Attached files
Exhibit 99.3
|
COVENANT
GROUP HOLDINGS INC.
|
||||
|
CONSOLIDATED
BALANCE SHEET
|
||||
|
SEPTEMBER
30, 2009
|
||||
|
(UNAUDITED)
|
||||
|
ASSETS
|
||||
|
CURRENT
ASSETS
|
||||
|
Cash
& cash equivalents
|
$ | 1,004,006 | ||
|
Accounts
receivable, net
|
4,508,514 | |||
|
Retentions
receivable
|
1,173,291 | |||
|
Prepayment
|
126,454 | |||
|
Other
receivables
|
372,218 | |||
|
Inventory
|
295,189 | |||
|
Intangible
assets
|
144,705 | |||
|
Total
current assets
|
7,624,377 | |||
|
NON-CURRENT
ASSETS
|
||||
|
Retentions
receivable
|
190,921 | |||
|
Property
and equipment, net
|
68,387 | |||
|
Goodwill
|
2,134,323 | |||
|
Total
non-current assets
|
2,393,631 | |||
|
TOTAL
ASSETS
|
$ | 10,018,008 | ||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
CURRENT
LIABILITIES
|
||||
|
Accounts
payable
|
$ | 3,052,343 | ||
|
Unearned
revenue
|
35,621 | |||
|
Tax
payable
|
645,782 | |||
|
Accrued
liabilities and other payables
|
192,116 | |||
|
Dividend
payable
|
346,293 | |||
|
Short-term
loans
|
485,973 | |||
|
Total
current liabilities
|
4,758,128 | |||
|
CONTINGENCIES
AND COMMITMENTS
|
||||
|
STOCKHOLDERS'
EQUITY
|
||||
|
Common
stock, $0.00001 par value, 20,000,000
shares
authorized, 6,230,000 shares issued
and
outstanding as of September 30, 2009
|
62 | |||
|
Paid
in capital
|
5,170,401 | |||
|
Statutory
reserve
|
87,915 | |||
|
Accumulated
other comprehensive income
|
1,502 | |||
|
Retained
earnings
|
- | |||
|
Total
stockholders' equity
|
5,259,880 | |||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 10,018,008 | ||
1
|
COVENANT
GROUP HOLDINGS INC.
|
||||
|
CONSOLIDATED
STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME
|
||||
|
FROM
INCEPTION (JUNE 10, 2009) TO SEPTEMBER 30, 2009
|
||||
|
(UNAUDITED)
|
||||
|
Net
sales
|
$ | 2,957,242 | ||
|
Cost
of goods sold
|
(2,325,551 | ) | ||
|
Gross
profit
|
631,691 | |||
|
Operating
expenses
|
||||
|
Selling
expenses
|
(38,050 | ) | ||
|
General
and administrative expenses
|
(455,312 | ) | ||
|
Total
operating expenses
|
(493,362 | ) | ||
|
Income
from operations
|
138,329 | |||
|
Non-operating
income (expenses)
|
||||
|
Interest
income
|
157 | |||
|
Interest
expense
|
(762 | ) | ||
|
Other
income
|
1,203 | |||
|
Other
expenses
|
(14 | ) | ||
|
Total
non-operating income
|
584 | |||
|
Income
before income tax
|
138,913 | |||
|
Income
tax expense
|
(34,242 | ) | ||
|
Net
income
|
104,671 | |||
|
Other
comprehensive item
|
||||
|
Foreign
currency translation
|
1,502 | |||
|
Comprehensive
Income
|
$ | 106,173 | ||
2
|
COVENANT
GROUP HOLDINGS INC.
