Attached files
Exhibit
99.1B
HAINAN
JIEN INTELLIGENT ENGINEERING CO., LTD
FINANCIAL
STATEMENTS
DECEMBER
31, 2008 and 2007
Contents
| Page | ||||
| Reports of Independent Registered Public Accounting Firms | 1-2 | |||
| Financial Statements: | 3 | |||
| Balance Sheets as of December 31, 2008 and 2007 | 4 | |||
| Statements of Operations for the Years Ended December 31, 2008 and 2007 | 5 | |||
| Statements of Shareholders’ Equity for the Years Ended December 31, 2008 and 2007 | 6 | |||
| Statements of Cash Flows for the Years Ended December 31, 2008 and 2007 | 7-15 | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Hainan Jien Intelligent Engineering Co., Ltd.
We have
audited the accompanying balance sheet of Hainan Jien Intelligent Engineering
Co., Ltd. (“the Company”) as of December 31, 2008, and the related statements of
operations and comprehensive income, stockholders’ equity and cash flows for the
year then ended. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audit.
We have
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2008, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/
Morison Cogen, LLP
Bala
Cynwyd, Pennsylvania
November
16, 2009
1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
shareholders of Hainan Jien Intelligent Engineering Co. Ltd.
We have
audited the balance sheet of Hainan Jien Intelligent Engineering Co.
Ltd. (the “Company”) as of December 31, 2007 and the related
statements of income and other comprehensive income, shareholders equity and
cash flows for year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2007
and the results of its operations and its cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
/s/
Goldman Parks Kurland Mohidin LLP
Encino,
California
April 15,
2008
2
HAINAN
JIEN INTELLIGENT ENGINEERING CO., LTD.
BALANCE
SHEETS
AS
OF
DECEMBER
31, 2008 and 2007
(AUDITED)
|
ASSETS
|
December
31, 2008
|
December
31, 2007
|
||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
& cash equivalents
|
$ | 68,101 | $ | 291,129 | ||||
|
Restricted
cash
|
3,449 | - | ||||||
|
Accounts
receivable, net
|
1,415,415 | 651,288 | ||||||
|
Retentions
receivable
|
53,716 | 98,395 | ||||||
|
Prepaid
expenses
|
257,306 | - | ||||||
|
Other
receivables
|
108,333 | 143,929 | ||||||
|
Inventory
|
118,800 | 17,134 | ||||||
|
Total
current assets
|
2,025,120 | 1,201,875 | ||||||
|
RETENTIONS
RECEIVABLE
|
202,666 | 98,886 | ||||||
|
PROPERTY
AND EQUIPMENT, net
|
78,919 | 37,219 | ||||||
|
TOTAL
ASSETS
|
$ | 2,306,705 | $ | 1,337,980 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 409,221 | $ | 349,966 | ||||
|
Unearned
revenue
|
268,725 | - | ||||||
|
Tax
payable
|
235,774 | 334,329 | ||||||
|
Other
payables and accrued liabilities
|
80,740 | 50,129 | ||||||
|
Total
current liabilities
|
994,460 | 734,424 | ||||||
|
CONTINGENCIES
AND COMMITMENTS
|
||||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||
|
Paid
in capital
|
120,824 | 120,824 | ||||||
|
Statutory
reserve
|
67,737 | 44,738 | ||||||
|
Accumulated
other comprehensive income
|
83,016 | 31,765 | ||||||
|
Retained
earnings
|
1,040,668 | 406,229 | ||||||
|
Total
stockholders' equity
|
1,312,245 | 603,556 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 2,306,705 | $ | 1,337,980 | ||||
3
HAINAN
JIEN INTELLIGENT ENGINEERING CO., LTD.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
YEARS ENDED
DECEMBER
31, 2008 and 2007
(AUDITED)
|
YEARS
ENDED
|
||||||||
|
DECEMBER
31
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
sales
|
$ | 5,554,357 | $ | 3,580,253 | ||||
|
Cost
of goods sold
|
(4,403,810 | ) | (2,732,574 | ) | ||||
|
Gross
profit
