Attached files
file | filename |
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EX-31.2 - CHINA ELECTRIC MOTOR, INC. | v167370_ex31-2.htm |
EX-31.1 - CHINA ELECTRIC MOTOR, INC. | v167370_ex31-1.htm |
EX-10.1 - CHINA ELECTRIC MOTOR, INC. | v167370_ex10-1.htm |
EX-32.1 - CHINA ELECTRIC MOTOR, INC. | v167370_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the Quarterly Period Ended September 30, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period
from to
Commission
File No.: 000-53017
CHINA
ELECTRIC MOTOR, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
26-1357787
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
Sunna
Motor Industry Park, Jian’an, Fuyong Hi-Tech Park, Baoan District, Shenzhen,
Guangdong,
People’s
Republic of China
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
86-0755-8149969
(COMPANY’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No x
The
registrant had 14,083,030 shares of common stock, par value $0.0001 per share,
outstanding as of November 20, 2009 (taking into account the reverse stock
split, as described below).
EXPLANATORY
NOTE
On
October 8, 2009, the Company’s Board of Directors and stockholders approved an
amendment to its Certificate of Incorporation to effect a 1-for-1.53846153846154
reverse stock split of all of its issued and outstanding shares of common stock
(the “Reverse Stock Split”). To effect the Reverse Stock Split, the Company will
file the amendment to the Certificate of Incorporation with the Secretary of the
State of Delaware, which will not be done sooner than 20 days after the Company
mails a definitive information statement on Schedule 14C to the Company’s
stockholders. The Reverse Stock Split will occur immediately prior to the
closing of the public offering that the Company proposes to complete in
accordance with the registration statement on Form S-1 as filed with the SEC
(File No. 333-162459). The par value and number of authorized shares
of the Company’s common stock will remain unchanged. All references to number of
shares and per share amounts included in this Form 10-Q gives effect to the
Reverse Stock Split. The number of shares and per share amounts included in the
consolidated financial statements and the accompanying notes have been adjusted
to reflect the Reverse Stock Split retroactively. Unless otherwise indicated,
all outstanding shares and earnings per share information contained in this
report gives effect to the Reverse Stock Split.
CHINA
ELECTRIC MOTOR, INC.
FORM 10-Q
For
the Quarterly Period Ended September 30, 2009
INDEX
Page
|
||||
Part I
|
Financial
Information
|
|||
Item
1.
|
Financial
Statements
|
2
|
||
(a)
|
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
2008
|
2
|
||
(b)
|
Consolidated
Statements of Operations for the Three and Nine Months Ended September 30,
2009 and 2008 (Unaudited)
|
3
|
||
(c)
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
2008 (Unaudited)
|
4
|
||
(d)
|
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Income for
the Nine Months Ended September 30, 2009 (Unaudited)
|
5
|
||
(e)
|
Notes
to Financial Statements (Unaudited)
|
6
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31
|
||
Item
4.
|
Controls
and Procedures
|
32
|
||
Part II
|
Other
Information
|
|||
Item
1.
|
Legal
Proceedings
|
32
|
||
Item
1A.
|
Risk
Factors
|
32
|
||
Item
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
32
|
||
Item
3.
|
Default
Upon Senior Securities
|
32
|
||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
32
|
||
Item
5.
|
Other
Information
|
32
|
||
Item
6.
|
Exhibits
|
32
|
||
Signatures
|
33
|
1
Part I.
Financial Information
Item
1. Financial Statements
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Balance Sheets
(In US
Dollars)
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS:
|
(Unaudited)
|
|||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 6,459,094 | $ | 2,655,808 | ||||
Accounts
receivable, net (Note 3)
|
7,828,010 | 5,239,785 | ||||||
Inventories
(Note 4)
|
7,241,415 | 7,293,544 | ||||||
Other
receivables and prepaid expense
|
90,265 | 15,103 | ||||||
Total
current assets
|
21,618,784 | 15,204,240 | ||||||
Property
and equipment, net (Note 5)
|
8,066,874 | 2,770,782 | ||||||
Total
Assets
|
$ | 29,685,658 | $ | 17,975,022 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 2,068,268 | $ | 2,309,026 | ||||
Accrued
merger costs
|
244,000 | - | ||||||
Short-term
note payable (Note 16)
|
333,557 | - | ||||||
Accrued
liabilities and other payable
|
150,000 | 240,130 | ||||||
Various
taxes payable (Note 8)
|
33,156 | 39,972 | ||||||
Wages
payable
|
358,043 | 295,367 | ||||||
Corporate
tax payable (Note 8)
|
849,864 | 469,435 | ||||||
Due
to director (Note 6)
|
1,569,720 | 1,339,337 | ||||||
Total
Current Liabilities
|
5,606,608 | 4,693,267 | ||||||
Commitments
and Contingencies (Note 9)
|
- | - | ||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
issued
|
- | - | ||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized,
13,314,042
|
||||||||
shares
and 10,679,260 shares issued and outstanding at September 30, 2009
and
|
||||||||
December
31, 2008, respectively. (Notes 1 and 13)
|
1,331 | 1,068 | ||||||
Additional
paid-in capital
|
2,755,481 | 158,271 | ||||||
Accumulated
other comprehensive income
|
952,119 | 1,089,032 | ||||||
Statutory
surplus reserve fund (Note 7)
|
1,177,075 | 1,177,075 | ||||||
Retained
earnings (unrestricted)
|
19,193,044 | 10,856,309 | ||||||
Total
Stockholders' Equity
|
24,079,050 | 13,281,755 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 29,685,658 | $ | 17,975,022 |
The
accompanying notes are an integral part of these consolidated financial
statements.
2
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Statements of Operations
(In
US Dollars)
(Unaudited)
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Sales
|
$ | 22,081,199 | $ | 14,163,197 | $ | 63,293,729 | $ | 39,049,862 | ||||||||
Cost
of Goods Sold
|
(15,598,052 | ) | (10,205,436 | ) | (45,460,910 | ) | (28,102,994 | ) | ||||||||
Gross
Profit
|
6,483,147 | 3,957,761 | 17,832,819 | 10,946,868 | ||||||||||||
Operating
Costs and Expenses:
|
||||||||||||||||
Selling
expenses
|
1,128,845 | 708,782 | 3,169,799 | 2,010,820 | ||||||||||||
Bad
debts recovery
|
(3,246 | ) | - | (3,246 | ) | - | ||||||||||
Merger
costs
|
- | - | 938,152 | - | ||||||||||||
Research
and development
|
476,124 | 275,479 | 1,264,119 | 703,201 | ||||||||||||
Depreciation
(Note 5)
|
5,187 | 5,577 | 15,991 | 17,209 | ||||||||||||
General
and administrative
|
807,849 | 296,206 | 1,682,738 | 835,909 | ||||||||||||
Total
operating costs and expenses
|
2,414,759 | 1,286,044 | 7,067,553 | 3,567,139 | ||||||||||||
Income
From Operations
|
4,068,388 | 2,671,717 | 10,765,266 | 7,379,729 | ||||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
6,989 | 449 | 19,869 | 2,156 | ||||||||||||
Imputed
interest (Notes 6 and 16)
|
(35,648 | ) | (3,778 | ) | (69,680 | ) | (13,227 | ) | ||||||||
Sundry
income (expense), net
|
2,966 | (30 | ) | 2,856 | (2,867 | ) | ||||||||||
Total
other income (expense)
|
(25,693 | ) | (3,359 | ) | (46,955 | ) | (13,938 | ) | ||||||||
Income
before income taxes
|
4,042,695 | 2,668,358 | 10,718,311 | 7,365,791 | ||||||||||||
Provision
for income taxes (Note 8)
|
(849,552 | ) | (481,608 | ) | (2,381,576 | ) | (1,329,169 | ) | ||||||||
Net
income
|
$ | 3,193,143 | $ | 2,186,750 | $ | 8,336,735 | $ | 6,036,622 | ||||||||
Basic
earnings per share
|
$ | 0.25 | $ | 0.20 | $ | 0.71 | $ | 0.57 | ||||||||
Weighted
average shares outstanding-basic
|
12,926,571 | 10,679,260 | 11,788,790 | 10,679,260 | ||||||||||||
Diluted
earnings per share
|
$ | 0.24 | $ | 0.20 | $ | 0.69 | $ | 0.57 | ||||||||
Weighted
average shares outstanding-diluted
|
13,553,465 | 10,679,260 | 12,128,645 | 10,679,260 |
The
accompanying notes are an integral part of these consolidated financial
statements.