|
||||||||||||||||||||||||||||
|
STATEMENTS
OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
FROM
INCEPTION (JUNE 10, 2009) TO SEPTEMBER 30, 2009
|
||||||||||||||||||||||||||||
|
(UNAUDITED)
|
||||||||||||||||||||||||||||
|
Common
stock
|
Other
comprehensive income
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Paid
in capital
|
Statutory
reserves
|
Retained
earnings
|
Total
|
|||||||||||||||||||||||
|
Balance
at inception (June 10, 2009)
|
- | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
|
Issuance
of funders' shares
|
6,230,000 | 62 | (62 | ) | - | - | - | - | ||||||||||||||||||||
|
Net
income for the period
|
- | - | - | - | - | 104,671 | 104,671 | |||||||||||||||||||||
|
Acquisition
of subsidiaries
at
June 24, 2009
|
- | - | 5,432,263 | 67,737 | - | - | 5,500,000 | |||||||||||||||||||||
|
Dividend
declared
|
- | - | (261,800 | ) | - | - | (84,493 | ) | (346,293 | ) | ||||||||||||||||||
|
Transfer
to statutory reserves
|
- | - | - | 20,178 | - | (20,178 | ) | - | ||||||||||||||||||||
|
Foreign
currency translation gain
|
- | - | - | - | 1,502 | - | 1,502 | |||||||||||||||||||||
|
Balance
at September 30, 2009
|
6,230,000 | $ | 62 | $ | 5,170,401 | $ | 87,915 | $ | 1,502 | $ | - | $ | 5,259,880 | |||||||||||||||
3
|
COVENANT
GROUP HOLDINGS INC.
|
||||
|
CONSOLIDATED
STATEMENT OF CASH FLOW
|
||||
|
FROM
INCEPTION (JUNE 10, 2009) TO SEPTEMBER 30, 2009
|
||||
|
(UNAUDITED)
|
||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||
|
Net
income
|
$ | 104,671 | ||
|
Adjustments
to reconcile net income to net cash
|
||||
|
provided
by operating activities:
|
||||
|
Depreciation
and amortization
|
23,096 | |||
|
Change
in allowance for doubtful accounts
|
27,406 | |||
|
(Increase)
decrease in current assets, net of effect of acquisition:
|
||||
|
Accounts
receivable
|
(732,806 | ) | ||
|
Retentions
receivable
|
(7,818 | ) | ||
|
Advance
to suppliers
|
- | |||
|
Other
receivable
|
(84,674 | ) | ||
|
Prepayment
|
112,574 | |||
|
Inventory
|
(77,128 | ) | ||
|
Increase
(decrease) in current liabilities, net of effect of
acquisition:
|
||||
|
Accounts
payable
|
616,675 | |||
|
Unearned
revenue
|
(72,649 | ) | ||
|
Tax
payable
|
(96,893 | ) | ||
|
Accrued
liabilities and other payable
|
(15,837 | ) | ||
|
Net
cash used in operating activities
|
(203,383 | ) | ||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||
|
Cash
acquired from acquisition
|
754,650 | |||
|
Acquisition
of property & equipment
|
(1,470 | ) | ||
|
Net
cash provide by investing activities
|
753,180 | |||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||
|
Proceeds
from Short-term loans
|
453,888 | |||
|
Net
cash provided by financing activities
|
453,888 | |||
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
321 | |||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
1,004,006 | |||
|
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
- | |||
|
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
$ | 1,004,006 | ||
|
Supplemental
disclosure of cash flow information:
|
||||
|
Cash
paid during the period for:
|
||||
|
Income
tax paid
|
$ | 113,082 | ||
|
Interest
paid
|
$ | 627 | ||
|
Supplemental
disclosure of non-cash financing activities:
|
||||
|
Dividend
declared
|
$ | 346,293 | ||
4
COVENANT
GROUP HOLDINGS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Covenant
Group Holdings Inc. (Covenant or the Company), was formed in the State of
Delaware in June 10, 2009 to acquire Technology companies in Mainland China. The
total number of shares authorized to issue is 20,000,000 with $0.0001 par value,
there was no shares issued as of September 30, 2009. Covenant is
engaged in identifying companies with synergies in businesses and management
that focus on IT software specifically in the financial markets in China as well
as Government mandated areas such as the Communications and Media, Government
Manufacturing and Security and Surveillance industries. There was no significant
activity from June 10, 2009 through June 30, 2009 except for the two
acquisitions.
On June
24, 2009(Effective Date), Covenant entered into a stock acquisition and
reorganization agreement with the Hainan Jien Intelligent Engineering Co. Ltd.
(Jien) and its stockholders. Pursuant to the terms of the Agreement, Covenant
acquired 100% of the common stock, Jien representing 100% of the outstanding
equity interests in exchange for 1,350,000 shares of a public shell's common
stock, the shell company whom shall acquire all of the rights and obligations of
Covenant, valued at a provisional amount of $2 per share (Note 4), which is the
stock price determined at $2 per share for the proposed capital raise (Stock
Consideration). 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.
