Attached files
file | filename |
---|---|
EX-31.2 - CHINA ELECTRIC MOTOR, INC. | v179203_ex31-2.htm |
EX-31.1 - CHINA ELECTRIC MOTOR, INC. | v179203_ex31-1.htm |
EX-32.1 - CHINA ELECTRIC MOTOR, INC. | v179203_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM _______ TO ___________
COMMISSION
FILE NO. 001-34613
CHINA
ELECTRIC MOTOR, INC.
(Exact Name Of Registrant As
Specified In Its Charter)
Delaware
|
26-1357787
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
Sunna
Motor Industry Park
Jian’an,
Fuyong Hi-Tech Park
Baoan
District, Shenzhen, Guangdong, China
|
N/A
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s telephone number, including area
code: (86)
755-81499969
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock, $0.0001 par value
|
NASDAQ
Global Market
|
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act:.
Large
accelerated filer
o
|
Accelerated
filer o
|
|
Non-accelerated
filer
x
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
There
were an aggregate of 20,744,743 shares outstanding of registrant’s common stock,
par value $0.0001 per share, as of March 29, 2010. The registrant’s
common stock commenced trading on the NASDAQ Global Market on January 29, 2010
under the ticker symbol “CELM.” There was no public market for the
registrant’s securities prior to listing on the NASDAQ Global
Market.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
TABLE
OF CONTENTS
CHINA
ELECTRIC MOTOR, INC.
TABLE
OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
For
the Fiscal Year Ended December 31, 2009
PAGE
|
||||
PART I
|
2
|
|||
Item 1.
|
Business
|
2
|
||
Item 1A.
|
Risk
Factors
|
11
|
||
Item 1B.
|
Unresolved
Staff Comments
|
27
|
||
Item 2.
|
Properties
|
27
|
||
Item 3.
|
Legal
Proceedings
|
27
|
||
Item 4.
|
(Reserved)
|
27
|
||
PART II
|
27
|
|||
Item 5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
27
|
||
Item 6.
|
Selected
Financial Data
|
28
|
||
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
30
|
||
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
40
|
||
Item 8.
|
Financial
Statements and Supplementary Data
|
41
|
||
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
41
|
||
Item 9A.
|
Controls
and Procedures
|
41
|
||
Item 9B.
|
Other
Information
|
42
|
||
PART III
|
42
|
|||
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
42
|
||
Item 11.
|
Executive
Compensation
|
45
|
||
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
|
49
|
||
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
50
|
||
Item 14.
|
Principal
Accountant Fees and Services
|
51
|
||
PART IV
|
52
|
|||
Item 15.
|
Exhibits
and Financial Statement Schedules
|
52
|
||
SIGNATURES
|
53
|
|||
EXHIBIT
INDEX
|
54
|
|||
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
F-1
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this Form 10-K, includes some statements that are not
purely historical and that are “forward-looking statements.” Such
forward-looking statements include, but are not limited to, statements regarding
our company’s and our management’s expectations, hopes, beliefs, intentions or
strategies regarding the future, including our financial condition, results of
operations, and the expected impact of the share exchange. In addition, any
statements that refer to projections, forecasts or other characterizations of
future events or circumstances, including any underlying assumptions, are
forward-looking statements. The words “anticipates,” “believes,” “continue,”
“could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,”
“potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.
The
forward-looking statements contained in this Form 10-K are based on current
expectations and beliefs concerning future developments and the potential
effects on the Company. There can be no assurance that future developments
actually affecting us will be those anticipated. These forward-looking
statements involve a number of risks, uncertainties (some of which are beyond
the parties’ control) or other assumptions that may cause actual results or
performance to be materially different from those expressed or implied by
these forward-looking statements, including the following:
· Our
reliance on our major customers for a large portion of our net
sales;
· Our
ability to develop and market new products;
· Our
ability to continue to borrow and raise additional capital to fund our
operations;
· Our
ability to collect aging trade receivables and the effect of a growing doubtful
account allowance;
· Our
ability to accurately forecast amounts of supplies needed to meet customer
demand;
· Exposure
to market risk through sales in international markets;
· The
market acceptance of our products;
· Exposure
to product liability and defect claims;
· Fluctuations
in the availability of raw materials and components needed for our
products;
· Protection
of our intellectual property rights;
· Changes
in the laws of the PRC that affect our operations;
· Inflation
and fluctuations in foreign currency exchange rates;
· Our
ability to obtain all necessary government certifications, approvals, and/or
licenses to conduct our business;
· Development
of a public trading market for our securities;
· The
cost of complying with current and future governmental regulations and the
impact of any changes in the regulations on our operations; and
· The
other factors referenced in this report, including, without limitation, under
the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and “Business.”
These
risks and uncertainties, along with others, are also described above under the
heading “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should any of the Company’s assumptions prove incorrect, actual
results may vary in material respects from those projected in these
forward-looking statements. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and we
cannot predict all such risk factors, nor can we assess the impact of all such
risk factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward looking statements. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.
1
PART
I
ITEM
1. BUSINESS
With
respect to this discussion, the terms, “we,” “us,” “our” or “the Company” refer
to China Electric Motor, Inc., and our 100%-owned subsidiary Attainment Holdings
Limited, a British Virgin Islands corporation (“Attainment Holdings”) and its
subsidiaries, including Luck Loyal International Investment Limited, a company
organized under the laws of Hong Kong (“Luck Loyal”) and Luck Loyal’s
wholly-owned subsidiary, Shenzhen YuePengCheng Motor Co., Ltd., a company
organized under the laws of the PRC (“Shenzhen YPC”).
Overview
We,
through Shenzhen YPC, are engaged in the design, manufacture, sale and marketing
of micro-motors and micro-motor components with a range of applications in
automobiles, power tools, home appliances and consumer electronics.
Industry
General
We are
engaged in the design, manufacture and sale of specialized micro-motors to the
Chinese and international market. We are focused on providing micro-motor
products that meet the growing demand for efficient, quiet and compact motors
from manufacturers of consumer electronics, automobiles, power tools, toys and
household appliances. Micro-motors are simple to control, easy to operate
and are generally very reliable. We believe that the market for
micro-motor products will expand as manufacturers look to offer more automated
features in their products.
The
micro-motor industry has considerably raised the barriers to enter the
industry. Currently there are three main obstacles to entering the
industry:
|
·
|
Due
to the rapid technological progress in the micro-motor industry and since
products necessitate higher technology, it is very difficult for ordinary
enterprises to enter the industry if they do not already possess a high
degree of technological capability.
|
|
·
|
The
industry requires a large-scale production capability. If an
enterprise does not have an adequate production capability, their products
will not have a competitive price advantage in the
market.
|
|
·
|
Industry
users have formed a stable user-supplier concentration. If the newly
entered rivals do not have a very strong competitiveness, it is very
difficult for them to enter the original
market.
|
Automobile
specialty micro-motors are used for various automation functions in
automobiles. In order to stay competitive and attract customers,
automobile manufacturers have been trying to keep costs down while offering more
features in their automobiles, which particularly increases the degree of
automation in an automobile offered by automakers. This trend has creased
a new market for new types of automobile specialty micro-motors that automate
different parts of an automobile including car seats, windows, trunks, door
locks, mirrors, sliding doors and roofs. We believe that the worldwide
demand for specialty automobile micro-motors with low costs and high quality is
rapidly growing. Global automakers are increasingly sourcing auto parts
from low costs countries, such as China.
China
China is
one of the world’s largest consumer markets. China’s market for home
appliances and automobiles has been growing, due in part to the country’s rapid
economic growth. In 2009, China’s gross domestic product (“GDP”)
increased 8.7% over 2008 according to the National Bureau of Statistics of
China. Economic growth in China has led to greater levels of personal
disposable income and increased spending among China’s expanding middle-class
consumer base. Notwithstanding China’s economic growth, with a
population of 1.3 billion people, China’s economic output and consumption rates
are still small on a per capita basis compared to developed
countries. As China’s economy develops, we believe that disposable
income and consumer spending levels will continue to become closer to that of
developed countries like the United States.
The
micro-motor industry is a fast-growing industry in China. In recent
years, the production of motor products has moved to China, making China the
largest global manufacturer of small household appliances. China’s market
share of the manufacture of small electronic appliances and micro-motor products
is expected to increase. China has a number of benefits in the
manufacture of micro-motors which are expected to drive this growth,
including:
2
|
·
|
Low
costs. China continues to have a relatively low cost of raw
materials, land and labor, which is especially important given the
labor-intensive nature of the manufacture of our
micro-motors.
|
|
·
|
Proximity
to supply chain. Manufacturing of consumer products in
general continues to shift to China, giving China-based manufacturers a
further cost and cycle time
advantage.
|
|
·
|
Proximity
to end-markets. China has focused in recent years on building
its research, development and engineering skill base in all aspects of
higher end manufacturing.
|
Competitive
Strengths
We
believe the following strengths contribute to our competitive advantages and
differentiate us from our competitors:
Market
position
Since our
inception, we have focused on the research, development and manufacture of
specialized micro-motor products. We have developed significant expertise in the
key technologies and large-scale manufacturing that enables us to improve the
quality of our products, reduce costs, and keep pace with current standards of
the rapidly evolving consumer electronics industry. We are able to bring to the
market well-differentiated products that perform well against competitive
offerings based on price, quality, and brand recognition. To meet the changing
needs of our customers, we intend to continue to improve and strengthen our
in-depth capabilities to meet the changing needs of our customers and to
continue to differentiate ourselves from our competitors in the global
marketplace.
Design
and manufacturing capabilities
We
continue to focus on the development of new products for existing and new
customers to meet the needs of existing customers and to broaden our customer
base. We employ a rigorous and systematic approach to product design and
manufacturing. Our design team develops and tracks new concepts and ideas from a
variety of sources, including direct customer feedback, trade shows, and
industry conferences. Our products are manufactured in our 15,000 square meter
factory by approximately 780 production employees. Our production workshop
includes a mold and molding workshop, a semi-finished products workshop, an
assembly workshop and a finished products testing workshop. Our use of manual
labor during the production process benefits from the availability of relatively
low-cost, skilled labor in China.
Emphasis
on providing our customer high value
We
provide value to our customers by offering a broad range of high quality
products, short lead times on custom products, quick delivery for stock products
and local customer service and support. We also offer the capability to design
and manufacture custom products that address the needs of our customers. We
believe that we are well positioned relative to many of our competitors who
emphasize low price.
Diversified
customer base and end markets
During
the year ended December 31, 2009, our products were sold to more than 17 OEMs
and 11 distributors across a wide variety of end markets. For 2009,
approximately 53.6% of our sales were to OEMs and 46.4% were to distributors.
There were eight distributors that accounted for over 5% of our sales for the
year ended December 31, 2009. We believe that the different purchasing patterns
among our customers in the various end markets served allow us to reduce the
overall sensitivity of demand of our products due to changes in the economy.
Also, we believe that our large installed base and specification of our products
by leading OEMs on original equipment creates significant replacement
demand.
Brand
awareness
Our
self-branded micro-motor products, marketed under our “Sunna” brand-name, have
become a recognized brand name in China, which we expect will assist us in
growing our business over the course of the next few years. Our micro-motor
products have a solid reputation and established a brand name in the
PRC.
Experienced
management team
Our
senior management team has extensive business and industry experience, including
an understanding of changing market trends, consumer needs, technologies and our
ability to capitalize on the opportunities resulting from these market changes.
Members of our senior management team also have significant experience with
respect to key aspects of our operations, including research and development,
product design, manufacturing, and sales and marketing.
3
Strategy
Our goal
is to become a global leader in the development and manufacture of micro-motor
products. We intend to achieve this goal by implementing the following
strategies:
Expand
existing and new product offerings
Since the
commencement of our manufacturing operations in 1999, we have expanded our
product offerings to produce a range of Alternating Current (“AC”) and Direct
Current (“DC”) micro-motors. We currently produce products in 28 different
series that include more than 1,200 different product specifications. We intend
to expand our micro-motor product offerings for incorporation into new
applications, such as Precision Slowdown Servo Drives. Additionally we intend to
focus our research and development activities to address industry trends to
reduce noise, vibration and energy consumption in our micro-motor
products.
Enhance
brand awareness
We
believe that continuing to strengthen our brand is critical to our increasing
demand for, and achieving widespread acceptance of, our micro-motor products. We
believe a strong brand offers a competitive advantage and we intend to devote
additional resources to strategic marketing promotion in order to increase brand
awareness and product recognition and heighten customer loyalty. We aim to
develop our “Sunna” brand into an internationally recognizable brand. We intend
to exhibit our products at trade fairs around the world and devote additional
resources into print, audio, television and outdoor advertising to promote our
brand. Additionally, we will hold press conferences for the launch of new
products and invite members of the local media and current and potential
customers.
Build
partnerships with new and existing clients
We intend
to strengthen relationships with our existing clients and explore opportunities
for product expansion with new and existing customers. Our strategy is to
establish partnerships with our current clients whereby we develop and
manufacture new products based on client needs.
Pursue
acquisitions to broaden product application and enhance
cost-savings
We will
consider strategic acquisitions that will provide us with a broader range of
product offerings and access to new markets. Additionally, we intend to consider
acquiring manufacturers of micro-motor component parts, such as rotors, which
will provide cost savings in our manufacturing operations.
Expand
sales network and distribution channels
We intend
to expand our sales network in China and develop relationships with a broader
set of distributors and resellers, all in order to expand the market
availability of our products in China. In addition, we intend to
increase the percentage of our sales made directly to OEMs, machinery accessory
manufacturers and repair facilities. We feel the Chinese markets are
underserved and there exists vast opportunities to expand market
presence. We hope that our relationships will allow us to diversify
our customer base and significantly increase the availability and exposure of
our products.
Products
We
develop, design, manufacture, and sell a wide range of micro-motor products. The
current annual output capacity of our factory is 24 million units, and we
operate at 100% capacity.
Motors
We
produce both Direct Current (“DC”) motors and Alternating Current (“AC”) motors,
each of which has different functions and uses. References to DC or AC refer to
how the electrical current is transferred through and from the motor. Our motors
are designed as both stock and custom products. Stock motors represented
approximately 4.2% of our motor sales for 2009 and are available for immediate
shipment. Custom motors are built to customer specifications and are typically
built and shipped with 2-3 weeks of order date.
DC
Motors
DC motors
are categorized into various types of motors, including brushless motors,
brushed motors, servo motors, and gear motors. DC motors require a direct
current or voltage source in order to work. DC motors provide a stable and
continuous current and work well in applications where controlling speed and
torque are important. Brushed DC motors use rings (or “brushes”) that conduct
the current and form the magnetic drive that powers the rotor. Brushless DC
motors use a switch to produce the magnetic drive that powers the rotor. While
brushed motors tend to wear out faster than brushless motors due to the wear on
the brushes, brushless motors are generally more expensive than brushed
motors.
4
Under
development is our variable frequency brushless motor. Our variable frequency
brushless DC motor and its control devices were created from our own research
and development. This motor has passed the provincial level new product
certification. It is listed in the year 2000’s “China’s High-Tech Products
Directory” (optical-electric-mechanical integration sector). It closely combines
the motor body with electrical and micro-electronic control devices to form a
new type of electromechanical integration product. We hope to introduce this
product in mid-year 2010.
AC
Motors
AC motors
require an alternating current or voltage source, which can usually be obtained
from places such as wall outlets, in order to work. AC motors can be categorized
into various types of motors, including single and multiphase motors, universal
motors, servo motors, induction motors, synchronous motors, and gear motors. AC
motors generally work better than DC motors in situations that require a high
starting power.
Single
phase AC motors are general purpose motors and can be used in a variety of
applications. Our primary AC motor is our industry drive and control motor. This
product’s notable feature is its energy efficiency, targeted to and applied to
specific occasions. These high efficiency energy saving motors are included in
the year 2000’s “China’s High-Tech Products Directory” (new energy and highly
efficient energy-saving sector). This product has reached the advanced level of
similar foreign products and is already at the mass production stage in our
factory.
Drives
Drives
are electronic controls used to adjust the speed and torque of an electric motor
to match an end application. Our precision slowdown servo drive is still in the
development stage. It can accomplish such tasks as non-deviation precise
positioning, complex contour processing, exact angle and speed synchronization
(with dynamic tracking) and other complex servo control tasks. It is an
important servo component in electromechanical integration and artificial
intelligence and has wide applications in various industrial automatic control
equipments. This product was introduced in the fourth quarter of
2009.
Mechanical
power transmission products
Sunna
brand power transmission products include mounted bearings, enclosed shaft
mount, helical and worm gearing, and other power transmission components such as
bearings, sheaves and conveyor pulleys. Our mechanical power transmission
products are used in many applications and industries, including mining,
petroleum, aggregate, unit handling, power generation and package
handling.
We
currently produce products in 28 different series that include more than 1,200
different product specifications. Our various types of motors are designed for
incorporation into a variety of applications, including:
|
·
|
Home
appliances: including hairdryers, air conditioners, paper shredders,
soy milk makers, juice makers, electric fans, heaters and
massagers.
|
|
·
|
Automobiles:
including automobile air conditioners, windshield wipers, automatic window
mechanisms and ignitions.
|
|
·
|
Digital
controls: including devices used to start mechanical equipment and
other larger motors.
|
|
·
|
Tools:
including lawn mowers, trimmers, branch cutters, channeling machines and
other garden tools.
|
Revenues
by product series as a percentage of total revenues is set forth
below:
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Home
Appliance
|
63.9
|
%
|
59.3
|
%
|
70.4
|
%
|
||||||
Auto
Parts
|
22.1
|
%
|
26.9
|
%
|
24.6
|
%
|
||||||
Digital
Motor
|
14.0
|
%
|
13.8
|
%
|
5.0
|
%
|
||||||
100
|
%
|
100
|
%
|
100
|
%
|
5
Supply
of Raw Materials
The cost
of the raw materials used to produce our products is a key factor in the pricing
of our products. Our company has built long-term partnerships with key materials
suppliers. We currently work with over 50 suppliers to establish a stable and
reliable supply of high-quality raw materials. We maintain at least four
suppliers for each of our key raw materials which include silicon, steel
materials and lacquered wire and at least two suppliers for all of our other raw
materials, which include various wrapping materials. We strive to use only
suppliers who have previously demonstrated quality control and reliability. If
any materials do not satisfy our quality or supply requirements, we can easily
obtain our needed materials from another supplier. While we do not maintain
long-term contracts with our suppliers, and we believe that alternative
suppliers are available. We believe that the location of our manufacturing
facility and design center in Shenzhen, China, provides us with flexibility in
obtaining our necessary supplies, which allows us to reduce delays and costs for
our materials.
Pricing
and availability of raw materials can be volatile, attributable to numerous
factors beyond our control, including general economic conditions, currency
exchange rates, industry cycles, production levels or a supplier’s limited
supply. To the extent that we experience cost increases we may seek to pass such
cost increases on to our customers, but cannot provide any assurance that we
will be able to do so successfully or that our business, results of operations
and financial condition would not be adversely affected by increased volatility
of the cost and availability of raw materials.
Our
suppliers for our key raw materials are located in China, in the Zhejiang and
Guangdong Provinces. Our top three suppliers accounted for a total of
approximately 34%, 34% and 27% of our raw material purchases for the years ended
December 31, 2009, 2008 and 2007, respectively. Our largest supplier accounted
for 13%, 22% and 17%, respectively, of our raw material purchases for the years
ended December 31, 2009, 2008 and 2007.
Presently,
our relationships with our suppliers are good and we expect that our suppliers
will be able to meet the anticipated demand for our products in the future.
However, due to our dependence on a few suppliers for certain raw materials, we
could experience delays in development and/or the ability to meet demand for our
products. Although we have not been subject to shortages for any of our
materials, we may be subject to cutbacks and price increases which we may not be
able to pass on to our customers in the event that the demand for components
generally exceeds the capacity of our suppliers.
Manufacturing
The
manufacture of our micro-motor products requires coordinated use of machinery
and raw materials at various stages of manufacturing. Our manufacturing
facilities are located in Shenzhen, Guangdong in our 15,000 square meter
(approximately 161,000 square feet) factory. Our facilities consist of a mold
and molding workshop, a semi-finished products workshop, and assembly workshop
and a finished products testing workshop.
Our
modern production equipment consists of both domestic and foreign-manufactured
equipment as well as in-house custom designed equipment. Production capability
at our manufacturing facilities encompasses assembling, machining, pressing,
tooling, mold making and plastic injection molding to produce components and
final products. Our modern production facilities allow us to produce high
quality products at competitive prices.
We
periodically evaluate the production layout of our factory in order to maximize
our production capacity. We currently produce approximately 24
million micro-motor units annually. We intend to further streamline our
production process and continue investing in our manufacturing infrastructure to
further increase our manufacturing capacity, helping us to control the per unit
cost of our products.
We
manufacture substantially all of the products that we sell, including some of
the components used in our products, such as hardware struts, stators and
rotors. We purchase other components for our products, such as lacquered wire,
commutators, spindle, and bearings from third party suppliers. In addition to
manufacturing components, our motor manufacturing operations include machining,
welding, winding, assembling, and finishing operations. Manufacturing many of
our own components permits us to better manage cost, quality and
availability.
Quality
Control
Quality
control an important element of our business practices. We have stringent
quality control systems that are implemented by approximately 30 company-trained
staff members to ensure quality control over each phase of the production
process, from the purchase of raw materials through each step in the
manufacturing process. Supported by advanced equipment, we utilize a scientific
management system and precision inspection measurement capable of ensuring our
products are of high quality.
Our
quality control department executes the following functions:
·
|
setting
internal controls and regulations for semi-finished and finished
products;
|
6
·
|
testing
samples of raw materials from
suppliers;
|
·
|
implementing
sampling systems and sample files;
|
·
|
maintaining
quality of equipment and instruments;
and
|
·
|
articulating
the responsibilities of quality control
staff.
|
We have
obtained certifications and accreditations that we believe exhibit our ability
to efficiently manufacture quality products. We first obtained ISO9001:2000
quality system accreditation in 2001. The International Organization for
Standardization (ISO) defines the ISO 9000 quality management system as one of
international references for quality management requirements in
business-to-business dealings. In 2003 we obtained the Chinese 3Cquality
certification. In 2005, we obtained certification for compliance with the
Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment, which is commonly referred to as the
Restriction of Hazardous Substances Directive, or RoHS. RoHS restricts the use
of various hazardous materials in the manufacture of electronic and electrical
equipment.
Sales
and Marketing
We employ
a sales and marketing team of 15 people that focus on selling and marketing our
products. We mainly sell our products directly to original equipment
manufacturers (“OEMs”). We sell our vehicle micro-motors directly to automobile
manufacturers. Sales directly to OEMs and vehicle manufacturers accounted for
53.6% of our total sales during the year ended December 31, 2009. In addition,
we also sell our micro-motor products to distributors and resellers and through
our website. Sales to distributors and resellers accounted for 46.4% of our
sales for the year ended December 31, 2009. We did not make any sales through
our website in 2008 and 2009.
We
participate in industry trade shows and technical conferences in order to
promote our products and increase our brand awareness. In the future, we intend
to utilize various traditional media advertising to sell and promote our
products, including print advertisements in magazines and newspapers, and audio
and television advertisements. We also intend to hold press conferences for
launching our new products.
A small
number of customers account for a very significant percentage of our revenue.
During the year ended December 31, 2009, we had eight customers who each
accounted for 5% of total sales, who together accounted for 60% of our total
sales for the period. None of those customers accounted for 10.0% of our total
sales in 2009, but three of them accounted for 9% each of our total sales for
the year ended December 31, 2009. During the year ended December 31, 2008, we
had eight customers that generated at least 5% of our total sales, with three of
those customers, Shenzhen Hongxingyu Trading Co., Ltd., Shanghai Keyu
International Trading Co., Ltd. and Shenzhen Hongji Investment Development Co.,
Ltd. accounting for 11%, 10% and 10% respectively, of our total sales for the
year ended December 31, 2008. These eight customers accounted for a total of
approximately 59.5% of our total sales for the year ended December 31, 2008. For
the year ended December 31, 2007, we had seven customers that accounted for at
least 5% of total sales, with one of those customers, Shanghai Keyu
International Trading Co., Ltd., accounting for approximately 17.1% of our total
sales. Unless we replace a customer, the loss of any of these customers could
have a material adverse effect upon our revenue and net income.
The loss
of any of these customers could have a material adverse effect upon our revenue
and net income.
Research
and Development
Our
product design efforts include both the development of new products, which
extend our product lines, and the improvement and modification of our existing
products for incorporation into new applications. To enhance our product
quality, reduce cost, and keep pace with technological advances and evolving
market trends, we have established an advanced research and development center.
Our research and development center concentrates on researching the areas of
industrial automation, office automation and home automation.
We employ
29 scientific and technical personnel who are directly engaged in the research
and development of new products and their applications, including persons
holding senior professional titles, electrical machine and control
professionals, mechanical design and manufacturing professionals and electrical
and electronics professionals. This represents approximately 4% of our total
number of company employees. Among them, there are 9 people holding senior
professional titles, 14 electrical machine and control professionals, 11
mechanical design and manufacturing professionals, and 4 electrical and
electronics professionals. Our research professionals closely observe industry
trends in consumer products to design motors for incorporation into new
products. By working closely with our customers to design new products, we have
been able to improve our competitive position in the micro-motor
industry.
7
We also
work with universities including Shenzhen University, and other scientific
research institutes to develop new products and technology and enhance our
current products.
For the
years ended December 31, 2009, 2008 and 2007, we expended $1,649,504, $1,032,722
and $445,841, respectively, in research and development.
Backlog
We have
historically shipped the majority of our products in the month the order is
received. Due to the short-cycle nature of our business, we did not sustain
significant backlogs and had no backlog of unfilled orders as of December 31,
2009, 2008 and 2007.
Warranties
and Return Policy
We offer
limited warranties for our products, comparable to those offered by our
competitors in China. We typically offer a warranty of up to 1 year, under which
we will pay for labor and parts, or offer a new or similar unit in exchange for
a non-performing unit. Our customers may return products to us for a variety of
reasons, such as damage to goods in transit, cosmetic imperfections and
mechanical failures, if within the warranty period.
Product
Liability and Insurance
We do not
have product liability insurance. Because of the nature of the products sold by
us, we may be periodically subject to product liability claims resulting from
personal injuries. We may become involved in various lawsuits incidental to our
business. To date, we have not been subject to products liability litigation.