3
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(In
US Dollars)
(Unaudited)
For the Nine Months Ended
|
||||||||
September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income
|
$ | 8,336,735 | $ | 6,036,622 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Shares
issued for legal service
|
148,720 | - | ||||||
Imputed
interest expense
|
69,680 | 13,227 | ||||||
Bad
debt recovery
|
(3,246 | ) | - | |||||
Depreciation
|
479,417 | 381,144 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
(Increase)
decrease in -
|
||||||||
Accounts
receivable – trade
|
(2,584,979 | ) | (2,555,544 | ) | ||||
Inventories
|
52,129 | (1,311,501 | ) | |||||
Prepaid
expenses and other receivables
|
(75,162 | ) | 284 | |||||
Increase
(decrease) in -
|
||||||||
Accounts
payable
|
(240,758 | ) | 1,234,214 | |||||
Accrued
merger costs
|
244,000 | - | ||||||
Accrued
liabilities and other payable
|
(90,130 | ) | 6,612 | |||||
Various
taxes payable
|
(6,816 | ) | (75,642 | ) | ||||
Wages
payable
|
62,676 | 86,907 | ||||||
Corporate
tax payable
|
380,429 | 363,089 | ||||||
Net
cash provided by operating activities
|
6,772,695 | 4,179,412 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Purchases
of property and equipment
|
(5,772,362 | ) | (406,871 | ) | ||||
Net
cash used in investing activities
|
(5,772,362 | ) | (406,871 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from (repayment of) short-term loans
|
333,557 | (164,520 | ) | |||||
Net
proceeds from sale of common shares
|
2,379,073 | - | ||||||
Dividends
paid
|
- | (2,088,600 | ) | |||||
Increase
(decrease) due to related parties
|
230,383 | (150,390 | ) | |||||
Net
cash provided by (used in) financing activities
|
2,943,013 | (2,403,510 | ) | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
(140,060 | ) | 468,142 | |||||
Increase
in cash and cash equivalents
|
3,803,286 | 1,837,173 | ||||||
Cash
and cash equivalents, beginning of period
|
2,655,808 | 1,588,778 | ||||||
Cash
and cash equivalents, end of period
|
$ | 6,459,094 | $ | 3,425,951 | ||||
Supplemental
disclosure information:
|
||||||||
Income
taxes paid
|
$ | 380,429 | $ | 981,179 | ||||
Interest
expense paid
|
$ | - | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
China
Electric Motor, Inc. and Subsidiaries
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive
Income
For the
Nine Months Ended September 30, 2009
(In US
Dollars)
(Unaudited)
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
Other
|
Statutory
|
Retained
|
Total
|
||||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Comprehensive
|
Reserve
|
Earnings
|
Stockholders'
|
Comprehensive
|
||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Fund
|
(Unrestricted)
|
Equity
|
Income
|
|||||||||||||||||||||||||
Balance
at December 31, 2008
|
10,679,260 | $ | 1,068 | $ | 158,271 | $ | 1,089,032 | $ | 1,177,075 | $ | 10,856,309 | $ | 13,281,755 | $ | ||||||||||||||||||
Reverse
merger adjustment
|
1,352,003 | 135 | (135 | ) | - | - | - | - | ||||||||||||||||||||||||
Shares
issued for legal service
|
- | - | 148,720 | - | - | - | 148,720 | |||||||||||||||||||||||||
Sale
of common shares
|
1,282,779 | 128 | 2,378,945 | - | - | - | 2,379,073 | |||||||||||||||||||||||||
Imputed
interest
|
- | - | 69,680 | - | - | - | 69,680 | |||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 8,336,735 | 8,336,735 | $ | 8,336,775 | |||||||||||||||||||||||
Foreign
currency translation
|
- | - | - | (136,913 | ) | - | - | (136,913 | ) | (136,913 | ) | |||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | $ | 8,199,822 | |||||||||||||||||||||||
Balance
September 30, 2009
|
13,314,042 | $ | 1,331 | $ | 2,755,481 | $ | 952,119 | $ | 1,177,075 | $ | 19,193,044 | $ | 24,079,050 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China
Electric Motor, Inc. (“China Electric”, formerly SRKP 21, Inc.) was incorporated
in the State of Delaware on October 11, 2007. China Electric was originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On May 6, 2009, China Electric (i) closed a share exchange
transaction pursuant to which SRKP 21 became the 100% parent of Attainment
Holdings Limited (“Attainment”), (ii) assumed the operations of Attainment and
its subsidiaries, including Luck Loyal International Investment Limited ("Luck
Loyal") and Shenzhen YuePengCheng Motor Co., Ltd (“YuePengCheng”), and (iii)
changed its name from SRKP 21, Inc. to China Electric Motor, Inc.
Attainment
is a holding company incorporated in the British Virgin Islands (“BVI”) on July
28, 2008. Attainment had 50,000 capital shares authorized with $1.00
par value and one share issued and outstanding. The sole shareholder
of Attainment was Excel Profit Global Group Limited (“Excel Profit”), which in
turn solely owned by Mr. To Chau Sum, a Hong Kong citizen.
Luck
Loyal is a holding company incorporated in Hong Kong (“HK”) on October 15,
2004. Luck Loyal had 10,000 shares authorized with one Hong Kong
Dollar (“HKD”) par value and one share issued and outstanding. The
sole shareholder of Luck Loyal is Attainment.
YuePengCheng
was incorporated in the City of Shenzhen of the People’s Republic of China
(“PRC”) on November 19, 1999. YuePengCheng mainly engages in
production, marketing, sales and research and development of specialized
micro-motor products for the domestic and international market.
Shenzhen
YuePengDa Development Enterprises (“YuePengDa”), a company owned by the son of
Ms. Jianrong Li, a director of YuePengCheng and Luck Loyal (the “Director”), and
Taiwan Qiling Shashi Enterprises (“Qiling”), a company owned by a relative of
the Director, were the original owners of YuePengCheng and held 75% and 25% of
the total interest of YuePengCheng, respectively.
In
November 2007, the Director caused Luck Loyal to enter into an ownership
transfer agreement with Qiling. Pursuant to the agreement, Qiling transferred
its 25% interest in YuePengCheng to Luck Loyal at a price of Chinese Renminbi
(“RMB”) 2.5 million. In September 2008, in order to implement a capital
restructuring program, the Director had Luck Loyal acquire the remaining 75%
ownership of YuePengCheng from YuePengDa under an ownership transfer agreement.
Pursuant to the agreement, Luck Loyal paid YuePengDa RMB 7.5 million for the
ownership transfer. Thereafter, Luck Loyal became the sole owner of
YuePengCheng. Since these transactions were effected by parties under
common control, the Company accounted for them as similar to a pooling of
interest transaction, with a retroactive reduction in additional paid-in capital
for the payments to the former owner, and the recording of a corresponding
liability.
The
Director agreed to convert the debts owed to her of RMB 7.5 million and RMB 2.5
million (approximately $1.3 million) into shares of the Company’s common stock
on the effective date of the public offering, with the conversion price to be
equal to the per share price of the shares sold in the Company’s public
offering.
For
accounting purpose, this transaction is being accounted as business combination
of entities under common control and the historical financial statements include
the operations of YuePengCheng for all periods presented.
China
Electric and its subsidiaries – Attainment, Luck Loyal and YuePengCheng are
collectively referred throughout as the “Company.”
6
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)
To
summarize the paragraphs above, the organization and ownership structure of the
Company is currently as follows:
Share
Exchange
On March
3, 2009, China Electric Motor, Inc. (the “Company”) (formerly known as “SRKP 21,
Inc.”) entered into a Share Exchange Agreement with Attainment Holdings, Excel
Profit as the sole shareholder of Attainment Holdings, and as to certain
portions of the agreement, certain designees. Pursuant to the Share
Exchange Agreement, as it was amended on May 6, 2009 (the “Exchange Agreement”),
SRKP 21 agreed to issue an aggregate of 10,679,260 shares of its common stock in
exchange for all of the issued and outstanding securities of Attainment Holdings
(the “Share Exchange”). The Share Exchange closed on May 6, 2009. The
10,679,260 shares of common stock issued to the stock holders of Attainment in
conjunction with the share exchange transaction have been presented as
outstanding for all periods.
Upon the
closing of the Share Exchange, the Company issued an aggregate of 10,679,260
shares of its common stock to Excel Profit and the designees in exchange for all
of the issued and outstanding securities of Attainment Holdings. Prior to
the closing of the Share Exchange, the stockholders of the Company canceled an
aggregate of 3,260,659 shares held by them such that there were 1,352,003 shares
of common stock outstanding immediately prior to the Share Exchange. The
Company’s stockholders also canceled an aggregate of 3,985,768 warrants to
purchase shares of common stock such that the stockholders held an aggregate of
626,894 warrants immediately after the Share Exchange. Immediately after
the closing of the Share Exchange, the Company had 12,031,263 outstanding shares
of common stock, no shares of Preferred Stock, no options, and warrants to
purchase 626,894 shares of common stock.
For
accounting purposes, this transaction is being accounted for as a reverse
merger. The transaction has been treated as a recapitalization of Attainment
Holdings and its subsidiaries, with China Electric Motor (the legal
acquirer of Attainment and its subsidiaries including YuePengCheng) considered
the accounting acquiree and YuePengCheng , the only operating company, and whose
management took control of China Electric Motor (the legal acquiree of
YuePengCheng) is considered the accounting acquirer. The Company did
not recognize goodwill or any intangible assets in connection with the
transaction. The 10,679,260 shares of common stock issued to the
shareholder of Attainment and its designees in conjunction with the share
exchange transaction have been presented as outstanding for all periods. The
10,679,260 shares of common stock issued to the stockholders of Attainment in
conjunction with the share exchange transaction have been presented as
outstanding for all periods. The historical consolidated financial statements
include the operations of the accounting acquirer for all periods
presented.
On
October 8, 2009, the Company’s Board of Directors authorized a 1-for-1.5384615
reverse stock split of the Company's outstanding shares of common stock (the
“Reverse Stock Split”). References to shares in the consolidated financial
statements and the accompanying notes, including, but not limited to, the number
of shares and per share amounts, have been adjusted to reflect the Reverse Stock
Split on a retroactive basis.
7
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a.
|
Basis
of Preparation
|
The
interim consolidated financial statements are unaudited and have been prepared
by the Company in accordance with U.S. GAAP for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation SX. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended December 31,
2008 and notes thereto contained in the Registration Statement on Form
S-1/A of the Company as filed with the United States Securities and Exchange
Commission (the “SEC”) on October 19, 2009. Interim results are not necessarily
indicative of the results for the full year.
The
parent only financial statements reflect nominal assets and operations
consistent with the disclosure that all assets and operations are conducted in
China, and that the only significant transactions at the parent level are
capital transactions, intercompany transactions, and equity accounting
transactions to account for the parent’s 100% ownership of its operations in
China. See the Registration Statement on Form S-1/A of the Company as filed with
the United States Securities and Exchange Commission (the “SEC”) on October 19,
2009 for further information.
In the
opinion of the management, the interim consolidated financial statements reflect
all adjustments of a normal recurring nature necessary for a fair statement of
the results for interim periods.
b.
|
Basis
of Consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions have been eliminated in
consolidation.
c.
|
Use
of Estimates
|
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting year. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.
d.
|
Fair
Values of Financial Instruments
|
US GAAP
requires certain disclosures about the fair value of financial instruments. The
Company defines fair value, using the required three-level valuation hierarchy
for disclosures of fair value measurement the enhanced disclosures requirements
for fair value measures. Current assets and current liabilities qualified as
financial instruments and management believes their carrying amounts are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their current interest rate is equivalent to interest rates
currently available. The three levels are defined as
follows:
·
|
Level
1 — inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
|
|
·
|
Level
2 — inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3 — inputs to the valuation methodology are unobservable and significant
to the fair value.
|
As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
8
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
e.
|
Cash
and Cash Equivalents
|
Cash and
cash equivalents include cash on hand, demand deposits with banks and liquid
investments with an original maturity of three months or less.
f.
|
Accounts
Receivable
|
Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
Company uses an aging method to estimate the valuation allowance for anticipated
uncollectible receivable balances. Under the aging method, bad debts percentages
determined by management based on historical experience as well as current
economic climate are applied to customers’ balances categorized by the number of
months the underlying invoices have remained outstanding. The valuation
allowance balance is adjusted to the amount computed as a result of the aging
method. When facts subsequently become available to indicate that the amount
provided as the allowance was incorrect, an adjustment, classified as a change
in estimate, is made.
g.
|
Inventories
|
Inventories
are stated at the lower of cost, as determined on a weighted average basis, or
market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
writes down the inventories to market value if it is below cost. The management
also regularly evaluates the composition of its inventories to identify
slow-moving and obsolete inventories to determine if valuation allowance is
required.
h.
|
Property
and Equipment
|
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of plant and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets at cost less 5% for salvage
value:
Building
|
46
years
|
Machinery
and Equipment
|
5
~ 25 years
|
Office
and Other Equipment
|
5
~ 10 years
|
i.
|
Impairment
of Long-Lived Assets
|
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with the standard of “Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires
the Company to evaluate a long-lived asset for recoverability when there is
event or circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
j.
|
Comprehensive
Income
|
The
Company reports Comprehensive Income, its components, and accumulated balances
in its financial statements. Accumulated other comprehensive income represents
the accumulated balance of foreign currency translation adjustments. No other
items of comprehensive income are present.