On June
24, 2009 (Effective Date), Covenant entered into a stock acquisition and
reorganization agreement with the Chongqing Sysway Information Technology Co.
Ltd. (Chongqing Sysway) and its stockholders. Pursuant to the terms of the
Agreement, Covenant acquired 100% of the common stock of Chongqing Sysway,
representing 100% of the outstanding equity interest in exchange for 1,400,000
shares of a public shell's common stock, the shell company whom shall acquire
all of the rights and obligations of Covenant, valued at a provisional amount of
$2 per share (Note 4), which is the stock price determined at $2 per share for
the proposed capital raise (Stock Consideration). Chongqing Sysway was
incorporated in the Chongqing City, Sichuan Province, PRC, in 1999 as a State
Owned Enterprise (SOE). In 2005, the two SOE shareholders sold their
ownership shares among other original minority shareholders and since then,
Chongqing Sysway began to operate as a private enterprise mainly engaged in
system integration services including computer system installation, website
design, and system firewall setup, particularly for tobacco
industry.
The
unaudited financial statements have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. The results for the period from business
inception through September 30, 2009 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2009.
5
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principle
of Consolidation
The
Consolidated financial statements include the accounts of Covenant, Jien, and
Chongqing Sysway, All intercompany transactions and account balances are
eliminated in consolidation.
Use
of Estimates
In
preparing the 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.
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 had allowances of $55,368 at September 30,
2009.
At
September 30, 2009 the Company had retentions receivable for product quality
assurance of $1,364,212. The retention rate varies from 3% to 5% of the sales
price with variable terms from 1 year to 3 years. $1,173,291 of the retentions
receivable at September 30, 2009 are current and due within one year, and
$190,921 of the retentions receivable are noncurrent.
Inventories
Jien’s
inventories are valued at the lower of cost or market with cost determined on a
first in, first out basis. Chongqing Sysway’s inventories are valued at the
lower of cost or market with cost determined on a specific identification
method.
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 are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with 5% salvage value and
estimated lives ranging from 3 to 25 years as follows:
Building 20 - 25 years
Leasehold
improvements Shorter
of lease term or 10 years
Vehicle
5 - 10 years
Office
Equipment 3
- 5 years
6
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 comparing 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
September 30, 2009, there were no significant impairments of its long-lived
assets.
Goodwill
Goodwill
represents the excess of the fair value of the consideration transferred over
the net of the acquisition date amount of identifiable assets acquired and the
liability assumed. In accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”),
codified in Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for
impairment annually, or when circumstances indicate a possible impairment may
exist. Impairment testing is performed at a reporting unit level. An impairment
loss generally would be recognized when the carrying amount of the reporting
unit exceeds the fair value of the reporting unit, with the fair value of the
reporting unit determined using a discounted cash flow (DCF) analysis. A number
of significant assumptions and estimates are involved in the application of the
DCF analysis to forecast operating cash flows, including the discount rate, the
internal rate of return, and projections of realizations and costs to produce.
Management considers historical experience and all available information at the
time the fair values of its reporting units are estimated.
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 expense was immaterial for the
period since business inception through September 30, 2009.
7
Income
Taxes
The
Company utilizes Statement of Financial Accounting Standards (SFAS) No. 109,
“Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (codified in FASB ASC Topic 740) on June 10,
2009. As a result of the implementation of FIN 48, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FIN 48. As a result of the
implementation of Interpretation 48, the Company recognized no material
adjustments to liabilities or stockholders equity. 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. The adoption of FIN 48 did not have a material impact on
the Company’s financial statements.
Covenant
has US net operating loss of $144,466 at September 30, 2009. A 100%
valuation allowance has been established due to the uncertainty of its
realization.
Jien is
qualified as a small business in the construction industry in
PRC. The Company is subject to a 4% tax rate on net sales for 2009.
Since the tax is based on sales, under US GAAP, it is not an income
tax.
Chongqing
Sysway is governed by the Income Tax Law of the PRC concerning the private-run
enterprises in Hi-Tech Zone, which are generally subject to tax at a statutory
rate of 25% on income reported in the statutory financial statements after
appropriated tax adjustments.