|
1,150,547 | 847,679 | ||||||
|
Operating
expenses
|
||||||||
|
Selling
expenses
|
(103,774 | ) | (15,351 | ) | ||||
|
General
and administrative expenses
|
(385,486 | ) | (346,918 | ) | ||||
|
Total
operating expenses
|
(489,260 | ) | (362,269 | ) | ||||
|
Income
from operations
|
661,287 | 485,410 | ||||||
|
Non-operating
income (expenses)
|
||||||||
|
Interest
income
|
189 | 102 | ||||||
|
Interest
expense
|
(2,937 | ) | (723 | ) | ||||
|
Other
income
|
547 | 6,551 | ||||||
|
Other
expenses
|
(1,648 | ) | (2,778 | ) | ||||
|
Total
non-operating income (expenses)
|
(3,849 | ) | 3,152 | |||||
|
Net
income
|
$ | 657,438 | $ | 488,562 | ||||
|
Other
comprehensive item
|
||||||||
|
Foreign
currency translation
|
51,251 | 26,990 | ||||||
|
Comprehensive
Income
|
$ | 708,689 | $ | 515,552 | ||||
4
HAINAN
JIEN INTELLIGENT ENGINEERING CO., LTD.
STATEMENTS
OF STOCKHOLDERS' EQUITY
FOR
YEARS ENDED
DECEMBER
31, 2008 and 2007
(AUDITED)
|
Paid
in capital
|
Statutory
reserves
|
Other
comprehensive income
|
(Accumulated
deficit) / Retained earnings
|
Total
|
||||||||||||||||
|
Balance
at January 1, 2007
|
$ | 120,824 | $ | - | $ | 4,775 | $ | (37,595 | ) | $ | 88,004 | |||||||||
|
Net
income for the year
|
- | - | - | 488,562 | 488,562 | |||||||||||||||
|
Transfer
to statutory reserves
|
- | 44,738 | - | (44,738 | ) | - | ||||||||||||||
|
Foreign
currency translation gain
|
- | - | 26,990 | - | 26,990 | |||||||||||||||
|
Balance
at December 31, 2007
|
120,824 | 44,738 | 31,765 | 406,229 | 603,556 | |||||||||||||||
|
Net
income for the year
|
- | - | - | 657,438 | 657,438 | |||||||||||||||
|
Transfer
to statutory reserves
|
- | 22,999 | - | (22,999 | ) | - | ||||||||||||||
|
Foreign
currency translation gain
|
- | - | 51,251 | - | 51,251 | |||||||||||||||
|
Balance
at December 31, 2008
|
$ | 120,824 | $ | 67,737 | $ | 83,016 | $ | 1,040,668 | $ | 1,312,245 | ||||||||||
5
HAINAN
JIEN INTELLIGENT ENGINEERING CO., LTD.
STATEMENTS
OF CASH FLOW
FOR
YEARS ENDED
DECEMBER
31, 2008 and 2007
(AUDITED)
|
YEARS
ENDED
|
|||||||||
|
DECEMBER
31,
|
|||||||||
|
2008
|
2007
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||
|
Net income
|
$ | 657,438 | $ | 488,562 | |||||
|
Adjustments
to reconcile net income to net cash
|
|||||||||
|
(used
in) provided by operating activities:
|
|||||||||
|
Depreciation
|
21,286 | 13,638 | |||||||
|
Change
in allowance for doubtful accounts
|
27,487 | - | |||||||
|
(Increase)
decrease in current assets:
|
|||||||||
|
Restricted
cash
|
(3,394 | ) | - | ||||||
|
|
Accounts
receivable
|
(736,318 | ) | (570,299 | ) | ||||
|
|
Retentions
receivable
|
(45,095 | ) | (174,676 | ) | ||||
|
|
Prepaid
expenses and other receivables
|
(208,649 | ) | (32,745 | ) | ||||
|
|
Inventory
|
(98,914 | ) | (11,249 | ) | ||||
|
Increase
(decrease) in current liabilities:
|
|||||||||
|
|
Accounts
payable
|
35,132 | 213,128 | ||||||
|
|
Unearned
revenue
|
264,449 | - | ||||||
|
|
Other
payables and accrued liabilities
|
28,004 | 34,326 | ||||||
|
|
Tax
payable
|
(119,130 | ) | 173,530 | |||||
|
Net
cash (used in) provided by operating activities
|
(177,704 | ) | 134,215 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||
|
Acquisition
of property & equipment
|
(59,858 | ) | (1,531 | ) | |||||
|
Net
cash used in investing activities
|
(59,858 | ) | (1,531 | ) | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||
|
Due
to (from) related parties
|
(1,200 | ) | 100,565 | ||||||
|
Net
cash (used in) provided by financing activities
|
(1,200 | ) | 100,565 | ||||||
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
15,734 | 13,080 | |||||||
|
NET