9
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
k.
|
Revenue
Recognition
|
The
Company generates revenues from the sales of micro-motor
products. The Company recognizes revenue net of value added tax (VAT)
when the earnings process is complete, as evidenced by an agreement with the
customer, transfer of title, acceptance of ownership and assumption of risk of
loss by the customer, as well as predetermined fixed pricing, persuasive
evidence of an arrangement exists, and collection of the relevant receivable is
probable. The Company includes shipping charges billed to customers in net
revenue, and includes the related shipping costs in cost of sales. No return
allowance is made as products returns are insignificant based on historical
experience.
The
Company does not provide different policies in terms warranties, credits,
discounts, rebates, price protection, or similar privileges among customers.
Orders are placed by both the distributors and OEMs and the products are
delivered to the customers within 30-45 days of order, the Company does not
provide price protection or right of return to the customers. The price of the
products are predetermined and fixed based on contractual agreements, therefore
the customers would be responsible for any loss if the customers are faced with
sales price reductions and rapid technology obsolescence in the industry. The
Company does not allow any discounts, credits, rebates or similar
privileges.
The
Company warrants the products sold to all customers for up to 1 year from the
date the products leave the Company’s factory, under which the Company will pay
for labor and parts, or offer a new or similar unit in exchange for a
non-performing unit due to defects in material or workmanship. The
customers may also return products for a variety of reasons, such as damage to
goods in transit, cosmetic imperfections and mechanical failures, if within the
warranty period. There is no allowance for warranty on the products sales as
historical costs incurred for warranty replacements and repairs have been
insignificant.
l.
|
Research
and Development Costs
|
Research
and development costs are expensed to operations as incurred. The Company spent
$476,124 and $275,479 in the three months ended September 30, 2009 and 2008,
respectively, and $1,264,119 and $703,201 in the nine months ended September 30,
2009 and 2008, respectively, on direct research and development
efforts.
m.
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with the US Generally Accepted
Accounting Principles (GAAP) which requires the asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach, deferred
taxes are provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The
Company follows the requirements of US GAAP in Accounting for Uncertainty in
Income Taxes, which requires a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return
(including a decision whether to file or not file to file a return in a
particular jurisdiction).
n.
|
Advertising
Costs
|
The
Company expenses advertising costs as incurred. The Company incurred
$133,510 and $97,606 in the three months ended September 30, 2009 and 2008,
respectively, and $417,020 and $276,909 in the nine months ended September 30,
2009 and 2008, respectively, on advertising expenses.
10
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
o.
|
Foreign
Currency Translation
|
The
functional currency of Attainment and Luck Loyal is the Hong Kong Dollar
(“HKD”). They maintain their financial statements using the functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
The
functional currency of YuePengCheng is the Renminbi (“RMB”), the PRC’s currency.
It maintains its financial statements using its own functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
For
financial reporting purposes, the financial statements of Attainment and Luck
Loyal, which are prepared in HKD, are translated into the Company’s reporting
currency, United States Dollars (“USD”); the financial statements of
YuePengCheng, which are prepared in RMB, are translated into the Company’s
reporting currency, USD. Balance sheet accounts are translated using the closing
exchange rate in effect at the balance sheet date and income and expense
accounts are translated using the average exchange rate prevailing during the
reporting period. Adjustments resulting from the translation, if any, are
included in accumulated other comprehensive income (loss) in stockholder’s
equity.
The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||||||
Nine
Months Ended September 30, 2009
|
6.81756
|
6.82174
|
||||||
Nine
Months Ended September 30, 2008
|
6.83527
|
6.97496
|
The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||||||
Nine
Months Ended September 30, 2009
|
7.75013
|
7.75193
|
||||||
Nine
Months Ended September 30, 2008
|
7.76908
|
7.79838
|
p.
|
Recently
Issued Accounting Pronouncements
|
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification (ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to
various former authoritative U.S. GAAP pronouncements have been changed to
coincide with the appropriate section of the ASC.
11
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
q.
|
Recently
issued accounting pronouncements
(continued)
|
In
September 2006, the FASB issued an accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements, and
required disclosures of assets and liabilities measured at fair value based on
their level in the hierarchy. This standard applies under other accounting
standards that require or permit fair value measurements. One of the amendments
deferred the effective date for one year relative to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at
fair value on a nonrecurring basis. This deferral applied to such items as
nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. The adoption of the fair value measurement standard did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended June 30,
2009.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In
April 2009, the FASB issued an accounting standard which modifies the
requirements for recognizing other-than-temporarily impaired debt securities and
changes the existing impairment model for such securities. The standard also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the standard, impairment of debt
securities will be considered other-than-temporary if an entity (1) intends
to sell the security, (2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The standard further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. The standard requires entities to initially apply its
provisions to previously other-than-temporarily impaired debt securities
existing as of the date of initial adoption by making a cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously other-than-temporarily impaired debt security
held as of the date of initial adoption from retained earnings to accumulated
other comprehensive income. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
12
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
q.
|
Recently
issued accounting pronouncements
(continued)
|
In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. This standard added an additional
required disclosure relative to the date through which subsequent events have
been evaluated and whether that is the date on which the financial statements
were issued. For the Company,
this standard was effective beginning April 1, 2009.
In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing guidance on transfers of
financial assets to, among other things, eliminate the qualifying
special-purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The Company is currently evaluating the impact of this
standard, but does not expect it to have a material impact on the Company’s
consolidated results of operations or financial condition.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company is currently evaluating the impact of this standard, but does not expect
it to have a material impact on the Company’s consolidated results of operations
or financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. The
Company is currently evaluating the impact of this standard, but does not expect
it to have a material impact on the Company’s consolidated results of operations
or financial condition.
13
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
q.
|
Recently
issued accounting pronouncements
(continued)
|
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s consolidated results of operations and financial
condition.
In
October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That
Include Software Elements—a consensus of the FASB Emerging Issues Task
Force, that reduces the types of transactions that fall within the
current scope of software revenue recognition guidance. Existing software
revenue recognition guidance requires that its provisions be applied to an
entire arrangement when the sale of any products or services containing or
utilizing software when the software is considered more than incidental to the
product or service. As a result of the amendments included in ASU
No. 2009-14, many tangible products and services that rely on software will
be accounted for under the multiple-element arrangements revenue recognition
guidance rather than under the software revenue recognition guidance. Under the
ASU, the following components would be excluded from the scope of software
revenue recognition guidance: the tangible element of the product,
software products bundled with tangible products where the software components
and non-software components function together to deliver the product’s essential
functionality, and undelivered components that relate to software that is
essential to the tangible product’s functionality. The ASU also provides
guidance on how to allocate transaction consideration when an arrangement
contains both deliverables within the scope of software revenue guidance
(software deliverables) and deliverables not within the scope of that guidance
(non-software deliverables). The ASU is effective beginning January 1,
2011. The Company is currently evaluating the impact of this standard on the
Company’s consolidated results of operations and financial
condition.
14
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Accounts
receivable-trade
|
$ | 7,828,010 | $ | 5,243,033 | ||||
Allowance
for doubtful accounts
|
- | (3,248 | ) | |||||
Accounts
receivable-trade, net
|
$ | 7,828,010 | $ | 5,239,785 |
The
change in the allowance for doubtful accounts between the reporting periods, as
of September 30, 2009 and December 31, 2008, is as follows:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Beginning
|
$ | (3,248 | ) | $ | (3,036 | ) | ||
(Provision)/reversal
during the period
|
3,246 | - | ||||||
Effect
of exchange rate changes
|
2 | (212 | ) | |||||
Ending
|
$ | - | $ | (3,248 | ) |
There
were no bad debts written off for the three months and nine months ended
September 30, 2009 and 2008 as there were no accounts receivable outstanding in
excess of 60 days at September 30, 2009 and 2008. The aging of the accounts
receivable is as follows:
September
30,
|
||||||||
2009
|
2008
|
|||||||
1-60
days
|
$ | 7,828,010 | $ | 5,200,667 |
NOTE
4 – INVENTORY
Inventory
includes raw materials, work-in-process (“WIP”), and finished goods. Finished
goods contain direct material, direct labor and manufacturing overhead and do
not contain general and administrative costs.
Inventory
consists of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 1,955,017 | $ | 2,524,124 | ||||
Finished
goods
|
2,385,642 | 2,544,534 | ||||||
Work-in-process
|
2,900,756 | 2,224,886 | ||||||
Total
|
$ | 7,241,415 | $ | 7,293,544 |
15
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and Equipment consist of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Building
|
$ | 3,717,781 | $ | - | ||||
Machinery
and equipment
|
6,369,548 | 4,314,429 | ||||||
Electronic,
office and other equipment
|
185,803 | 182,963 | ||||||
Accumulated
depreciation
|
(2,206,258 | ) | (1,726,610 | ) | ||||
Property
and equipment, net
|
$ | 8,066,874 | $ | 2,770,782 |
Depreciation
expense for the three months and nine months ended September 30, 2009 and 2008
is as follows:
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of goods sold
|
$ | 168,825 | $ | 124,785 | $ | 463,426 | $ | 363,935 | ||||||||
Operating
expenses
|
5,187 | 5,577 | 15,991 | 17,209 | ||||||||||||
Total
|
$ | 174,012 | $ | 130,362 | $ | 479,417 | $ | 381,144 |
NOTE
6 – DUE TO DIRECTOR
Due to
director consists of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Due
to director - Li, Jianrong: Luck Loyal loans
|
1,440,288 | 1,339,337 | ||||||
Due
to director - Li, Jianrong: Working capital loans
|
129,432 | - | ||||||
Total
|
$ | 1,569,720 | $ | 1,339,337 |
In
November 2007, Luck Loyal acquired a 25% ownership interest in YuePengCheng from
Qiling; and in September 2008 acquired the remaining 75% ownership interest in
YuePengCheng from YuePengDa. Pursuant to the agreements, Luck Loyal paid Qiling
and YuePengDa RMB 2.5 million and RMB 7.5 million, respectively. These amounts
were contributed by a director of Luck Loyal, Ms. Li, Jianrong, in 2007 and
2008.