The
following table reconciles the U.S. statutory rates to the Company’s
consolidated effective tax rate for the period since inception of business
through September 30, 2009:
|
U.S.
statutory rates
|
|
$
|
56,876
|
|
|
Foreign
tax rate less than U.S. statutory rate
|
|
(28,057)
|
|
|
|
Unrecognized
tax benefit on US operating loss
|
49,118
|
|||
|
Foreign
income exempt from foreign income tax
|
(43,695)
|
|||
|
Income
tax expense
|
|
$
|
$
34,242
|
|
8
Income
tax expense consists of the following:
|
Current
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
State
|
-
|
|||
|
Foreign
|
34,242
|
|||
|
Total
current
|
34,242
|
|||
|
Deferred
|
||||
|
Federal
|
-
|
|||
|
State
|
-
|
|||
|
Foreign
|
-
|
|||
|
Total
deferred
|
-
|
|||
|
Income
tax expense
|
$
|
34,242
|
||
Deferred
tax assets (liabilities) consist of the following:
U.S. net
operating loss
|
Deferred
tax asset
|
||||
|
U.S.
net operating loss
|
$
|
49,118
|
||
|
Less
valuation allowance
|
(49,118)
|
|||
|
Net
deferred tax asset
|
$
|
-
|
The
valuation allowance for deferred tax assets as of September 30, 2009 was
$49,118. The change in the total valuation for the period ended September 30,
2009 was an increase of $49,118. The deferred tax asset arose from
the net operating loss generated at the US parent company level. In assessing
the realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependant upon the generation of future taxable income during the periods in
which the net operating losses and temporary differences become
deductible. Management considered projected future taxable income and
tax planning strategies in making this assessment. The value of the
deferred tax assets was offset by a valuation allowance, due to the current
uncertainty of the future realization of the deferred tax assets.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104 (codified in FASB
ASC Topic 480). 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) (codified in FASB ASC Topic 605). 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.
9
Sales
revenue represents the invoiced value of goods and services, net of value-added
tax (VAT). Chongqing Sysway’s products that are sold and services
that are provided in the PRC are subject to Chinese value-added tax of 17% of
the gross sales price. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the financial statements. The VAT tax
return is filed offsetting the payables against the receivables.
Jien 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 VAT rate of 4% of the gross
sales price regardless of the VAT paid for 2009. 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.
The
standard warranty of Jien 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(codified in
FASB ASC Topic 605) separation and allocation model for a multiple deliverable
arrangement. FAS 5 (codified in FASB ASC Topic Warranty) 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.
Chongqing
Sysway provides post-contract support (PCS). Maintenance revenues from
ongoing customer support services are billed on an annual basis with the revenue
being deferred and recognized ratably over the maintenance period. Chongqing
Sysway does not charge for PCS services separately for the first year from the
date the product is sold. The Company believes that this type of PCS does not
have to be accounted for as a separate unit in accordance with guidance provided
by AICPA Statement of Position (SOP) 97-2, codified in FASB ASC Topic
985.
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,” codified in FASB ASC
Topic 230, cash flows from the Company's operations are calculated based upon
the 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.
10
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” codified in FASB
ASC Financial Instruments, Topic 825, requires that 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 (Loss)
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.
The
Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC
Topic 220). Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders.
Comprehensive income for the period since inception of business through
September 30, 2009 included net income and foreign currency translation
adjustments.
Segment
Reporting
SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
codified in FASB ASC Topic 280, 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
On June
10, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
11
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC Topic 855-10-05, which provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009,
and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Company
has evaluated subsequent events through December 7, 2009.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP 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 FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009. This FSP had no
material impact on the Company’s financial position, results of operations or
cash flows.
FASB ASC
820-10 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this standard relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. This standard is effective for fiscal years beginning after
November 15, 2007; however, it provides a one-year deferral of the effective
date for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value at least
annually. The Company adopted this standard for financial assets and financial
liabilities and nonfinancial assets and nonfinancial liabilities disclosed or
recognized at fair value on a recurring basis (at least annually) as of January
1, 2008. The Company adopted the standard for nonfinancial assets and
nonfinancial liabilities on June 10, 2009. The adoption of this standard did not
have a material impact on its financial statements.
FASB ASC
820-10 provides additional guidance for Fair Value Measurements when the volume
and level of activity for the asset or liability has significantly decreased.
This standard is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this standard did not have a material effect on
its financial statements.
FASB ASC
805 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. This standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This standard was adopted by the Company beginning June 10, 2009
and will change the accounting for business combinations on a prospective
basis.