Product liability insurance is expensive, restrictive and difficult to obtain.
Accordingly, there can be no assurance that we will have capital sufficient to
cover any successful product liability claims made against us in the future,
which could have a material adverse effect on our financial condition and
results of operations.
Competition
We face
competition from many other micro-motor manufacturers, most of which have
significantly greater name recognition and financial, technical, manufacturing,
personnel, marketing, and other resources than we have. Our competitors may be
able to respond more rapidly than we can to new or emerging technologies or
changes in customer requirements. They may also devote greater resources to the
development, promotion and sale of their products than we do. We compete
primarily on the basis of quality, price, reliability, brand recognition, and
quality assurance and support to our customers. Our primary competitors include
Wolong Holding Group Co., Ltd., a manufacturer of micro and specialty motors;
Shanghai Motor Co., Ltd., a manufacturer of turbo generators and large-scale TAC
DC motors; Shangdong Electric Group, a maker of general motors; Nanyang
Explosion-proof Electrical Group and Jiamusi Electric Corp., both manufacturers
of explosion-proof and high-voltage motors; Xinagtan Electric Group Co., a
producer of traction motors and high-voltage motors; Zhangqiu Haier Appliances
Motor Co., Ltd., a maker of appliance motors; and Xima Motor Group, Co., Ltd.
and Jiangsu Dazhong Electric Corp., manufacturers of high-voltage motors and DC
motors.
Intellectual
Property
We rely
on a combination of patent, trademark and trade secret protection and other
unpatented proprietary information to protect our intellectual property rights
and to maintain and enhance our competitiveness in the micro-motor industry. We
currently have one patent application pending in China for technology related to
shaded-pole motors. We do not currently own any patents or license any patents
from third parties.
We also
rely on unpatented technologies to protect the proprietary nature of our product
and manufacturing processes. We require that our management team and key
employees enter into confidentiality agreements that require the employees to
assign the rights to any inventions developed by them during the course of their
employment with us. All of the confidentiality agreements include
non-competition and non-solicitation provisions that remain effective during the
course of employment and for periods following termination of employment, which
vary depending on position and location of the employee.
We have
one registered trademark in China. Our trademark registration certificate
expires in September 2011.
Our
success will depend in part on our ability to obtain patents and preserve other
intellectual property rights covering the design and operation of our products.
We intend to continue to seek patents on our inventions when we deem it
commercially appropriate. The process of seeking patent protection can be
lengthy and expensive, and there can be no assurance that patents will be issued
for currently pending or future applications or that our existing patents or any
new patents issued will be of sufficient scope or strength or provide meaningful
protection or any commercial advantage to us. We may be subject to, or may
initiate, litigation or patent office interference proceedings, which may
require significant financial and management resources. The failure to obtain
necessary licenses or other rights or the advent of litigation arising out of
any such intellectual property claims could have a material adverse effect on
our operations.
8
Employees
As of
December 31, 2009, we had approximately 920 employees, all of whom are full-time
employees. All of our employees are based inside China. We have not experienced
any work stoppages and we consider our relations with our employees to be
good.
All of
our employees in China are represented by a labor union formed on October 18,
2007, pursuant to the requirements of the China’s National Labor Law. The
members of Shenzhen YPC’s labor union represent the interests of each of
Shenzhen YPC’s employees. On October 15, 2009, Shenzhen YPC entered into a new
3-year collective contract with the labor union covering various policies on
various employment matters such as recruitment, leave, wages and allowances,
benefits, employment security, and discipline and punishment.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total contributions to the
funds were approximately $27,229, $29,300 and $14,700 for the years ended
December 31, 2009, 2008 and 2007, respectively. We expect that the amount of our
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations.
We also
provide housing facilities for our employees. Currently, approximately 99% of
our employees live in company-provided housing facilities. Under PRC laws, we
may be required to make contributions to a housing assistance fund for employees
based in Shenzhen, China, which could increase the costs and expenses of
conducting our business operations and could have negative effect on our results
of operations.
PRC
Government Regulations
Business
license
Any
company that conducts business in the PRC must have a business license that
covers a particular type of work. Our business license covers our present
business of the production and marketing of micro-motor products and relevant
components. Prior to expanding our business beyond that of our business license,
we are required to apply and receive approval from the PRC
government.
Employment
laws
We are
subject to laws and regulations governing our relationship with our employees,
including: wage and hour requirements, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These include
local labor laws and regulations, which may require substantial resources for
compliance.
China’s
National Labor Law, which became effective on January 1, 1995, and China’s
National Labor Contract Law, which became effective on January 1, 2008, permit
workers in both state and private enterprises in China to bargain collectively.
The National Labor Law and the National Labor Contract Law provide for
collective contracts to be developed through collaboration between the labor
union (or worker representatives in the absence of a union) and management that
specify such matters as working conditions, wage scales, and hours of work. The
laws also permit workers and employers in all types of enterprises to sign
individual contracts, which are to be drawn up in accordance with the collective
contract.
Environmental
regulations
We are
subject to various state and local environmental laws and regulations of the
PRC, including those governing the use, discharge and disposal of hazardous
substances in the ordinary course of our manufacturing process. The major
environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Law on the Prevention and Control of Water Pollution and
its Implementation Rules, the PRC Law on the Prevention and Control of Air
Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
of Noise Pollution. We believe that our current manufacturing operations
comply in all material respects with applicable environmental laws and
regulations. Although we believe that our current manufacturing operations
comply in all material respects with applicable environmental laws and
regulations, it is possible that future environmental legislation may be enacted
or current environmental legislation may be interpreted to create environmental
liability with respect to our other facilities, operations, or
products.
We
constructed our manufacturing facilities with the PRC’s environmental laws and
requirements in mind. If we fail to comply with the provisions of
environmental laws, we could be subject to fines, criminal charges or other
sanctions by regulators, including the suspension or termination of our
manufacturing operations.
9
Patent
protection in China
The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of
rights in copyrights, patents, trademarks and trade secrets.
The PRC
is also a signatory to most of the world’s major intellectual property
conventions, including:
·
|
Convention establishing the World
Intellectual Property Organization (WIPO Convention) (June 4,
1980);
|
·
|
Paris Convention for the
Protection of Industrial Property (March 19,
1985);
|
·
|
Patent Cooperation Treaty
(January 1, 1994); and
|
·
|
The Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPs) (November 11,
2001).
|
Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of
the China Patent Law and its Implementing Regulations came into effect in 2001
and 2003, respectively. The current effective amended China Patent Law was
further amended by the Standing Committee of the National People’s Congress of
the PRC on December 27, 2008 and will come into effect on October 1, 2009.
To our knowledge, the current effective amended Implementing Regulations of the
China Patent Law are in the progress of further amendment and will be released
in the near future so that the amended Implementing Regulations are in
compliance with the newly amended China Patent Law.
The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention
(12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents—patents for inventions, utility models
and designs. The Chinese patent system adopts the principle of first to
file; therefore, where more than one person files a patent application for the
same invention, a patent can only be granted to the person who first filed the
application. Consistent with international practice, the PRC only allows
the patenting of inventions or utility models that possess the characteristics
of novelty, inventiveness and practical applicability. For a design to be
patentable, it cannot be identical with or similar to any design which, before
the date of filing, has been publicly disclosed in publications in the country
or abroad or has been publicly used in the country, and should not be in
conflict with any prior right of another.
PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One broad exception to this rule, however, is that, where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national
emergency or any extraordinary state of affairs occurs or where the public
interest so requires. SIPO, however, has not granted any compulsory
license to date. The patent holder may appeal such decision within three
months from receiving notification by filing a suit in a people’s
court.
PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. Patent holders who believe their
patent is being infringed may file a civil suit or file a complaint with a PRC
local Intellectual Property Administrative Authority, which may order the
infringer to stop the infringing acts. Preliminary injunction may be
issued by the People’s Court upon the patentee’s or the interested parties’
request before instituting any legal proceedings or during the
proceedings. Damages in the case of patent infringement is calculated as
either the loss suffered by the patent holder arising from the infringement or
the benefit gained by the infringer from the infringement. If it is
difficult to ascertain damages in this manner, damages may be reasonably
determined in an amount ranging from one to more times of the license fee under
a contractual license. The infringing party may be also fined by
Administration of Patent Management in an amount of up to three times the
unlawful income earned by such infringing party. If there is no unlawful
income so earned, the infringing party may be fined in an amount of up to
RMB500,000, or approximately US$73,200.
Tax
Pursuant
to the amended Provisional Regulation of China on Value Added Tax and their
Implementing Rules which came into effect on January 1, 2009, all entities and
individuals that are engaged in the sale of goods, the provision of repairs and
replacement services and the importation of goods in China are generally
required to pay Value Added Tax (“VAT”) at a rate of 17.0% of the gross sales
proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Further, when exporting goods, the exporter is entitled to a
portion of or all the refund of VAT that it has already paid or borne. Our
imported raw materials that are used for manufacturing export products and are
deposited in bonded warehouses are exempt from import VAT.
10
Foreign
currency exchange
Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange
transactions. Conversion of Renminbi for capital account items, such as
direct investment, loan, security investment and repatriation of investment,
however, is still subject to the approval of the PRC State Administration of
Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell
and/or remit foreign currencies at those banks authorized to conduct foreign
exchange business after providing valid commercial documents and, in the case of
capital account item transactions, obtaining approval from the SAFE.
Capital investments by foreign-invested enterprises outside of China are also
subject to limitations, which include approvals by the Ministry of Commerce
(“MOFCOM”), the SAFE and the State Reform and Development Commission. We
currently do not hedge our exposure to fluctuations in currency exchange
rates.
Dividend
distributions
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash
dividends. The board of directors of a foreign-invested enterprise has the
discretion to allocate a portion of its after-tax profits to staff welfare and
bonus funds, which may not be distributed to equity owners except in the event
of liquidation.
ITEM
1A: RISK
FACTORS
Any
investment in our common stock involves a high degree of risk. Potential
investors should carefully consider the material risks described below and all
of the information contained in this Form 10-K before deciding whether to
purchase any of our securities. Our business, financial condition or results of
operations could be materially adversely affected by these risks if any of them
actually occur. The trading price could decline due to any of these risks, and
an investor may lose all or part of his investment. Some of these
factors have affected our financial condition and operating results in the past
or are currently affecting us. This report also contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced described below and
elsewhere in this Form 10-K.
RISKS
RELATED TO OUR OPERATIONS
We
depend on a small number of customers for the vast majority of our sales. A
reduction in business from any of these customers could cause a significant
decline in our sales and profitability.
The vast
majority of our sales are generated from a small number of customers. For the
year ended December 31, 2009, we had eight customers that each accounted for at
least 5% of our total sales during such period, with one of those customers
accounting for at least 10% of our total sales. Those eight customers
accounted for 60% of our total sales for the year ended December 31,
2009. For the year ended December 30, 2008, we had eight customers
that each accounted for at least 5% of total sales, with three of those
customers accounting for at least 10% of total sales. These eight
customers accounted for a total of approximately 59.5% of our total sales for
that period. During the year ended December 31, 2007, we had seven
customers that generated revenues of at least 5% of our total sales, with one of
those customers accounting for at least 10% of our total sales in
2007. These seven customers accounted for a total of approximately
54.0% of our total sales for the year ended December 31, 2007. We
expect that we will continue to depend upon a small number of customers for a
significant majority of our sales for the foreseeable future.
Because
we do not have long-term contracts with our customers, our customers can
terminate their relationship with us at any time, which could cause a material
adverse effect on our results of operations.
We do not
have written long term agreements with our customers. As a result,
our customers may, without notice or penalty, terminate their relationship with
us at any time or delay the delivery of products on relatively short
notice. We cannot assure you that any of our current customers will
continue to purchase our products in the future. Additionally, even
if customers decide to continue their relationship with us, there can be no
guarantee that they will purchase the same amounts of products as in the
past. Any loss of a customer, or decrease in the volume of products
purchased by a customer could have a material adverse effect on our business,
operating results and financial condition.
11
We cannot
rely on long-term purchase orders or commitments to protect us from the negative
financial effects of a decline in demand for our products. The
limited certainty of product orders can make it difficult for us to forecast our
sales and allocation our resources in a manner consistent with our actual
sales. Moreover, our expense levels are based in part on our
expectations of future sales and, if our expectations regarding future sales are
inaccurate, we may be unable to reduce costs in a timely manner to adjust for
sales shortfalls. Furthermore, because we depend on a small number of
customers for the vast majority of our sales, the magnitude of the ramifications
of these risks is greater than if our sales were less concentrated with a small
number of customers. As a result of our lack of long-term purchase
orders and purchase commitments we may experience a rapid decline in our sales
and profitability.
Historically,
a substantial portion of our assets has been comprised of accounts receivable
representing amounts owed by a small number of customers. If any of
these customers fails to timely pay us amounts owed, we could suffer a
significant decline in cash flow and liquidity which, in turn, could cause us to
be unable pay our liabilities and purchase an adequate amount of inventory to
sustain or expand our sales volume.
Our
accounts receivable represented approximately 32.4%, 34.6% and 32.1% of our
total current assets as of December 31, 2009, 2008 and 2007,
respectively. As of December 31, 2009, 24.5% of our accounts receivable
represented amounts owed by two customers, each of whom represented over 10% of
the total amount of our accounts receivable. As of December 31, 2008, 30%
of our accounts receivable represented amounts owed by three customers, each of
which represented over 10% of the total amount of our accounts
receivable. As a result of the substantial amount and concentration
of our accounts receivable, if any of our major customers fails to timely pay us
amounts owed, we could suffer a significant decline in cash flow and liquidity
which could adversely affect our ability to borrow funds to pay our liabilities
and to purchase inventory to sustain or expand our current sales
volume.
Micro-motors
for electronics products are subject to rapid technological
changes. If we fail to accurately anticipate and adapt to these
changes, the products we sell will become obsolete, causing a decline in our
sales and profitability.
Micro-motors
for electronics products are subject to rapid technological changes which often
cause product obsolescence. Companies within our industry are
continuously developing new products with heightened performance and
functionality. This puts pricing pressure on existing products and
constantly threatens to make them, or causes them to be,
obsolete. Our typical product's life cycle is short, generating lower
average selling prices as the cycle matures. If we fail to accurately
anticipate the introduction of new technologies, we may possess significant
amounts of obsolete inventory that can only be sold at substantially lower
prices and profit margins than we anticipated. In addition, if we
fail to accurately anticipate the introduction of new technologies, we may be
unable to compete effectively due to our failure to offer products most demanded
by the marketplace. If any of these failures occur, our sales, profit
margins and profitability will be adversely affected.
We
may incur design and development expenses and purchase inventory in anticipation
of orders which are not placed.
In order
to transact business, we assess the integrity and creditworthiness of our
customers and suppliers and we may, based on this assessment, incur design and
development costs that we expect to recoup over a number of orders produced for
the customer. Such assessments are not always accurate and expose us
to potential costs, including the write off of costs incurred and inventory
obsolescence if the orders anticipated do not materialize. We may
also occasionally place orders with suppliers based on a customer’s forecast or
in anticipation of an order that is not realized. Additionally, from
time to time, we may purchase quantities of supplies and materials greater than
required by customer orders to secure more favorable pricing, delivery or credit
terms. These purchases can expose us to losses from cancellation
costs, inventory carrying costs or inventory obsolescence, and hence adversely
affect our business and operating results.
The
micro-motor industry is subject to significant fluctuations in the availability
of raw materials and components. If we do not properly anticipate the
need for critical raw materials and components, we may be unable to meet the
demands of our customers and end-users, which could reduce our competitiveness,
cause a decline in our market share and have a material adverse effect on our
results of operations.
As the
availability of raw materials and components decreases, the cost of acquiring
those raw materials and components ordinarily increases. The prices
of such materials are volatile, with price fluctuations due to supply and
demand, market fluctuations, currency fluctuations, and changes in governmental
regulation. If we fail to procure adequate supplies of raw materials
and components in anticipation of our customers' orders or end-users’ demand,
our gross margins may be negatively impacted due to higher prices that we are
required to pay for raw materials and components in short supply. We
currently do not engage in hedging activities to reduce our risk to price
increases in our raw materials. High growth product categories have
experienced chronic shortages of raw materials and components during periods of
exceptionally high demand. If we do not properly anticipate the need
for critical raw materials and components, we may pay higher prices for the raw
materials and components, we may be unable to meet the demands of our customers
and end-users, which could reduce our competitiveness, cause a decline in our
market share and have a material adverse effect on our results of
operations. Price increases for our raw materials will result in
increases in cost of sales and we may not be able to pass on the increased
production costs to our customers in the form of higher prices for our
products. Increases in the prices for our products may result in
reduced sales volume and profitability. Any increase in operating
costs that we cannot pass on to our customers or any decrease in sales due to
higher product prices may result in reduced profitability and a material adverse
effect on our results of operations.
12
Adverse
capital and credit market conditions may significantly affect our ability to
meet liquidity needs, access to capital and cost of capital.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than twelve months. In recent weeks, the volatility and
disruption have reached unprecedented levels. In some cases, the
markets have exerted downward pressure on availability of liquidity and credit
capacity for certain issuers. We have historically relied on credit
to fund our business and we need liquidity to pay our operating
expenses. Without sufficient liquidity, we will be forced to curtail
our operations, and our business will suffer. Disruptions,
uncertainty or volatility in the capital and credit markets may also limit our
access to capital required to operate our business. Such market
conditions may limit our ability to replace, in a timely manner, maturing
liabilities and access the capital necessary to operate and grow our
business. As such, we may be forced to delay raising capital or bear
an unattractive cost of capital which could decrease our profitability and
significantly reduce our financial flexibility. Our results of
operations, financial condition, cash flows and capital position could be
materially adversely affected by disruptions in the financial
markets.
We
derive the majority of our revenues from sales in the PRC and any downturn in
the Chinese economy could have a material adverse effect on our business and
financial condition.
A
substantial portion of our revenues are generated from sales in the
PRC. We anticipate that revenues from sales of our products in the
PRC will continue to represent a substantial portion of our total revenues in
the near future. Our sales and earnings can also be affected by
changes in the general economy since purchases of most household appliances and
tools are generally discretionary for consumers. Our success is
influenced by a number of economic factors which affect disposable consumer
income, such as employment levels, business conditions, interest rates, oil and
gas prices and taxation rates. Adverse changes in these economic
factors, among others, may restrict consumer spending, thereby negatively
affecting our sales and profitability.
We
do not carry any business interruption insurance, products liability insurance
or any other insurance policy except for a limited property insurance
policy. As a result, we may incur uninsured losses, increasing the
possibility that you would lose your entire investment in our
company.
We could
be exposed to liabilities or other claims for which we would have no insurance
protection. We do not currently maintain any business interruption
insurance, products liability insurance, or any other comprehensive insurance
policy. As a result, we may incur uninsured liabilities and losses as
a result of the conduct of our business. There can be no guarantee
that we will be able to obtain insurance coverage in the future, and even if we
are able to obtain coverage, we may not carry sufficient insurance coverage to
satisfy potential claims. Should uninsured losses occur, any
purchasers of our common stock could lose their entire investment.
Because
we do not carry products liability insurance, a failure of any of the products
marketed by us subjects us to the risk of product liability claims and
litigation arising from injuries allegedly caused by the improper functioning or
design of our products. We cannot assure that we will have enough
funds to defend or pay for liabilities arising out of a products liability
claim. To the extent we incur any product liability or other
litigation losses, our expenses could materially increase
substantially. There can be no assurance that we will have sufficient
funds to pay for such expenses, which could end our operations and you would
lose your entire investment.
We
are subject to market risk through our sales to international
markets.
A growing
percentage of our sales are being derived from international
markets. These international sales are primarily focused in Korea. These
operations are subject to risks that are inherent in operating in foreign
countries, including the following:
·
|
foreign countries could change
regulations or impose currency restrictions and other
restraints;
|
·
|
changes in foreign currency
exchange rates and hyperinflation or deflation in the foreign countries in
which we operate;
|
·
|
exchange
controls;
|
·
|
some countries impose burdensome
tariffs and quotas;
|
·
|
political changes and economic
crises may lead to changes in the business environment in which we
operate;
|
·
|
international conflict, including
terrorist acts, could significantly impact our financial condition and
results of operations; and
|
·
|
economic downturns, political
instability and war or civil disturbances may disrupt distribution
logistics or limit sales in individual
markets.
|
13
If
our third party sales representatives and distributors fail to adequately
promote, market and sell our products, our revenues could significantly
decrease.
A
significant portion of our product sales are made through third party sales
representative organizations, whose members are not our
employees. Our level of sales depends on the effectiveness of these
organizations, as well as the effectiveness of our own
employees. Some of these third party representatives may sell (and do
sell), with our permission, competitive products of third parties as well as our
products. During our fiscal years ended December 31, 2009, 2008 and
2007, these organizations were responsible for approximately 46.4%, 42% and 35%,
respectively, of our net revenues during such periods. Significant
terms and conditions of distributor agreements include FOB source, net 30 days
payment terms, with no return or exchange rights, and no price
protection. If any of the third party sales representative
organizations engaged by us fails to adequately promote, market and sell our
products, our revenues could be significantly decreased until we can retain a
replacement organization or distributor. Finding replacement
organizations and distributors can be a time consuming process during which our
revenues could be negatively impacted. Our success is dependent on
these distributors finding new customers and receiving new orders from existing
customers.
Unanticipated
disruptions in our operations or slowdowns by our suppliers and shipping
companies could adversely affect our ability to deliver our products our
customers which could materially and adversely affect our revenues and our
relationships with our customers.
Our
ability to provide high quality customer service, process and fulfill orders and
manage inventory depends on:
·
|
the efficient and uninterrupted
operation of our distribution centers;
and
|
·
|
the timely and uninterrupted
performance of third party suppliers, shipping companies, and dock
workers.
|
Any
material disruption or slowdown in the operation of our distribution centers,
manufacturing facilities or management information systems, or comparable
disruptions or slowdowns suffered by our principal suppliers and shippers could
cause delays in our ability to receive, process and fulfill customer orders and
may cause orders to be canceled, lost or delivered late, goods to be returned or
receipt of goods to be refused. As a result, our revenues and
operating results could be materially and adversely affected.
We
are subject to intense competition in the industry in which we operate, which
could cause material reductions in the selling price of our products or losses
of our market share.
The
micro-motor industry is highly competitive, especially with respect to pricing
and the introduction of new products and features. Our products
compete primarily on the basis of:
·
|
reliability;
|
·
|
brand
recognition;
|
·
|
quality;
|
·
|
price;
|
·
|
design;
|
·
|
consumer acceptance of our
trademark; and
|
·
|
quality service and support to
retailers and our customers.
|
In recent
years, we and many of our competitors, have regularly lowered prices, and we
expect these pricing pressures to continue. If these pricing
pressures are not mitigated by increases in volume, cost reductions from our
supplier or changes in product mix, our revenues and profits could be
substantially reduced. As compared to us, many of our competitors
have:
·
|
significantly longer operating
histories;
|
·
|
significantly greater managerial,
financial, marketing, technical and other competitive resources;
and
|
·
|
greater brand
recognition.
|
14
As a
result, our competitors may be able to:
·
|
adapt more quickly to new or
emerging technologies and changes in customer
requirements;
|
·
|
devote greater resources to the
promotion and sale of their products and services;
and
|
·
|
respond more effectively to
pricing pressures.
|
These
factors could materially adversely affect our operations and financial
condition. In addition, competition could increase if:
·
|
new companies enter the
market;
|
·
|
existing competitors expand their
product mix; or
|
·
|
we expand into new
markets.
|
An
increase in competition could result in material price reductions or loss of our
market share.
We
may not be able to effectively recruit and retain skilled employees,
particularly scientific, technical and management professionals.
Our
ability to compete effectively depends largely on our ability to attract and
retain certain key personnel, including scientific, technical and management
professionals. We anticipate that we will need to hire additional
skilled personnel in all areas of our business. Industry demand for
such employees, however, exceeds the number of personnel available, and the
competition for attracting and retaining these employees is
intense. Because of this intense competition for skilled employees,
we may be unable to retain our existing personnel or attract additional
qualified employees to keep up with future business needs. If this
should happen, our business, operating results and financial condition could be
adversely affected.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law, which became
effective on January 1, 2008, amended and formalized workers’ rights concerning
overtime hours, pensions, layoffs, employment contracts and the role of trade
unions. As a result of the new law, the Company has had to increase the salaries
of its employees, provide additional benefits to its employees, and revise
certain other of its labor practices. The increase in labor costs has increased
the Company’s operating costs, which increase the Company has not always been
able to pass through to its customers. In addition, under the new law, employees
who either have worked for the Company for 10 years or more or who have had two
consecutive fixed-term contracts must be given an “open-ended employment
contract” that, in effect, constitutes a lifetime, permanent contract, which is
terminable only in the event the employee materially breaches the Company’s
rules and regulations or is in serious dereliction of his duty. Such
non-cancelable employment contracts will substantially increase its employment
related risks and limit the Company’s ability to downsize its workforce in the
event of an economic downturn. No assurance can be given that the Company will
not in the future be subject to labor strikes or that it will not have to make
other payments to resolve future labor issues caused by the new laws.
Furthermore, there can be no assurance that the labor laws will not change
further or that their interpretation and implementation will vary, which may
have a negative effect upon our business and results of operations.
Our
business could be materially adversely affected if we cannot protect our
intellectual property rights or if we infringe on the intellectual property
rights of others.
Our
ability to compete effectively will depend on our ability to maintain and
protect our proprietary rights. We have one pending patent
application in China. We also own a trademark related to the sale of
our products, which is materially important to our business. Our
trademark is registered in China. However, third parties may seek to
challenge, invalidate, circumvent or render unenforceable any proprietary rights
owned by or licensed to us. In addition, in the event third party
licensees fail to protect the integrity of our trademark, the value of our mark
could be materially adversely affected.
Our
inability to protect our proprietary rights could materially adversely affect
the license of our trade names and trademarks to third parties as well as our
ability to sell our products. Litigation may be necessary
to:
·
|
enforce our intellectual property
rights;
|
15
·
|
protect our trade secrets;
and
|
·
|
determine the scope and validity
of such intellectual property
rights.
|
Any such
litigation, whether or not successful, could result in substantial costs and
diversion of resources and management’s attention from the operation of our
business.