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS
|
(223,028 | ) | 246,329 | ||||||
|
CASH
& CASH EQUIVALENTS, BEGINNING OF YEAR
|
291,129 | 44,800 | |||||||
|
CASH
& CASH EQUIVALENTS, END OF YEAR
|
$ | 68,101 | $ | 291,129 | |||||
|
Supplemental
Cash flow data:
|
|||||||||
|
Interest
paid
|
$ | 2,985 | $ | 1,344 | |||||
6
HAINAN
JIEN INTELLIGENT ENGINEERING CO., LTD.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008 and 2007
(Audited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hainan
Jien Intelligent Engineering Co. Ltd. (the “Company” or “Jien”) was incorporated
in the Hainan Province, People’s Republic of China (“PRC”) in
1999. Jien is engaged in providing full service of design and
installation of intelligentized equipment for business and residential
communities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Presentation
The
accompanying financial statements have been prepared in conformity with US
GAAP. The Company’s functional currency is the Chinese Renminbi;
however, the accompanying financial statements have been translated and
presented in United States Dollars ($).
Use
of Estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2008, the Company maintained total restricted
cash of $3,449 in a bank account, represented cash deposit from a customer for
partial settlement of retention receivable that is due in 2011. The restricted
cash will be released in 2011 after the retention period expires.
Accounts
and Retentions Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical
collection activity, the Company made allowance of approximately $27,931 and
$1,692 at December 31, 2008 and 2007, respectively.
At
December 31, 2008 and 2007, the Company had retentions receivable for product
quality assurance in the amount of $256,832 and $197,281,
respectively. The retention rate varies from 3% to 5% of the sales
price with variable terms from 1 year to 3 years. At December 31,
2008, $53,716 of the retentions receivable are current and due within one year,
and $202,666 of the retentions receivable are noncurrent. At December
31, 2007, $98,395 of the retentions receivable are current and due within one
year, and $98,886 of the retentions receivable are noncurrent.
7
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a first in,
first out basis.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation is
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with a 5% salvage value
and estimated lives ranging from 5 to 20 years as follows:
Building 20
years
Leasehold
improvements
Shorter of lease term or 10 years
Vehicle
5 years
Office
Equipment 5
years
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily
determinable. Based on its review, the Company believes that, as of
December 31, 2008 and 2007, there were no significant impairments of its
long-lived assets.
Warranties
The
Company offers warranty to its customers on its products for a period from three
months to three years depending on the contract terms negotiated with the
customers; most of warranty term is one year. The Company accrues for warranty
costs based on estimates of the costs that may be incurred under its warranty
obligations. The warranty expense and related accrual is included in the
Company's selling expenses and other payable respectively, and is recorded at
the time revenue is recognized. Factors that affect the Company's warranty
liability include the number of sold equipment, its estimates of anticipated
rates of warranty claims, costs per claim and estimated support labor costs and
the associated overhead. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary.