FASB ASC
810-10 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. The standard
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that does not result in deconsolidation and expands
disclosures in the consolidated financial statements. This standard is effective
for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. This standard is not currently applicable to the
Company.
12
FASB ASC
815-10 is effective January 1, 2009. This standard requires enhanced disclosures
about derivative instruments and hedging activities to allow for a better
understanding of their effects on an entity’s financial position, financial
performance, and cash flows. Among other things, this standard requires
disclosures of the fair values of derivative instruments and associated gains
and losses in a tabular formant. This standard is not currently applicable to
the Company since the Company does not have derivative instruments or hedging
activity.
FASB ASC
350-30 and 275-10 amend the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This standard is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The adoption
of this standard did not have any impact on the Company’s financial
statements.
FASB ASC
260-10 provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. This standard is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company does not
currently have any share-based awards that would qualify as participating
securities. Therefore, application of this standard is not expected to have an
effect on the Company's financial reporting.
FASB ASC
470-20 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008. The standard includes guidance that
convertible debt instruments that may be settled in cash upon conversion should
be separated between the liability and equity components, with each component
being accounted for in a manner that will reflect the entity's nonconvertible
debt borrowing rate when interest costs are recognized in subsequent periods.
This standard is currently not applicable to the Company since the Company does
not have any convertible debt.
FASB ASC
815-10 and 815-40 are effective for financial statements for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The standard addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which is the first part
of the scope exception for the purpose of determining whether the instrument is
classified as an equity instrument or accounted for as a derivative instrument
which would be recognized either as an asset or liability and measured at fair
value. The standard shall be applied to outstanding instruments as of the
beginning of the fiscal year in which this standard is initially applied. Any
debt discount that was recognized when the conversion option was initially
bifurcated from the convertible debt instrument shall continue to be amortized.
The cumulative effect of the change in accounting principles shall be recognized
as an adjustment to the opening balance of retained earnings. This standard is
currently not applicable to the Company.
FASB ASC
825-10 requires disclosures about the fair value of financial instruments for
interim reporting periods. This standard is effective for interim reporting
periods ending after June 15, 2009. The adoption of this standard did not have a
material impact on the Company’s financial statements.
FASB ASC
320-10 amends the other-than-temporary impairment guidance for debt and equity
securities. This standard is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on its financial statements.
As of
September 30, 2009, the FASB has issued Accounting Standards Updates (ASU)
through No. 2009-12. None of the ASUs have had an impact on the Company’s
financial statements.
13
Recently
Issued Accounting Pronouncements Not Yet Adopted
As of
September 30, 2009, there are no recently issued accounting standards not yet
adopted which would have a material effect on the Company’s financial
statements.
Inventory
at September 30, 2009 was mainly working in process, raw material including
computer parts, supplementary parts in the amount of
$295,189.
4.
ACQUISITION OF SUBSIDIARIES AND GOODWILL
On June
24, 2009, Covenant entered into stock acquisition and reorganization agreements
with Jien and Chongqing Sysway (note 1).
The
operating results of these two acquires, Jien and Chongqing Sysway are included
in the accompanying consolidated statements of operations from the acquisition
date. For convenience of reporting the acquisition for accounting
purposes, June 30, 2009 has been designated as the acquisition
date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
|
Jien
|
Chongqing
Sysway
|
Total
|
||||||||||
|
Cash
|
$ | 710,552 | $ | 44,098 | $ | 754,650 | ||||||
|
Accounts
receivable
|
2,420,881 | 1,380,413 | 3,801,294 | |||||||||
|
Retention
receivable
|
271,770 | 1,084,047 | 1,355,817 | |||||||||
|
Prepaid
expenses
|
238,275 | - | 238,275 | |||||||||
|
Advance
to suppliers
|
- | 1,661 | 1,661 | |||||||||
|
Other
receivables
|
154,237 | 132,186 | 286,423 | |||||||||
|
Inventory
|
134,087 | 83,858 | 217,945 | |||||||||
|
Property
and equipment
|
45,102 | 37,265 | 82,367 | |||||||||
|
Intangible
assets-core software
|
- | 152,256 | 152,256 | |||||||||
|
Goodwill
|
896,020 | 1,238,303 | 2,134,323 | |||||||||
|
Accounts
payable
|
(1,442,990 | ) | (991,463 | ) | (2,434,453 | ) | ||||||
|
Other
current liabilities
|
(182,370 | ) | (25,499 | ) | (207,869 | ) | ||||||
|
Unearned
revenue
|
(108,245 | ) | - | (108,245 | ) | |||||||
|
Tax
payable
|
(405,263 | ) | (337,125 | ) | (742,388 | ) | ||||||
|
Short
term loan
|
(32,056 | ) | - | (32,056 | ) | |||||||
|
Purchase
price
|
$ | 2,700,000 | $ | 2,800,000 | $ | 5,500,000 | ||||||
The fair
value of the consideration transferred is provisionally based on $2 per share
that is reflected in the proposed capital raise. The final valuation will be
based on either the price per share reflected in the proposed capital raise or
the price per share in the open market once the reverse merge into a U.S. public
shell is consummated. Whichever the management of the Company
believes is most representative of the fair value of its common
stock.