We may
receive notice of claims of infringement of other parties’ proprietary
rights. Such actions could result in litigation and we could incur
significant costs and diversion of resources in defending such
claims. The party making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable
relief. Such relief could effectively block our ability to make, use,
sell, distribute or market our products in such jurisdiction. We may
also be required to seek licenses to such intellectual property. We
cannot predict, however, whether such licenses would be available or, if
available, that such licenses could be obtained on terms that are commercially
reasonable and acceptable to us. The failure to obtain the necessary
licenses or other rights could delay or preclude the sale, manufacture or
distribution of our products and could result in increased costs to
us.
We
may need additional capital to implement our current business strategy, which
may not be available to us, and if we raise additional capital, it may dilute
your ownership in us.
We
currently depend on net revenues to meet our short-term cash
requirements. In order to grow revenues and sustain profitability, we
will need additional capital. Obtaining additional financing will be
subject to a number of factors, including market conditions, our operating
performance and investor sentiment. These factors may make the
timing, amount, terms and conditions of additional financing unattractive to
us. We cannot assure you that we will be able to obtain any
additional financing. If we are unable to obtain the financing needed
to implement our business strategy, our ability to increase revenues will be
impaired and we may not be able to sustain profitability.
Our
failure to effectively manage growth could harm our business.
We have
rapidly and significantly expanded the number and types of products we sell, and
we will endeavor to further expand our product portfolio. We must
continually introduce new products and technologies, enhance existing products
in order to remain competitive, and effectively stimulate customer demand for
new products and upgraded versions of our existing products.
This
expansion of our products places a significant strain on our management,
operations and engineering resources. Specifically, the areas that
are strained most by our growth include the following:
·
|
New Product Launch: With the
growth of our product portfolio, we experience increased complexity in
coordinating product development, manufacturing, and
shipping. As this complexity increases, it places a strain on
our ability to accurately coordinate the commercial launch of our products
with adequate supply to meet anticipated customer demand and effective
marketing to stimulate demand and market acceptance. If we are
unable to scale and improve our product launch coordination, we could
frustrate our customers and lose retail shelf space and product
sales;
|
·
|
Forecasting, Planning and Supply
Chain Logistics: With the growth of our product portfolio, we also
experience increased complexity in forecasting customer demand and in
planning for production, and transportation and logistics
management. If we are unable to scale and improve our
forecasting, planning and logistics management, we could frustrate our
customers, lose product sales or accumulate excess inventory;
and
|
·
|
Support Processes: To manage the
growth of our operations, we will need to continue to improve our
transaction processing, operational and financial systems, and procedures
and controls to effectively manage the increased complexity. If
we are unable to scale and improve these areas, the consequences could
include: delays in shipment of product, degradation in levels of customer
support, lost sales, decreased cash flows, and increased
inventory. These difficulties could harm or limit our ability
to expand.
|
Our
facilities and information systems could be damaged as a result of disasters or
unpredictable events, which could have an adverse effect on our business
operations.
Our
headquarters and major facilities including manufacturing plants, sales offices
and research and development centers are located in China. If major
disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer
viruses, transportation disasters or other events occur, or our information
system or communications network breaks down or operates improperly as a result
of such events, our facilities may be seriously damaged, and we may have to stop
or delay production and shipment. We may incur expenses relating to
such damages.
16
Our business could be materially
adversely affected if we cannot maintain any business interruption
insurance.
We could
be exposed to liabilities or other claims for which the Company would have no
insurance protection. We do not currently maintain any business interruption
insurance, products liability insurance, or any other comprehensive insurance
policy except for property insurance policies with limited coverage. For
example, because we does not carry products liability insurance, a failure of
any of the products marketed by the Company may subject it to the risk of
product liability claims and litigation arising from injuries allegedly caused
by the improper functioning or design of its products. We cannot assure that it
will have enough funds to defend or pay for liabilities arising out of a
products liability claim. To the extent the Company incurs any product liability
or other litigation losses, its expenses could materially increase
substantially. There can be no assurance that the Company will have sufficient
funds to pay for such expenses, which could end its operations. There can be no
guarantee that we will be able to obtain additional insurance coverage in the
future, and even if it can obtain additional coverage, we may not carry
sufficient insurance coverage to satisfy potential claims. All investors of the
Company could lose their entire investment should uninsured losses
occur.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts
substantial influence and control over the manner in which we must conduct our
business activities. Our ability to operate in China may be adversely
affected by changes in Chinese laws and regulations, including those relating to
taxation, import and export tariffs, raw materials, environmental regulations,
land use rights, property and other matters. Under the current
government leadership, the government of the PRC has been pursuing economic
reform policies that encourage private economic activity and greater economic
decentralization. There is no assurance, however, that the government
of the PRC will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without
notice.
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the
interpretations thereof, may have a material and adverse effect on our
business.
The PRC’s
legal system is a civil law system based on written statutes. Unlike
the common law system prevalent in the United States, decided legal cases have
little value as precedent in China. There are substantial
uncertainties regarding the interpretation and application of PRC laws and
regulations, including but not limited to, governmental approvals required for
conducting business and investments, laws and regulations governing the consumer
electronics business and electric product safety, national security-related laws
and regulations and export/import laws and regulations, as well as commercial,
antitrust, patent, product liability, environmental laws and regulations,
consumer protection, and financial and business taxation laws and
regulations.
The
Chinese government has been developing a comprehensive system of commercial
laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters. However, because these
laws and regulations are relatively new, and because of the limited volume of
published cases and judicial interpretation and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect
existing and proposed future businesses may also be applied
retroactively.
Our principal operating
subsidiary, Shenzhen Yuepengcheng Motor Co., Ltd., (“Shenzhen YPC”), is
considered a foreign invested enterprise under PRC laws, and as a result is
required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC
laws or regulations, they would have broad discretion in dealing with such a
violation, including, without limitation:
·
|
levying
fines;
|
·
|
revoking our business license,
other licenses or
authorities;
|
·
|
requiring that we restructure our
ownership or operations; and
|
·
|
requiring that we discontinue any
portion or all of our
business.
|
17
Investors
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
Most of
our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all of our directors and officers
are nationals and residents of China. All or substantially all of the assets of
these persons are located outside the United States and in the PRC. As a result,
it may not be possible to effect service of process within the United States or
elsewhere outside China upon these persons. In addition, uncertainty exists as
to whether the courts of China would recognize or enforce judgments of U.S.
courts obtained against us or such officers and/or directors predicated upon the
civil liability provisions of the securities laws of the United States or any
state thereof, or be competent to hear original actions brought in China against
us or such persons predicated upon the securities laws of the United States or
any state thereof.
Contract
drafting, interpretation and enforcement in China involves significant
uncertainty, which could leave us vulnerable to legal disputes and challenges
related to our contracts.
We have
entered into numerous contracts governed by PRC law, many of which are material
to our business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and are not as comprehensive in
defining contracting parties’ rights and obligations. As a result, contracts in
China are more vulnerable to disputes and legal challenges. In addition,
contract interpretation and enforcement in China is not as developed as in the
United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be subject to
disputes under our material contracts, and if such disputes arise, we cannot
assure you that we will prevail.
If
our land use rights of our landlord are revoked, we would be forced to relocate
operations.
Under
Chinese law land is owned by the state or rural collective economic
organizations. The state issues to the land users the land use right
certificate. Land use rights can be revoked and the land users forced to vacate
at any time when redevelopment of the land is in the public interest. The public
interest rationale is interpreted quite broadly and the process of land
appropriation may be less than transparent. We do have any land use rights and
each of our manufacturing facilities rely on land use rights of a landlord, and
the loss of such rights would require us to identify and relocate our
manufacturing and other facilities, which could have a material adverse effect
on our financial conditions and results of operations.
We
face risks related to natural disasters, terrorist attacks or other events in
China that may affect usage of public transportation, which could have a
material adverse effect on our business and results of operations.
Our
business could be materially and adversely affected by natural disasters,
terrorist attacks or other events in China. For example, in early 2008, parts of
China suffered a wave of strong snow storms that severely impacted public
transportation systems. In May 2008, Sichuan Province in China suffered a strong
earthquake measuring approximately 8.0 on the Richter scale that caused
widespread damage and casualties. The May 2008 Sichuan earthquake has had a
material adverse effect on the general economic conditions in the areas affected
by the earthquake. Any future natural disasters, terrorist attacks or other
events in China could cause a reduction in usage of or other severe disruptions
to, public transportation systems and could have a material adverse effect on
our business and results of operations.
We
face uncertainty from the Circular on Strengthening the Administration of
Enterprise Income Tax on Non-resident Enterprises' Share Transfer (“Circular
698”) released in December 2009 by China's State Administration of Taxation
(SAT), effective as of January 1, 2008.
Where a
foreign investor indirectly transfers equity interests in a Chinese resident
enterprise by selling the shares in an offshore holding company, and the latter
is located in a country (jurisdiction) where the effective tax burden is less
than 12.5% or where the offshore income of her residents is not taxable, the
foreign investor shall provide the tax authority in charge of that Chinese
resident enterprise with the relevant information within 30 days of the
transfers.
Where a
foreign investor indirectly transfers equity interests in a Chinese resident
enterprise through the abuse of form of organization and there are no reasonable
commercial purposes such that the corporate income tax liability is avoided, the
tax authority shall have the power to re-assess the nature of the equity
transfer in accordance with the “substance-over-form” principle and deny the
existence of the offshore holding company that is used for tax planning
purposes.
“Income
derived from equity transfers” as mentioned in this circular refers to income
derived by non-resident enterprises from direct or indirect transfers of equity
interest in China resident enterprises, excluding share in Chinese resident
enterprises that are bought and sold openly on the stock exchange.
While the
term "indirectly transfer" is not defined, we understand that the relevant PRC
tax authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct contact with China. The relevant
authority has not yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the very country (jurisdiction) and
to what extent and the process of the disclosure to the tax authority in charge
of that Chinese resident enterprise. Meanwhile, there are not any formal
declarations with regard to how to decide “abuse of form of organization” and
“reasonable commercial purpose,” which can be utilized by us to balance if our
company complies with the Circular 698.
18
We
could be liable for damages for defects in our products pursuant to the Tort
Liability Law of the PRC.
The Tort
Liability Law of the People’s Republic of China, which was passed during the
12th Session of the Standing Committee of the 11th National People’s Congress on
December 26, 2009, states that manufacturers are liable for damages caused by
defects in their products and sellers are liable for damages attributable to
their fault. If the defects are caused by the fault of third parties such as the
transporter or storekeeper, manufacturers and sellers are entitled to claim for
compensation from these third parties after paying the compensation
amount.
The
scope of our business license in China is limited, and we may not expand or
continue our business without government approval and renewal,
respectively.
Our
principal operating subsidiary, Shenzhen YPC, is a wholly foreign-owned
enterprise, commonly known as a WFOE. A WFOE can only conduct
business within its approved business scope, which ultimately appears on its
business license. Our license permits us to produce and market
micro-motor products and relevant components. Any amendment to the
scope of our business requires further application and government
approval. In order for us to expand our business beyond the scope of
our license, we will be required to enter into a negotiation with the PRC
authorities for the approval to expand the scope of our business. We
cannot assure investors that Shenzhen YPC will be able to obtain the necessary
government approval for any change or expansion of its business.
We
are subject to a variety of environmental laws and regulations related to our
manufacturing operations. Our failure to comply with environmental
laws and regulations may have a material adverse effect on our business and
results of operations.
We are
subject to various environmental laws and regulations in China. We
cannot assure you that at all times we will be in compliance with the
environmental laws and regulations or that we will not be required to expend
significant funds to comply with, or discharge liabilities arising under,
environmental laws and regulations. Additionally, these regulations
may change in a manner that could have a material adverse effect on our
business, results of operations and financial condition. We have made
and will continue to make capital and other expenditures to comply with
environmental requirements.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability to
operate. Our failure to obtain the prior approval of the China Securities
Regulatory Commission, or the CSRC, for the listing and trading of our common
stock could have a material adverse effect on our business, operating results,
reputation and trading price of our common stock, and may also create
uncertainties in the future.
On
October 21, 2005, SAFE issued a Circular on Relevant Issues
Concerning Foreign Exchange Administration on the Financing and Return
Investment by Chinese Domestic Residents through Overseas Special Purpose
Companies (“Circular 75”), which became effective on November 1,
2005. Circular 75 regulates the foreign exchange matters in relation
to the use of a “special purpose vehicle” by PRC residents to seek offshore
equity financing and conduct “round trip investment” in China. Under
Circular 75, a “special purpose vehicle” or “SPV” refers to an offshore entity
established or controlled, directly or indirectly, by PRC residents or PRC
entities for the purpose of seeking offshore equity financing using assets or
interests owned by such PRC residents or PRC entities in onshore companies,
while “round trip investment” refers to the direct investment in China by PRC
residents through the “SPV”, including without limitation establishing foreign
invested enterprises and using such foreign invested enterprises to purchase or
control (by way of contractual arrangements) onshore assets. Pursuant
to Circular 75, (1) a PRC resident shall register with a local branch of the
SAFE before he or she establishes or controls an overseas SPV, for the purpose
of overseas equity financing (including convertible debt financing); (2) when a
PRC resident contributes the assets of or his or her equity interests in a
domestic enterprise to an SPV, or engages in overseas financing after
contributing assets or equity interests to an SPV, such PRC resident must
register his or her interest in the SPV and any subsequent changes in such
interest with a local branch of the SAFE; and (3) when the SPV undergoes a
material change outside of China, such as a change in share capital or merger or
acquisition, the PRC resident shall, within 30 days from the occurrence of the
event that triggers the change, register such change with a local branch of the
SAFE. In addition, SAFE issued updated internal implementing rules,
or the Implementing Rules in relation to Circular 75. The
Implementing Rules (“Circular 106”) were promulgated and became effective on May
29, 2007. Circular 106 provides more detailed provisions and
requirements regarding the overseas investment foreign exchange registration
procedures. Under Circular 106, the PRC subsidiary of the offshore SPV are
prohibited from distributing their profits and proceeds from any reduction in
capital, share transfer or liquidation to their offshore special purpose vehicle
parent companies if the SPV shareholders who are PRC residents have not
completed foreign exchange registration pursuant to Circular
75. However, even after the promulgation of Circular 106 there still
exist uncertainties regarding the SAFE registration for PRC residents’ interests
in overseas companies. If any PRC resident stockholder of a SPV fails
to make the required SAFE registration and amended registration, the onshore PRC
subsidiaries of that offshore company may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer or
liquidation to the offshore entity. Failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. Because of uncertainty in how the SAFE circulars will
be further interpreted and enforced, we cannot be sure how it will affect our
business operations or future plans. For example, Shenzhen YPC’s
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE circulars by our PRC resident beneficial holders over
whom we have no control. In addition, we cannot assure you that such
PRC residents will be able to complete the necessary approval and registration
procedures required by the SAFE circulars. In connection with the Li
Conversion, Ms. Li filed a SAFE registration with respect to her investment in
the Company. We cannot assure you that such registration will be approved.
Failure by Mr. Li or any PRC resident beneficial holder to register as required
with the relevant branch of SAFE could subject these PRC resident beneficial
holders to fines or legal sanctions, restrict our overseas or cross-border
investment activities, limit Shenzhen YPC’s ability to make distributions or pay
dividends or affect our ownership structure, which could adversely affect our
business and prospects.
19
On August
8, 2006, the MOFCOM joined by the State-owned Assets Supervision and
Administration Commission of the State Council, the State Administration of
Taxation, the State Administration for Industry and Commerce, the China
Securities Regulatory Commission (“CSRC”) and SAFE, released a substantially
amended version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the “Revised M&A Regulations”), which took effect
September 8, 2006. These new rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign
acquisitions of domestic enterprises. Depending on the structure of
the transaction, the Revised M&A Regulations require the Chinese parties to
make a series of applications and supplemental applications to the
aforementioned governmental agencies, some of which must be made within strict
time limits and depend on approvals from one or the other of the aforementioned
governmental agencies. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules
establish reporting requirements for acquisition of control by foreigners of
companies in key industries, and reinforce the ability of the Chinese government
to monitor and prohibit foreign control transactions in key
industries.
Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs
seeking CSRC approval of their overseas listings. However, the
application of this PRC regulation remains unclear with no consensus currently
existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement.
If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required for our restructuring, we may face regulatory actions or other
sanctions from the CSRC or other PRC regulatory agencies. These regulatory
agencies may impose fines and penalties on our operations in the PRC, limit our
operating privileges in the PRC, or take other actions that could have a
material adverse effect on our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our Common
Stock.
Our BVI
subsidiary, Attainment Holdings, was owned by non-PRC
individuals. Luck Loyal International Investment Limited (“Luck
Loyal”), a company organized under the laws of Hong Kong, acquired all of the
equity interests of Shenzhen YPC pursuant to the terms of an Equity Transfer
Agreement dated October 24, 2008 by and between Luck Loyal and Shenzhen
Yuepengda Industrial Development Co., Ltd. (the “Equity Purchase
Agreement”). The Equity Purchase Agreement was approved by the
Commerce Bureau of Shenzhen Bao’an District on October 29, 2008, a Certificate
of Approval for Establishment of Enterprises with Foreign Investment in the PRC
was issued by the People’s Government of Shenzhen Municipality on October 30,
2008, and a new Business License of Shenzhen YPC was issued by the
Administration for the Industry and Commerce of Shenzhen Municipality on
November 11, 2008. Shenzhen YPC has filed all required applications
and received all appropriate SAFE approvals.
Also, if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or
negative publicity regarding this CSRC approval requirement could have a
material adverse effect on the trading price of our common
stock. Furthermore, published news reports in China recently
indicated that the CSRC may have curtailed or suspended overseas listings for
Chinese private companies. These news reports have created further
uncertainty regarding the approach that the CSRC and other PRC regulators may
take with respect to us.
We
believe that Revised M&A Regulations and CSRC approval were not required in
the context of the share exchange because (i) share exchange is a purely foreign
related transaction governed by foreign laws, not subject to the jurisdiction of
PRC laws and regulations; (ii) we are not an SPV formed or controlled by
PRC companies or PRC individuals, and (iii) we are owned or substantively
controlled by foreigners. However, we cannot assure you that the
relevant PRC government agencies, including the CSRC, would reach the same
conclusion, and we still cannot rule out the possibility that CSRC may deem that
the transactions effected by the share exchange circumvented the Revised M&A
Regulations, related clarifications and PRC Securities Law. It is
also uncertain how our business operations or future strategy will be affected
by the interpretations and implementation of Circular 75, Circular 106, and the
Revised M&A Regulations. It is anticipated that application of
the new rules will be subject to significant administrative interpretation, and
we will need to closely monitor how SAFE, MOFCOM and other ministries apply the
rules to ensure that our domestic and offshore activities continue to comply
with PRC law. Given the uncertainties regarding interpretation and
application of the new rules, we may need to expend significant time and
resources to maintain compliance.
20
The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.
To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that
time. Conversely, if we decide to convert our Renminbi into U.S.
Dollars for the operational needs or paying dividends on our common stock, the
dollar equivalent of our earnings from our subsidiaries in China would be
reduced should the dollar appreciate against the Renminbi. We
currently do not hedge our exposure to fluctuations in currency exchange
rates.
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi
relative to the U.S. Dollar has remained stable and has appreciated slightly
against the U.S. Dollar. Countries, including the United States, have argued
that the Renminbi is artificially undervalued due to China’s current monetary
policies and have pressured China to allow the Renminbi to float freely in world
markets. In July 2005, the PRC government changed its policy of
pegging the value of the Renminbi to the dollar. Under the new policy
the Renminbi is permitted to fluctuate within a narrow and managed band against
a basket of designated foreign currencies. While the international
reaction to the Renminbi revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in further and more significant
appreciation of the Renminbi against the dollar.
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply
and rising inflation. According to the National Bureau of Statistics
of China, China’s Consumer Price Index increased 2.7% in February 2010 over
February 2009. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as
raw materials, it may have an adverse effect on our profitability.
Furthermore,
in order to control inflation in the past, the PRC government has imposed
controls on bank credits, limits on loans for fixed assets and restrictions on
state bank lending. In January 2010, the Chinese government took
steps to tighten the availability of credit including ordering banks to increase
the amount of reserves they hold and to reduce or limit their lending. The
implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the
interest rate again. Repeated rises in interest rates by the central
bank would likely slow economic activity in China which could, in turn,
materially increase our costs and also reduce demand for our products and
services.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and
other financial institutions in the PRC do not provide insurance for funds held
on deposit. A significant portion of our assets are in the form of
cash deposited with banks in the PRC, and in the event of a bank failure, we may
not have access to our funds on deposit. Depending upon the amount of
money we maintain in a bank that fails, our inability to have access to our cash
could impair our operations, and, if we are not able to access funds to pay our
suppliers, employees and other creditors, we may be unable to continue in
business.
We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.
Companies
based in the PRC may not have properly kept financial books and records that may
be reconciled with U.S. generally accepted accounting principles. If we attempt
to acquire a significant PRC target company and/or its assets, we would be
required to obtain or prepare financial statements of the target that are
prepared in accordance with and reconciled to U.S. generally accepted accounting
principles. Federal securities laws require that a business combination meeting
certain financial significance tests require the public acquirer to prepare and
file historical and/or pro forma financial statement disclosure with the SEC.
These financial statements must be prepared in accordance with, or be reconciled
to U.S. generally accepted accounting principles and the historical financial
statements must be audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. If a proposed
acquisition target does not have financial statements that have been prepared in
accordance with, or that can be reconciled to, U.S. generally accepted
accounting principles and audited in accordance with the standards of the PCAOB,
we will not be able to acquire that proposed acquisition target. These financial
statement requirements may limit the pool of potential acquisition targets with
which we may acquire and hinder our ability to expand our retail operations.
Furthermore, if we consummate an acquisition and are unable to timely file
audited financial statements and/or pro forma financial information required by
the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use
the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form
S-3, the process of raising capital may be more expensive and time consuming and
the terms of any offering transaction may not be as favorable as they would have
been if we were eligible to use Form S-3.
21
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
As our
ultimate holding company is a Delaware corporation, we are subject to the United
States Foreign Corrupt Practices Act, which generally prohibits United States
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign
companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices may occur from time-to-time in the PRC. We
can make no assurance, however, that our employees or other agents will not
engage in such conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties and other consequences that may have a material adverse
effect on our business, financial condition and results of
operations.
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could
restrict our ability to adopt an equity compensation plan for our directors and
employees and other parties under PRC law.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which
are so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the
plan. In addition, Circular 78 also requires PRC citizens to register
with SAFE and make the necessary applications and filings if they participated
in an overseas listed company’s covered equity compensation plan prior to April
6, 2007. We intend to adopt an equity compensation plan in the future
and make option grants to our officers and directors, most of who are PRC
citizens. Circular 78 may require our officers and directors who
receive option grants and are PRC citizens to register with SAFE. We
believe that the registration and approval requirements contemplated in Circular
78 will be burdensome and time consuming. If it is determined that
any of our equity compensation plans are subject to Circular 78, failure to
comply with such provisions may subject us and participants of our equity
incentive plan who are PRC citizens to fines and legal sanctions and prevent us
from being able to grant equity compensation to our PRC employees. In
that case, our ability to compensate our employees and directors through equity
compensation would be hindered and our business operations may be adversely
affected.
We
have enjoyed certain preferential tax concessions and the loss of these
preferential tax concessions may cause our tax liabilities to increase and our
profitability to decline.
Under the
tax laws of PRC, we have had tax advantages granted by local government for
corporate income taxes and sales taxes commencing April 6, 2004. We are
entitled to a 50% reduction on normal tax rate of 15% commencing in 2005 for the
following three consecutive years. On March 16, 2007, the National
People’s Congress of China enacted a new PRC Enterprise Income Tax Law, under
which foreign invested enterprises and domestic companies will be subject to
enterprise income tax at a uniform rate of 25%. The new law became
effective on January 1, 2008. During the transition period for
enterprises established before March 16, the tax rate will be gradually
increased starting in 2008 and be equal to the new tax rate in
2012. The Company’s prior tax rate of 15% was increased to a rate of
18% in 2008 and 20% in 2009. The expiration of the preferential tax
treatment will increase our tax liabilities and reduce our
profitability.
Dividends
payable by us to our foreign investors and any gain on the sale of our shares
may be subject to taxes under PRC tax laws.
If
dividends payable to our shareholders are treated as income derived from sources
within China, then the dividends that shareholders receive from us, and any gain
on the sale or transfer of our shares, may be subject to taxes under PRC tax
laws.
22
Under the
New EIT Law and its implementing rules, PRC enterprise income tax at the rate of
10% is applicable to dividends payable by us to our investors that are
non-resident enterprises so long as such non-resident enterprise investors do
not have an establishment or place of business in China or, despite the
existence of such establishment of place of business in China, the relevant
income is not effectively connected with such establishment or place of business
in China, to the extent that such dividends have their sources within the PRC.
Similarly, any gain realized on the transfer of our shares by such investors is
also subject to a 10% PRC income tax if such gain is regarded as income derived
from sources within China and we are considered as a resident enterprise which
is domiciled in China for tax purpose. Additionally, there is a possibility that
the relevant PRC tax authorities may take the view that the purpose of us and
Attainment Holdings is holding Shenzhen YPC, and the capital gain derived by our
overseas shareholders or investors from the share transfer is deemed
China-sourced income, in which case such capital gain may be subject to a PRC
withholding tax at the rate of up to 10%. If we are required under the New EIT
Law to withhold PRC income tax on our dividends payable to our foreign
shareholders or investors who are non-resident enterprises, or if you are
required to pay PRC income tax on the transfer or our shares under the
circumstances mentioned above, the value of your investment in our shares may be
materially and adversely affected.
In
January, 2009, the State Administration of Taxation promulgated the Provisional
Measures for the Administration of Withholding of Enterprise Income Tax for
Non-resident Enterprises (“Measures”), pursuant to which, the entities which
have the direct obligation to make the following payment to a non-resident
enterprise shall be the relevant tax withholders for such non-resident
enterprise, and such payment includes: incomes from equity investment (including
dividends and other return on investment), interests, rents, royalties, and
incomes from assignment of property as well as other incomes subject to
enterprise income tax received by non-resident enterprises in China. Further,
the Measures provides that in case of equity transfer between two non-resident
enterprises which occurs outside China, the non-resident enterprise which
receives the equity transfer payment shall, by itself or engage an agent to,
file tax declaration with the PRC tax authority located at place of the PRC
company whose equity has been transferred, and the PRC company whose equity has
been transferred shall assist the tax authorities to collect taxes from the
relevant non-resident enterprise. However, it is unclear whether the Measures
refer to the equity transfer by a non-resident enterprise which is a direct or
an indirect shareholder of the said PRC company. Given these Measures, there is
a possibility that we may have an obligation to withhold income tax in respect
of the dividends paid to non-resident enterprise investors.