On March
25, 2009, Ms. Li, Jianrong entered into an agreement to convert the debt
outstanding as of the close of the share exchange (approximately $1.3 million)
into corresponding equity of China Electric Motor, Inc. at the time of China
Electric Motor, Inc.’s anticipated public offering of its common stock based on
the per share offering price.
The other
amounts that are due to Ms. Li, Jianrong consist of unsecured loans for working
capital with no fixed repayment date.
The
Company recorded the imputed interests with respect to these loans as a charge
to operations, and as a credit to additional paid-in capital. The
calculations are performed monthly at annual rates in the range of 5.25% - 7.14%
with the reference to the average short term loan rate announced by People's
Bank of China. A summary of the imputed interest is as follows:
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Imputed
interest
|
$ | 28,468 | $ | 3,778 | $ | 62,500 | $ | 13,227 |
16
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
7 – STATUTORY RESERVES
As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the Company is required to make annual appropriations to a statutory
surplus reserve fund. Specifically, the Company is required to allocate 10% of
its profits after taxes, as determined in accordance with the PRC accounting
standards applicable to the Company, to a statutory surplus reserve until such
reserve reaches 50% of the registered capital of the Company.
NOTE
8 – INCOME TAX AND VARIOUS TAXES
Income Tax
The
Company is registered and entitled as a “Hi-Tech Corporation” in the
PRC. The Company has tax advantages granted by the local government
for corporate income taxes and sales taxes. The Company is
entitled to have a 50% reduction on the normal tax rate of 15% commencing year
2005 for the following three consecutive years. The Company’s tax
advantages were abolished after the Enterprise Income Tax Law that took effect
on January 1, 2008. The Company’s prior tax rate of 15% was changed to a rate of
18% in 2008.
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities.
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
Current income tax expense:
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
PRC
Enterprises Income Tax
|
$ | 849,552 | $ | 481,608 | $ | 2,381,576 | $ | 1,329,169 |
A
reconciliation between the income tax computed at the PRC statutory rate and
provision for income tax is as follows:
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Preferential
PRC income tax rate
|
20 | % | 18 | % | 20 | % | 18 | % |
Effective
January 1, 2008, the new "Law of the People's Republic of China on Enterprise
Income Tax" was implemented. The new law requires that:
|
(i)
|
For
all resident enterprises, domestic or foreign, the Enterprise Income Tax
rate is unified 25%.
|
|
(ii)
|
Enterprises
that are categorized as the "High Tech Enterprise" will have a reduced tax
rate of 15%.
|
|
(iii)
|
From
January 1, 2008 onwards, enterprises that enjoyed a preferential tax rate
before, will need to adopt the new law within the next five years.
Specifically, enterprises with a current preferential tax rate of 15% for
2007, the tax rate will be 18%, 20%, 22%, 24%, and 25% for the years ended
December 31 2008, 2009, 2010, 2011, and 2012,
respectively.
|
Accounting for Uncertainty
in Income Taxes
The
Company follows the requirements of US GAAP in Accounting for Uncertainty in
Income Taxes, as per ASC codification 740. The standard clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements and prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The standard also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event it receives an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.
17
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
8 – INCOME TAX AND VARIOUS TAXES (continued)
Various
Taxes
The
Company is subject to pay various taxes such as Value added tax (VAT), City
development tax, and Education tax to the local government tax authorities. The
Value added tax (VAT) collected on sales is netted against taxes paid for
purchases of cost of goods sold to determine the amounts payable or refundable.
The city development tax and education tax are expensed as general and
administrative expense.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
The
Company leased its factory premises and staff quarters for approximately
$300,000 per year. This lease was terminated effective September 30,
2009.
On
September 24, 2009, the Company purchased a factory building covered under its
factory lease from the lessor, and the lessor terminated the existing lease
agreement without penalties.
The
Company signed a new lease agreement for the remaining buildings from the lessor
for approximately $176,000 per year.
Rent
expense was $76,731 and $76,625 for the three months ended September 30, 2009
and 2008, respectively, and $230,128 and $225,072 for the nine months ended
September 30, 2009 and 2008, respectively.
NOTE
10 – OPERATING RISK
Country
Risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Concentration of Credit
Risk
A
significant portion of the Company’s cash is maintained at various financial
institutions in the PRC which do not provide insurance for amounts on
deposit. The Company has not experienced any losses in such accounts
and believes it is not exposed to significant credit risk in this
area.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
For the
nine months ended September 30, 2009, two customers accounted for 10% and 10% of
total sales, respectively. At September 30, 2009, these two customers accounted
for 13%, and 21% of accounts receivable, respectively.
For the
nine months ended September 30, 2008, two customers accounted for 11% and 10% of
total sales, respectively. At September 30, 2008, these two customers accounted
for 11%, and 9% of accounts receivable, respectively.
For the
year ended December 31, 2008, three customers accounted for 11%, 10% and 10% of
total sales, respectively. At December 31, 2008, these three customers accounted
for 11%, 9%, and 10% of accounts receivable, respectively.
Supply
Risk
The
suppliers for the Company's key raw materials are located in
China. For the nine months ended September 30, 2009, three suppliers
accounted for 13%, 12% and 10% of the Company's total purchases,
respectively. At September 30, 2009, these suppliers accounted for
14%, 14% and 0% of accounts payable, respectively.
For the
nine months ended September 30, 2008, one supplier accounted for 24% of the
Company's total purchases. At September 30, 2008, this supplier
accounted for 10% of accounts payable.
18
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
11– SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
The
Company has not segregated business units for managing different products and
services that the Company has been carrying and selling on the
market. The assets and resources of the Company have been utilized,
on a corporate basis, for overall operations of the Company. The
Company has not segregated its operating assets by segments as it is
impracticable to do so since the same assets are used to produce products as one
segment.
The
Company uses the “management approach” in determining reportable operating
segments. The management approach considers the internal organization and
reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining the
Company’s reportable segments. Management, including the chief operating
decision maker, reviews operating results solely by monthly revenue (but not by
sub-product type or geographic area) and operating results of the Company and,
as such, the Company has determined that the Company has one operating segment
as defined by the standard “Disclosures about Segments of an Enterprise and
Related Information” within ASC codification 280.
The
geographic information for revenue is as follows:
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||
China
Mainland
|
$ | 12,201,253 | 55.3 | % | $ | 7,932,986 | 56.0 | % | $ | 36,687,172 | 58.0 | % | $ | 22,017,428 | 56.4 | % | ||||||||
Korea
|
4,836,646 | 21.9 | % | 4,461,151 | 31.5 | % | 13,929,630 | 22.0 | % | 10,852,691 | 27.8 | % | ||||||||||||
Hong
Kong
|
5,043,300 | 22.8 | % | 1,769,060 | 12.5 | % | 12,676,927 | 20.0 | % | 6,179,743 | 15.8 | % | ||||||||||||
Total
|
$ | 22,081,199 | $ | 14,163,197 | $ | 63,293,729 | $ | 39,049,862 |
The
geographic information for accounts receivables which are classified based on
the customers is as follows:
September 30,
|
||||||||
2009
|
2008
|
|||||||
China
Mainland
|
$ | 4,410,202 | $ | 3,110,743 | ||||
Korea
|
1,876,582 | 1,519,080 | ||||||
Hong
Kong
|
1,541,226 | 570,844 | ||||||
Total
|
$ | 7,828,010 | $ | 5,200,667 |
NOTE
12 –DIVIDENDS PAID PRIOR TO SHARE EXCHANGE
In
January 31, 2007, the Company declared dividends of $1,287,700. The
dividends were paid in May 2007 to its then current owners.
In
January 31, 2008, the Company declared dividends of $2,088,600. The
dividends were paid in May 2008 to its then current owners.
NOTE
13 – COMMON STOCK
On May 6,
2009, concurrently with the close of the Share Exchange, the
Company conducted an initial closing of a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered
into with the investors, the Company sold an aggregate of 320,186 shares of
common stock, $0.0001 par value per share, at $2.08 per share, for gross
proceeds of approximately $665,000.
On June
19, 2009, the Company conducted a second closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 208,868 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $433,800.
19
China Electric
Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
13 – COMMON STOCK (continued)
On July
17, 2009, the Company conducted a third closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 272,342 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $565,625.
On
September 4, 2009, the Company conducted a fourth closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 481,383 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $999,775.
NOTE
14 – WARRANTS
Warrants remaining from
Share Exchange
Prior to
the Share Exchange and Private Placement, the shareholders of SRKP 21 held an
aggregate of 4,612,662 warrants to purchase shares of the Company’s common
stock, and an aggregate of 3,985,768 warrants were cancelled in conjunction with
the closing of the Share Exchange. Immediately after the closing of
the Share Exchange and Private Placement, the shareholders held an aggregate of
626,894 warrants with an exercise price of $0.000154. The warrants have a 5 year
term and are not exercisable until at least one year from the date of the
closing of the Share Exchange.
The
summary of the status of the Company’s outstanding warrants and changes as of
September 30, 2009 is as follows:
September 30, 2009
|
||||||||
Number of
|
Average
|
|||||||
Warrants
|
Exercise Price
|
|||||||
Warrants
remaining from Share Exchange
|
626,894 | $ | 0.000154 | |||||
Exercised
|
- | $ | - | |||||
Forfeited/canceled
|
- | $ | - | |||||
September
30, 2009
|
626,894 |
NOTE
15 – STOCK BASED SERVICES
On
September 26, 2008, the Company entered into a legal consulting service
agreement. According to the agreement, the consideration for the legal
consulting services was to be paid in the form of the Company’s common stock
upon the closing of the Share Exchange (Refer to Note 1). The law firm does not
have any relationship or common ownership with the Company or any of the
Company’s affiliates. The Company issued to 71,500 shares of its common stock
for these services. The Company recognized legal expenses of $148,720
based on the price of its common shares at the time of the
transaction.
