel's experience in the mobile handset manufacturing industry, in similar business operations, in sales and marketing, and
on their relationships with Gold Lion Group's shareholders, customers, and suppliers. If Gold Lion Group loses the services of one or
more of these key personnel, it may not be able to replace them readily, if at all, with suitable or qualified candidates, and may incur
additional expenses to recruit and retain new officers, which could severely disrupt its business and growth.
In addition, if any of these key personnel joins a competitor or forms a competing company, Gold Lion Group may lose some of its
customers. Gold Lion Group has entered into employment agreements with each of these key personnel, which contain confidentiality
and non-competition provisions. However, if any disputes arise between these key personnel and Gold Lion Group, it is not clear what
the court decisions will be and the extent to which these court decisions could be enforced in China, where all of these key personnel
reside and hold some of their assets. Furthermore, as Gold Lion Group expects to continue to expand its operations and develop new
products, Gold Lion Group will need to continue attracting and retaining experienced management and key research and development
Competition for management and research and development personnel in the mobile handset market in China is intense, and the
availability of suitable and qualified candidates is limited. In particular, Gold Lion Group competes to attract and retain qualified
research and development personnel with other mobile handset manufacturers, universities and research institutions. Competition for
these individuals could cause Gold Lion Group to offer higher compensation and other benefits in order to attract and retain them,
which could have a material adverse effect on Gold Lion Group's financial condition and results of operations. Gold Lion Group may
also be unable to attract or retain the personnel necessary to achieve its business objectives, and any failure in this regard could
severely disrupt its business and growth.
Fluctuations in exchange rates could adversely affect Gold Lion Group's business.
Because substantially all of its earnings are denominated in Renminbi, any appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect Gold Lion Group's balance sheet position and financial results reported in U.S. dollar
terms without giving effect to any underlying change in its business or results of operations. In addition, fluctuations in the exchange
rate between the U.S. dollar and the Renminbi would affect the relative purchasing power of Gold Lion Group's U.S. dollar denominated
cash assets and the Renminbi value of Gold Lion Group's U.S. dollar denominated bank borrowings. Fluctuations in the exchange rate
will also affect the relative value of any dividend Gold Lion Group may issue that will be exchanged into U.S. dollars, and will affect the
earnings from and value of any U.S. dollar-denominated investments it makes in the future.
Gold Lion Group's competitive position could decline if it is unable to obtain additional financing to acquire businesses or
technologies that are strategic for its success, or otherwise execute its business strategy.
Gold Lion Group believes that its current cash will be sufficient to fund its working capital and capital expenditure requirements for
at least the next twelve months. However, Gold Lion Group may need to raise additional funds to support more rapid expansion,
respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. Gold
Lion Group cannot assure you that additional funding will be available to it in amounts or on terms acceptable to Gold Lion Group. If
sufficient funds are not available or are not available on acceptable terms, Gold Lion Group's ability to fund its expansion, take
advantage of acquisition opportunities, develop or enhance its services or products, or otherwise respond to competitive pressures
would be significantly limited. If appropriate opportunities arise, Gold Lion Group intends to acquire businesses; technologies, services
or products that it believes are strategic.
Risks Related to Gold Lion's Industry
If Gold Lion Group cannot keep pace with market changes and produce mobile phones with new technologies and features
in a timely and cost-efficient manner to meet its customers' requirements and preferences, the growth and success of its business will
be materially adversely affected.
The mobile handset market in China is characterized by changing consumer preferences with respect to style and functionality,
increasing demand for new and advanced technologies and features, rapid product obsolescence and price erosion, evolving industry
standards, intense competition and wide fluctuations in product supply and demand. If Gold Lion Group cannot keep pace with market
changes and produce new mobile handsets in a timely and cost-efficient manner to meet its customers' requirements and preferences,
the growth and success of its business will be materially adversely affected.
Gold Lion Group experiences intensive competition from its Electronics Manufacturing Service ("EMS") competitors; Gold
Lion Group's failure to maintain its relationship with clients may have material adverse impact on its business and profitability.