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, Swine Flu or
another widespread public health problem, in the PRC could adversely affect our
operations.
A renewed
outbreak of SARS, Avian Flu, Swine Flu or another widespread public health
problem in China, where all of our manufacturing facilities are located and
where the substantial portion of our sales occur, could have a negative effect
on our operations. Our business is dependent upon its ability to
continue to manufacture products. Such an outbreak could have an
impact on our operations as a result of:
|
·
|
quarantines or closures of some
of our manufacturing facilities, which would severely disrupt our
operations,
|
|
·
|
the sickness or death of our key
officers and employees, and
|
|
·
|
a general slowdown in the Chinese
economy.
|
Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
A
downturn in the economy of the PRC may slow our growth and
profitability.
A
significant portion of our revenues are generated from sales in
China. The growth of the Chinese economy has been uneven across
geographic regions and economic sectors. There can be no assurance
that growth of the Chinese economy will be steady or that any downturn will not
have a negative effect on our business, especially if it results in either a
decreased use of our products or in pressure on us to lower our
prices.
Because
our business is located in the PRC, we may have difficulty establishing adequate
management, legal and financial controls, which we are required to do in order
to comply with U.S. GAAP and securities laws, and which could cause a materially
adverse impact on our financial statements, the trading of our common stock and
our business
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may difficulty hiring new employees in the
PRC with experience and expertise relating to U.S. GAAP and U.S. public-company
reporting requirements. In addition, we may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. This may result in significant deficiencies or material weaknesses in our
internal controls which could impact the reliability of our financial statements
and prevent us from complying with SEC rules and regulations and the
requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, material
weaknesses or lack of compliance could result in restatements of our historical
financial information, cause investors to lose confidence in our reported
financial information, have an adverse impact on the trading price of our common
stock, adversely affect our ability to access the capital markets and our
ability to recruit personnel, lead to the delisting of our securities from the
stock exchange on which they are traded, lead to litigation claims, thereby
diverting management’s attention and resources, and which may lead to the
payment of damages to the extent such claims are not resolved in our
favor, lead to regulatory proceedings, which may result in sanctions, monetary
or otherwise, and have a materially adverse effect on our reputation and
business.
23
RISKS
RELATED TO OUR CAPITAL STRUCTURE
Our
stock price is volatile and you might not be able to resell your securities at
or above the price you have paid.
Since our
initial public offering and listing of our common stock on the NASDAQ Global
Market on January 29, 2010, the price at which our common stock had traded has
been volatile, with a high and low sales price of $4.44 and $6.38, respectively,
as through March 29, 2010. You might not be able to sell the shares of our
common stock at or above the price you have paid. The stock market has
experienced extreme volatility that often has been unrelated to the performance
of its listed companies. Moreover, only a limited number of our shares are
traded each day, which could increase the volatility of the price of our stock.
These market fluctuations might cause our stock price to fall regardless of our
performance. The market price of our common stock might fluctuate significantly
in response to many factors, some of which are beyond our control, including the
following:
|
·
|
actual or anticipated
fluctuations in our annual and quarterly results of
operations;
|
|
·
|
changes in securities analysts’
expectations;
|
|
·
|
variations in our operating
results, which could cause us to fail to meet analysts’ or investors’
expectations;
|
|
·
|
announcements by our competitors
or us of significant new products, contracts, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
conditions and trends in our
industry;
|
|
·
|
general market, economic,
industry and political conditions;
|
|
·
|
changes
in market values of comparable companies;
|
|
·
|
additions or departures of key
personnel;
|
|
·
|
stock market price and volume
fluctuations attributable to inconsistent trading volume levels;
and
|
|
·
|
future
sales of equity or debt securities, including sales which dilute existing
investors.
|
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
The
market price of our Common Stock could decline as a result of sales of a large
number of shares of our Common Stock in the market or the perception that these
sales could occur. These sales, or the possibility that these sales may occur,
also might make it more difficult for us to sell equity securities in the future
at a time and at a price that we deem appropriate.
As of
March 29, 2010, we had approximately 20.7million shares of Common Stock
outstanding. In January 2010, we conducted a registered public
offering of 5,000,000 shares of common stock, and all of these shares are now
freely tradable. Also in January 2010, we registered for resale a
total of 2,455,664 shares of common stock, of which 2,051,767 shares were issued
in an equity financing that was conducted in connection with the Share Exchange
(the “Private Placement Shares”). In March 2010 we also registered
for resale 1,574,982 shares of common stock held by the Company’s existing
security holders prior to the Share Exchange (the “Existing
Securityholders”).
Each
investor may sell or transfer any shares of the common stock after the effective
date of the registration statement except that they entered into a lock-up
agreement. Investors in the Private Placement holding an aggregate of
1,077,968 shares of common stock entered into lock-up agreements pursuant to
which they agreed not to sell their shares until six (6) months after our common
stock is listed or quoted on either the New York Stock Exchange, NYSE Amex,
NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board.
Investors in the Private Placement holding an aggregate of 973,799 shares of
common stock entered into lock-up agreements pursuant to which they agreed not
to sell their shares until 90 days after our common stock is listed or quoted on
a national exchange, at which time one-tenth of their shares will be released
from the lock-up restrictions, and after which their shares will automatically
be released from the lock-up restrictions every 30 days in nine equal
installments.
24
Each of
the Company’s Existing Securityholders have also agreed not to sell any of
Company’s securities held by them until eight (8) months after our common stock
is first listed or quoted on a national securities exchange. Roth Capital
Partners, LLC (“Roth”) and WestPark Capital, Inc. (“WestPark” and together with
Roth, the “Underwriters”) may release some or all the of the shares earlier than
the schedule indicated in the lock-up agreements, provided however that (i) no
early release shall be made with respect to Existing Securityholders prior to
the release in full of all such lock-up restrictions on shares of the common
stock acquired in the Private Placement and (ii) any such early release shall be
made pro rata with respect to all investors’ shares acquired in this Private
Placement.
We also
are registering with the Private Placement shares all of the 1,352,003 shares of
common stock and the 626,894 shares of common stock underlying the warrants held
by the Existing Securityholders. Of the shares, 403,897 shares were
included in the registration statement filed on October 14, 2009 and 1,575,000
shares will be included in a subsequent registration statement filed by us on or
about April 24, 2010, which is 10 days after the end of the six-month period
that immediately follows the date on which we filed the registration statement
on October 14, 2009. All of the shares included in an effective registration
statement may be freely sold and transferred, subject to a lock-up
agreement.
Additionally,
in connection with our public offering in January 2010, the former stockholder
of Attainment Holdings, and its designees, may be eligible to sell all or some
of our shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act (“Rule
144”), as early as May 6, 2010, subject to certain limitations. Under Rule
144, an affiliate stockholder who has satisfied the required holding period may,
under certain circumstances, sell within any three-month period a number of
securities which does not exceed the greater of 1% of the then outstanding
shares of common stock or the average weekly trading volume of the class during
the four calendar weeks prior to such sale. As of the date of this report,
1% of our issued and outstanding shares of common stock was approximately
207,444 shares. Non-affiliate stockholders are not subject to volume
limitations. Any substantial sale of common stock pursuant to any resale
prospectus or Rule 144 may have an adverse effect on the market price of our
common stock by creating an excessive supply.
The
former principal shareholder of Attainment Holdings has significant influence
over us.
The
former shareholder of Attainment Holdings, Excel Profit, beneficially owns or
controls approximately 65.5% of our outstanding shares of common stock and has a
controlling influence in determining the outcome of any corporate transaction or
other matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors, and other significant corporate actions. Excel Profit
may also have the power to prevent or cause a change in control. In
addition, without the consent of Excel Profit, we could be prevented from
entering into transactions that could be beneficial to us. The
interests Excel Profit may differ from the interests of our other
stockholders.
If
we fail to maintain effective internal controls over financial reporting, it may
lead to a restatement of our financial information and the price of our common
stock may be adversely affected, as well as our ability to access the capital
markets and our business.
We are
required to establish and maintain appropriate internal controls over financial
reporting. Failure to establish those controls, or any failure of
those controls once established, could adversely impact our public disclosures
regarding our business, financial condition or results of
operations. Any failure of these controls could also prevent us from
maintaining accurate accounting records and discovering accounting errors and
financial frauds. Rules adopted by the SEC pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control
over financial reporting, and attestation of this assessment by our independent
registered public accountants. The SEC extended the compliance dates
for non-accelerated filers, as defined by the SEC. Accordingly, we
believe that the annual assessment of our internal controls requirement and the
attestation requirement of management’s assessment by our independent registered
public accountants will first apply to our annual report for the 2009 fiscal
year. The standards that must be met for management to assess the
internal control over financial reporting as effective are new and complex, and
require significant documentation, testing and possible remediation to meet the
detailed standards. We may encounter problems or delays in completing
activities necessary to make an assessment of our internal control over
financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial
reporting as effective, or our independent registered public accountants are
unable to provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
25
In
addition, management’s assessment of internal controls over financial reporting
may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for
investors. Any actual or perceived weaknesses and conditions that need to be
addressed in our internal control over financial reporting, disclosure of
management’s assessment of our internal controls over financial reporting, or
disclosure of our public accounting firm’s attestation to or report on
management’s assessment of our internal controls over financial reporting may
cause investors to lose confidence in our reported financial information, have
an adverse impact on the trading price of our common stock, adversely affect our
ability to access the capital markets and our ability to recruit personnel, lead
to the delisting of our securities from the stock exchange on which they are
traded, lead to litigation claims, thereby diverting management’s attention and
resources, and which may lead to the payment of damages to the extent such
claims are not resolved in our favor, lead to regulatory proceedings,
which may result in sanctions, monetary or otherwise and have a materially
adverse effect on our reputation and business.
We
may not be able to achieve the benefits we expect to result from the Share
Exchange.
On May 6,
2009, the Share Exchange closed and Attainment Holdings became our 100%-owned
subsidiary, and our sole business operations became that of Attainment Holdings
and its subsidiaries. We also have a new Board of Directors and
management consisting of persons from Attainment Holdings and changed our
corporate name from SRKP 21, Inc. to China Electric Motor, Inc.
We may
not realize the benefits that we hoped to receive as a result of the Share
Exchange, which include:
|
·
|
access to the capital markets of
the United States;
|
|
·
|
the increased market liquidity
expected to result from exchanging stock in a private company for
securities of a public company that may eventually be
traded;
|
|
·
|
the ability to use registered
securities to make acquisition of assets or
businesses;
|
|
·
|
increased visibility in the
financial community;
|
|
·
|
enhanced access to the capital
markets;
|
|
·
|
improved transparency of
operations; and
|
|
·
|
perceived credibility and
enhanced corporate image of being a publicly traded
company.
|
There can
be no assurance that any of the anticipated benefits of the Share Exchange will
be realized with respect to our new business operations. In addition,
the attention and effort devoted to achieving the benefits of the Share Exchange
and attending to the obligations of being a public company, such as reporting
requirements and securities regulations, could significantly divert management’s
attention from other important issues, which could materially and adversely
affect our operating results or stock price in the future.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant
management time and financial resources to comply with both existing and
evolving standards for public companies, which will lead to increased general
and administrative expenses and a diversion of management time and attention
from revenue generating activities to compliance activities.
Our
common stock may be considered a “penny stock,” and thereby be subject to
additional sale and trading regulations that may make it more difficult to
sell.
Our
common stock, may be considered to be a “penny stock” if it does not qualify for
one of the exemptions from the definition of “penny stock” under Section 3a51-1
of the Securities Exchange Act for 1934, as amended (the “Exchange Act”) once,
and if, it starts trading. Our common stock may be a “penny stock” if
it meets one or more of the following conditions (i) the stock trades at a price
less than $5.00 per share; (ii) it is NOT traded on a “recognized” national
exchange; (iii) it is NOT quoted on the NASDAQ Capital Market, or even if so,
has a price less than $5.00 per share; or (iv) is issued by a company that has
been in business less than three years with net tangible assets less than $5
million.
26
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment
objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
We
do not foresee paying cash dividends in the foreseeable future and, as a result,
our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not
plan to declare or pay any cash dividends on our shares of common stock in the
foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an
investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our shares may be investors’
sole source of gain for the foreseeable future. Moreover, investors
may not be able to resell their shares of our common stock at or above the price
they paid for them.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
Prior to
September 24, 2009, we leased all of our manufacturing facilities, which consist
of our factory space and dormitories, pursuant to a written lease
agreement. On September 24, 2009, we purchased one of the factory
buildings covered under the lease from the lessor. In connection with
the purchase of the building, the original lease was terminated without
penalties and we entered into a new lease with the lessor for the remaining
facilities. The new lease expires on December 31,
2010. Our lease has been registered with the Shenzhen Futian Bureau
of Housing Lease Management.
We expect
to extend our facility by approximately 1,700 square meters just next door to
our current facilities with a laboratory and finished product
warehouse. We expect to enter into a new lease agreement for this new
space in April 2010. We are buying new equipment for this new factory space and
expect by the end of June 2010, this facility will be fully up and running and
will increase our current annual production capacity by 24 million units, a 100%
increase over our current annual output capacity.
In
addition, we sublet office space in Hong Kong though our subsidiary Luck Loyal
pursuant to a lease agreement that expires on August 19, 2010. Our
landlord currently leases the premises under an oral agreement with the property
owner. In the event that the oral agreement between our landlord and the
property owner terminates, Luck Loyal’s lease agreement with our landlord will
lapse and Luck Loyal will have to negotiate a new tenancy agreement with the
property owner in order to continue to occupy the property.
Our
principal corporate offices are located in the PRC at Sunna Motor Industry Park,
Jian’an, Fuyong Hi-Tech Park, Baoan District, Shenzhen, Guangdong, People’s
Republic of China.
ITEM
3. LEGAL PROCEEDINGS
We are
not involved in any material legal proceedings outside of the ordinary course of
our business.
ITEM
4. RESERVED
PART
II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market
Information
Commencing
on January 29, 2010, our shares of common stock have been listed for trading on
the NASDAQ Global Market under the ticker symbol “CELM.” In January
2009, we conducted a registered public offering of 5,000,000 shares of common
stock at an offering price of $4.50. The closing sales price of our
common stock on March 29, 2010 was $5.39, as reported on the NASDAQ Global
Market. As of March 29, 2010, we had 20,744,743 common
stockholders of record.
27
Dividends
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.
We did
not pay cash dividends for the year ended December 31, 2009. In
January 2008 and 2007, we declared cash dividends of $2.1 million and $1.3
million, respectively, which were paid in May 2008 and May 2007,
respectively.
Transfer
Agent
The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc.
Securities
Authorized for Issuance Under Equity Compensation Plan
As of
December 31, 2009, we did not have an equity compensation plan.
Use
of Proceeds
On
February 3, 2010, we completed our public offering of common stock in which we
sold 5,000,000 shares of common stock at an issue price of $4.50 per share. The
SEC declared the registration statement for the public offering, File No.
333-162459 effective on January 28, 2010. We raised a total of approximately
$22.5 million in gross proceeds from our public offering, or approximately $20.0
million in net proceeds after deducting underwriting discounts and commissions
of approximately, other offering costs, and related expenses of approximately
$2.5 million. On February 24, 2009, the underwriters exercised
their over-allotment option in full for the offer and sale of 750,000 additional
shares of common stock at $4.50, for gross proceeds of approximately $3.4
million, or approximately $3.1 million in net proceeds after deducting
underwriting discounts and commissions of approximately, other offering costs,
and related expenses of approximately $268,000. As of March 30, 2010,
we have not used any of the proceeds from the public offering.
Additional
Information
Copies of
our annual reports, quarterly reports, current reports, and any amendments to
those reports, are available free of charge on the Internet at www.sec.gov. All
statements made in any of our filings, including all forward-looking statements,
are made as of the date of the document in which the statement is included, and
we do not assume or undertake any obligation to update any of those statements
or documents unless we are required to do so by law.
ITEM
6. SELECTED CONSOLIDATED FINANCIAL DATA
The
following selected consolidated statement of operations data for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005 and the balance sheet data as of
December 31, 2009, 2008, 2007, 2006 and 2005 are derived from the Company’s
audited consolidated financial statements, except for the statement of
operations data for the year ended December 31, 2005 and the balance sheet data
as of December 31, 2005. The following data is qualified in its entirety by the
consolidated financial statements and the notes to the consolidated financial
statements starting on page F-1 and should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and related notes included
elsewhere in this Form 10-K.
28
Consolidated Statements of
Operations
|
Years Ended December 31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||
(unaudited)
|
|||||||||||||||||||
(in
thousands except share and per share data)
|
|||||||||||||||||||
Revenue
|
$
|
85,379
|
$
|
53,073
|
$
|
27,855
|
$
|
15,952
|
$
|
9,597
|
|||||||||
Other
Sales
|
-
|
-
|
380
|
-
|
-
|
||||||||||||||
Cost
of Goods Sold
|
61,043
|
38,286
|
20,617
|
11,798
|
6,913
|
||||||||||||||
Gross
Profit
|
24,336
|
14,787
|
7,618
|
4,154
|
2,684
|
||||||||||||||
Operating
Costs and Expenses
|
|||||||||||||||||||
Selling
expenses
|
4,237
|
2,720
|
1,352
|
1,016
|
627
|
||||||||||||||
Merger
cost
|
820
|
-
|
-
|
-
|
-
|
||||||||||||||
Research
and development
|
1,649
|
1,033
|
446
|
303
|
150
|
||||||||||||||
Depreciation
|
21
|
23
|
21
|
17
|
8
|
||||||||||||||
General
and administrative
|
2,874
|
1,172
|
809
|
640
|
407
|
||||||||||||||
Total
operating costs and expenses
|
9,601
|
4,948
|
2,628
|
1,976
|
1,192
|
||||||||||||||
Income
from operations
|
14,735
|
9,839
|
4,990
|
2,178
|
1,492
|
||||||||||||||
Other
income (expenses)
|
|||||||||||||||||||
Government
grants
|
-
|
-
|
-
|
-
|
7
|
||||||||||||||
Interest
income
|
16
|
15
|
10
|
2
|
1
|
||||||||||||||
Imputed interest
|
-
|
(50
|
)
|
(44
|
)
|
(65
|
)
|
-
|
|||||||||||
Other
sundry income (expense), net
|
8
|
9
|
58
|
21
|
-
|
||||||||||||||
Total
other income (expenses)
|
24
|
(26
|
)
|
24
|
(42
|
)
|
8
|
||||||||||||
Income
before income taxes
|
14,759
|
9,813
|
5,014
|
2,136
|
1,500
|
||||||||||||||
Income
taxes
|
(3,262)
|
(1,798
|
)
|
(383
|
)
|
(172
|
)
|
(112
|
)
|
||||||||||
Net
Income
|
11,497
|
8,015
|
4,631
|
1,964
|
1,388
|
||||||||||||||
Basic
earnings per share
|
$
|
0.93
|
$
|
0.75
|
$
|
0.43
|
$
|
0.18
|
$
|
0.13
|
|||||||||
Weighted-average
shares outstanding, Basic
|
12,356,530
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
||||||||||||||
Diluted
earnings per share
|
$
|
0.89
|
$
|
0.75
|
$
|
0.43
|
$
|
0.18
|
$
|
0.13
|
|||||||||
Weighted-average
shares outstanding – Diluted
|
12,988,805
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
||||||||||||||
Cash
dividends per share
|
$
|
-
|
$
|
0.20
|
0.12
|
$
|
-
|
$
|
-
|
Consolidated Balance Sheets
|
December 31,
|
||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
(unaudited)
|
|||||||||||||||||||
(in thousands)
|
|||||||||||||||||||
Total
Current Assets
|
$
|
26,355
|
$
|
15,204
|
$
|
8,261
|
$
|
5,006
|
$
|
2,492
|
|||||||||
Total
Assets
|
34,291
|
17,975
|
10,627
|
7,057
|
4,654
|
||||||||||||||
Total
Current Liabilities
|
5,970
|
4,693
|
3,904
|
1,664
|
1,255
|
||||||||||||||
Total
Liabilities
|
5,970
|
4,693
|
3,904
|
4,122
|
3,733
|
||||||||||||||
Total
Stockholders' Equity
|
28,321
|
13,282
|
6,723
|
2,934
|
831
|
29
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking
Statements
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes, and
the other financial information included in this report.
This
report contains forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
similar expressions are intended to identify forward-looking statements. These
statements include, among others, information regarding future operations,
future capital expenditures, and future net cash flow. Such statements reflect
our management’s current views with respect to future events and
financial performance and involve risks and uncertainties, including,
without limitation, general economic and business conditions, changes in
foreign, political, social, and economic conditions, regulatory initiatives and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond our control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated. Consequently, all of the forward-looking statements made in
this report are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
Overview
Through
Shenzhen YPC, we engage in the design, production, marketing and sale of
micro-motor products. Our products, which are incorporated into
household appliances, vehicles and other consumer devices, are sold under our
“Sunna” brand name.
We sell
our products directly to original equipment manufacturers and to distributors
and resellers. We do not have any long-term sales contract with any
of our customers. As a result it is necessary for us to estimate,
based in part on non-binding estimates by our customers and potential customers,
the requirements for our products. In addition, in some instances, we
develop products based on anticipated customer demand with no assurance that we
will receive the anticipated orders. To the extent that we do not
receive the anticipated orders or that our customers require products in greater
quantities than anticipated, our revenue and margins may be
affected.
A small
number of customers account for a very significant percentage of our
revenue. For the year ended December 31, 2009, we had eight customers
who each accounted for 5% of total sales, who together accounted for 60% of our
total sales for the period. None of those customers accounted for 10.0% of
our total sales for 2009, but three of them accounted for 9% each of our total
sales for year ended December 31, 2009. During the year ended
December 31, 2008, we had eight customers that generated at least 5% of our
total sales, with three of those customers, Shenzhen Hongxingyu Trading Co.,
Ltd., Shanghai Keyu International Trading Co., Ltd. and Shenzhen Hongji
Investment Development Co., Ltd. accounting for 11%, 10% and 10% respectively,
of our total sales for the year ended December 31, 2008. These eight
customers accounted for a total of approximately 59.5% of our total sales for
the year ended December 31, 2008. For the year ended December 31,
2007, we had seven customers that accounted for at least 5% of total sales, with
one of those customers, Shanghai Keyu International Trading Co., Ltd.,
accounting for approximately 17.1% of our total sales. Unless we
replace a customer, the loss of any of these customers could have a material
adverse effect upon our revenue and net income.
Recent
Events
Public
Offering
In
February 2010, we completed a public offering consisting of 5,000,000 shares of
our common stock. Roth Capital Partners, LLC (“Roth”) and WestPark Capital, Inc.
(“WestPark,” and together with Roth, the “Underwriters”) acted as
co-underwriters in the public offering. Our shares of common stock
were sold to the public at a price of $4.50 per share, for gross proceeds of
approximately $22.5 million. Compensation for the Underwriters’
services included discounts and commissions of $1,462,500, a $281,250
non-accountable expense allowance, roadshow expenses of approximately of
$10,000, and legal counsel fees (excluding blue sky fees) of
$40,000. The Underwriters also received warrants to purchase an
aggregate of 500,000 shares of our common stock at an exercise price of $5.625
per share. The warrants, which have a term of five years, are not
exercisable until at least one-year from the date of
issuance. The warrants also carry registration
rights.
On
February 24, 2009, the Underwriters exercised their over-allotment option in
full for the offer and sale of 750,000 additional shares of common stock at
$4.50, for gross proceeds of approximately $3.4 million. Discounts
and commissions to the Underwriters totaled $219,375.
30
Reverse
Stock Split
On
October 8, 2009, our Board of Directors and our stockholders approved an
amendment to our Certificate of Incorporation to effect a 1-for-1.53846153846154
reverse stock split of all of our issued and outstanding shares of common stock
(the “Reverse Stock Split”). On January 22, 2010 we effected the Reverse Stock
Split by filing the amendment to the Certificate of Incorporation with the
Secretary of the State of Delaware. The par value and number of authorized
shares of our common stock remained unchanged. All references to number of
shares and per share amounts included in this report gives effect to the Reverse
Stock Split. The number of shares and per share amounts included in the
consolidated financial statements and the accompanying notes, included in the F-
section have been adjusted to reflect the Reverse Stock Split retroactively.
Unless otherwise indicated, all outstanding shares and earnings per share
information contained in this report gives effect to the Reverse Stock
Split.
Share
Exchange
On March
3, 2009, we entered into a share exchange agreement with Attainment Holdings,
Excel Profit Global Group Limited, a British Virgin Islands corporation (“Excel
Profit”), as the sole shareholder of Attainment Holdings, and as to certain
portions of the agreement, certain designees. Pursuant to the share
exchange agreement, as it was amended on May 6, 2009 (the “Exchange Agreement”),
we agreed to issue an aggregate of 10,679,260 shares of its common stock in
exchange for all of the issued and outstanding securities of Attainment Holdings
(the “Share Exchange”). On May 6, 2009, the Share Exchange closed and
Attainment Holdings became our wholly-owned subsidiary and we immediately
changed our name from “SRKP 21, Inc.” to “China Electric Motor,
Inc.” At total of 10,679,260 shares were issued to Excel Profit and
its designees.
Prior to
the closing of the Share Exchange and the initial closing of the Private
Placement, as described below, our stockholders cancelled an aggregate of
3,260,659 shares held by them such that there were 1,352,003 shares of common
stock outstanding immediately prior to the Share Exchange. Our
stockholders also canceled an aggregate of 3,985,768 warrants to purchase shares
of common stock such that they held an aggregate of 626,894 warrants immediately
after the Share Exchange.
We paid
an aggregate of $600,000 in connection with the Share Exchange, consisting of
$350,000 to WestPark Capital, Inc., the placement agent in the private placement
described below, and $250,000 to Keen Dragon Group Limited, a company
unaffiliated with the Company, Attainment Holdings or WestPark Capital.