NOTE
16 – BRIDGE LOANS
In
connection with the initial closing of the Private Placement on May 6, 2009, a
shareholder of the Company issued a promissory note in the principal amount of
$335,000 bearing no interest to Chen Dong (the “Note”). The Company
assumed the obligations under the Note on the date of the Note’s
issuance. The principal was originally due and payable on or before
the earlier of (a) nine months from the date of issuance of the Note or (b) upon
the receipt by the Company after the date of the Note of at least $1 million in
additional proceeds in the Private Placement, however, the noteholder agreed to
extend the Company’s repayment of the Note until the closing of the proposed
firm commitment public offering of the Company’s common stock which will occur
concurrently with the Company’s proposed listing on the NASDAQ Global
Market.
20
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
16 – BRIDGE LOANS (continued)
The
Company recorded the imputed interests with respect to the promissory note as a
charge to operations, and as a credit to additional paid-in
capital. The calculations are performed monthly at annual rates in
the range of 5.25% - 7.14% with the reference to the average short term loan
rate announced by People's Bank of China. A summary of the imputed interest is
as follows.
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Imputed
interest
|
$ | 7,180 | $ | - | $ | 7,180 | $ | - |
NOTE
17 – REGISTRATION PAYMENT ARRANGEMENT
Pursuant
to the Registration Rights Agreement (“Agreement”) dated May 6, 2009, by and
among the Company,, Attainment Holdings and certain of the original stockholders
of the Company prior to the Share Exchange who are affiliates of WestPark
Capital, Inc. (the “Original Stockholders”), the Company agreed to file a
registration statement covering the resale of the shares held by the Original
Stockholders (the “Subsequent Registration Statement”) no later than the tenth
(10th) day
after the end of the six month period immediately following the filing date of
the registration statement covering the shares of common stock sold in the
Private Placement (the “Required Filing Date”). The Company agreed to
use its reasonable best efforts to cause the Subsequent Registration Statement
to become effective within one hundred fifty (150) days after the Required
Filing Date or the actual filing date, whichever is earlier, or one hundred
eighty (180) days after the Required Filing Date or the actual filing date,
whichever is earlier, if the Registration Statement is subject to a full review
by the SEC (the “Required
Effectiveness Date”).
If the
Company fails to file the Subsequent Registration Statement by the Required
Filing Date or if the Subsequent Registration Statement does not become
effective on or before the Required Effectiveness Date due to the failure of the
Company to fulfill its obligations under the Agreement, the Company is required
to issue, as liquidated damages, to each of the Original Stockholders, shares of
common stock (the “Penalty Shares”) equal to a total of 0.0333% of each Original
Stockholder’s respective shares for each calendar day that the Subsequent
Registration Statement has not been filed or declared effective by the SEC (and
until the Subsequent Registration Statement is filed with or declared effective
by the SEC), as applicable. No Penalty Shares shall be due to the
Original Stockholders if the Company is using its best efforts to cause the
Subsequent Registration Statement to be filed and declared effective in a timely
manner.
The
registration statement covering the shares of common stock sold in the Private
Placement was originally filed with the SEC on October 14,
2009. Therefore, the Required Effectiveness Date is on or about
April 24, 2010. The Company has used its best efforts to file the
Subsequent Registration Statement and believes the Original Stockholders agree
that the Company has used its best effort based on the continuing dialogue
between the Company and the Original Stockholders. The Company does not believe
it has incurred any liability to date and as long as the Company keeps using its
best efforts it will not incur a liability.
21
China
Electric Motor, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Amounts
and disclosures at and for the three months and nine months ended September 30,
2009 and 2008 are unaudited)
NOTE
18 – RECONCILIATION OF EARNINGS PER SHARE (EPS)
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator
|
||||||||||||||||
Net
income
|
$ | 3,193,143 | $ | 2,186,750 | $ | 8,336,735 | $ | 6,036,622 | ||||||||
Denominator
|
||||||||||||||||
Weighted-average
shares outstanding
|
||||||||||||||||
for
basic earnings per share
|
12,926,571 | 10,679,260 | 11,788,790 | 10,679,260 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Warrants
|
626,894 | - | 339,855 | - | ||||||||||||
Weighted-average
shares outstanding
|
||||||||||||||||
for
diluted earnings per share
|
13,553,465 | 10,679,260 | 12,128,645 | 10,679,260 | ||||||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | 0.25 | $ | 0.20 | $ | 0.71 | $ | 0.57 | ||||||||
Diluted
|
$ | 0.24 | $ | 0.20 | $ | 0.69 | $ | 0.57 |
NOTE
19 – SUBSEQUENT EVENTS
On
October 6, 2009, the Company conducted a final closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 768,988 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $1,597,095.
The
Company has evaluated subsequent events through the date that the financial
statements were issued, which was November 20, 2009, the date immediately
preceding the date of the Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2009.
22
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
The
following discussion relates to a discussion of the financial condition and
results of operations of China Electric Motor, Inc. (“China Electric”), China
Electric’s wholly-owned subsidiary Attainment Holdings Limited (“Attainment
Holdings”), and Attainment Holdings’ wholly-owned subsidiary Shenzhen
YuePengCheng Motor Co., Ltd. (“Shenzhen YPC”) (collectively referred to
throughout as the “Company,” “we,” “our,” and “us”).
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with its financial statements and the
related notes, and the other financial information included in this
report. .”
Forward-Looking
Statements
This
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and the related notes, and the other financial information
included in this Quarterly Report.
The
information contained in this report includes some statements that are not
purely historical and that are “forward-looking statements” as defined by the
Private Securities Litigation Reform Act of 1995. This Quarterly Report contains
forward-looking statements that involve substantial risks and uncertainties. All
statements other than historical facts contained in this report, including
statements regarding our future financial position, capital expenditures, cash
flows, business strategy and plans and objectives of management for future
operations, are forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
similar expressions are intended to identify forward-looking statements. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation, the current economic downturn adversely affecting demand for
the our products; our reliance on our major customers for a large portion of our
net sales; our ability to develop and market new products; our ability to raise
additional capital to fund our operations; our ability to accurately forecast
amounts of supplies needed to meet customer demand; market acceptance of our
products; exposure to product liability and defect claims; fluctuations in the
availability of raw materials and components needed for our products; protection
of our intellectual property rights; changes in the laws of the PRC that affect
our operations; inflation and fluctuations in foreign currency rates and various
other matters, many of which are beyond our control. Actual results may vary
materially and adversely from those anticipated, believed, estimated or
otherwise indicated should one or more of these risks or uncertainties occur or
if any of the risks or uncertainties described in elsewhere in this report
occur. Consequently, all of the forward-looking statements made in this filing
are qualified by these cautionary statements and there can be no assurance of
the actual results or developments.
Overview
Through
Shenzhen YPC, we engage in the design, production, marketing and sale of
micro-motor products. Our products, which are incorporated into household
appliances, vehicles and other consumer devices are sold under our “Sunna” brand
name.
We sell
our products directly to original equipment manufacturers and to distributors
and resellers. We do not have any long-term sales contract with any of our
customers. As a result it is necessary for us to estimate, based in part on
non-binding estimates by our customers and potential customers, the requirements
for our products. In addition, in some instances, we develop products based on
anticipated customer demand with no assurance that we will receive the
anticipated orders. To the extent that we do not receive the anticipated orders
or that our customers require products in greater quantities than anticipated,
our revenue and margins will be affected.
Recent
Events
On March
3, 2009, we entered into a share exchange agreement, with Attainment Holdings,
Attainment Holdings’ sole shareholder Excel Profit Global Group Limited, a
British Virgin Islands corporation (“Excel Profit”), and as to certain portions
of the agreement, certain designees, pursuant to which Excel Profit would
transfer all of the issued and outstanding securities of Attainment Holdings to
us in exchange for 11,069,260 shares of our common stock. The parties amended
the share exchange agreement on May 6, 2009. On May 6, 2009, the Share Exchange
closed and Attainment Holdings became our wholly-owned subsidiary. We also
changed our name to “China Electric Motor, Inc.” A total of 10,679,260 shares
were issued to the former sole shareholder of Attainment Holdings and the
designees.
We paid
an aggregate of $600,000 in connection with the Share Exchange, consisting of
$350,000 to WestPark Capital, Inc., the placement agent in the private placement
described below, and $250,000 to a third party unaffiliated with the Company,
Attainment Holdings or WestPark Capital. In addition, we paid WestPark
Capital a success fee of $140,000 for the Share Exchange and a due diligence fee
of $80,000.
23
On May 6,
2009, we received gross proceeds of approximately $665,000 in an initial closing
of a private placement transaction. Pursuant to subscription agreements
entered into with the investors, we sold an aggregate of 320,186 shares of
Common Stock at $2.08 per share. On June 19, 2009, we conducted a second
closing of the private placement, pursuant to which we sold an aggregate of
208,868 shares of Common Stock at $2.08 per share for gross proceeds of
approximately $433,800. On July 17, 2009, we conducted a third closing of
the private placement, pursuant to which we sold an aggregate of 272,342
shares of common stock at $2.08 per share, for gross proceeds of approximately
$565,625. On September 4, 2009, we conducted a fourth closing of the
private placement pursuant to which we sold an aggregate of 481,383 shares of
Common Stock at $2.08 per share, for gross proceeds of approximately
$999,775. On October 6, 2009, we conducted the fifth and final closing of
the private placement pursuant to which we sold an aggregate of 768,988 shares
of Common Stock at $2.08 per share, for gross proceeds of approximately $1.6
million. Accordingly, we sold a total of 2,051,767 shares of our common stock in
the private placement for total gross proceeds of $4.3 million (the “Private
Placement”). In connection with the Private Placement, we paid WestPark
Capital, the placement agent for the Private Placement, a commission equal to
8.5% of the gross proceeds from the Private Placement for aggregate fee of
$362,000.
In
connection with the initial closing of the Private Placement, Excel Profit
Global Group Ltd., a stockholder of the Company, issued a promissory note in the
principal amount of $335,000, bearing no interest, to Chen Dong on May 6, 2009
(the “Note”). The Company assumed the obligations under the Note as of the
date of the Note’s issuance. Originally, the principal was due and payable
by the Company on or before the earlier of (a) six months from the date of
issuance of the Note or (b) upon the receipt by the Company after the date of
the Note of at least $1 million in additional proceeds in the Private Placement,
however, the noteholder agreed to extend the Company’s re-payment of the Note
until the closing of the proposed firm commitment public offering (the “Public
Offering”) of the Company’s comment stock which will occur concurrently with the
Company’s proposed listing on the NASDAQ Global Market.