The
company has not finalized the determination of whether identifiable intangible
assets exists and thus the excess of the fair value of the consideration
transferred over the net of the acquisition date amounts of identifiable assets
acquired and liabilities assumed is allocated to goodwill.
14
The
following pro forma financial information presents the consolidated operations
of the Company as if the Jien and Chongqing Sysway acquisitions had occurred on
January 1, 2009.
|
For
the nine months ended
September
30, 2009
|
Pro
forma Consolidated
|
|||
|
Net
Revenue
|
$ | 8,320,065 | ||
|
Cost
of Revenue
|
(6,468,690 | ) | ||
|
Gross
Profit
|
1,851,375 | |||
|
Operating
expenses
|
(991,311 | ) | ||
|
Income
from operations
|
860,064 | |||
|
Non-operating
expenses
|
(4,047 | ) | ||
|
Income
tax expense
|
(90,723 | ) | ||
|
Net
income
|
$ | 765,294 | ||
The
following pro forma financial information presents the consolidated operations
of Jien and Chongqing Sysway for the three months ended September 30, 2008 as to
provide comparative operating results to the consolidated operations of Covenant
since business inception through September 30, 2009 which includes the operating
results of Jien and Chongqing Sysway since acquisition.
|
For
the three months ended
September
30, 2008
|
Pro
forma Consolidated
|
|||
|
Net
Revenue
|
$ | 3,196,590 | ||
|
Cost
of Revenue
|
(2,582,522 | ) | ||
|
Gross
Profit
|
614,068 | |||
|
Operating
expenses
|
(292,138 | ) | ||
|
Income
from operations
|
321,930 | |||
|
Non-operating
income
|
3,453 | |||
|
Income
tax expense
|
(45,483 | ) | ||
|
Net
income
|
$ | 279,900 | ||
15
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at September 30, 2009:
|
Vehicle
|
$ | 8,978 | ||
|
Office
equipment
|
62,646 | |||
|
Leasehold
Improvement
|
12,249 | |||
|
Subtotal
|
83,873 | |||
|
Less:
Accumulated depreciation
|
(15,486 | ) | ||
| $ | 68,387 |
Depreciation
expense for the period since business inception through September 30, 2009 was
approximately $ 15,400.
6.
OTHER RECEIVABLES
Other
receivables consisted of the following at September 30, 2009:
|
Short
term advance to third parties
|
$ | 184,507 | ||
|
Receivable
on disposal of office building
|
87,861 | |||
|
Advance
to staffs
|
63,883 | |||
|
Advance
to subcontractors
|
18,976 | |||
|
Tax
rebate
|
7,355 | |||
|
Deposits
|
9,636 | |||
| $ | 372,218 |
7.
INTANGIBLE ASSETS
Intangible
assets mainly consisted of computer core software that was developed by the
Company for sale. The Company amortizes the software over 5 years. Amortization
expense of intangible assets for the period from business inception through
September 30, 2009 was approximately $7,600.
8.
TAX PAYABLE
Tax
payable consisted of the following at September 30, 2009:
|
Income
tax payable
|
$ | 432,778 | ||
|
Value
added tax payable
|
970 | |||
|
Sales
and business tax payable
|
194,171 | |||
|
Other
taxes payable
|
17,863 | |||
| $ | 645,782 |
16
9.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables mainly consisted of accrued payroll, welfare
payable, payable for after-sales service, short term cash advances from third
parties and payables for the Company’s construction deposits in the aggregate of
$ 192,116 at September 30, 2009.