The $250,000 paid to Keen Dragon, a company affiliated with Chen Dong, was in
connection with Keen Dragon’s services as an advisor to the Company, including
assisting in preparations for the share exchange and the Company’s listing of
securities in the United States. In addition, we paid a $140,000
success fee to WestPark Capital for services provided in connection with the
Share Exchange, including coordinating the share exchange transaction process,
interacting with the principals of the shell corporation and negotiating the
definitive purchase agreement for the shell, conducting a financial analysis of
Attainment Holdings, conducting due diligence on Attainment Holdings and its
subsidiaries and managing the interrelationship of legal and
accounting activities. We also reimbursed Westpark Capital $80,000
for expenses related to due diligence.
Pursuant
to the terms of the Share Exchange, we agreed to register the 1,352,003 shares
of common stock and the 626,894 shares of common stock underlying the warrants
held by our stockholders immediately prior to the Share Exchange. Of the shares,
404,327 shares are included in the registration statement dated October 14, 2009
and 947,676 shares, which are held by affiliates of WestPark Capital, Inc., will
be included in a subsequent registration statement filed by us on or about April
24, 2010, which is 10 days after the end of the six-month period that
immediately follows the date on which we filed the registration
statement. With respect to the registration statement that we will
file to cover the 947,676 shares held by the WestPark affiliates, we agreed to
use our reasonable best efforts to cause the registration statement to become
effective within 150 days after the required filing date or the actual filing
date, whichever is earlier, or 180 days after the required filing date or the
actual filing date, whichever is earlier, if the registration statement is
subject to a full review by the SEC. In addition, we agreed to use our
reasonable best efforts to maintain the registration statement effective for a
period of 12 months at our expense. We also agreed to a penalty provision
pursuant to which we will issue additional shares of our common stock to the
WestPark affiliates if we fail to timely file and maintain the registration
statement.
The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a “tax-free” contribution and/or reorganization pursuant to the provisions
of Sections 351 and/or 368(a) of the Internal Revenue Code of 1986, as
amended.
Li
Conversion
On
February 2, 2010, the Company and Jianrong Li, a former director of the Company
and the current President of Attainment Holdings and Luck Loyal and President
and director of Shenzhen YPC, entered into an agreement pursuant to which
approximately $1.3 million of debt owed to Ms. Li by Attainment Holdings would
be converted into shares of our common stock. According to the
agreement, the shares would be issued upon the closing of the public offering at
a conversion price equal to the per share price of the shares of common stock
sold in our public offering, which was $4.50 per share. On February 3,
2010, we issued a total of 284,843 shares of common stock to Ms. Li pursuant to
the agreement upon the closing of our public offering. As a result of
the conversion of the debt into equity, the debt is no longer
outstanding.
31
Private
Placement
On
October 6, 2009, we completed the final closing in a series of five closings
beginning May 6, 2009 of a private placement transaction (the “Private
Placement”). Pursuant to subscription agreements entered into with the
investors, we sold an aggregate of 2,051,767 shares of common stock at $2.08 per
share. As a result, we received gross proceeds in the amount of approximately
$4.3 million. In connection with the Private Placement, we agreed to
pay WestPark Capital, Inc., the placement agent for the Private Placement, a
commission equal to 8.5% of the gross proceeds from the Private Placement, for
an aggregate fee of approximately $362,000. The purpose of the
Private Placement was to increase our working capital and the net proceeds from
the Private Placement will be used for working capital.
In
connection with the initial closing of the Private Placement on May 6, 2009, a
shareholder (“Excel Profit”) of the Company issued a promissory note in the
principal amount of $335,000 bearing no interest to Chen Dong (the
“Note”). The Company assumed the obligations of the Note since the
Note proceeds were received by Luck Loyal but not transferred to the shareholder
as of yearend. The principal was originally due and payable on or
before the earlier of (a) nine months from the date of issuance of the Note or
(b) upon the receipt by the Company after the date of the Note of at least $1
million in additional proceeds in the Private Placement. The Company repaid the
Note in full in February 2010.
Critical
Accounting Policies, Estimates and Assumptions
The SEC
defines critical accounting policies as those that are, in management's view,
most important to the portrayal of our financial condition and results of
operations and those that require significant judgments and
estimates.
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities. On an on-going basis, we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of inventory, income taxes and contingencies. We
base our estimates on historical experience and on other assumptions that we
believe to be reasonable under the circumstances, the results of which form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
Accounts
Receivable
We
typically provide payment terms ranging from 30 to 45 days. We examine the
creditworthiness of our customers prior to any transaction to limit our
collection risk. We use estimates in determining our allowance for
bad debts that are based on our historical collection experience, current
trends, credit policy and a percentage of our accounts receivable by aging
category. In determining these percentages, we review historical
write-offs in our receivables. In determining the appropriate reserve
percentages, we also review current trends in the credit quality of our
customers, as well as changes in our internal credit policies.
We
maintain reserves for potential credit losses on accounts
receivable. Management review the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patters to
evaluate the adequacy of these reserves. Reserves are recorded
primarily on a specific identification basis. Additional allowances
for doubtful accounts may be required if there is deterioration in past due
balances, if economic conditions are less favorable than anticipated, or for
customer-specific circumstances, such as financial difficulty.
There
were no bad debts written off for the years ended December 31, 2009, 2008 and
2007, respectively, as there were no accounts receivable outstanding in excess
of 90 days at December 31, 2009, 2008 and 2007. The aging of the accounts
receivable (in thousands) is as follows:
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
1-30
days
|
$ | 8,182 | $ | 5,243 | $ | 2,648 | ||||||
31-60
days
|
344 | - | - | |||||||||
60-90
days
|
- | - | - | |||||||||
Total
|
$ | 8,526 | $ | 5,243 | $ | 2,648 |
32
Inventories.
Inventory
levels are based on projections of future demand and market
conditions. Inventories are stated at cost, no in excess of market,
using the weighted average cost method. Any sudden decline in demand
and/or rapid product improvements and technological changes can result in excess
and/or obsolete inventories. Because most of our products are
customized and unique to a particular customer, there is a risk that we will
forecast inventory needs incorrectly and purchase or produce excess
inventory. As a result, actual demand may differ from forecasts, and
such differences, if not managed, may have a material adverse effect on future
results of operations due to required write-offs of excess or obsolete
inventory. To mitigate such exposure, we require a binding purchase
order or a signed agreement by our customer agreeing to pay for and take
possession of finished goods inventory parts for the duration of the
agreement. On an ongoing basis, inventories are reviewed for
potential write-down for estimated obsolescence or unmarketable inventories
equal to the difference between the costs of inventories and the estimated net
realizable value based upon forecasts for future demand and market
conditions. To the extent that we increase our reserves for future
period, operating income will be reduced.
Revenue
Recognition
We
recognize revenues net of value added tax (VAT) when the earnings process is
complete, as evidenced by an agreement with the customer, transfer of title, and
acceptance of ownership and assumption of risk of loss by the customer, as well
as predetermined fixed pricing, persuasive evidence of an arrangement exists,
and collection of the relevant receivables is probable. We include shipping
charges billed to customers in net revenue, and include the related shipping
costs in cost of sales. No return allowance is made as products
returns are insignificant based on historical experience.
We do not
provide different policies in terms, warranties, credits, discounts, rebates,
price protection, or similar privileges among customers. Orders are
placed by both the distributors and OEMs and the products are delivered to the
customers within 30-45 days of order; we do not provide price protection or
right of return to customers. Product prices are predetermined and fixed based
on contractual agreements and, therefore, customers would be responsible for any
loss if they are faced with sales price reductions and technology obsolescence.
We do not allow any discounts, credits, rebates or similar
privileges.
We
warrant our products for up to 1 year from the date the products leave our
factory, under which we will pay for labor and parts, or offer a new or similar
unit in exchange for a non-performing unit due to defects in material or
workmanship. Customers may also return products for a variety of
reasons, such as damage to goods in transit, cosmetic imperfections and
mechanical failures, if within the warranty period. There is no
allowance for warranty on the products sales as historical costs incurred for
warranty replacements and repairs have been insignificant.
Recently
Issued Accounting Pronouncements
In June 2009, the Financial
Accounting Standards Board (FASB) issued a standard that established the FASB
Accounting Standards Codification (ASC) and amended the hierarchy of
generally accepted accounting principles (ASC) and amended the hierarchy of
generally accepted accounting principles (GAAP) such that the ASC became the
single source of authoritative nongovernmental U.S. GAAP. The ASC did not change
current U.S. GAAP, but was intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature related to a particular
topic in one place. All previously existing accounting standard documents were
superseded and all other accounting literature not included in the ASC is
considered non-authoritative. New accounting standards issued subsequent to
June 30, 2009 are communicated by the FASB through Accounting Standards
Updates (ASUs). The Company adopted the ASC on July 1, 2009. This standard
did not have an impact on the Company’s consolidated results of operations or
financial condition. However, throughout the notes to the consolidated financial
statements references that were previously made to various former authoritative
U.S. GAAP pronouncements have been changed to coincide with the appropriate
section of the ASC.
In
September 2006, the FASB issued an accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements, and
required disclosures of assets and liabilities measured at fair value based on
their level in the hierarchy. This standard applies under other accounting
standards that require or permit fair value measurements. One of the amendments
deferred the effective date for one year relative to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at
fair value on a nonrecurring basis. This deferral applied to such items as
nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. The adoption of the fair value measurement standard did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
33
In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended June 30,
2009.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. For the Company, this standard was effective
beginning April 1, 2009. The adoption
did not have an impact on the Company’s consolidated results of operations or
financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. The
Company is currently evaluating the impact of this standard, but does not expect
it to have a material impact on the Company’s consolidated results of operations
or financial condition.
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under ASC 820
by adding required disclosures about items transferring into and out of levels 1
and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and
clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for the first quarter of 2010,
except for the requirement to provide level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which is effective beginning the
first quarter of 2011. Since this standard impacts disclosure requirements only,
its adoption will not have a material impact on the Company's consolidated
results of operations or financial condition.
Results
of Operations
The
following table sets forth information from our statements of operations for the
years ended December 31, 2009, 2008, and 2007 in dollars and as a percentage of
revenue. All amounts are in thousands except share and per share
amounts.
34
Years Ended
|
||||||||||||||||||||||||
December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
(in thousands, except per share data)
|
||||||||||||||||||||||||
Revenue
|
$
|
85,379
|
100
|
%
|
$
|
53,073
|
100
|
%
|
$
|
27,855
|
100
|
%
|
||||||||||||
Other
Sales
|
-
|
-
|
-
|
-
|
380
|
1.4
|
%
|
|||||||||||||||||
Cost
of Goods Sold
|
61,043
|
71.5
|
%
|
38,286
|
72.1
|
%
|
20,617
|
74.0
|
%
|
|||||||||||||||
Gross
Profit
|
24,336
|
28.5
|
%
|
14,787
|
27.9
|
%
|
7,618
|
27.3
|
%
|
|||||||||||||||
Operating
Costs and Expenses:
|
||||||||||||||||||||||||
Selling
Expenses
|
4,237
|
5.0
|
%
|
2,720
|
5.1
|
%
|
1,352
|
4.9
|
%
|
|||||||||||||||
Merger
costs
|
820
|
*
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Research
and development
|
1,649
|
1.9
|
%
|
1,033
|
1.9
|
%
|
446
|
1.6
|
%
|
|||||||||||||||
Depreciation
|
21
|
23
|
*
|
21
|
*
|
|||||||||||||||||||
General
and administrative
|
2,874
|
3.3
|
%
|
1,172
|
2.2
|
%
|
809
|
3.1
|
%
|
|||||||||||||||
Total
operating costs and expenses
|
9,601
|
11.3
|
%
|
4,948
|
8.5
|
%
|
2,628
|
9.4
|
%
|
|||||||||||||||
9.4
|
%
|
|||||||||||||||||||||||
Income
from operations
|
14,735
|
17.3
|
%
|
9,839
|
18.7
|
%
|
4,990
|
17.9
|
%
|
|||||||||||||||
Other
income (expenses)
|
||||||||||||||||||||||||
Interest
income
|
16
|
*
|
15
|
*
|
10
|
*
|
||||||||||||||||||
Imputed
interest
|
-
|
*
|
(50
|
)
|
*
|
(44
|
)
|
*
|
||||||||||||||||
Sundry
income (expense), net
|
8
|
*
|
9
|
*
|
58
|
*
|
||||||||||||||||||
Total
other income (expenses)
|
24
|
*
|
(26
|
)
|
*
|
24
|
*
|
|||||||||||||||||
Income
before income taxes
|
14,759
|
17.3
|
%
|
9,813
|
18.5
|
%
|
5,014
|
18.0
|
%
|
|||||||||||||||
Income
taxes
|
(3,262)
|
3.8
|
%
|
(1,798
|
)
|
3.4
|
%
|
(383
|
)
|
1.4
|
%
|
|||||||||||||
Net
Income
|
$
|
11,497
|
13.5
|
%
|
$
|
8,015
|
15.1
|
%
|
$
|
4,631
|
16.6
|
%
|
||||||||||||
Basic
earnings per share
|
$
|
0.93
|
$
|
0.75
|
$
|
0.43
|
||||||||||||||||||
Diluted
earnings per share
|
$
|
0.89
|
$
|
0.75
|
$
|
0.43
|
||||||||||||||||||
Cash
dividends per share
|
$
|
-
|
$
|
0.20
|
0.12
|
* Less
than 1,000 or 1%.
Years
ended December 31, 2009 and 2008
Revenues
for the year ended December 31, 2009 were $85.4 million, an increase of 60.8%,
compared to revenues of $53.1million for the year ended December 31,
2008. The increase in revenues was largely due to a 64.6% increase in the
number of units sold during the year ended December 31, 2009, which was
attributable to increased orders from new and existing customers. Our increase
in revenues was partially offset by the mix of the types of products sold during
the period. During the year ended December 31, 2009, we sold more of our lower
priced-products than our higher-priced products, which include our numerical
control motor products.
Cost of
goods sold consists of the cost of motor sales and other materials. Cost
of goods sold was $61.0 million for the year ended December 31, 2009, an
increase of $22.7 million, or 59.4%, compared to $38.3 million for the year
ended December 31, 2008. This increase was primarily due to an increase in
our sales volume. As a percentage of revenues, cost of goods sold
decreased to 71.5% for the year ended December 31, 2009 compared to 72.1% for
the comparable period in 2008. This decrease was attributable to a slight
change in the mix of products sold and a decrease in raw material prices (mainly
copper and steel) during the periods.
Gross
profit for the year ended December 31, 2009, was $24.3 million, or 28.5% of
revenues, compared to $14.8 million, or 27.9% of revenues, for the comparable
period in 2008. Management considers gross profit to be a key performance
indicator in managing our business. Gross profit margins are usually a
factor of cost of sales, product mix and demand for product. The increase
in our gross profit margin for the year ended December 31, 2009 is primarily due
to a change in the mix of products sold, which included an increase in sales of
our newer products with higher gross margins. Our margin was good as we do not
compete with our competitors in price, we compete in quality and turn around
time, and we offer a co-development program to our customers so that we charge a
higher price for our products than our competitors. Also, raw materials (mainly
copper and steel) prices were lower in 2009 than 2008, thus margin was still
better than 2008.
35
Selling
expenses were $4.2 million for the year ended December 31, 2009, compared to
$2.7 million for the comparable period in 2008. The increase was due to a
64% increase in our sales volume.
We
incurred merger costs of $820,000 in the twelve months ended December 31, 2009
related to the share exchange transaction which closed on May 6,
2009.
Research
and development (“R&D”) costs were $1.6 million or1.9% of revenues in year
ended December 31, 2009, compared to $1.0 million or 1.9% of revenues in the
comparable period in 2008, representing a 60% increase. The increased
spending on R&D in 2009 was primarily due to our increased research and
development efforts on new products.
General
and administrative expenses for the year ended December 31, 2009 were $2.9
million, or 3.4% of revenues, compared to $1.2 million, or 2.2% of revenues, for
the comparable period in 2008. General and administrative expenses include
office expenses, salary and benefits, and other expense. The increase in
general and administrative expenses for the year ended December 31, 2009 as
compared to the comparable period in 2008 was primarily due to an increase of
$302,020 in office expenses, an increase of $233,041 in salary and benefit
expenses, an increase of $587,108 in professional fees such as legal, auditing,
and consulting, and an increase of $577,854 in other expenses. We expect
our general and administrative expenses to increase as a result of professional
fees incurred as a result of being a publicly reporting company in the United
States.
Interest
income for the year ended December 31, 2009 was $16,000 compared to interest
income of $15,000 for the comparable period in 2008. The increase in
interest income is primarily due to an increased deposit balance in our bank
account.
Imputed
interest expense for the year ended December 31, 2009 was nil, compared to
$50,000 for the comparable period in 2008, because we did not calculate the
imputed interests for related party transactions based on guidance provided by
ASC 835-30.
Income
tax expenses for the year ended December 31, 2009 were $3.3 million, as compared
to income tax expenses of $1.8 million for the comparable period in 2008. The
increase in income tax expense for the year ended December 31, 2009 was
primarily due to an increase in our taxable income in the year ended December
31, 2009 and an increase in our tax rate to 20% for the year ended December 31,
2009 from 18% in the comparable period in 2008.
Net
Income for the year ended December 31, 2009 was $11.5 million compared to $8.0
million for the year ended December 31, 2008.
Years
ended December 31, 2008 and 2007
Revenue
for the year ended December 31, 2008 were $53.1 million, an increase of 90.5%,
compared to revenues of $27.9 million for the year ended December 31, 2007. The
increase in revenue was primarily attributable to a 37% increase in the average
selling price of our micro-motor units and a 35% increase in the number of
micro-motor units sold, which was attributable to increased orders from new and
existing customers.
Cost of
goods sold consists of the cost of motor sales and other materials. Cost of
goods sold was $38.3 million for the year ended December 31, 2008, an increase
of $17.7 million, or 85.7%, compared to $20.6 million for the year ended
December 31, 2007. This increase was primarily due to a decrease in the prices
of raw materials, particularly lacquered wire. As a percentage of revenues, cost
of goods sold decreased to 72.1% for the year ended December 31, 2008 compared
to 74.0% for the comparable period in 2007. This decrease was attributable to a
decrease in the prices of raw materials.
Gross
profit for the year ended December 31, 2008, was $14.8 million, or 27.9% of
revenues, compared to $7.6 million, or 27.3% of revenues, for the comparable
period in 2007. Management considers gross profit to be a key performance
indicator in managing our business. Gross profit margins are usually a factor of
cost of sales, product mix and demand for product. The increase in our gross
profit margin for the year ended December 31, 2008 is primarily due to a change
in our product mix, which included an increase in sales of our numerical control
motor products, which are our higher-profit products. Sales of these products
increased $5.9 million in fiscal 2008 from fiscal 2007.
Selling
expenses were $2.7 million for the year ended December 31, 2008, compared to
$1.4 million for the comparable period in 2007. The increase was due to our
expansion of our team of sales representatives and a 27% increase in our sales
volume.
We
experienced no bad debt expenses in the year ended December 31, 2008, but
experienced a $60,000 gain from bad debts in the year ended December 31, 2007
due to the collection of debts deemed previously uncollectible bad debts in
2006.
36
General
and administrative expenses for the year ended December 31, 2008 were $1.2
million, or 2.2% of revenues, compared to $869,000, or 3.1% of revenues, for the
comparable period in 2007. General and administrative expenses include office
expenses, salary and benefits, professional fees, rent and utilities and other
expense. The increase in other general and administrative expenses for the year
ended December 31, 2008 as compared to the comparable period in 2007 was
primarily due to an increase of $53,000 in office expenses, an increase of
$63,000 in salary and benefit expenses, an increase of $12,000 in professional
fees, an increase of $14,000 in rent and utilities expenses and an increase of
$173,000 in other expenses. We expect our general and administrative expenses to
increase as a result of professional fees incurred as a result of being a
publicly reporting company in the United States.
Research
and development (“R&D”) costs were $1.0 million or 1.9% of revenues in 2008,
compared to $446,000 or 1.6% of revenues in 2007, representing a 131.6% increase
year-over-year. The increased spending on R&D in 2008 was primarily due to
our increased research and development efforts on new products. In the future,
our R&D spending could increase to support the future growth of the company.
As a percent of revenues, we expect the R&D spending to be in the 2% to 3%
range.
Interest
income for the year ended December 31, 2008 was $15,000 compared to interest
income of $10,000 for the comparable period in 2007. The increase in interest
income is primarily due to an increased deposit balance in our bank
account.
Income
tax expenses for the year ended December 31, 2008 were $1.8 million, as compared
to income tax expenses of $383,000 for the comparable period in 2007. The
increase in income tax expense for the year ended December 31, 2008 was
primarily due to an increase in our taxable income in fiscal 2008 and an
increase in our tax rate to 18% in 2008 from 7.5% in 2007. Shenzhen YPC is
registered in PRC and has had tax advantages granted by local government for
corporate income taxes and sales taxes. On March 16, 2007, the National People’s
Congress of China enacted a new PRC Enterprise Income Tax Law, under which
foreign invested enterprises and domestic companies will be subject to
enterprise income tax at a uniform rate of 25%. The new law became effective on
January 1, 2008. During the transition period for enterprises established before
March 16, the tax rate will be gradually increased starting in 2008 and be equal
to the new tax rate in 2012. We believe that our profitability will be
negatively affected in the near future as a result of the new EIT
Law.
Net
Income for the year ended December 31, 2008 was $8.1 million compared to $4.6
million for fiscal 2007.
Liquidity
and Capital Resources
We had
cash and cash equivalents of $10.6 million as of December 31, 2009, as compared
to $2.7 million as of December 31, 2008. Our funds are kept in financial
institutions located in China, and these funds are not insured. We have
historically funded our operations from revenues.
On
February 2, the Company and Jianrong Li, a former director of the Company and
the current President of Attainment Holdings and Luck Loyal and President and
director of Shenzhen YPC, entered into an agreement with Ms. Li pursuant to
which approximately $1.3 million of debt owed to Ms. Li by Attainment Holdings
would be converted into shares of our common stock. According to the
agreement, the shares would be issued upon the closing of the public offering at
a conversion price equal to the per share price of the shares of common stock
sold in our public offering, which was $4.50 per share. On February
3, 2010, we issued a total of 284,843 shares of common stock to Ms. Li pursuant
to the agreement upon the closing of our public offering pursuant to the
agreement (the “Li Conversion”). As a result of the conversion of the
debt into equity, the debt is no longer outstanding.
We are
subject to the regulations of the PRC which restricts the transfer of cash from
China, except under certain specific circumstances. Accordingly, such funds may
not be readily available to us to satisfy obligations which have been incurred
outside the PRC.
Our
accounts receivable has been an increasingly significant portion of our current
assets, representing $8.5 million, $5.2 million and $2.6 million as of December
31, 2009, 2008 and 2007, respectively. If customers responsible for a
significant amount of accounts receivable were to become insolvent or otherwise
unable to pay for our products, or to make payments in a timely manner, our
liquidity and results of operations could be materially adversely affected. An
economic or industry downturn could materially adversely affect the servicing of
these accounts receivable, which could result in longer payment cycles,
increased collections costs and defaults in excess of management’s expectations.
A significant deterioration in our ability to collect on accounts receivable
could affect our cash flow and working capital position and could also impact
the cost or availability of financing available to us.
We
provide our major customers with payment terms ranging from 30 to 45 days.
Additionally, our production lead time is approximately three weeks, from the
inspection of incoming materials, to production, testing and packaging. We need
to keep a large supply of raw materials and work in process and finished goods
inventory on hand to ensure timely delivery of our products to our customers. We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. Allowance for doubtful
accounts is based on our assessment of the collectability of specific customer
accounts, the aging of accounts receivable, our history of bad debts, and the
general condition of the industry. If a major customer’s credit worthiness
deteriorates, or our customers’ actual defaults exceed historical experience,
our estimates could change and impact our reported results. We have not
experienced any significant amount of bad debt since the inception of our
operations.
37
As of
December 31, 2009, inventories amounted to $7.2 million, compared to $7.3
million as of December 31, 2008 and $3.9 million as of December 31,
2007.
On May 6,
2009, we received gross proceeds of approximately $665,000 in an initial closing
of a private placement transaction. Pursuant to subscription agreements entered
into with the investors, we sold an aggregate of 320,186 shares of Common Stock
at $2.08 per share. On June 19, 2009, we conducted a second closing of the
private placement, pursuant to which we sold an aggregate of 208,868 shares of
Common Stock at $2.08 per share for gross proceeds of approximately $433,800. On
July 17, 2009, we conducted a third closing of the private placement, pursuant
to which we sold an aggregate of 272,342 shares of common stock at $2.08 per
share, for gross proceeds of approximately $565,625. On September 4, 2009, we
conducted a fourth closing of the private placement pursuant to which we sold an
aggregate of 481,383 shares of Common Stock at $2.08 per share, for gross
proceeds of approximately $999,775. On October 6, 2009, we conducted the fifth
and final closing of the private placement pursuant to which we sold an
aggregate of 768,988 shares of Common Stock at $2.08 per share, for gross
proceeds of approximately $1.6 million. Accordingly, we sold a total of
2,051,767 shares of our common stock in the private placement for total gross
proceeds of $4.3 million, with net proceeds of approximately $2.4 million. (the
“Private Placement”).
We agreed
to file a registration statement covering the common stock sold in the Private
Placement within 30 days of the final closing of the Private Placement and to
pay for all costs related to the registration of the shares. We initially filed
the registration statement with the SEC on October 4, 2009, within the 30-day
time period.
In
connection with the initial closing of the Private Placement on May 6, 2009, a
shareholder (“Excel Profit”) of the Company issued a promissory note in the
principal amount of $335,000 bearing no interest to Chen Dong (the
“Note”). The Company assumed the obligations of the Note since the
note proceeds were received by Luck Loyal but not transferred to the shareholder
as of yearend. The principal was originally due and payable on or
before the earlier of (a) nine months from the date of issuance of the Note or
(b) upon the receipt by the Company after the date of the Note of at least $1
million in additional proceeds in the Private Placement. The Company repaid the
Note in full in February 2010.