Jianrong
Li, one of our directors, shall convert approximately $1.3 million owed to her
by the Company as of the closing of the share exchange into shares of the
Company’s common stock on the effective date of the Public Offering, the
conversion price of such to be equal to the per share price of the shares sold
in the Public Offering.
On
October 8, 2009, our Board of Directors and our stockholders approved an
amendment to our Certificate of Incorporation to effect a 1-for-1.53846153846154
reverse stock split of all of our issued and outstanding shares of common stock
(the “Reverse Stock Split”). To effect the Reverse Stock Split, we will file the
amendment to the Certificate of Incorporation with the Secretary of the State of
Delaware, which will not be done sooner than 20 days after we mail an
information statement on Schedule 14C to our stockholders. The Reverse Stock
Split will occur immediately prior to the closing of the Company’s proposed firm
public offering that we propose to complete in accordance with the registration
statement on Form S-1 as filed with the SEC (File No. 333-162459), as the
holders of a majority of the outstanding shares of our common stock have
provided their consent to such corporate action. The par value and number of
authorized shares of our common stock will remain unchanged. All references to
number of shares and per share amounts included in this Form 10-Q gives effect
to the Reverse Stock Split. The number of shares and per share amounts included
in the consolidated financial statements and the accompanying notes have been
adjusted to reflect the Reverse Stock Split retroactively. Unless otherwise
indicated, all outstanding shares and earnings per share information contained
in this Form 10-Q gives effect to the Reverse Stock Split.
Critical
Accounting Policies and Estimates
The SEC
defines critical accounting policies as those that are, in management's view,
most important to the portrayal of our financial condition and results of
operations and those that require significant judgments and
estimates.
The
preparation of the condensed consolidated financial statements in this Report
requires our management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, as well as the
disclosure of contingent assets and liabilities at the date of our financial
statements. We base our estimates on historical experience, actuarial valuations
and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Some of those judgments can be subjective and complex and,
consequently, actual results may differ from these estimates under different
assumptions or conditions. While for any given estimate or assumption made by
our management there may be other estimates or assumptions that are reasonable,
we believe that, given the current facts and circumstances, it is unlikely that
applying any such other reasonable estimate or assumption would materially
impact the financial statements. The accounting principles we utilized in
preparing our consolidated financial statements conform in all material respects
to generally accepted accounting principles in the United States of
America.
Accounts
Receivable
We
typically provide payment terms ranging from 30 to 45 days. We examine the
creditworthiness of our customers prior to any transaction to limit our
collection risk. We use estimates in determining our allowance for bad
debts that are based on our historical collection experience, current trends,
credit policy and a percentage of our accounts receivable by aging category. In
determining these percentages, we review historical write-offs in our
receivables. In determining the appropriate reserve percentages, we also review
current trends in the credit quality of our customers, as well as changes in our
internal credit policies.
24
We
maintain reserves for potential credit losses on accounts receivable. Management
review the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patters to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis. Additional
allowances for doubtful accounts may be required if there is deterioration in
past due balances, if economic conditions are less favorable than anticipated,
or for customer-specific circumstances, such as financial
difficulty.
Inventories
Inventory
levels are based on projections of future demand and market conditions.
Inventories are stated at cost, no in excess of market, using the weighted
average cost method. Any sudden decline in demand and/or rapid product
improvements and technological changes can result in excess and/or obsolete
inventories. Because most of our products are customized and unique to a
particular customer, there is a risk that we will forecast inventory needs
incorrectly and purchase or produce excess inventory. As a result, actual
demand may differ from forecasts, and such differences, if not managed, may have
a material adverse effect on future results of operations due to required
write-offs of excess or obsolete inventory. To mitigate such exposure, we
require a binding purchase order or a signed agreement by our customer agreeing
to pay for and take possession of finished goods inventory parts for the
duration of the agreement.
On an
ongoing basis, inventories are reviewed for potential write-down for estimated
obsolescence or unmarketable inventories equal to the difference between the
costs of inventories and the estimated net realizable value based upon forecasts
for future demand and market conditions. To the extent that we increase
our reserves for future period, operating income will be reduced.
Revenue
Recognition
We
recognize revenues net of value added tax (VAT) when the earnings process is
complete, as evidenced by an agreement with the customer, transfer of title, and
acceptance of ownership and assumption of risk of loss by the customer, as well
as predetermined fixed pricing, persuasive evidence of an arrangement exists,
and collection of the relevant receivables is probable. We include shipping
charges billed to customers in net revenue, and include the related shipping
costs in cost of sales. No return allowance is made as products returns
are insignificant based on historical experience.
We do not
provide different policies in terms, warranties, credits, discounts, rebates,
price protection, or similar privileges among customers. Orders are placed
by both the distributors and OEMs and the products are delivered to the
customers within 30-45 days of order; we do not provide price protection or
right of return to customers. Product prices are predetermined and fixed based
on contractual agreements and, therefore, customers would be responsible for any
loss if they are faced with sales price reductions and technology obsolescence.
We do not allow any discounts, credits, rebates or similar
privileges.
We
warrant our products for up to 1 year from the date the products leave our
factory, under which we will pay for labor and parts, or offer a new or similar
unit in exchange for a non-performing unit due to defects in material or
workmanship. Customers may also return products for a variety of reasons,
such as damage to goods in transit, cosmetic imperfections and mechanical
failures, if within the warranty period. There is no allowance for
warranty on the products sales as historical costs incurred for warranty
replacements and repairs have been insignificant.
25
Results
of Operations
The
following table sets forth information from our statements of operations for the
three and nine months ended September 30, 2009 and 2008, in dollars in
thousands, except earnings per share and as a percentage of revenue
(unaudited):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
In Dollars
|
Percent of
Revenues
|
In Dollars
|
Percent of
Revenues
|
In Dollars
|
Percent of
Revenues
|
In Dollars
|
Percent of
Revenues
|
|||||||||||||||||||||||||
(in thousands, except earnings per share)
|
||||||||||||||||||||||||||||||||
Revenue
|
$ | 22,081 | 100.0 | % | $ | 14,163 | 100 | % | $ | 63,294 | 100 | % | $ | 39,050 | 100 | % | ||||||||||||||||
Cost
of goods sold
|
(15,598 | ) | 70.6 | % | (10,205 | ) | 72.1 | % | (45,461 | ) | 71.8 | % | (28,103 | ) | 72.0 | % | ||||||||||||||||
Gross
profit
|
6,483 | 29.4 | % | 3,958 | 27.9 | % | 17,833 | 28.2 | % | 10,947 | 28.0 | % | ||||||||||||||||||||
Operating
Costs and Expenses:
|
||||||||||||||||||||||||||||||||
Selling
expenses
|
1,129 | 5.1 | % | 709 | 5.0 | % | 3,170 | 5.0 | % | 2,011 | 5.1 | % | ||||||||||||||||||||
Bad
debts recovery
|
(3 | ) | * | - | - | (3 | ) | * | - | - | ||||||||||||||||||||||
Merger
costs
|
- | - | - | - | 938 | 1.5 | % | - | - | |||||||||||||||||||||||
Research
and development
|
476 | 2.2 | % | 275 | 1.9 | % | 1,264 | 2.0 | % | 703 | 1.8 | % | ||||||||||||||||||||
Depreciation
|
5 | * | 6 | * | 16 | * | 17 | * | ||||||||||||||||||||||||
General
and administration
|
808 | 3.7 | % | 296 | 2.1 | % | 1,683 | 2.7 | % | 836 | 2.1 | % | ||||||||||||||||||||
Total
operating costs and expenses
|
2,415 | 10.9 | % | 1,286 | 9.1 | % | 7,068 | 11.2 | % | 3,567 | 9.1 | % | ||||||||||||||||||||
Income
from operations
|
4,068 | 18.4 | % | 2,672 | 18.9 | % | 10,765 | 17.0 | % | 7,380 | 18.9 | % | ||||||||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||||||||||
Interest
income
|
7 | * | * | * | 20 | * | 2 | * | ||||||||||||||||||||||||
Imputed
interest
|
(36 | ) | 0.2 | % | (4 | ) | * | (70 | ) | 0.1 | % | (13 | ) | * | ||||||||||||||||||
Sundry
income (expenses), net
|
3 | * | * | * | 3 | * | (3 | ) | * | |||||||||||||||||||||||
Total
other income (expense)
|
(26 | ) | 0.1 | % | (3 | ) | * | (47 | ) | * | (14 | ) | * | |||||||||||||||||||
Income
before income taxes
|
4,043 | 18.3 | % | 2,668 | 18.8 | % | 10,718 | 16.9 | % | 7,366 | 18.9 | % | ||||||||||||||||||||
Provision
for income taxes
|
(850 | ) | 3.8 | % | (482 | ) | 3.4 | % | (2,382 | ) | 3.8 | % | (1,329 | ) | 3.4 | % | ||||||||||||||||
Net
income
|
$ | 3,193 | 14.5 | % | $ | 2,187 | 15.4 | % | $ | 8,337 | 13.2 | % | $ | 6,037 | 15.5 | % | ||||||||||||||||
Basic
earnings per share
|
$ | 0.25 | $ | 0.20 | $ | 0.71 | $ | 0.57 | ||||||||||||||||||||||||
Diluted
earnings per share
|
$ | 0.24 | $ | 0.20 | $ | 0.69 | $ | 0.57 |
* Less
than $1,000 or 0.1%.
Three
Months Ended September 30, 2009 and 2008
Revenues
for the three months ended September 30, 2009 were $22.1 million, an increase of
55.9%, compared to revenues of $14.2 million for the three months ended
September 30, 2008. The increase in revenues was primarily attributable to
a 69% increase in the number of micro-motor units sold during the three months
ended September 30, 2009. The increase in revenues was partially
offset by the mix of the types of products sold during the period. During
the three months ended September 30, 2009, we sold more of our lower
priced-products than our higher-priced products, which include our numerical
control motor products.