In recent years, more and more EMS providers have invested heavily in the northern part of China and particularly in the Bo Hai
area where Tianjin city is located. Gold Lion Group's OEM customers are also giving more orders to other EMS providers to balance
their need and reduce their risk. Gold Lion Group will attempt to provide better services and higher quality products to attract more
customers and reduce its risk from fierce competition.
Competition in mobile phone manufacture and sales is intense. Gold Lion Group's failure to maintain or improve its market
position and respond successfully to changes in the competitive landscape may have a material adverse impact on its business and
results of operations.
The mobile handset manufacturing industry in China is intensely competitive. Industry participants compete with each other mainly
on the basis of the breadth and depth of their product portfolios, price, operational and manufacturing efficiency, technical performance,
product features, quality, customer support and brand recognition. Gold Lion Group faces significant competition from a number of
competitors, including domestic mobile handset producers such as Bird Ningbo Co., Ltd, Haier Telecom Co. Ltd., , Konka Group Co.,
Ltd, Lenovo Group Limited, and TCL Communication Technology Holdings Limited,. and a number of large multinational mobile
handset producers, such as LG Electronics Ltd., Motorola Inc., Nokia Corporation, Samsung Electronics Co., Ltd., and Sony Ericsson
Mobile Communications (China) Co., Ltd.. Many of Gold Lion Group's competitors have longer operating histories, greater name
recognition, significantly larger market shares, access to larger customer bases and significantly greater economies of scale and
financial, sales and marketing, manufacturing, distribution, technical and other resources than Gold Lion Group does. Some of these
competitors have used, and will probably continue to use, more aggressive pricing strategies, greater amounts of sales incentives and
subsidies for distributors, retailers and customers, more successful design approaches, and more advanced technologies. In addition,
some competitors have chosen to focus on building products based on commercially available components, which may enable them to
introduce these products faster and with lower levels of research and development spending than Gold Lion Group. Furthermore,
consolidation among the industry participants in China may potentially result in stronger competitors that are better able to compete as
end-to-end suppliers as well as competitors who are more specialized in particular areas and geographic markets. This could have a
material adverse effect on Gold Lion Group's business, financial condition, results of operations and prospects.
Gold Lion Group may be unable to manage rapid growth and a changing operating environment, which
could adversely affect its ability to serve its customers and could harm its business.
Gold Lion Group has experienced rapid growth over the last few years. Gold Lion Group has limited operational, administrative and
financial resources, which may be inadequate to sustain its current growth rate. If Gold Lion Group is unable to manage its growth
effectively, the quality of its solutions could deteriorate and its business may suffer. As its customer base increases and it enters new
end-markets, Gold Lion Group will need to:
- increase its investments in personnel, research and development capabilities, facilities and other operational areas;
- continue training, motivating and retaining its existing employees, and attract and integrate new qualified employees;
- develop and improve its operational, financial, accounting and other internal systems and controls; and
- take enhanced measures to protect any proprietary technology or technological capability it develops.
Any failure to manage Gold Lion Group's growth successfully could distract management's attention and result in its failure to serve
its customers and harm its business.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the
overall economic growth of China, which could reduce the demand for Gold Lion Group's products and materially adversely affect its
Gold Lion Group conducts substantially all of its operations and generates most of its revenues in China. Accordingly, its business,
financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China.
The PRC economy differs from the economies of most developed countries in many respects, including:
- the higher level of government involvement;
- the early stage of development of the market-oriented sector of the economy;
- the rapid growth rate;
- the higher level of control over foreign exchange; and
- the allocation of resources.
While the PRC economy has grown significantly since the late 1970s, the growth has been uneven, both geographically and among
various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on Gold
Lion Group. For example, Gold Lion Group's financial condition and results of operations may be adversely affected by government
control over the telecommunications industry, capital investments or changes in tax regulations that are applicable to it.