In
connection with the Share Exchange transactions, the Company incurred merger
costs of $820,000, which consists of shell company acquisition cost of $600,000
($250,000 of the $600,000 was paid to a third party unaffiliated with the
Company and WestPark), a success fee of $140,000 and a due diligence fee of
$80,000 paid to WestPark Capital, Inc, were accounted as a part of general and
administrative expenses. Other financing costs of $526,000, which mainly consist
of 8.5% commission to WestPark of $362,000 and other fees were accounted to net
against additional paid-in capital.
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including pension insurance, medical
insurance, unemployment insurance, and job injuries insurance, and maternity
insurance, in accordance with relevant regulations. Total contributions to the
funds were approximately $27,229, $29,300 and $14,700 for the years ended
December 31, 2009, 2008 and 2007, respectively. We expect that the amount of our
contribution to the government’s social insurance funds will increase in the
future as we expand our workforce and operations and commence contributions to
an employee housing fund.
Net cash
provided by operating activities was $9.7 million for the year ended December
31, 2009, compared to net cash provided by operations of $3.9 million for the
year ended December 31, 2008. The $5.8 million increase was primarily due to an
increase in operating profit. Net cash provided by operating activities was $3.9
million for the year ended December 31, 2008, compared to net cash provided by
operations of $2.7 million for the year ended December 31, 2007. The $1.2
million increase was primarily due to an increase in operating profit and our
collection of receivables.
Net cash
used in investing activities amounted to approximately $5.8 million for the year
ended December 31, 2009, compared to net cash used in investing activities of
$754,000 for the year ended December 31, 2008. The change was due to an increase
in our investment in fixed assets. Net cash used in investing activities
amounted to approximately $754,000 for the year ended December 31, 2008,
compared to net cash used in investing activities of $547,000 for the year ended
December 31, 2007. The change was due to an increase in our investment in fixed
assets.
Net cash
provided by financing activities amounted to $4.3 million for the year ended
December 31, 2009, compared to net cash used by financing activities of $2.5
million for the year ended December 31, 2008. The increase of cash provided by
financing activities was primarily a result of the receipt of $2.4 million in
cash proceeds from the Private Placement in the year ended December 31, 2009 and
the payment of $2.1 million in dividends during the year ended December 31,
2008. Net cash used by financing activities amounted to $2.5 million for the
year ended December 31, 2008, compared to net cash used by financing activities
of $2.0 million for the year ended December 31, 2007. The increase of cash used
by financing activities was primarily a result of our payment of $2.1 million in
cash dividends in January 2008 as compared to our payment of $1.3 million in
cash dividends in January 2007.
38
The
ability of Shenzhen YPC to pay dividends may be restricted due to the foreign
exchange control policies and availability of cash balance of the Chinese
operating subsidiaries. A majority of our revenue being earned and currency
received are denominated in RMB, which is subject to the exchange control
regulation in China, and, as a result, we may unable to distribute any dividends
outside of China due to PRC exchange control regulations that restrict our
ability to convert RMB into US Dollars. Accordingly, Shenzhen YPC’s funds may
not be readily available to us to satisfy obligations which have been incurred
outside the PRC, which could adversely affect our business and prospects or our
ability to meet our cash obligations.
Based
upon our present plans, we believe that cash on hand, cash flow from operations
and funds available to us through financing will be sufficient to fund our
capital needs for at least the next 12 months. We expect that our primary
sources of funding for our operations for the upcoming 12 months and thereafter
will result from our cash flow from operations to fund our operations during the
upcoming 12 months and thereafter, in addition to the possibility of conducting
debt and equity financings. However, our ability to maintain sufficient
liquidity depends partially on our ability to achieve anticipated levels of
revenue, while continuing to control costs. If we did not have sufficient
available cash, we would have to seek additional debt or equity financing
through other external sources, which may not be available on acceptable terms,
or at all. Failure to maintain financing arrangements on acceptable terms would
have a material adverse effect on our business, results of operations and
financial condition.
Contractual
obligations
This
table summarizes our known contractual obligations and commercial commitments on
December 31, 2009.
Payments due by Period (in $)
|
|||||||||||||||||
Contractual Obligations
|
Total
|
Less Than
1 Year
|
1 - 3
Years
|
3 - 5
Years
|
More Than
5 Years
|
||||||||||||
Operating
lease obligations
|
$
|
167,531
|
$
|
167,531
|
$
|
$
|
-
|
$
|
-
|
Seasonality
Our
business is not seasonal in nature. The seasonal effect does not have
material impact on our sales.
Quarterly
Information
The table
below presents selected results of operations for the quarters
indicated. All amounts are in thousands, except share and per share
amounts.
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2009
|
2009
|
2009
|
2009
|
Total
|
||||||||||||||||
Revenues
|
$
|
22,086
|
$
|
22,081
|
$
|
22,319
|
$
|
18,893
|
$
|
85,379
|
||||||||||
Gross
Profit
|
6,504
|
6,483
|
5,996
|
5,354
|
24,337
|
|||||||||||||||
Net
Income
|
2,936
|
3,418
|
2,132
|
3,012
|
11,498
|
|||||||||||||||
Net
income per share
|
||||||||||||||||||||
-
Basic
|
$
|
0.21
|
$
|
0.26
|
$
|
0.18
|
$
|
0.28
|
$
|
0.93
|
||||||||||
-Diluted
|
$
|
0.20
|
$
|
0.24
|
$
|
0.17
|
$
|
0.28
|
$
|
0.89
|
||||||||||
Basic
weighted average shares outstanding
|
14,041,237
|
12,926,571
|
11,735,842
|
10,679,260
|
12,356,530
|
|||||||||||||||
Diluted
weighted average shares outstanding
|
14,952,974
|
13,553,465
|
12,406,466
|
10,701,414
|
12,988,805
|
|||||||||||||||
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2008
|
2008
|
2008
|
2008
|
Total
|
||||||||||||||||
Revenues
|
$
|
14,023
|
$
|
14,163
|
$
|
13,210
|
$
|
11,677
|
$
|
53,073
|
||||||||||
Gross
Profit
|
3,840
|
3,958
|
3,639
|
3,350
|
14,787
|
|||||||||||||||
Net
Income
|
1,979
|
2,187
|
2,050
|
1,800
|
8,016
|
|||||||||||||||
Basic
and diluted net income per share
|
0.19
|
0.20
|
0.19
|
0.17
|
0.75
|
|||||||||||||||
Basic
and diluted weighted average shares outstanding
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
|||||||||||||||
Off-Balance
Sheet Arrangements
We have
no material off-balance sheet transactions.
39
Change
in Accountants
The
reports of Kempisty on our consolidated financial statements for each of the
fiscal years ended December 31, 2008 and 2007 did not contain any adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope or accounting principles. During our fiscal years
ended December 31, 2008 and 2007, and during the subsequent period through
to the date of Kempisty's dismissal, there were no disagreements between us and
Kempisty, whether or not resolved, on any matter of accounting principles or
practices, financial statements disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Kempisty, would have
caused Kempisty to make reference in its reports on our audited consolidated
financial statements. During the fiscal years ended December 31, 2008 and
2007, and during the subsequent period through the date of Kempisty's dismissal,
there were no "reportable events" as such term is defined in
Item 304(a)(1)(v) of Regulation S-K ("Reportable Event").
During
the two years ended December 31, 2008, and through the date of our
retention of MaloneBailey as our independent registered public accounting firm
on February 10, 2010, we did not consult with MaloneBailey on matters that
involved the application of accounting principles to a specified transaction,
the type of audit opinion that might be rendered on our financial statements or
any other matter that was either the subject of a disagreement or a Reportable
Event.
We
engaged Kempisty as our independent registered public accounting firm on May 6,
2009 upon our dismissal of AJ. Robbins, PC ("AJ. Robbins") as our independent
registered public accounting firm following the change in control of the Company
on the closing of the Share Exchange. The Company engaged AJ. Robbins
to audit its financial statements for the period from October 11, 2007
(inception) to December 31, 2008. The decision to change accountants
was approved and ratified by the Company’s Board of Directors. The
report of AJ. Robbins on the financial statements of the Company for the period
from October 11, 2007 (inception) ended December 31, 2008 did not contain any
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principle, except for an explanatory
paragraph relative to the Company’s ability to continue as a going
concern. Additionally, during period from the Company’s inception
(October 11, 2007) to December 31, 2008, there were no disagreements with
AJ. Robbins on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
While AJ.
Robbins was engaged by the Company, there were no disagreements with AJ. Robbins
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure with respect to the Company, which
disagreements if not resolved to the satisfaction of AJ. Robbins would have
caused it to make reference to the subject matter of the disagreements in
connection with its report on the Company’s financial statements for period from
October 11, 2007 (inception) to December 31, 2008.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Risk
We may
face some risk from potential fluctuations in interest rates, although our debt
obligations are primarily short-term in nature, but some bank loans have
variable rates. If interest rates have great fluctuations, our
financing cost may be significantly affected.
Foreign
Currency Risk
Substantially
all of our operations are conducted in the PRC and our primary operational
currency in Chinese Renminbi (“RMB”). As a result, currently the
effect of the fluctuations of RMB exchange rates only has a minimal impact on
our business operations, but will be increasingly material as we introduce our
products widely into new international markets. Substantially all of
our revenues and expenses are denominated in RMB. However, we use the
United States dollar for financial reporting purposes. Conversion of
RMB into foreign currencies is regulated by the People’s Bank of China through a
unified floating exchange rate system. Although the PRC government
has stated its intention to support the value of the RMB, there can be no
assurance that such exchange rate will not again become volatile or that the RMB
will not devalue significantly against the U.S. dollar. Exchange rate
fluctuations may adversely affect the value, in U.S. dollar terms, of our net
assets and income derived from our operations in the PRC.
Country
Risk
40
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
information required by this Item 8 is incorporated by reference to information
begins on Page F-1 of this Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
As of the
end of the period covered by this Annual Report on Form 10-K, we conducted an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms and which also are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
the supervision of, our principal executive and principal financial officers and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management believes that as of
December 31, 2009, our internal control over financial reporting is
effective based on those criteria.
41
This
Annual Report on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.
Changes
in Internal Control Over Financial Reporting
Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 or
15d-15 of the Exchange Act, we believe that there were no changes in our
internal control over financial reporting that occurred during our last fiscal
year that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive
Officers, Directors and Key Employees
The
following individuals constitute our board of directors and executive management
as of the date of this prospectus.
Name
|
Age
|
Position
|
||
Yue
Wang
|
26
|
Chief
Executive Officer
|
||
Haixia
Zhang
|
32
|
Chief
Financial Officer and Corporate Secretary
|
||
Xiaobo
Zhang
|
35
|
Chief
Administrative Officer
|
||
Hongyang
Chen
|
35
|
Executive
Vice President
|
||
Fugui
Wang
|
47
|
Chairman
of the Board of Directors
|
||
Guoqiang
Zhang
|
38
|
Director
|
||
Liang
Tang
|
57
|
Director
|
||
Shuiping
Wang
|
45
|
Director
|
||
Heung
Sang Fong
|
50
|
Director
|
Yue Wang
has served as Chief Executive Officer of the Company since March 2009 and as
General Manager of Shenzhen YPC since February, 2006. Prior to
serving as General Manager, Mr. Wang served as the Vice General Manager of
Shenzhen YPC from January 2005. Prior to January 2005, Mr. Wang was a
student at the University of Leeds in London. Mr. Wang received a
Bachelor of Arts degree in Business and Economy from the University of Leeds in
2005.
Haixia
Zhang has served as the Chief Financial Officer of the Company since
March 2009 and as Chief Financial Officer of Shenzhen YPC since June
2008. Ms. Zhang has served as the Account Manager of each of Excel
Profit, Attainment Holdings and Luck Loyal since March 2009. From
March 2005 to June 2008, Ms. Zhang served as the Financial Manager of Shenzhen
YPC. From January 2003 to March 2005, Ms. Zhang served as an accountant at Hunan
Huxiang Wood Industry Co., Ltd., a company involved in the production and sale
of wooden plates. Mr. Zhang received a bachelor’s degree in
accounting in 2001 from Hunan University.
Xiaobo
Zhang has served as the Chief Administrative Officer of the Company since
March 2009 and as Chief Administrative Officer of Shenzhen YPC since August
2008. From December 2004 to December 2007, Mr. Zhang served as the
human resources manager for Johnson Electric (Shenzhen) Co.,
Ltd. From December 2000 to December 2004, Mr. Zhang served as the
human resources manager for Li Qian Fluorescent Furniture (Shenzhen) Co.,
Ltd. Mr. Zhang received a bachelor’s degree in business
administration in 1997 from the Anhui University School of
Management.
Hongyang
Chen has served as the Executive Vice President of the Company since
March 2009 and as the Vice General Manager of Shenzhen YPC since March
2003. Mr. Chen received a bachelor’s degree in electrical engineering
in 1997 from Northwestern Polytechnic University.
Fugui Wang
has served as Chairman of the Board of the Company since March 2009 and as a
director of Shenzhen YPC since November 1999. Since November 1999,
Mr. Wang has served as the Chairman of the Board of Shenzhen
YPC. Since October 2001, Mr. Wang has served as the president of
Rongxuan An (Shenzhen) Industrial Development Co., Ltd. Mr. Wang
received a bachelor’s degree in civil engineering in 1981 from Chongqing
University. We believe Mr. Wang’s qualifications to sit on our
Board include his expertise in corporate strategy development and his extensive
understanding of our business, our products and the micro-motor industry that he
has acquired over his 10 years as a director of Shenzhen YPC.
42
Guoqiang
Zhang has served as a director of the Company since March 2009 and has
been a director of Shenzhen YPC since March 2003. Since 2003, Mr.
Zhang has served as the General Manager of Friends of Shenzhen Venture Capital
Co., Ltd. Mr. Zhang received a bachelor’s degree in accounting from
Guangzhou Institute of Financial and Economics College in 1992. We believe that
Mr. Zhang’s deep knowledge of our business and products obtained through
his 6 years of service as a director of Shenzhen YPC, as well as his 10 years of
experience in corporate management and finance and understanding of U.S. GAAP
and financial statements principles well qualifies Mr. Zhang to serve on our
Board.
Liang
Tang has
served as a director of the Company since March 2009 and as a director of
Shenzhen YPC since March 2008. Since 2002, Mr. Tang has served as the
Chief Financial Officer of Hunan Shaoyang Ocean Fertilizer Group, a company
engaged in the production and sale of fertilizer. Mr. Tang received a
bachelor’s degree in finance in 1989 from Hunan TV University. We
believe that Mr. Tang’s qualifications to sit on our Board include his 20 years
of experience, expertise and background with respect to accounting matters,
including his experience as a chief financial officer and familiarity with U.S.
GAAP and financial statements.
Shuiping
Wang has served as a director of the Company since March
2009. He served as the Director and Accountant of the ChaHuTanXiang
Enterprise Office from May 2004 to September 2008. Mr. Wang received
a bachelor’s degree in accounting in 1985 from Hunan University of Finance and
Economics. We believe that Mr. Wang’s qualifications to sit on our
Board include his 10 years of basic financial and accounting work expertise,
including his understanding of U.S. GAAP and financial statements well qualify
him to serve on our Board.
Heung Sang
Fong has served as a director of the Company since January
2010. From February 2009 to March 2010, Mr. Fong served as the Chief
Financial Officer and as a Director of Apollo Solar Energy, Inc. (OTCBB:
ASOE). From December 2006 to January 2009, Mr. Fong served as the
Executive Vice President of Corporate Development of Fuqi International, Inc.
(NASDAQ: FUQI). From January 2004 to November 2006, Mr. Fong served
as the managing partner of Iceberg Financial Consultants, a financial advisory
firm based in China that advises Chinese clients in capital raising activities
in the United States. From December 2001 to December 2003, Mr. Fong was the
Chief Executive Officer of Holley Communications, a Chinese company that engaged
in CDMA chip and cell phone design. From March 2002 to March 2004, he served as
Chief Executive Officer of Pacific Systems Control Technology, Inc. From May
2001 to November 2001, Mr. Fong was the Director of Finance of PacificNet, Inc.,
a customer relationship management, mobile internet, e-commerce and gaming
technology based in China. From December 1998 to April 2001, he was the Group
Financial Controller of Oregon Scientific, a wholly-owned subsidiary of IDT, a
Hong Kong Stock Exchange-listed company. Mr. Fong is a U.S. CPA and has held
various positions in such capacity with accounting firms in the United States
and Hong Kong, including Deloitte and Touche, Ernst and Young, and KPMG Peat
Marwick. Since July 2006, Mr. Fong has served as an independent director of a
Hong Kong public company, Universal Technology Inc. (HK:8091). Since July 2007,
Mr. Fong has also served as a director and audit committee chairman, for each of
Diguang International Development Co., Ltd. (OTCBB: DGNG) and Kandi Technology
Corp. (NASDAQ-CM: KNDI). Mr. Fong served as independent director of Zhaoheng
Hydropower (ZHYLP.PK) from June 2008 to May 2009. Mr. Fong graduated
from the Hong Kong Baptist College with a diploma in History in 1982. He also
received an MBA from the University of Nevada at Reno in 1989 and a Masters
degree in Accounting from the University of Illinois at Urbana Champaign in
1993. We believe that Mr. Fong’s long and varied business career, including
service as a CFO and director of a publicly-traded company, as well as his
significant financial and accounting experience as a U.S. CPA and knowledge of
the capital markets well qualify him to serve on our Board.
Family
Relationships
Fugui
Wang, our Chairman of the Board, is the father of Yue Wang, our Chief Executive
Officer. There are no family other relationships among any of the
officers and directors.
Involvement
in Certain Legal Proceedings
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of the Company during the past five years.
The
Company is not aware of any legal proceedings in which any director, nominee,
officer or affiliate of the Company, any owner of record or beneficially of more
than five percent of any class of voting securities of the Company, or any
associate of any such director, nominee, officer, affiliate of the Company, or
security holder is a party adverse to the Company or any of its subsidiaries or
has a material interest adverse to the Company or any of its
subsidiaries.
43
The
Board of Directors and Committees
Subject
to certain exceptions, under the listing standards of the NASDAQ Global Market,
a listed company’s board of directors must consist of a majority of independent
directors. Currently, our board of directors has determined that each of the
non-management directors, Guoqiang Zhang, Liang Tang and Shuiping Wang, is an
“independent” director as defined by the listing standards of NASDAQ Global
Market currently in effect and approved by the U.S. Securities and Exchange
Commission (“SEC”) and all applicable rules and regulations of the SEC. All
members of the Audit, Compensation and Nominating Committees satisfy the
“independence” standards applicable to members of each such committee. The board
of directors made this affirmative determination regarding these directors’
independence based on discussions with the directors and on its review of the
directors’ responses to a standard questionnaire regarding employment and
compensation history; affiliations, family and other relationships; and
transactions with the Company. The board of directors considered relationships
and transactions between each director or any member of his immediate family and
the Company and its subsidiaries and affiliates. The purpose of the board of
director’s review with respect to each director was to determine whether any
such relationships or transactions were inconsistent with a determination that
the director is independent under the NASDAQ Global Market rules.
Audit
Committee
We
established our Audit Committee in November 2009. The Audit Committee consists
of Guoqiang Zhang, Liang Tang and Shuiping Wang, each of whom is an independent
director. Liang Tang, Chairman of the Audit Committee, is an “audit committee
financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of
the Audit Committee is to represent and assist our board of directors in its
general oversight of our accounting and financial reporting processes, audits of
the financial statements and internal control and audit functions. The Audit
Committee’s responsibilities include:
|
·
|
The
appointment, replacement, compensation, and oversight of work of the
independent auditor, including resolution of disagreements between
management and the independent auditor regarding financial reporting, for
the purpose of preparing or issuing an audit report or performing other
audit, review or attest services.
|
|
·
|
Reviewing
and discussing with management and the independent auditor various topics
and events that may have significant financial impact on our company or
that are the subject of discussions between management and the independent
auditors.
|
The board
of directors has adopted a written charter for the Audit Committee. A copy of
the Audit Committee Charter is posted on our corporate website at:
http://szmotor.investorroom.com/.
Compensation
Committee
We
established our Compensation Committee November 2009. The Compensation Committee
consists of Liang Tang and Guoqiang Zhang, each of whom is an independent
director. Guoqiang Zhang is the Chairman of the Compensation Committee. The
Compensation Committee is responsible for the design, review, recommendation and
approval of compensation arrangements for our directors, executive officers and
key employees, and for the administration of our equity incentive plans,
including the approval of grants under such plans to our employees, consultants
and directors. The Compensation Committee also reviews and determines
compensation of our executive officers, including our Chief Executive Officer.
The board of directors has adopted a written charter for the Compensation
Committee. A copy of the Compensation Committee Charter is posted on our
corporate website at: http://szmotor.investorroom.com/.
Nominating
Committee
The
Nominating Committee consists of Liang Tang and Guoqiang Zhang, each of whom is
an independent director. Guoqiang Zhang is the Chairman of the Nominating
Committee. The Nominating Committee assists in the selection of director
nominees, approves director nominations to be presented for stockholder approval
at our annual general meeting and fills any vacancies on our board of directors,
considers any nominations of director candidates validly made by stockholders,
and reviews and considers developments in corporate governance practices. The
board of directors has adopted a written charter for the Nominating
Committee. A copy of the Nominating Committee Charter is posted on
our corporate website at: http://szmotor.investorroom.com/.
Code
of Business Conduct and Ethics
On
November 24, 3009, our board of directors amended and restated its Code of
Business Conduct and Ethics, which applies to all directors, officers and
employees. The purpose of the Code is to promote honest and ethical conduct. A
copy of the Code is posted on our corporate website located at http://szmotor.investorroom.com/.. The Code is available in
print, without charge, upon written request to us at China Electric Motor, Inc.,
Attention: Secretary, Sunna Motor Industry Park, Jian’an, Fuyong Hi-Tech Park,
Baoan District, Shenzhen, Guangdong, China. We intend to post
promptly any amendments to or waivers of the Code on our corporate
website.
44
Section
16(a) Beneficial Ownership Reporting Compliance
The
Company’s securities are currently registered under Section 12 of the Securities
Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a-2, the
Company’s directors and officers and holders of 10% or more of its common stock
are currently required to file statements of beneficial ownership with regards
to their ownership of equity securities under Sections 13 or 16 of the Exchange
Act. Based on a review of written representations from our executive officers
and directors, we believe that during the fiscal year ended December 31, 2009,
our directors, officers and owners of more than 10% of our common stock complied
with all applicable filing requirements.
Compensation
Discussion and Analysis
Compensation Before the Share
Exchange
Prior to
the closing of the Share Exchange on May 6, 2009, we were a “blank check” shell
company named SRKP 21, Inc. that was formed to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. The only officers and directors of SRKP 21, Inc., Richard
Rappaport and Anthony Pintsopoulos, SRKP 21’s President and Chief Financial
Officer, respectively, did not receive any compensation or other perquisites for
serving in such capacities. Messrs. Rappaport and Pintsopoulos
resigned from all of their executive and director positions with SRKP 21 upon
the closing of the Share Exchange and are no longer employed by or affiliated
with our company.
Prior to
the closing of the Share Exchange, our current named executive officers were
compensated by Shenzhen YPC until the closing of the Share Exchange, including
for the year ended December 31, 2008 and the period from January 1, 2009 to May
6, 2009. The Chairman of the Board of Shenzhen YPC, Fugui Wang,
determined the compensation for himself and the other executive officers of
Shenzhen YPC that was earned in fiscal 2008 and the period from January 1, 2009
to May 6, 2009 after consulting with the board members of Shenzhen
YPC. In addition, the Board of Directors of Shenzhen YPC approved the
compensation. From January 1, 2009 to May 6, 2009 and during the
fiscal years of 2008, 2007 and 2006, the compensation for Shenzhen YPC’s named
executive officers consisted solely of each executive officer’s salary and cash
bonus. The Board of Directors of Shenzhen YPC believe that the
salaries paid to our executive officers during 2008 and the period from January
1, 2009 to May 6, 2009 are indicative of the objectives of its compensation
program and reflect the fair value of the services provided to Shenzhen YPC, as
measured by the local market in China.
Compensation After the Share
Exchange
Upon the
closing of the Share Exchange, the executive officers of Shenzhen YPC were
appointed as our executive officers and we adopted the compensation policies of
Shenzhen YPC, as modified for a company publicly reporting in the United
States. Compensation for our current executive officers is determined
with the goal of attracting and retaining high quality executive officers and
encouraging them to work as effectively as possible on our
behalf. Compensation is designed to reward executive officers for
successfully meeting their individual functional objectives and for their
contributions to our overall development. For these reasons, the
elements of compensation of our executive officers are salary and
bonus. Salary is paid to cover an appropriate level of living
expenses for the executive officers and the bonus is paid to reward the
executive officer for individual and company achievement.
Salary is
designed to attract, as needed, individuals with the skills necessary for us to
achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue to
perform at or above the levels that we expect. When setting and
adjusting individual executive salary levels, we consider the relevant
established salary range, the named executive officer’s responsibilities,
experience, potential, individual performance and contribution. We
also consider other factors such as our overall corporate budget for annual
merit increases, unique skills, demand in the labor market and succession
planning.
We
determine the levels of salary as measured primarily by the local market in
China. We determine market rate by conducting a comparison with the
local geographic area averages and industry averages in China. In
determining market rate, we review statistical data collected and reported by
the Shenzhen Labor Bureau which is published monthly. The statistical
data provides the high, median, low and average compensation levels for various
positions in various industry sectors. In particular, we use the data
for the manufacturing sector as our benchmark to determine compensation levels
because we operate in Shenzhen City as a consumer electronics
manufacturer. Our compensation levels are at roughly the 80th-90th
percentile of the compensation spectrum for the manufacturing
sector.
45
Corporate
performance goals include sales targets, research and development targets,
production yields, and equipment utilization. Additional key areas of
corporate performance taken into account in setting compensation policies and
decisions are cost control, profitability, and innovation. The key
factors may vary depending on which area of business a particular executive
officer’s work is focused. Individual performance goals include
subjective evaluation, based on an employee’s team-work, creativity and
management capability, and objective goals such as sales targets. We
have not paid bonuses to our executive officers in the past. Because we
successfully completed the listing of our common stock on the NASDAQ Global
Market, we expect to pay bonuses to our executive officers based upon whether
corporate and individual performance goals are met. Generally, the
amount of a bonus, when awarded, will be equal to one month’s salary plus 5% to
25% of the individual's annual salary. If the corporate and
individual goals are fully met, the bonus will be closer to the top end of the
range. If the goals are only partially met, the amount of the bonus
will be closer to the bottom end of the range. In no event will there
be a bonus equal to more than one month's salary if the corporate goals are not
met by at least 50%.