The
Company's warranty reserve at December 31, 2008 was as follows:
|
Beginning
balance
|
$
|
-
|
||
|
Provisions
made
|
73,715
|
|||
|
Changes
in estimates
|
-
|
|||
|
Actual
costs incurred
|
(28,943)
|
|||
|
Ending
balance, included in other payables and accrued expenses
|
$
|
44,772
|
8
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits are classified as interest expense and
penalties are classified in selling, general and administrative expenses in the
statements of income. At December 31, 2008 and 2007, the Company did not take
any uncertain positions that would necessitate recording of tax related
liability.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”)
104. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist and
collectibility is reasonably assured. Payments received before all of
the relevant criteria for revenue recognition are recorded as unearned
revenue.
The
Company records its revenue when certain milestones as defined in the service
contract are reached. These service contracts have clear milestones and
deliverables with distinct values assigned to each milestone. The
milestones do not require the delivery of multiple elements as noted in Emerging
Issues Task Force (“EITF”) Issue 00-21 “Revenue Arrangements with Multiple
Deliverables” ("EITF No. 00-21"). In accordance with SAB No. 104,
the Company treats each milestone as an individual revenue agreement and only
recognizes revenue for each milestone when all the conditions of SAB 104 defined
earlier are met.
The
Company is qualified as a small business so that all of the Company’s products
sold or services provided in the PRC are subject to a fixed low value-added tax
(“VAT”) of 4% of the gross sales price regardless of the VAT
paid. Sales revenue represents the invoiced value of goods or
services, net of VAT. This VAT cannot be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished.
9
VAT
deducted from sales was $ 8,357 and $ 39,039 for the year ended December 31,
2008 and 2007, respectively. Sales are recorded net of VAT collected
as the Company acts as an agent for the government.
The
standard warranty of the Company is provided to its customers and is not
considered an additional service; rather it is considered an integral part of
the product and services’ sale. The Company believes that the existence of its
standard product warranty in a sales contract does not constitute a deliverable
in the arrangement and thus there is no need to apply the EITF 00-21
separation and allocation model for a multiple deliverable arrangement. FAS 5
specifically address the accounting for standard warranties and neither SAB 104
nor EITF 00-21 supersedes FAS 5. The Company believes that accounting for its
standard warranty pursuant to FAS 5 does not impact revenue recognition because
the cost of honoring the warranty can be reliably estimated.
Cost
of Revenue
Cost of
goods sold consists primarily of material costs, labor costs, and related
overhead which are directly attributable to the production of the service.
Write-down of inventory to lower of cost or market is also recorded in cost of
goods sold.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other
security
to support these receivables. The Company conducts periodic reviews of its
clients' financial condition and customer payment practices to minimize
collection risk on accounts receivable.
The
operations of the Company are located in the PRC. Accordingly, the
Company's business, financial condition, and results of operations may be
influenced by the political, economic, and legal environments in the PRC, as
well as by the general state of the PRC economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations is calculated based upon local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.
Basic
and Diluted Net Income per Share
The
Company is a limited company formed under the laws of the PRC. Like limited
liability companies (LLC) in the United States, limited liability companies
in the PRC do not issue shares to the owners. The owners however,
are called shareholders. Ownership interest is determined in proportion
to capital contributed. Accordingly, earnings per share data are
not presented.
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires the
Company disclose estimated fair values of financial instruments. The
carrying amounts reported in the statements of financial position for current
assets and current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
Foreign
Currency Translation and Comprehensive Income
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
10
The
Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is
comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders. Comprehensive income for the years
ended December 31, 2008 and 2007 included net income and foreign currency
translation adjustments.
Segment
Reporting
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires use of the “management approach” model for segment
reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure, or any
other manner in which management disaggregates a company.
SFAS 131
has no effect on the Company's financial statements as substantially all of the
Company's operations are conducted in one industry segment. The
Company consists of one reportable business segment. All of the
Company's assets are located in the PRC.
New
Accounting Pronouncements
The Hierarchy of Generally
Accepted Accounting Principles
In May
2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with USA GAAP in the United States (the GAAP hierarchy). SFAS
162 adoption did not have an impact on the Company’s financial
statements.