Cost of
goods sold consists of the cost of motor sales and other materials. Cost
of goods sold was $15.6 million for the three months ended September 30, 2009,
an increase of $5.4 million, or 52.8%, compared to $10.2 million for the three
months ended September 30, 2008. This increase was primarily due to an
increase in our sales volume. As a percentage of revenues, cost of goods
sold decreased to 70.6% for the three months ended September 30, 2009 compared
to 72.1% for the comparable period in 2008. This decrease was attributable
to a change in the mix of products sold during the periods.
Gross
profit for the three months ended September 30, 2009, was $6.5 million, or 29.4%
of revenues, compared to $4.0, or 27.9% of revenues, for the comparable period
in 2008. Management considers gross profit to be a key performance
indicator in managing our business. Gross profit margins are usually a
factor of cost of sales, product mix and demand for product. The increase
in our gross profit margin for the three months ended September 30, 2009 is
primarily due to a change in the mix of products sold, which included an
increase in sales of our newer products with higher gross margins.
Selling
expenses were $1.1 million for the three months ended September 30, 2009,
compared to $709,000 for the comparable period in 2008. The increase was
due to our expansion of our team of sales representatives and a 69% increase in
our sales volume.
Research
and development (“R&D”) costs were $476,000 or 2.2% of revenues in the three
months ended September 30, 2009, compared to $275,000 or 1.9% of revenues in the
comparable period in 2008, representing a 72.8% increase. The
increased spending on R&D in 2009 was primarily due to our increased
research and development efforts on new products. In the future, our
R&D spending could increase to support new products and spur the future
growth of the Company.
General
and administrative expenses for the three months ended September 30, 2009 were
$808,000, or 3.7% of revenues, compared to $296,000, or 2.1% of revenues, for
the comparable period in 2008. General and administrative expenses include
office expenses, salary and benefits, rent and utilities and other
expense. The increase in general and administrative expenses for the three
months ended September 30, 2009 as compared to the comparable period in 2008 was
primarily due to an increase of $12,000 in office expenses,
an increase of $56,000 in salary and benefit expenses, an
increase of $290,000 in professional fees such as legal, auditing, and
consulting, and an increase of $154,000 in other expenses. We expect our
general and administrative expenses to increase as a result of professional fees
incurred as a result of being a publicly reporting company in the United
States.
Interest
income for the three months ended September 30, 2009 was $7,000 compared to
interest income of $449 for the comparable period in 2008. The increase in
interest income is primarily due to an increased deposit balance in our bank
account.
26
Imputed
interest expense for the three months ended September 30, 2009 was $36,000,
compared to $4,000 for the comparable period in 2008, an increase of
843.7%. The increase in imputed interest expense was due to an increase in
imputed interest expense of $29,000 related to interest on a loan
from one of our directors. Additionally, in the three months ended
September 30, 2009, we incurred imputed interest expense of $7,000 related to an
interest-free promissory note payable by the Company. The holder of the
note agreed to extend the repayment of the note until the closing of the
Company’s proposed public offering.
Income
tax expense for the three months ended September 30, 2009 were $850,000 as
compared to income tax expense of $482,000, for the comparable period in
2008. The increase in income tax expense for the three months ended
September 30, 2009 was primarily due to an increase in our taxable income in the
three months ended September 30, 2009 and an increase in our tax rate to 20% for
the three months ended September 30, 2009 from 18% in the comparable period in
2008. Shenzhen YPC is registered in PRC and has had tax advantages granted
by local government for corporate income taxes and sales taxes. On March
16, 2007, the National People’s Congress of China enacted a new PRC Enterprise
Income Tax Law, under which foreign invested enterprises and domestic companies
will be subject to enterprise income tax at a uniform rate of 25%. The new
law became effective on January 1, 2008. During the transition period for
enterprises established before March 16, the tax rate will be gradually
increased starting in 2008 and be equal to the new tax rate in 2012. We
believe that our profitability will be negatively affected in the near future as
a result of the new EIT Law.
Net
Income for the three months ended September 30, 2009 was $3.2 million compared
to $2.2 million for the three months ended September 30, 2008.
Nine
months Ended September 30, 2009 and 2008
Revenues
for the nine months ended September 30, 2009 were $63.3 million, an increase of
62.1%, compared to revenues of $39.0 million for the nine months ended September
30, 2008. The increase in revenues was largely due to a 74% increase in the
number of units sold during the nine months ended September 30, 2009, which was
attributable to increased orders from new and existing customers. Our
increase in revenues was partially offset by the mix of the types of products
sold during the period. During the nine months ended September 30, 2009,
we sold more of our lower priced-products than our higher-priced products, which
include our numerical control motor products.
Revenues
from sales of our Home Appliance Series of products were $41.2 million, or 65%
of total revenues, for the nine months ended September 30, 2009, a 80% increase
from revenues of $22.9 million, or 59% of total revenues, for the nine months
ended September 30, 2008 for products in our Home Appliance Series.
Revenues from sales of our Auto Parts Series of products were $13.7 million, or
22% of total revenues, for the nine months ended September 30, 2009, a
28% increase from revenues of $10.7 million, or 27% of total revenues, for
the nine months ended September 30, 2008 for products in our Auto Parts
Series. Revenues from sales of our Digital Motor Series of products were
$8.3 million, or 13% of total revenues, for the nine months ended September
30, 2009, a 54% increase from revenues of $5.5 million, or 14% of total
revenues, for the nine months ended September 30, 2008 for products in our
Digital Motor Series.
Cost of
goods sold consists of the cost of motor sales and other materials. Cost
of goods sold was $45.5 million for the nine months ended September 30, 2009, an
increase of $17.4 million, or 61.8%, compared to $28.1 million for the nine
months ended September 30, 2008. This increase was primarily due to an
increase in our sales volume. As a percentage of revenues, cost of goods
sold decreased to 71.8% for the nine months ended September 30, 2009 compared to
72.0% for the comparable period in 2008. This decrease was attributable to
a slight change in the mix of products sold during the periods.
Gross
profit for the nine months ended September 30, 2009, was $17.8 million, or 28.2%
of revenues, compared to $10.9 million, or 28.0% of revenues, for the comparable
period in 2008. Management considers gross profit to be a key performance
indicator in managing our business. Gross profit margins are usually a
factor of cost of sales, product mix and demand for product. The
increase in our gross profit margin for the nine months ended September 30, 2009
is primarily due to a change in the mix of products sold, which included an
increase in sales of our newer products with higher gross margins.
Selling
expenses were $3.2 million for the nine months ended September 30, 2009,
compared to $2.0 million for the comparable period in 2008. The increase
was due to a 74% increase in our sales volume.
We
incurred merger costs of $938,000 in the nine months ended September 30, 2009
related to the share exchange transaction which closed on May 6,
2009.
Research
and development (“R&D”) costs were $1.3 million or 2.0% of revenues in the
nine months ended September 30, 2009, compared to $703,000 or 1.8% of revenues
in the comparable period in 2008, representing a 79.8% increase. The
increased spending on R&D in 2009 was primarily due to our increased
research and development efforts on new products.
27
General
and administrative expenses for the nine months ended September 30, 2009 were
$1.7 million, or 2.7% of revenues, compared to $836,000, or 2.1% of revenues,
for the comparable period in 2008. General and administrative expenses
include office expenses, salary and benefits, rent and utilities and other
expense. The increase in general and administrative expenses for the nine
months ended September 30, 2009 as compared to the comparable period in 2008 was
primarily due to an increase of $125,000 in office expenses, an increase of
$127,000 in salary and benefit expenses, an increase of $324,000 in professional
fees such as legal, auditing, and consulting, and an increase of $270,000 in
other expenses. We expect our general and administrative expenses to
increase as a result of professional fees incurred as a result of being a
publicly reporting company in the United States.
Interest
income for the nine months ended September 30, 2009 was $20,000 compared to
interest income of $2,000 for the comparable period in 2008. The increase
in interest income is primarily due to an increased deposit balance in our bank
account.
Imputed
interest expense for the nine months ended September 30, 2009 was $70,000,
compared to $13,000 for the comparable period in 2008, an increase of
426.8%. The increase in imputed interest expense was due to an increase in
imputed interest expenses of $63,000 related to interest on a loan
from one of our directors. Additionally, in the nine months ended
September 30, 2009, we incurred imputed interest expense of $7,000 related to an
interest-free promissory note payable by the Company. The holder of the
note agreed to extend the repayment of the note until the closing of the
Company’s proposed public offering.
Income
tax expenses for the nine months ended September 30, 2009 were $2.4 million, as
compared to income tax expenses of $1.3 million for the comparable period in
2008. The increase in income tax expense for the nine months ended
September 30, 2009 was primarily due to an increase in our taxable income in the
nine months ended September 30, 2009 and an increase in our tax rate to 20% for
the nine months ended September 30, 2009 from 18% in the comparable period in
2008.
Net
Income for the nine months ended September 30, 2009 was $8.3 million compared to
$6.0 million for the nine months ended September 30, 2008.
Liquidity
and Capital Resources
We had
cash and cash equivalents of $6.5 million as of September 30, 2009, as compared
to $2.7 million as of December 31, 2008. Our funds are kept in financial
institutions located in China, and these funds are not insured. We have
historically funded our operations from revenues.
We paid
an aggregate of $600,000 in connection with the Share Exchange, including
$350,000 to WestPark Capital, Inc., the placement agent, and $250,000 to a third
party unaffiliated with the Company, Attainment Holdings or WestPark
Capital. In addition, we also paid WestPark Capital a success fee of
$140,000 for the Share Exchange and a due diligence fee of $80,000.
Jianrong
Li, one of our directors, shall convert approximately $1.3 million owed to her
by the Company at the closing of the Share Exchange into shares of the Company’s
common stock on the effective date of the Company’s proposed firm commitment
public offering (the “Public Offering”) which will occur concurrently with the
Company’s listing on the NADSAQ Global Market, the conversion price of such to
be equal to the per share price of the shares sold in the Public
Offering.
We are
subject to the regulations of the PRC which restricts the transfer of cash from
China, except under certain specific circumstances. Accordingly, such
funds may not be readily available to us to satisfy obligations which have been
incurred outside the PRC.
Our
accounts receivable has been an increasingly significant portion of our current
assets, representing $7.8 million as of September 30, 2009 and $5.2 million as
of December 31, 2008. If customers responsible for a significant amount of
accounts receivable were to become insolvent or otherwise unable to pay for our
products, or to make payments in a timely manner, our liquidity and results of
operations could be materially adversely affected. An economic or industry
downturn could materially adversely affect the servicing of these accounts
receivable, which could result in longer payment cycles, increased collections
costs and defaults in excess of management’s expectations. A significant
deterioration in our ability to collect on accounts receivable could affect our
cash flow and working capital position and could also impact the cost or
availability of financing available to us.