Our board
of directors established a compensation committee in November 2009 comprised of
non-employee directors. The compensation committee will perform, at
least annually, a strategic review of the compensation program for our executive
officers to determine whether it provides adequate incentives and motivation to
our executive officers and whether it adequately compensates our executive
officers relative to comparable officers in other companies with which we
compete for executives. Those companies may or may not be public
companies or companies located in the PRC or even, in all cases, companies in a
similar business. Prior to the formation of the compensation
committee, Fugui Wang, upon consulting with our board members, determined the
compensation for our current executive officers. In 2010, our
compensation committee will determine compensation levels for our executive
officers. We have established a compensation program for executive
officers for 2010 that is designed to attract, as needed, individuals with the
skills necessary for us to achieve our business plan, to motivate those
individuals, to reward those individuals fairly over time, and to retain those
individuals who continue to perform at or above the levels that we
expect. If paid, bonuses for executive officers in 2010 will be based
on company and individual performance factors, as described above.
Because
we successfully completed the listing of our common stock on the NASDAQ Global
Market in 2010, we intend to adjust our compensation evaluations upwards in
2010, including through the payment of bonuses. However, in such
case, we do not intend to increase compensation by more than 20%. We
believe that adopting higher compensation in the future may be based on the
increased amount of responsibilities and the expansion of our business to be
assumed by each of the executive officers after we become a publicly listed
company.
We also
intend to expand the scope of our compensation, such as the possibility of
granting options to executive officers and tying compensation to predetermined
performance goals. We intend to adopt an equity incentive plan in the
near future and issue stock-based awards under the plan to aid our company’s
long-term performance, which we believe will create an ownership culture among
our named executive officers that fosters beneficial, long-term performance by
our company. We do not currently have a general equity grant policy
with respect to the size and terms of grants that we intend to make in the
future, but we expect that our compensation committee will evaluate our
achievements for each fiscal year based on performance factors and results of
operations such as revenues generated, cost of revenues, and net
income.
Summary
Compensation Table
The
following table sets forth information concerning the compensation for the three
fiscal years ended December 31, 2009 of the principal executive officer,
principal financial officer, in addition to our three most highly compensated
officers whose annual compensation exceeded $100,000, and up to two additional
individuals, as applicable, for whom disclosure would have been required but for
the fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.
Name and Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
Yue
Wang
|
2009
|
$ | 17,568 | $ | - | $ | 17,568 | |||||||
Chief
Executive Officer
|
2008
|
8,126 | - | 8,126 | ||||||||||
2007
|
6,575 | - | 6,575 | |||||||||||
Haixia
Zhang
|
2009
|
$ | 8,076 | $ | - | $ | 8,076 | |||||||
Chief
Financial Officer
|
2008
|
6,627 | - | 6,627 | ||||||||||
2007
|
5,425 | - | 5,425 | |||||||||||
Richard
Rappaport (1)
|
2009
|
$ | - | $ | - | $ | - | |||||||
Former
President
|
2008
|
- | - | - | ||||||||||
and
Former Director
|
2007
|
- | - | - | ||||||||||
Anthony
Pintsopoulos (1)
|
2009
|
$ | - | $ | - | $ | - | |||||||
Former
Secretary, Former Chief
|
2008
|
- | - | - | ||||||||||
Financial
Officer, and Former
|
2007
|
- | - | - | ||||||||||
Director
|
|
(1)
|
Upon
the close of the Share Exchange on May 6, 2009, Messrs. Rappaport and
Pintsopoulos resigned from all positions with the Company, which they held
from the Company’s inception on October 11,
2007.
|
46
Grants
of Plan-Based Awards in 2009
There
were no option grants in 2009.
Outstanding
Equity Awards at 2009 Fiscal Year End
There
were no option exercises or options outstanding in 2009.
Option
Exercises and Stock Vested in Fiscal 2009
There
were no option exercises or stock vested in 2009.
Pension
Benefits
There
were no pension benefit plans in effect in 2009.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
There
were no nonqualified defined contribution or other nonqualified deferred
compensation plans in effect in 2009.
Employment
Agreements
Each of
Yue Wang, Haixia Zhang, Xiaobo Zhang and Hongyang Chen are parties to employment
agreements with Shenzhen YPC with durations of one year from January 1, 2010 to
December 31, 2010, further to which each employee is paid a monthly salary as
follows:
|
·
|
Yue
Wang is paid a monthly salary of RMB 10,000, which is approximately
US$1,464.
|
|
·
|
Haixia
Zhang is paid a monthly salary of RMB 4,600, which is approximately
US$673.
|
|
·
|
Xiaobo
Zhang is paid a monthly salary of RMB 4,000, which is approximately
US$585.
|
|
·
|
Hongyang
Chen is paid a monthly salary of RMB 5,600, which is approximately
US$820.
|
Pursuant
to the agreement, each employee’s salary is reviewed annually in March for
adjustment in light of the employee’s performance and working
conditions. In the event an employee works overtime that has been
approved by Shenzhen YPC, each employee will be offered compensation leave or
overtime salary in accordance with the Labor Law of China. Under the
employment agreements, the employees have an obligation to maintain the
commercial secrets of the Company.
During
each employee’s probationary period, either the employee or Shenzhen YPC may
terminate the agreement, provided however, that Shenzhen YPC may only terminate
the agreement if the employee has failed to satisfy the requirements for his or
her recruitment, as stipulated in Shenzhen YPC’s employee handbook and other
relevant regulations. Each agreement may be renewed upon one party’s
providing of 30 days written notice to the other party and both parties’
agreement to renew the agreement. The employment agreements provide
for immediate termination upon the occurrence of termination conditions
stipulated by the Law of Labor Contract in China.
47
Director
Compensation
The
following table shows information regarding the compensation earned during the
fiscal year ended December 31, 2009 by members of board of
directors.
Name
|
Fees Earned
or Paid in Cash ($)
|
Stock
Awards ($)
|
Option
Awards
($) |
Non-Equity
Incentive Plan Compensation ($) |
Change in
Pension Value and Nonqualified Deferred Compensation Earnings |
All Other
Compensation ($)
|
Total
($)
|
|||||||||||||||||||||
Fugui
Wang
|
20,000 | - | - | - | - | - | 20,000 | |||||||||||||||||||||
Jianrong
Li (1)
|
20,000 | - | - | - | - | - | 20,000 | |||||||||||||||||||||
Guoqiang
Zhang
|
20,000 | - | - | - | - | - | 20,000 | |||||||||||||||||||||
Liang
Tang
|
20,000 | - | - | - | - | - | 20,000 | |||||||||||||||||||||
Shuiping
Wang
|
20,000 | - | - | - | - | - | 20,000 |
(1) Ms.
Li resigned as a director of the Company in January 2010.
We do not
currently have an established policy to provide compensation to members of our
Board of Directors for their services in that capacity. We intend to
develop such a policy in the near future.
Indemnifications
of Directors And Executive Officers And Limitations of Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to us and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
We may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. As of the date of the Share Exchange, we have not entered into any
indemnification agreements with our directors or officers, but may choose to do
so in the future. Such indemnification agreements may require us, among other
things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise because
of their status as officers or
directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with a
legal proceeding, subject to limited exceptions;
or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
48
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this prospectus are deemed outstanding even if they have
not actually been exercised. Those shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.
The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on issued and outstanding shares of common
stock before and after the offering, by:
|
·
|
Each
person known to be the beneficial owner of 5% or more of our outstanding
common stock;
|
|
·
|
Each
executive officer;
|
|
·
|
Each
director; and
|
|
·
|
All
of the executive officers and directors as a
group.
|
The
number of shares of our common stock outstanding as of the date of this
prospectus is 20,744,743 shares of common stock, which excludes 500,000 shares
of common stock that are issuable upon the exercise of outstanding
warrants. Unless otherwise indicated, the persons and entities named
in the table have sole voting and sole investment power with respect to the
shares set forth opposite the stockholder’s name, subject to community property
laws, where applicable. Unless otherwise indicated, the address of
each stockholder listed in the table is c/o China Electric Motor, Inc., Sunna
Motor Industry Park, Jian’an, Fuyong Hi-Tech Park, Baoan District, Shenzhen,
Guangdong, China
Name and Address
of Beneficial Owner
|
Title
|
Shares of
Common Stock Beneficially Owned |
Percent of Class
Beneficially Owned |
|||||||
Directors
and Executive Officers
|
||||||||||
Yue
Wang
|
Chief
Executive Officer
|
- | - | |||||||
Haixia
Zhang
|
Chief
Financial Officer
and Corporate Secretary |
- | - | |||||||
Xiaobo
Zhang
|
Chief
Administrative
Officer |
- | - | |||||||
Hongyang
Chen
|
Executive
Vice President
|
- | - | |||||||
Fugui
Wang
|
Director
|
- | - | |||||||
Guoqiang
Zhang
|
Director
|
- | - | |||||||
Liang
Tang
|
Director
|
- | - | |||||||
Shuiping
Wang
|
Director
|
- | - | |||||||
Heung
Sang Fong
|
Director
|
- | - | |||||||
Officers
and Directors as a Group (total of 9 persons)
|
- | - | ||||||||
5%
Owners
|
||||||||||
Excel
Profit Global Group Limited (1)
|
9,226,679 | 44.5 | % | |||||||
Richard
Rappaport
1900
Avenue of the Stars,
Suite 310 Los
Angeles, CA 90067
|
1,268,257 | (2) | 6.1 | % |
49
(1)
|
To
Chau Sum, who is the 100% owner of Excel Profit Global Group Limited, may
be deemed the indirect beneficial owner of these securities since he has
sole voting and investment control over the
securities.
|
(2)
|
Includes
316,619 shares of Common Stock owned by Mr. Rappaport. Also
includes 89,049 shares of Common Stock held by each of the Amanda
Rappaport Trust and the Kailey Rappaport Trust (together, the “Rappaport
Trusts”) as well as 773,540 shares of Common Stock held by WestPark
Capital Financial Services LLC. All warrants are currently
exercisable. Mr. Rappaport, as Trustee of each of the Rappaport
Trusts and Chief Executive Officer (“CEO”) and Chairman of WestPark
Capital Financial Services, LLC, may be deemed the indirect beneficial
owner of these securities since he has sole voting and investment control
over the securities.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Attainment
Holdings Limited
Attainment
Holdings Limited, Luck Loyal International Investment Limited and Shenzhen
YuePengCheng Motor Company Limited, are either directly or indirectly
wholly-owned subsidiaries of China Electric Motor, Inc. and each of which has
interlocking executive and director positions with us and with each
other.
Share
Exchange
On May 6,
2009, we completed the Share Exchange with Attainment Holdings and Excel Profit
Global Group Limited, the former sole shareholder of Attainment Holdings (“Excel
Profit”). At the closing, Attainment Holdings became a wholly-owned
subsidiary of the Company and 100% of the issued and outstanding securities of
Attainment Holdings were exchanged for securities of our company. An
aggregate of 10,679,260 shares of common stock were issued to Excel Profit, the
sole shareholder of Attainment Holdings, and certain designees. The
sole shareholder of Excel Profit, To Chau Sum, is a director of Attainment
Holdings, Luck Loyal and Shenzhen Yuepengcheng. As of the close of
the Share Exchange and the initial closing of the Private Placement (described
below), Excel Profit owned approximately 74.7% of the issued and outstanding
stock of the Company. Prior to the closing of the Share Exchange and
the closing of the Private Placement, the stockholders of the Company agreed to
the cancellation of an aggregate of 3,260,659 shares and 3,985,768 warrants to
purchase shares of common stock held by them such that there were 12,351,449
shares of common stock and warrants to purchase 626,984 shares of common stock
owned by them immediately after the Share Exchange and initial closing of the
Private Placement. The Board resigned in full and appointed Fugui
Wang, Jianrong Li, Guoqiang Zhang, Liang Tang and Shuiping Wang to the board of
directors of our company, with Fugui Wang serving as Chairman. The
Board also appointed Yue Wang as our Chief Executive Officer, Haixia Zhang as
our Chief Financial Officer and Corporate Secretary, Xiaobo Zhang as our Chief
Administrative Officer, and Hongyang Chen as our Executive Vice
President. Most of these executives and directors were executives
and/or directors of Attainment Holdings and/or its subsidiaries. We
paid an aggregate of $600,000 in connection with the Share Exchange, consisting
of $350,000 to WestPark Capital, the placement agent in the private placement
described below, and $250,000 to Keen Dragon Group Limited, a company
unaffiliated with the Company, Attainment Holdings or WestPark
Capital. The $250,000 paid to Keen Dragon, a company affiliated with
Chen Dong, was in connection with Keen Dragon’s services as an advisor to the
Company, including assisting in preparations for the share exchange and the
Company’s listing of securities in the United States. We also paid
WestPark Capital a success fee of $140,000 for the Share Exchange and an $80,000
due diligence fee.
Private
Placement and Underwriting Services
Richard
Rappaport, one of our controlling stockholders prior to the Share Exchange,
indirectly holds a 100% interest in WestPark Capital, Inc., the placement agent
for the equity financing, of approximately $4.3 million conducted by us in
connection with the Share Exchange. Anthony C. Pintsopoulos, an
officer, director and significant stockholder of ours prior to the Share
Exchange, is the Chief Financial Officer of WestPark Capital,
Inc. Kevin DePrimio and Jason Stern, each employees of WestPark
Capital, Inc., are also our stockholders. Richard Rappaport is the
sole owner of the membership interests of WestPark Capital Financial Services,
LLC. Each of Messrs. Rappaport and Pintsopoulos resigned from all of
their executive and director positions with us upon the closing of the Share
Exchange. We paid WestPark Capital, Inc., the placement agent for the
Private Placement, a commission equal to 8.5% of the gross proceeds from the
Private Placement, for an aggregate fee of approximately $362,000.
50
In
addition, WestPark acted as a co-underwriter, along with Roth Capital Partners,
LLC, in our public offering that we closed in February 2010. We sold
a total of 5,000,000 shares of common stock in the public offering at $4.50 per
share, for gross proceeds of approximately $22.5
million. Compensation for the underwriters’ services included
discounts and commissions of $1,462,500, a $281,250 non-accountable expense
allowance, roadshow expenses of approximately of $10,000, and legal counsel fees
(excluding blue sky fees) of $40,000. WestPark received a five-year
warrant to purchase 25,000 shares of our common stock at an exercise price of
$5.625 per share.
On
February 24, 2009, the underwriters exercised their over-allotment option in
full for the offer and sale of 750,000 additional shares of common stock at
$4.50, for gross proceeds of approximately $3.4 million. Discounts
and commissions to the underwriters totaled $219,375.
Li
Conversion
Jianrong
Li, a former director of the Company and the current President of Attainment
Holdings and Luck Loyal and President and director of Shenzhen YPC, converted
approximately $1.3 million owed to her by Attainment Holdings into 284,843
shares of the Company’s common stock upon the closing of the public offering at
a conversion price of $4.50 per share, the per share price of the shares sold in
this public offering.
Policy
for Approval of Related Party Transactions
In
November 2009, we established an Audit Committee and adopted an Audit Committee
Charter. The Charter contains our policy for approval of related
party transactions. Our policy is to have our Audit Committee review
and pre-approve any related party transactions and other matters pertaining to
the integrity of management, including potential conflicts of interest, trading
in our securities, or adherence to standards of business conduct as required by
our policies.
We
believe that the related party transactions disclosed above are at fair market
value and are on terms comparable to those that would have been reached in
arm’s-length negotiations had the parties been unaffiliated at the time of the
negotiations.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table presents fees, including reimbursements for expenses, for
professional audit services rendered by Kempisty & Company Certified Public
Accountants PC for the audits of the Company’s annual financial statements and
interim reviews of the Company’s quarterly financial statements for the years
ended December 31, 2009 and December 31, 2008, and fees billed for other
services rendered by Kempisty & Company Certified Public Accountants PC
during those periods.
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Audit
Fees(1)
|
$ | 117,750 | $ | 144,810 | ||||
Audit-Related
Fees
|
- | - | ||||||
Tax
Fees
|
- | - | ||||||
All
Other Fees
|
- | - | ||||||
Total
|
$ | 117,750 | $ | 144,810 |
(1) These
are fees for professional services performed by Kempisty & Company Certified
Public Accountants PC for the audit of our annual financial statements, review
of our quarterly reports, and review of our Registration Statement on
Form S-1.
Pre-Approval
Policy
The Audit
Committee on an annual basis reviews audit and non-audit services performed by
the independent registered public accounting firm for such services. The audit
committee pre-approves (i) auditing services (including those performed for
purposes of providing comfort letters and statutory audits) and (ii)
non-auditing services that exceed a de minimis standard established by the
committee, which are rendered to the Company by its outside auditors (including
fees).
51
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial
Statements: See “Index to Consolidated Financial Statements” on page F-1 of this
annual report on Form 10-K.
2. Financial
Statement Schedule: See Notes to the Consolidated Financial Statements in Part
II, Item 8 of this annual report on Form 10-K.
3. Exhibits:
The exhibits listed in the accompanying “Index to Exhibits” are filed or
incorporated by reference as part of this Form 10-K.
52
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Huizhou, People’s
Republic of China, on March 30, 2010.
China
Electric Motor, Inc.
|
||
(Registrant)
|
||
Dated:
March 30, 2010
|
/s/ Yue
Wang
|
|
By: Yue
Wang
|
||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities
and on the dates indicated.
Signature
|
Capacity
|
Date
|
||
/s/
Yue Wang
|
Chief
Executive Officer
|
March
30, 2010
|
||
Yue
Wang
|
||||
Chief
Financial Officer and Corporate
|
||||
/s/
Haixia Zhang
|
Secretary
(Principal Financial and Accounting
|
March
30, 2010
|
||
Haixia
Zhang
|
Officer)
|
|||
/s/
Fugui Wang
|
Chairman
of the Board
|
March
30, 2010
|
||
Fugui
Wang
|
||||
/s/
Guoqiang Zhang
|
Director
|
March
30, 2010
|
||
Guoqiang
Zhang
|
||||
/s/
Liang Tang
|
Director
|
March
30, 2010
|
||
Liang
Tang
|
||||
/s/
Shuiping Wang
|
Director
|
March
30, 2010
|
||
Shuiping
Wang
|
||||
/s/
Heung Sang
Fong
|
Director
|
March
30, 2010
|
||
Heung
Sang
Fong
|
53
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
2.1
|
Share
Exchange Agreement, dated as of March 3, 2009, by and among the
Registrant, Attainment Holdings Limited, Attainment Holdings’ sole
shareholder Excel Profit Global Group Limited, and with respect to certain
portions of the agreement, certain designees (incorporated by reference
from Exhibit 2.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 12, 2009).
|
|
2.1(a)
|
Amendment
No. 1 to Share Exchange Agreement, dated as of May 6, 2009, by and among
the Registrant, Attainment Holdings Limited, Attainment Holdings’ sole
shareholder Excel Profit Global Group Limited, and with respect to certain
portions of the agreement, certain designees (incorporated by reference
from Exhibit 2.1(a) to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 12, 2009).
|
|
3.1
|
Certificate
of Incorporation (incorporated by reference from Exhibit 3.1 to the
Registration Statement on Form 10-SB (File No. 000-53017) filed with the
Securities and Exchange Commission on January 16,
2008).
|
|
3.2
|
Bylaws
(incorporated by reference from Exhibit 3.2 to the Registration Statement
on Form 10-SB (File No. 000-53017) filed with the Securities and Exchange
Commission on January 16, 2008).
|
|
3.3
|
Articles
of Merger effecting name change filed with the Office of Secretary of
State of Delaware on May 6, 2009 (incorporated by reference from Exhibit
3.3 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 12, 2009).
|
|
3.4
|
Certificate
of Amendment to the Certificate of Incorporation (incorporated by
reference from Exhibit 3.1 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 25,
2010).
|
|
4.1
|
Specimen
Certificate of Common Stock (incorporated by reference from Exhibit 4.3 to
the Registration Statement on Form S-1/A (File No. 333-162459) filed with
the Securities and Exchange Commission on January 11,
2010).
|
|
4.2
|
Form
of Warrant dated October 11, 2007 (incorporated by reference from Exhibit
4.1 to the Registration Statement on Form 10-SB (File No. 000-53017) filed
with the Securities and Exchange Commission on January 16,
2008).
|
|
4.3
|
Form
of Underwriters’ Warrant dated February 3, 2010 (incorporated by reference
from Exhibit 4.3 to the Registration Statement on Form S-1/A (File No.
333-162459) filed with the Securities and Exchange Commission on January
20, 2010).
|
|
10.1
|
Registration
Rights Agreement dated May 6, 2009 entered into by and between the
Registrant and Stockholders (incorporated by reference from Exhibit 10.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 12, 2009).
|
|
10.2
|
Share
and Warrant Cancellation Agreement dated May 6, 2009 entered into by and
between the Registrant and Shareholders (incorporated by reference from
Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 12, 2009).
|
|
10.3
|
Form
of 2010 Employment Agreement dated January 2010 entered into with
executive officers indicated in Schedule A attached to the Form of
Agreement (translated to English) (incorporated by reference from Exhibit
10.3 to the Registration Statement on Form S-1/A (File No. 333-162459)
filed with the Securities and Exchange Commission on January 11,
2010).
|
|
10.4
|
Shenzhen
Real Estate Lease Agreement dated as of October 9, 2009 by and between
Shenzhen Jianhuilong Industry Co., Ltd. and Shenzhen YuePengCheng Motor
Co., Ltd. (translated to English). (incorporated by reference from Exhibit
10.1 to the Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 23, 2009).
|
|
10.5
|
Promissory
Note dated May 6, 2009 by and between Excel Profit Global Group Limited
and Chen Dong (incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 12,
2009).
|
54
Exhibit
No.
|
Description
|
|
10.6
|
Note
Assumption Agreement by and among Excel Profit Global Group Limited, China
Electric Holdings, Inc. and Chen Dong (incorporated by reference from
Exhibit 10.6 to the Registration Statement on Form S-1/A (File No.
333-162459) filed with the Securities and Exchange Commission on December
4, 2009).
|
|
10.7
|
Form
of Subscription Agreement between investors and the Registrant
(incorporated by reference from Exhibit 10.7 to the Registration Statement
on Form S-1 (File No. 333-162459) filed with the Securities and Exchange
Commission on October 14, 2009).
|
|
10.8
|
Form
of Amendment to Subscription Agreement between investors and the
Registrant (incorporated by reference from Exhibit 10.8 to the
Registration Statement on Form S-1 (File No. 333-162459) filed with the
Securities and Exchange Commission on October 14,
2009).
|
|
10.9
|
Form
of Common Stock Purchase Agreement dated October 11, 2007 (incorporated by
reference from Exhibit 10.1 to the Registration Statement on Form 10-SB
(File No. 000-53017) filed with the Securities and Exchange Commission on
January 16, 2008).
|
|
10.10
|
Form
of Warrant Purchase Agreement dated October 11, 2007 (incorporated by
reference from Exhibit 10.2 to the Registration Statement on Form 10-SB
(File No. 000-53017) filed with the Securities and Exchange Commission on
January 16, 2008).
|
|
10.11
|
Form
of Amended Lock-Up Agreement between investors, the Registrant and the
Underwriters (incorporated by reference from Exhibit 10.11 to the
Registration Statement on Form S-1/A (File No. 333-162459) filed with the
Securities and Exchange Commission on January 19,
2010).
|
|
10.12
|
Form
of Lock-Up Agreement between Existing Securityholders and the Registrant
(incorporated by reference from Exhibit 10.12 to the Registration
Statement on Form S-1/A (File No. 333-162459) filed with the Securities
and Exchange Commission on January 19, 2010).
|
|
10.13
|
Agreement
to Convert Debt into Equity dated February 2, 2010, by and between the
Company and Jianrong Li (incorporated by reference from Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 8, 2010).
|
|
16.1
|
Letter
from Kempisty & Company Certified Public Accounts to the Securities
and Exchange Commission dated February 11, 2010 (incorporated by reference
from Exhibit 16.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 17,
2010).
|
|
16.2
|
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated May
11, 2009 (incorporated by reference from Exhibit 16.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 12, 2009).
|
|
21.1
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 12, 2009).
|
|
23.1
|
Consent
of Kempisty & Company Certified Public Accountants
PC.
|
55
CHINA
ELECTRIC MOTOR, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2009
INDEX
TO FINANCIAL STATEMENTS
PAGE
|
||
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-2
– F-5
|
|
CONSOLIDATED
BALANCE SHEETS
|
F-6
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-7
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
||
AND
COMPREHENSIVE INCOME
|
F-8
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-9
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-10–
F-26
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
China
Electric Motor, Inc. and Subsidiaries
Shenzhen,
China
We have
audited the accompanying consolidated balance sheet of China Electric Motor,
Inc. and Subsidiaries (“the Company”) as of December 31, 2009 and the related
consolidated statements of income, change in stockholders’ equity, comprehensive
income, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with 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 misstatements. 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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for
our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Electric Motor, Inc.
as of December 31, 2009, 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 of America.
/s/MALONEBAILEY,
LLP
www.malone-bailey.com
Houston,
Texas
March 30,
2010
F-2
KEMPISTY
& COMPANY
CERTIFIED
PUBLIC ACCOUNTANTS, P.C.
15
MAIDEN LANE - SUITE 1003 - NEW YORK, NY 10038 - TEL (212) 406-7272 - FAX (212)
513-1930
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
China
Electric Motor, Inc.
We have
audited the accompanying consolidated balance sheets of China Electric Motor,
Inc. as of December 31, 2008 and 2007 and the related consolidated statements of
operations, changes in stockholders’ equity and comprehensive income and cash
flows for each of the years in the three year period ended December 31, 2008.
These financial statements are the responsibility of the company management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits 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. The company is not required at
this time, 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 internal control over financial
reporting. Accordingly, we express no such opinion. 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 China Electric Motor, Inc. at
December 31, 2008 and 2007 and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2008 in
conformity with accounting principles generally accepted in the in the United
States of America.