Determination of the Useful
Life of Intangible Assets
In
April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
and requires additional disclosures. The objective of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (R), “Business Combinations” (“SFAS
141(R)”), and other accounting principles generally accepted in the USA. FSP FAS
142-3 applies to all intangible assets, whether acquired in a business
combination or otherwise and shall be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The guidance for determining the useful life of
intangible assets shall be applied prospectively to intangible assets acquired
after the effective date. The disclosure requirements apply prospectively to all
intangible assets recognized as of, and subsequent to, the effective date. Early
adoption is prohibited. FSP FAS 142-3 is not currently applicable to the
company.
Disclosures about Derivative
Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or
after November 15, 2008. SFAS 161 is not currently applicable to the
company.
11
Fair value of
measurements
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements,” SFAS 157 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosures requirements for fair value measurements. The three levels are
defined as follow:
|
|
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 asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
Non-Controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51." SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a non-controlling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the non-controlling interest will be included in consolidated net income on the
face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the non-controlling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company expects SFAS 160 will
have an impact on accounting for business combinations, but the effect is
dependent upon acquisitions at that time.
Business
Combinations
SFAS 141
(Revised 2007), Business Combinations (SFAS 141(R)), is effective for the
Company for business combinations for which the acquisition date is on or after
January 1, 2009. SFAS 141(R) changes how the acquisition method is applied in
accordance with SFAS 141. The primary revisions to this Statement require an
acquirer in a business combination to measure assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, at their fair values as of that date, with limited exceptions specified in
the Statement. This Statement also requires the acquirer in a business
combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values (or other amounts determined in accordance with the
Statement). Assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date are to be measured at their
acquisition-date fair values, and assets or liabilities arising from all other
contingencies as of the acquisition date are to be measured at their
acquisition-date fair value, only if it is more likely than not that they meet
the definition of an asset or a liability in FASB Concepts Statement No. 6,
Elements of Financial Statements. This Statement significantly amends other
Statements and authoritative guidance, including FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method, and now requires the capitalization of research and
development assets acquired in a business combination at their acquisition-date
fair values, separately from goodwill. FASB Statement No. 109, Accounting for
Income Taxes, was also amended by this Statement to require the acquirer to
recognize changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. The Company expects SFAS 141R will have a
significant impact on accounting for business combinations, but the effect is
dependent upon acquisitions at that time.
12
Accounting for
Non-Refundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities
In June
2007, FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities,” which addresses whether non-refundable
advance payments for goods or services that used or rendered for research and
development activities should be expensed when the advance payment is made or
when the research and development activity has been performed. EITF 07-03
is effective for fiscal years beginning after December 15, 2008. The
adoption of EITF 07-03 is not expected to have a significant impact on the
Company’s financial statements.
Inventory
at December 31, 2008 and 2007 consisted of raw material and work in process as
follows.
|
December
31,
|
||||||||
|
Inventory
|
2008
|
2007
|
||||||
|
Raw
material
|
$ | 37,224 | 17,134 | |||||
|
Work
in process
|
81,576 | -- | ||||||
| $ | 118,800 | 17,134 | ||||||
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at December 31, 2008 and 2007,
respectively:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Leasehold
Improvement
|
$ | 100,692 | -- | |||||
|
Office
equipment
|
41,615 | 76,343 | ||||||
|
Less:
Accumulated depreciation
|
(63,388 | ) | (39,124 | ) | ||||
| $ | 78,919 | 37,219 | ||||||
Depreciation
expense for the years ended December 31, 2008 and 2007 was $ 21,286 and $13,638,
respectively.
5.
PREPAID EXPENSES
Prepaid
expenses consisted of prepayments to vendors for materials and parts for the
projects which have not commenced at balance sheet date. Prepaid
expenses were $257,306 and $0 at December 31, 2008 and 2007,
respectively.
6.
OTHER RECEIVABLES
Other
receivables consisted of prepayment to vendors and sub-contractors and cash
advances to employees for normal business purposes such as travelling expense.
At December 31, 2008 and 2007, the amount was $108,333 and $143,929,
respectively.
13
7. MAJOR CUSTOMERS AND VENDORS
Four
major customers accounted for 80% of the Company’s net revenue for 2008, each
customer accounted for approximately 52%, 11%, 9% and 8% of net sales. At
December 31, 2008, the total receivable balance due from these customers was $
1,149,240.