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC
government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC
government continues to exercise significant control over economic growth in China through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy, and imposing policies that impact particular industries or
companies in different ways. For example, efforts by the PRC government to slow the pace of growth of the PRC economy could result
in decreased capital expenditure by mobile telecommunication network operators, which in turn could reduce demand for its
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall
economic growth and the level of mobile communications investments and expenditures in China, which in turn could lead to a
reduction in demand for Gold Lion Group's products and consequently have a material adverse effect on its business and prospects. In
particular, any adverse change in the PRC government's policies towards the mobile communications industry may have a material
adverse effect on Gold Lion Group's business.
Gold Lion may have difficulty establishing adequate management, legal and financial controls in the PRC.
Most PRC companies historically have been less focused on establishing Western style management and financial reporting
concepts and practices, as well as modern banking, computer and other internal control systems, than companies in the U.S. and
certain other Western countries. Gold Lion may have difficulty in hiring and retaining a sufficient number of qualified internal control
employees to work in the PRC. As a result of these factors, Gold Lion may experience difficulty in establishing management, legal and
financial controls, collecting financial data, preparing financial statements, books of account and corporate records, and instituting
business practices that meet Western standards.
Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to document and test its internal controls
over financial reporting in future periods. Any delays or difficulty in satisfying these requirements could adversely affect its future results
of operations and the Company's stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to document and test the effectiveness of Gold
Lion's internal control over financial reporting in accordance with an established internal control framework and to report on its
conclusion as to the effectiveness of such internal controls. It may cost more than it expects to comply with these control and
The Company may discover in the future areas of internal control that need improvement, particularly with respect to Gold Lion
Group or other businesses that it may acquire. The Company cannot be certain that any remedial measures it takes will provide
adequate internal control over financial processes and reporting in the future. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation could harm the Company's operating results or cause it to fail to
meet its reporting obligations. If the Company is unable to conclude that it has effective internal control over financial reporting, or if its
independent auditors are unable to provide it with an unqualified report regarding the effectiveness of its internal control over financial
reporting in future periods as required by Section 404, investors could lose confidence in the reliability of its financial statements,
which could result in a decrease in the value of the Company's common stock. In addition, failure to comply with Section 404
could potentially subject the Company to sanctions or investigations by the SEC or other regulatory authorities.
Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of the Shareholders of the Registrant took place on September 8, 2009 and the shareholders approved of: (a)
the acquisition by Zoom by the issuance of 4,225,219 shares of Zoom common stock for 100% of Gold Lion, which is a holding
company that owns (i) 100% of Jiangsu Leimone Electronics Co., Ltd., a foreign investment enterprise organized under the laws of the
People's Republic of China, or PRC, which owns 51.03% of Tianjin Tong Guang Group Digital Communication Co., Ltd., or TCB Digital,
a company organized under the laws of the PRC, and (ii) 100% of Profit Harvest Corporation Ltd., a company organized under the laws
of Hong Kong, and (b) the future acquisition by Zoom by the issuance of an additional 2,402,576 shares of Zoom common stock of
additional shares of TCB Digital such that Zoom would own up to 80% of the outstanding shares of TCB Digital. The acquisition is made
pursuant to the Share Exchange Agreement, dated January 28, 2009, as amended on May 12, 2009, between Zoom, Gold
Lion, TCB Digital, Zoom Telephonics, Inc., a wholly owned subsidiary of Zoom, and the Gold Lion shareholders. The completion of the
acquisition on September 22, 2009 resulted in the change of control of Zoom under the NASDAQ Stock Market Rules.
Item 5. Other Information. None
Item 6. Exhibits.
The following exhibits are included with this report.
Exhibit 31.1 Rule 13a-14(a) / 15d-14(a) Certification of Lei Gu, CEO.
Exhibit 31.1 Rule 13a-14(a) / 15d-14(a) Certification of Anthony K. Chan, CFO.
Exhibit 32.0 Section 1350 Certifications.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf on November 16, 2009 by the undersigned, thereunto duly authorized.
Zoom Technologies, Inc.
By: /s/ Lei Gu
Chief Executive Officer
INDEX TO EXHIBITS
Exhibits filed herewith:
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Lei Gu, CEO PDF
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Anthony K. Chan, CFO PDF
32.0 Section 1350 Certifications PDF