We
provide our major customers with payment terms ranging from 30 to 45
days. Additionally, our production lead time is approximately three weeks,
from the inspection of incoming materials, to production, testing and
packaging. We need to keep a large supply of raw materials and work in
process and finished goods inventory on hand to ensure timely delivery of our
products to our customers. We typically offer certain of our customers 30
to 90 days credit terms for payment. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Allowance for doubtful accounts is based on our
assessment of the collectability of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry. If a major customer’s credit worthiness deteriorates, or our
customers’ actual defaults exceed historical experience, our estimates could
change and impact our reported results. We have not experienced any
significant amount of bad debt since the inception of our
operation.
As of
September 30, 2009, inventories amounted to $7.2 million, as compared to $7.3
million as of December 31, 2008.
28
On May 6,
2009, we received gross proceeds of approximately $665,000 in an initial closing
of a private placement transaction. Pursuant to subscription agreements
entered into with the investors, we sold an aggregate of 320,186 shares of
Common Stock at $2.08 per share. On June 19, 2009, we conducted a second
closing of the private placement, pursuant to which we sold an aggregate of
208,868 shares of Common Stock at $2.08 per share for gross proceeds of
approximately $433,800. On July 17, 2009, we conducted a third closing of
the private placement, pursuant to which we sold an aggregate of 272,342
shares of common stock at $2.08 per share, for gross proceeds of approximately
$565,625. On September 4, 2009, we conducted a fourth closing of the
private placement pursuant to which we sold an aggregate of 481,383 shares of
Common Stock at $2.08 per share, for gross proceeds of approximately
$999,775. On October 6, 2009, we conducted the fifth and final closing of
the private placement pursuant to which we sold an aggregate of 768,988 shares
of Common Stock at $2.08 per share, for gross proceeds of approximately $1.7
million. Accordingly, we sold a total of 2,051,767 shares of our common stock in
the private placement for total gross proceeds of $4.3 million (the “Private
Placement”). In connection with the Private Placement, we paid WestPark
Capital, Inc., the placement agent for the Private Placement, a commission equal
to 8.5% of the gross proceeds from the Private Placement for aggregate fee of
$362,000.
We agreed
to file a registration statement covering the common stock sold in the Private
Placement within 30 days of the final closing of the Private Placement and to
pay for all costs related to the registration of the shares. We initially
filed the registration statement with the SEC on October 4, 2009, within the
30-day time period.
In
connection with the initial closing of the Private Placement, Excel Profit
Global Group Ltd., a stockholder of the Company, issued a promissory note in the
principal amount of $335,000, bearing no interest, to Chen Dong on May 6, 2009
(the “Note”). The Company assumed the obligation under the Note as of the
date of the Note’s issuance. Originally, the principal was due and payable
on or before the earlier of (a) six months from the date of issuance of the Note
or (b) upon the receipt by the Company after the date of the Note of at least $1
million in additional proceeds in the Private Placement, however, the noteholder
agreed to extend the Company’s re-payment of the Note until the closing of the
proposed firm commitment Public Offering.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total contributions to
the funds were approximately $7,470 and $22,334 for the three and nine months
ended September 30, 2009 and $5,708 and $14,329 for the three and nine
months ended September 30, 2008. We expect that the amount of our
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations and commence contributions to
an employee housing fund.
Net cash
provided by operating activities was $6.8 million for the nine months ended
September 30, 2009, compared to net cash provided by operations of $4.2 million
for the nine months ended September 30, 2008. The $2.6 million increase
was primarily due to an increase in operating profit.
Net cash
used in investing activities amounted to approximately $5.8 million for the nine
months ended September 30, 2009, compared to net cash used in investing
activities of $407,000 for the nine months ended September 30, 2008. The
change was due to an increase in our investment in fixed assets.
Net cash
provided by financing activities amounted to $2.9 million for the nine months
ended September 30, 2009, compared to net cash used by financing activities of
$2.4 million for the nine months ended September 30, 2008. The increase of
cash provided by financing activities was primarily a result of the receipt
of $2.4 million in cash proceeds from the Private Placement in the nine months
ended September 30, 2009 and the payment of $2.1 million in dividends during the
nine months ended September 30, 2008.
Our
ability to maintain sufficient liquidity depends partially on our ability to
achieve anticipated levels of revenue, while continuing to control costs.
If we did not have sufficient available cash, we would have to seek debt or
equity financing through other external sources, which may not be available on
acceptable terms, or at all. Failure to maintain financing arrangements on
acceptable terms would have a material adverse effect on our business, results
of operations and financial condition.
Recent
Accounting Pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification (ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to
various former authoritative U.S. GAAP pronouncements have been changed to
coincide with the appropriate section of the ASC.
29
In
September 2006, the FASB issued an accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements, and
required disclosures of assets and liabilities measured at fair value based on
their level in the hierarchy. This standard applies under other accounting
standards that require or permit fair value measurements. One of the amendments
deferred the effective date for one year relative to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at
fair value on a nonrecurring basis. This deferral applied to such items as
nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. The adoption of the fair value measurement standard did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended June 30,
2009.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In
April 2009, the FASB issued an accounting standard which modifies the
requirements for recognizing other-than-temporarily impaired debt securities and
changes the existing impairment model for such securities. The standard also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the standard, impairment of debt
securities will be considered other-than-temporary if an entity (1) intends
to sell the security, (2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The standard further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. The standard requires entities to initially apply its
provisions to previously other-than-temporarily impaired debt securities
existing as of the date of initial adoption by making a cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously other-than-temporarily impaired debt security
held as of the date of initial adoption from retained earnings to accumulated
other comprehensive income. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. This standard added an additional
required disclosure relative to the date through which subsequent events have
been evaluated and whether that is the date on which the financial statements
were issued. For the Company,
this standard was effective beginning April 1, 2009.
30
In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing guidance on transfers of
financial assets to, among other things, eliminate the qualifying
special-purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The adoption of this standard is not expected to have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.
Contractual
obligations
The
following table describes our contractual commitments and obligations as of
September 30, 2009:
|
Payments due by Period (in $)
|
|||||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1 – 3
Years
|
3 – 5
Years
|
More
Than
5 Years
|
|||||||||||||||
Operating
lease obligations
|
$ | 209,385 | $ | 167,508 | $ | 41,877 | $ | - | $ | - |
Seasonality
Our
business is not seasonal in nature. The seasonal effect does not have
material impact on our sales.
Off-Balance
Sheet Arrangements
We have
no material off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Concentration
of Credit Risk
A
significant portion of our cash is maintained at various financial institutions
in the PRC which do not provide insurance for amounts on deposit. We have not
experienced any losses in such accounts and believe we are not exposed to
significant credit risk in this area.
Interest
Rate Risk
We may
face some risk from potential fluctuations in interest rates, although our debt
obligations are primarily short-term in nature, but some bank loans have
variable rates. If interest rates have great fluctuations, our financing
cost may be significantly affected.
Foreign
Currency Risk
Substantially
all of our operations are conducted in the PRC and our primary operational
currency in Chinese Renminbi (“RMB”). As a result, currently the effect of
the fluctuations of RMB exchange rates only has minimum impact on our business
operations, but will be increasingly material as we introduce our products
widely into new international markets. Substantially all of our revenues
and expenses are denominated in RMB. However, we use the United States
dollar for financial reporting purposes. Conversion of RMB into foreign
currencies is regulated by the People’s Bank of China through a unified floating
exchange rate system. Although the PRC government has stated our intention
to support the value of the RMB, there can be no assurance that such exchange
rate will not again become volatile or that the RMB will not devalue
significantly against the U.S. dollar. Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from our operations in the PRC.
31
Country
Risk
The
substantial portion of our assets and operations are located and conducted in
China. While the PRC economy has experienced significant growth in the
past twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various
measures to encourage economic growth and guide the allocation of
resources. Some of these measures benefit the overall economy of China,
but may also have a negative effect on us. For example, our operating
results and financial condition may be adversely affected by government control
over capital investments or changes in tax regulations applicable to us.
If there are any changes in any policies by the Chinese government and our
business is negatively affected as a result, then our financial results,
including our ability to generate revenues and profits, will also be negatively
affected.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and
procedures, which are designed to ensure that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer, or CEO, and Chief Financial
Officer, or CFO, as appropriate to allow timely decisions regarding required
disclosure.
Based on
an evaluation carried out as of the end of the period covered by this quarterly
report, under the supervision and with the participation of our management,
including our CEO and CFO, our CEO and CFO have concluded that, as of the end of
such period, our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) were
effective as of September 30, 2009.
Changes
in Internal Control Over Financial Reporting
Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 of
the Exchange Act, there were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Part II.
Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
On May 6, 2009, we (i) closed a
share exchange transaction, described above, pursuant to which we became the
100% parent of Attainment Holdings Limited, (ii) assumed the operations of
Attainment Holdings and its subsidiaries, including Shenzhen YPC, and (iii)
changed our name from SRKP 21, Inc. to China Electric Motor, Inc. The risk
factors for the Company post-share exchange are set forth in the Company’s
current report on form 8-K/A filed with the SEC on October 27, 2009. These
risk factors differ materially from the risk factors disclosed in the “Risk
Factors” section of our annual report on Form 10-K for the year ended December
31, 2008 which was filed with the SEC on February 17, 2009, prior to the closing
of the share exchange transaction. There have been no material changes in
the risk factors of the Company as previously disclosed in the Company’s Current
Report on Form 8-K/A filed with the SEC on October 27, 2009.
Item
2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item
3. Default Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
32
Item
6. Exhibits
(a)
Exhibits
Exhibit
Number
|
Description of Document
|
|
10.1
|
Shenzhen
Real Estate Lease Agreement dated as of October 9, 2009 by and between
Shenzhen Jianhuilong Industry Co., Ltd. and Shenzhen YuePengCheng Motor
Co., Ltd. (translated to English).
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
* This
exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
section, nor shall it be deemed incorporated by reference in any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
33
CHINA
ELECTRIC MOTOR, INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
China
Electric Motor, Inc.
|
||
Dated:
November 23, 2009
|
/s/
Yue Wang
|
|
By:
|
Yue
Wang
|
|
Its:
Chief Executive Officer
|
||
/s/
Haixia Zhang
|
||
By:
|
Haixia
Zhang
|
|
Its:
Chief Financial
Officer
|
34