Four
major customers accounted for 65% of the Company’s net revenue for 2007, each
customer accounted for approximately 25%, 18%, 12%, and 10% of net
sales. At December 31, 2007, the total receivable balance due from
these customers was $591,060.
Two major
vendors provided 83% and 25% of the Company’s purchases of raw materials for
year 2008 and 2007. The Company had total accounts payable to these
two vendors of $ 360,262 and $54,780 at December 31, 2008 and 2007,
respectively.
8.
TAX PAYABLE
Tax
payable consisted of the following at December 31, 2008 and 2007 as
follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Income
tax payable
|
$ | 147,620 | 215,898 | |||||
|
Value
added tax payable
|
648 | 57,829 | ||||||
|
Business
tax payable
|
83,370 | 54,726 | ||||||
|
Other
taxes payable
|
4,136 | 5,876 | ||||||
| $ | 235,774 | 334,329 | ||||||
9.
OTHER PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities consisted of the following at December 31, 2008
and 2007, respectively:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Payable
to Subcontractors
|
$
|
17,482
|
$
|
-
|
||||
|
Salary
and welfare payable
|
4,258
|
17,562
|
||||||
|
Payable
to employees for expense reimburse
|
12,100
|
-
|
||||||
|
Warranty
reserve
|
44,772
|
-
|
||||||
|
Deposit
from customers for construction
|
-
|
28,509
|
||||||
|
Other
payables
|
2,128
|
4,058
|
||||||
|
Total
|
$
|
80,740
|
$
|
50,129
|
||||
10.
UNEARNED REVENUE
Unearned
revenue represented amounts received from customers but services has not been
provided or completed. As of December 31, 2008 and 2007, the amount was $
268,725 and $0, respectively.
11.
INCOME TAXES
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises in special district, which are generally subject to tax at a
statutory rate of 15% before year 2008 on income reported in the statutory
financial statements after appropriated tax adjustments.
The
Company is qualified as a small business in the construction industry in
PRC. The Company was subject to 2.7% and 2.4% tax rate on net sales
in 2008 and 2007, respectively. The tax rate will increase to 3% of net sales in
2009. Since the tax is based on sales, under US GAAP, it is not income tax.
Accordingly, $ 144,973 and $ 85,926 have been recorded as general and
administrative expense for 2008 and 2007 respectively.
12.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
14
Surplus reserve
fund
The
Company is now only required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the Company’s registered capital. For
the year ended December 31 2008, the Company transferred approximately $23,000
to the reserve as the amount reached 50% of the Company’s registered capital.
For the year ended December 31, 2007, the Company made $44,738 to this
reserve.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common welfare
fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to
10% of its net income to this fund. The Company did not make any
contribution to this fund for the year ended December 31, 2008 and
2007.
This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than
upon liquidation.
Pursuant
to the "Circular of the Ministry of Finance (MOF) on the Issue of Corporate
Financial Management after the Corporate Law Enforced" (No.67 [2006]), effective
on April 1, 2006, issued by the MOF, companies transferred the balance of SCWF
(Statutory Common Welfare Fund) as of December 31, 2005 to Statutory Surplus
Reserve. Any deficit in the SCWF was charged in turn to Statutory Surplus
Reserve, additional paid-in capital and undistributed profit of previous years.
If a deficit still remains, it should be transferred to retained earnings and be
reduced to zero by a transfer from after tax profit of following years. At
December 31, 2005, the Company did not have a deficit in the SCWF.
13.
COMMITMENTS
The
Company leased its office under long term, non-cancelable, and renewable
operating lease agreements on November 8, 2007 with expiration date on November
7, 2009. The Company will pay the rents month-by-month after the
expiration date.
Future
minimum rental payments required under this operating lease though November 7,
2009 is $ 35,202. Total rental expense for the years ended December
31, 2008 and 2007 were approximately $14,000 and $5,000,
respectively.
14.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’ s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
15