10.
DIVIDEND PAYABLE
The
Company declared 30% dividend of Jien and Chongqing Sysway’s 2008 net income to
Jien and Chongqing Sysway’s original shareholders and management as part of the
acquisition agreement dated June 24, 2009. The dividend declared for Jien and
Chongqing Sysway was $197,231 and $149,062, respectively, and has been recorded
as dividend payable at September 30, 2009.
As part
of the acquisition agreement, the Company also agreed to pay the original
shareholders and management of Jien and Chongqing Sysway a 30% dividend on 2009
year end profits.
11.
MAJOR CUSTOMERS AND VENDORS
Five
customers accounted for 83% of the total sales for the period since business
inception through September 30, 2009, each customer accounted for 21%, 21%, 17%,
13% and 11%, respectively. At September 30, 2009, the total receivable balance
due from these customers was $ 2,448,498.
Three
suppliers accounted for 61% of the total purchases for the period since business
inception through September 30, 2009, each vendor accounted for 35%, 17% and 9%,
respectively. At September 30, 2009, the total payable due to these vendors was
$ 1,609,324.
12.
SHORT TERM LOANS
Since
June of 2009, Jien obtained several short term loans from Shenzhen Development
Bank for the aggregate amount of approximately $86,000, interest rate at 5.832%
per annum, with various maturity dates. Jien repaid approximately $32,000
on November 7, 2009, and the remaining is due to be repaid on or before
the end of February 2010.
In
September of 2009, Covenant entered three bridge loan agreements with one lender
for the aggregate amount of $399,870 for financing certain startup
expenditures. These three bridge loans bear interest rate of 6% per
annum, principal and interest will be payable in full six months from the loan
agreement date. These bridge loans may be prepaid at any time, in
whole or in part, without interest, penalty or premium of any
kind. Effective November 10, 2009, these bridge loans have been
converted into the investment into the Company by issuing total 200,909 shares
of the Company’s common stock to the lender.
13.
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.
17
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. The Company had $87,915 in this reserve at September 30,
2009.
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 period since business inception through
September 30, 2009.
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.
14.
COMMITMENTS
Jien
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 pays the rents month-by-month after the expiration
date.
Chongqing
Sysway leased its office under one year, non-cancelable, and renewable operating
lease agreement on December 1, 2007 with expiration date on November 30, 2008;
at maturity, the Company renewed the lease for additional one year expiring on
November 30, 2009. The Company leases this office month-by-month after November
30, 2009.
Total
rental expense for the period since business inception through September 30,
2009 was approximately $14,000.
15.
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.
18
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.
16.
SUBSEQUENT EVENTS
Effective
November 10, 2009, the Company and the lender of the three bridge loans have
agreed to cancel the promissory note of $399,870. In lieu of
principal and interest payments due to the lender, the Company agreed to issue
200,909 shares of the Company’s common stock to the lender.
Based on
confidential private placement memorandum dated November 24, 2009, the Company
is offering to sell up to 750,000 Shares at $2.00 per share, with a minimum
purchase of 10,000 Shares per investor, requiring a minimum investment of
$20,000, with a minimum total quantity of 150,000 Shares ($300,000) that must be
subscribed for by all investors to affect a closing and avoid termination of the
Offering. The Company will pay commissions or finder’s fees on sales
through broker-dealers or finders in an amount not to exceed 8% of the purchase
price of such sales (excluding expenses).
The
Offering will continue until the earlier of when all Shares offered are sold or
such time as the Company elects to terminate the offering, which shall be no
later than January 31, 2010 (which date may be extended by the Company at its
sole election for up to an additional one month). The shares issued to investors
through the private placement will be converted into publicly-traded securities
upon the Company’s contemplated merger with a public shell
company. At December 16, 2009, the Company sold 200,000 shares
through the private placement.
On
December 24, 2009, Covenant entered into a share exchange agreement with Everest
Resources Corp. (Everest) for 1 to 1 share exchange of 9,380,909 shares of
Covenant’s outstanding shares, whereby Covenant shareholders became the majority
owners of Everest after the reverse merge. The acquisition of Covenant by
Everest has been accounted for as recapitalization of Covenant as Covenant’s
shareholders will be the majority shareholders and have control of the
Company.
19