/s/
Kempisty & Company CPAs, PC
Kempisty
& Company
Certified
Public Accountants PC
New York,
New York
August
20, 2009 (except for Note 1, October 9, 2009)
F-3
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
China
Electric Motor, Inc. and Subsidiaries
Shenzhen,
China
We have
audited the condensed Parent Only balance sheet of China Electric Motor, Inc.
and Subsidiaries (“the Company”) (the “Company”) as of December 31, 2009 and the
related condensed Parent Only statements of income and cash flows for the year
then ended included in Footnote 18 to the Consolidated Financial Statements of
China Electric Motor, Inc. These Parent Only condensed 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. The Company is not required at
this time, 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 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 condensed Parent Only financial statements referred to above
present fairly, in all material respects, the financial position of China
Electric Motor, Inc. and Subsidiaries at December 31, 2009 and the results of
its operations and its cash flows for
the year
then ended in conformity with accounting principles generally accepted in the in
the United States of America.
/s/MALONEBAILEY,
LLP
www.malone-bailey.com
Houston,
Texas
March 30,
2010
F-4
KEMPISTY
& COMPANY
CERTIFIED
PUBLIC ACCOUNTANTS, P.C.
15
MAIDEN LANE - SUITE 1003 - NEW YORK, NY 10038 - TEL (212) 406-7272 - FAX (212)
513-1930
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
China
Electric Motor, Inc.
We have
audited the condensed Parent Only balance sheet of China Electric Motor, Inc. as
of December 31, 2008 and 2007 and the related condensed Parent Only statements
of operations and cash flows for the year ended December 31, 2008 and the period
October 11, 2007 (inception) to December 31, 2007 included in Footnote 21 to the
Consolidated Financial Statements of China Electric Motor, Inc. These Parent
Only condensed 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 audits 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. The Company is not required at
this time, 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 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 condensed Parent Only financial statements referred to above
present fairly, in all material respects, the financial position of China
Electric Motor, Inc. at December 31, 2008 and 2007 and the results of its
operations and its cash flows for the year ended December 31, 2008 and the
period October 11, 2007 (inception) to December 31, 2007 in conformity with
accounting principles generally accepted in the in the United States of
America.
/s/
Kempisty & Company CPAs, PC
Kempisty
& Company
Certified
Public Accountants PC
New York,
New York
August
20, 2009 (except for Note 1, October 9, 2009)
F-5
CHINA
ELECTRIC MOTOR, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
U.S. Dollars)
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 10,633,518 | $ | 2,655,808 | ||||
Accounts
receivable, net
|
8,526,451 | 5,239,785 | ||||||
Inventories,
net
|
7,194,656 | 7,293,544 | ||||||
Prepaid
expenses and other receivable
|
- | 15,103 | ||||||
Total
current assets
|
26,354,625 | 15,204,240 | ||||||
Property
and equipment, net
|
7,936,284 | 2,770,782 | ||||||
Total
Assets
|
$ | 34,290,909 | $ | 17,975,022 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 2,217,702 | $ | 2,309,026 | ||||
Accrued
liabilities and other payable
|
463,185 | 240,130 | ||||||
Various
taxes payable
|
28,962 | 39,972 | ||||||
Wages
payable
|
465,119 | 295,367 | ||||||
Corporate
tax payable
|
878,305 | 469,435 | ||||||
Due
to related party
|
1,581,376 | 1,339,337 | ||||||
Due
to affiliated companies
|
334,977 | - | ||||||
Total
current liabilities
|
5,969,626 | 4,693,267 | ||||||
Total
Liabilities
|
5,969,626 | 4,693,267 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders'
Equity
|
||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
issued
|
- | - | ||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 14,083,030 and
10,679,260 shares issued and outstanding at December 31, 2009 and 2008,
respectively.
|
1,408 | 1,068 | ||||||
Additional
paid-in capital
|
3,899,125 | 158,271 | ||||||
Accumulated
other comprehensive income
|
889,668 | 1,089,032 | ||||||
Statutory
surplus reserve fund
|
1,177,075 | 1,177,075 | ||||||
Retained
earnings (unrestricted)
|
22,354,007 | 10,856,309 | ||||||
Total
Shareholders' Equity
|
28,321,283 | 13,281,755 | ||||||
Total
Shareholders' Liabilities & Equity
|
$ | 34,290,909 | $ | 17,975,022 |
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
CHINA
ELECTRIC MOTOR, INC. AND SUBSIDIARIES
STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
(In U.S.
Dollars)
For Years Ended
|
For Years Ended
|
For Years Ended
|
||||||||||
December 31,
|
December 31,
|
December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenue
|
$ | 85,379,374 | $ | 53,072,547 | $ | 27,855,159 | ||||||
Other
Sales
|
- | - | 379,911 | |||||||||
Cost
of Goods Sold
|
(61,042,596 | ) | (38,285,648 | ) | (20,617,408 | ) | ||||||
Gross
Profit
|
24,336,778 | 14,786,899 | 7,617,622 | |||||||||
Selling
Expenses
|
4,237,346 | 2,719,775 | 1,351,897 | |||||||||
General
and administrative
|
||||||||||||
Merger
cost
|
820,000 | - | - | |||||||||
Research
and development
|
1,649,504 | 1,032,722 | 445,841 | |||||||||
Depreciation
|
20,910 | 22,636 | 21,172 | |||||||||
Others
general and administrative
|
2,873,658 | 1,171,908 | 808,733 | |||||||||
Total
general and administrative
|
5,364,072 | 2,227,266 | 1,275,746 | |||||||||
Total
operating expenses
|
9,601,418 | 4,947,041 | 2,627,643 | |||||||||
Income
from operations
|
14,735,360 | 9,839,858 | 4,990,019 | |||||||||
Other
income (expenses)
|
||||||||||||
Interest
income
|
16,087 | 15,036 | 9,673 | |||||||||
Imputed
interest
|
- | (50,126 | ) | (43,962 | ) | |||||||
Sundry
income (expenses), net
|
8,318 | 8,845 | 58,364 | |||||||||
Total
other income (expenses)
|
24,405 | (26,245 | ) | 24,075 | ||||||||
Income
before income taxes
|
14,759,765 | 9,813,613 | 5,014,094 | |||||||||
Income
taxes
|
(3,262,067 | ) | (1,797,721 | ) | (383,308 | ) | ||||||
Net
income
|
$ | 11,497,698 | $ | 8,015,892 | $ | 4,630,786 | ||||||
Basic
earnings per share
|
$ | 0.93 | $ | 0.75 | $ | 0.43 | ||||||
Weighted-average
shares outstanding, Basic
|
12,356,530 | 10,679,260 | 10,679,260 | |||||||||
Diluted
earnings per share
|
$ | 0.89 | $ | 0.75 | $ | 0.43 | ||||||
Weighted-average
shares outstanding, Diluted
|
12,988,805 | 10,679,260 | 10,679,260 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
CHINA
ELECTRIC MOTOR, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2009, 2008 and 2007
(In U.S.
Dollars)
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
Other
|
Statutory
|
Retained
|
Total
|
||||||||||||||||||||||||||||
Common Shares
|
Paid-in
|
Comprehensive
|
Reserve
|
Earnings
|
Stockholders'
|
Comprehensive
|
||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income (Loss)
|
Fund
|
(Unrestricted)
|
Equity
|
Income
|
|||||||||||||||||||||||||
Balance
at December 31, 2006
|
10,679,260 | $ | 1,068 | $ | 64,183 | $ | 106,135 | $ | 506,424 | $ | 2,256,582 | $ | 2,934,392 | |||||||||||||||||||
Imputed
interest allocated
|
- | - | 43,962 | - | - | - | 43,962 | |||||||||||||||||||||||||
Allocation
of retained earnings to statutory reserve fund
|
- | - | - | - | 670,651 | (670,651 | ) | - | ||||||||||||||||||||||||
Dividend
declared
|
- | - | - | - | - | (1,287,700 | ) | (1,287,700 | ) | |||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 401,466 | - | - | 401,466 | 401,466 | ||||||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 4,630,786 | 4,630,786 | 4,630,786 | ||||||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | $ | 5,032,252 | |||||||||||||||||||||||
Balance
at December 31, 2007
|
10,679,260 | 1,068 | 108,145 | 507,601 | 1,177,075 | 4,929,017 | 6,722,906 | - | ||||||||||||||||||||||||
Imputed
interest allocated
|
- | - | 50,126 | - | - | - | 50,126 | |||||||||||||||||||||||||
Dividend
declared
|
- | - | - | - | - | (2,088,600 | ) | (2,088,600 | ) | |||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 581,431 | - | - | 581,431 | 581,431 | ||||||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 8,015,892 | 8,015,892 | 8,015,892 | ||||||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | $ | 8,597,323 | |||||||||||||||||||||||
Balance
at December 31, 2008
|
10,679,260 | $ | 1,068 | $ | 158,271 | $ | 1,089,032 | $ | 1,177,075 | $ | 10,856,309 | $ | 13,281,755 | |||||||||||||||||||
Reverse
merger adjustment
|
1,352,003 | 135 | (135 | ) | - | - | - | - | ||||||||||||||||||||||||
Sale
of common shares
|
2,051,767 | 205 | 3,740,989 | - | - | - | 3,741,194 | |||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | (199,364 | ) | - | - | (199,364 | ) | (199,364 | ) | |||||||||||||||||||||
Net
income
|
- | - | - | - | - | 11,497,698 | 11,497,698 | 11,497,698 | ||||||||||||||||||||||||
Comprehensive
income
|
- | - | - | - | - | - | - | $ | 11,298,334 | |||||||||||||||||||||||
Balance
at December 31, 2009
|
14,083,030 | $ | 1,408 | $ | 3,899,125 | $ | 889,668 | $ | 1,177,075 | 22,354,007 | $ | 28,321,283 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-8
CHINA
ELECTRIC MOTOR, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Decrease)
Increase in Cash
(In U.S.
Dollars)
For
Years Ended
|
For
Years Ended
|
For
Years Ended
|
||||||||||
December
31
|
December
31
|
December
31
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
Flows From Operating Activities
|
||||||||||||
Net
Income (loss)
|
$ | 11,497,698 | $ | 8,015,892 | $ | 4,630,786 | ||||||
Adjustments
to reconcile net income to net cash
|
||||||||||||
provided
by operating activities:
|
||||||||||||
Bad
debt recovery
|
(3,248 | ) | - | (60,250 | ) | |||||||
Imputed
interest expense
|
- | 50,126 | 43,962 | |||||||||
Depreciation
|
678,039 | 519,014 | 379,885 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
(Increase)
decrease in:
|
||||||||||||
Accounts
receivable, net
|
(3,297,186 | ) | (2,594,662 | ) | (420,353 | ) | ||||||
Inventories,
net
|
79,724 | (3,355,276 | ) | (2,412,558 | ) | |||||||
Prepaid
expenses and other receivables
|
15,064 | 73,661 | (5,709 | ) | ||||||||
Increase
(decrease) in:
|
||||||||||||
Accounts
payable
|
(85,257 | ) | 692,371 | 413,956 | ||||||||
Accrued
liabilities and other payable
|
223,692 | - | - | |||||||||
Various
taxes payable
|
(10,905 | ) | (9,195 | ) | (4,875 | ) | ||||||
Wages
payable
|
170,528 | 119,971 | 69,063 | |||||||||
Corporate
tax payable
|
410,104 | 350,403 | 58,621 | |||||||||
Net
cash provided by (used in) operating activities
|
9,678,253 | 3,862,305 | 2,692,528 | |||||||||
Cash
Flows From Investing Activities
|
||||||||||||
Purchases
of property and equipment
|
(5,849,388 | ) | (754,160 | ) | (546,963 | ) | ||||||
Net
cash used in investing activities
|
(5,849,388 | ) | (754,160 | ) | (546,963 | ) | ||||||
Cash
Flows From Financing Activities
|
||||||||||||
Net
proceeds from/(Repayments to) short-term loan
|
- | 164,520 | (164,520 | ) | ||||||||
Net
proceeds from issuance of shares
|
3,741,194 | - | - | |||||||||
Dividends
paid
|
- | (2,088,600 | ) | (1,287,700 | ) | |||||||
Increase
(decrease) in due to related parties
|
577,016 | (199,865 | ) | (919,460 | ) | |||||||
Net
cash provided by (used in) financing activities
|
4,318,210 | (2,452,985 | ) | (2,042,640 | ) | |||||||
Effect
of exchange rate changes on cash
|
(169,365 | ) | 411,870 | 313,322 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
7,977,710 | 1,067,030 | 416,247 | |||||||||
Cash
and cash equivalents, beginning of period
|
2,655,808 | 1,588,778 | 1,172,531 | |||||||||
Cash
and cash equivalents, end of period
|
$ | 10,633,518 | $ | 2,655,808 | $ | 1,588,778 | ||||||
Supplemental
disclosure information:
|
||||||||||||
Income
taxes paid
|
$ | 2,845,066 | $ | 1,797,721 | $ | 383,308 | ||||||
Interest
expense paid
|
$ | - | $ | - | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-9
CHINA
ELECTRIC MOTOR, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China
Electric Motor, Inc. (“China Electric”, formerly SRKP 21, Inc.) was incorporated
in the State of Delaware on October 11, 2007. China Electric was originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On May 6, 2009, China Electric (i) closed a share exchange
transaction pursuant to which SRKP 21 became the 100% parent of Attainment
Holdings Limited (“Attainment”), (ii) assumed the operations of Attainment and
its subsidiaries, including Luck Loyal International Investment Limited ("Luck
Loyal") and Shenzhen YuePengCheng Motor Co., Ltd (“YuePengCheng”), and (iii)
changed its name from SRKP 21, Inc. to China Electric Motor, Inc.
Attainment
is a holding company incorporated in the British Virgin Islands (“BVI”) on July
28, 2008. Attainment had 50,000 capital shares authorized with $1.00
par value and one share issued and outstanding. The sole shareholder
of Attainment was Excel Profit Global Group Limited (“Excel Profit”), which in
turn solely owned by Mr. To Chau Sum, a Hong Kong citizen.
Luck
Loyal is a holding company incorporated in Hong Kong (“HK”) on October 15,
2004. Luck Loyal had 10,000 shares authorized with one Hong Kong
Dollar (“HKD”) par value and one share issued and outstanding. The
sole shareholder of Luck Loyal is Attainment.
YuePengCheng
was incorporated in the City of Shenzhen of the People’s Republic of China
(“PRC”) on November 19, 1999. YuePengCheng mainly engages in
production, marketing, sales and research and development of specialized
micro-motor products for the domestic and international market.
Shenzhen
YuePengDa Development Enterprises (“YuePengDa”), a company owned by the son of
Ms. Jianrong Li, a director of YuePengCheng and Luck Loyal (the “Director”), and
Taiwan Qiling Shashi Enterprises (“Qiling”), a company owned by a relative of
the Director, were the original owners of YuePengCheng and held 75% and 25% of
the total interest of YuePengCheng, respectively.
In
November 2007, the Director caused Luck Loyal to enter into an ownership
transfer agreement with Qiling. Pursuant to the agreement, Qiling transferred
its 25% interest in YuePengCheng to Luck Loyal at a price of Chinese Renminbi
(“RMB”) 2.5 million. In September 2008, in order to implement a capital
restructuring program, the Director had Luck Loyal acquire the remaining 75%
ownership of YuePengCheng from YuePengDa under an ownership transfer agreement.
Pursuant to the agreement, Luck Loyal paid YuePengDa RMB 7.5 million for the
ownership transfer. Thereafter, Luck Loyal became the sole owner of
YuePengCheng. Since these transactions were affected by parties under
common control, the Company accounted for them as similar to a pooling of
interest transaction, with a retroactive reduction in additional paid-in capital
for the payments to the former owner, and the recording of a corresponding
liability.
For
accounting purpose, this transaction is being accounted as business combination
of entities under common control and the historical financial statements include
the operations of YuePengCheng for all periods presented.
China
Electric and its subsidiaries – Attainment, Luck Loyal and YuePengCheng are
collectively referred throughout as the “Company.”
F-10
To
summarize the paragraphs above, the organization and ownership structure of the
Company is currently as follows:
Share
Exchange
On March
3, 2009, China Electric Motor, Inc. (the “Company”) (formerly known as “SRKP 21,
Inc.”) entered into a Share Exchange Agreement with Attainment Holdings, Excel
Profit as the sole shareholder of Attainment Holdings, and as to certain
portions of the agreement, certain designees. Pursuant to the Share
Exchange Agreement, as it was amended on May 6, 2009 (the “Exchange Agreement”),
SRKP 21 agreed to issue an aggregate of 10,679,260 shares of its common stock in
exchange for all of the issued and outstanding securities of Attainment Holdings
(the “Share Exchange”). The Share Exchange closed on May 6, 2009. The
10,679,260 shares of common stock issued to the stock holders of Attainment in
conjunction with the share exchange transaction have been presented as
outstanding for all periods.
Upon the
closing of the Share Exchange, the Company issued an aggregate of 10,679,260
shares of its common stock to Excel Profit and the designees in exchange for all
of the issued and outstanding securities of Attainment Holdings. Prior to
the closing of the Share Exchange, the stockholders of the Company canceled an
aggregate of 3,260,659 shares held by them such that there were 1,352,003 shares
of common stock outstanding immediately prior to the Share Exchange. The
Company’s stockholders also canceled an aggregate of 3,985,768 warrants to
purchase shares of common stock such that the stockholders held an aggregate of
626,894 warrants immediately after the Share Exchange. Immediately after
the closing of the Share Exchange, the Company had 12,031,263 outstanding shares
of common stock, no shares of Preferred Stock, no options, and warrants to
purchase 626,894 shares of common stock.
In
relation to the Share Exchange transactions, the Company incurred merger costs
of $820,000, which consist shell company acquisition costs of $600,000, a
success fee of $140,000 and a due diligence fee of $80,000.
For
accounting purposes, this transaction is being accounted for as a reverse
merger. The transaction has been treated as a recapitalization of Attainment
Holdings and its subsidiaries, with China Electric Motor (the legal
acquirer of Attainment and its subsidiaries including YuePengCheng) considered
the accounting acquiree and YuePengCheng , the only operating company, and whose
management took control of China Electric Motor (the legal acquiree of
YuePengCheng) is considered the accounting acquirer. The Company did
not recognize goodwill or any intangible assets in connection with the
transaction. The 10,679,260 shares of common stock issued to the
shareholder of Attainment and its designees in conjunction with the share
exchange transaction have been presented as outstanding for all periods. The
10,679,260 shares of common stock issued to the stockholders of Attainment in
conjunction with the share exchange transaction have been presented as
outstanding for all periods. The historical consolidated financial statements
include the operations of the accounting acquirer for all periods
presented.
On
October 8, 2009, the Company’s Board of Directors authorized a 1-for-1.5384615
reverse stock split of the Company's outstanding shares of common stock (the
“Reverse Stock Split”). The Reverse Stock Split was effected on January 22,
2010. References to shares in the consolidated financial statements and the
accompanying notes, including, but not limited to, the number of shares and per
share amounts, have been adjusted to reflect the Reverse Stock Split on a
retroactive basis.
F-11
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a.
|
Basis
of Preparation
|
The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).
The
parent only financial statements reflect nominal assets and operations
consistent with the disclosure that all assets and operations are conducted in
China, and that the only significant transactions at the parent level are
capital transactions, intercompany transactions, and equity accounting
transactions to account for the parent’s 100% ownership of its operations in
China.
b.
|
Basis of
Consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions have been eliminated in
consolidation.
c.
|
Use of
Estimates
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting year. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those
estimates.
d.
|
Fair Values of Financial
Instruments
|
US GAAP
requires certain disclosures about fair value of financial instruments. The
Company defines fair value, using the required three-level valuation hierarchy
for disclosures of fair value measurement, the enhanced disclosures requirements
for fair value measures. Current assets and current liabilities qualified as
financial instruments and management believes their carrying amounts are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their current interest rate is equivalent to interest rates
currently available. The three levels are defined as
follows:
|
·
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
e.
|
Cash
and Cash Equivalents
|
Cash and
cash equivalents include cash on hand, demand deposits with banks and liquid
investments with an original maturity of three months or less.
f.
|
Accounts
Receivable
|
Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
Company uses an aging method to estimate the valuation allowance for anticipated
uncollectible receivable balances. Under the aging method, bad debts percentages
determined by management based on historical experience as well as current
economic climate are applied to customers’ balances categorized by the number of
months the underlying invoices have remained outstanding. The valuation
allowance balance is adjusted to the amount computed as a result of the aging
method. When facts subsequently become available to indicate that the amount
provided as the allowance was incorrect, an adjustment, classified as a change
in estimate, is made.
F-12
g.
|
Inventories
|
Inventories
are stated at the lower of cost, as determined on a weighted average basis, or
market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
writes down the inventories to market value if it is below cost. The management
also regularly evaluates the composition of its inventories to identify
slow-moving and obsolete inventories to determine if valuation allowance is
required.
h.
|
Property
and Equipment
|
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of plant and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets at cost less 5% for salvage
value:
Building
|
46
years
|
Machinery
and Equipment
|
5
~ 25 years
|
Office
and Other Equipment
|
5
~ 10 years
|
i.
|
Impairment of Long-Lived
Assets
|
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with the standard of “Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires
the Company to evaluate a long-lived asset for recoverability when there is
event or circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
j.
|
Comprehensive
Income
|
The
Company reports comprehensive income, its components, and accumulated balances
in its financial statements. Accumulated other comprehensive income represents
the accumulated balance of foreign currency translation adjustments. No other
items of comprehensive income are present.
k.
|
Revenue
Recognition
|
The
Company generates revenues from the sales of micro-motor
products. The Company recognizes revenue net of value added tax (VAT)
when the earnings process is complete, as evidenced by an agreement with the
customer, transfer of title, acceptance of ownership and assumption of risk of
loss by the customer, as well as predetermined fixed pricing, persuasive
evidence of an arrangement exists, and collection of the relevant receivable is
probable. The Company includes shipping charges billed to customers in net
revenue, and includes the related shipping costs in cost of sales. No return
allowance is made as products returns are insignificant based on historical
experience.
The
Company does not provide different policies in terms warranties, credits,
discounts, rebates, price protection, or similar privileges among customers.
Orders are placed by both the distributors and OEMs and the products are
delivered to the customers within 30-45 days of order, the Company does not
provide price protection or right of return to the customers. The price of the
products are predetermined and fixed based on contractual agreements, therefore
the customers would be responsible for any loss if the customers are faced with
sales price reductions and rapid technology obsolescence in the industry. The
Company does not allow any discounts, credits, rebates or similar
privileges.
The
Company warrants the products sold to all customers for up to 1 year from the
date the products leave the Company’s factory, under which the Company will pay
for labor and parts, or offer a new or similar unit in exchange for a
non-performing unit due to defects in material or workmanship. The
customers may also return products for a variety of reasons, such as damage to
goods in transit, cosmetic imperfections and mechanical failures, if within the
warranty period. There is no allowance for warranty on the products sales as
historical costs incurred for warranty replacements and repairs have been
insignificant.
l.
|
Research and Development
Costs
|
Research
and development costs are expensed to operations as incurred. The Company spent
$1,649,504, $1,032,722 and $445,841 in the years ended December 31, 2009, 2008
and 2007, respectively on direct research and development
efforts.
F-13
m.
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with the US Generally Accepted
Accounting Principles (GAAP) which requires the asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach, deferred
taxes are provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The
Company follows the requirements of US GAAP in Accounting for Uncertainty in
Income Taxes which requires a comprehensive model for how a company should
recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return
(including a decision whether to file or not file to file a return in a
particular jurisdiction).
n.
|
Advertising
Costs
|
The
Company expenses advertising costs as incurred. The Company incurred
$512,373, $388,482 and $153,673 in the years ended December 31, 2009, 2008 and
2007, respectively on advertising expenses.
o.
|
Foreign Currency
Translation
|
The
functional currency of Attainment and Luck Loyal is the Hong Kong Dollar
(“HKD”). They maintain their financial statements using the functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
The
functional currency of YuePengCheng is the Renminbi (“RMB”), the PRC’s currency.
It maintains its financial statements using its own functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income (loss) for the respective
periods.
For
financial reporting purposes, the financial statements of Attainment and Luck
Loyal, which are prepared in HKD, are translated into the Company’s reporting
currency, United States Dollars (“USD”); the financial statements of
YuePengCheng, which are prepared in RMB, are translated into the Company’s
reporting currency, USD. Balance sheet accounts are translated using the closing
exchange rate in effect at the balance sheet date and income and expense
accounts are translated using the average exchange rate prevailing during the
reporting period. Adjustments resulting from the translation, if any, are
included in accumulated other comprehensive income (loss) in stockholder’s
equity.
The
exchange rates used for foreign currency translation were as follows (USD$1 =
RMB):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||||||
Year
Ended December 31, 2009
|
6.83527
|
6.82082
|
||||||
Year
Ended December 31, 2008
|
6.81731
|
6.93722
|
||||||
Year
Ended December 31, 2007
|
7.29395
|
7.59474
|
The
exchange rates used for foreign currency translation were as follows (USD$1 =
HKD):
Period Covered
|
Balance Sheet Date Rates
|
Average Rates
|
||||||
Year
Ended December 31, 2009
|
7.80000
|
7.80000
|
||||||
Year
Ended December 31, 2008
|
7.74960
|
7.70153
|
||||||
Year
Ended December 31, 2007
|
7.80214
|
7.78634
|
F-14
p. Recently
Issued Accounting Pronouncements
In June 2009, the Financial
Accounting Standards Board (FASB) issued a standard that established the FASB
Accounting Standards Codification (ASC) and amended the hierarchy of
generally accepted accounting principles (ASC) and amended the hierarchy of
generally accepted accounting principles (GAAP) such that the ASC became the
single source of authoritative nongovernmental U.S. GAAP. The ASC did not change
current U.S. GAAP, but was intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature related to a particular
topic in one place. All previously existing accounting standard documents were
superseded and all other accounting literature not included in the ASC is
considered non-authoritative. New accounting standards issued subsequent to
June 30, 2009 are communicated by the FASB through Accounting Standards
Updates (ASUs). The Company adopted the ASC on July 1, 2009. This standard
did not have an impact on the Company’s consolidated results of operations or
financial condition. However, throughout the notes to the consolidated financial
statements references that were previously made to various former authoritative
U.S. GAAP pronouncements have been changed to coincide with the appropriate
section of the ASC.
q. Recently issued accounting
pronouncements (continued)
In
September 2006, the FASB issued an accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements, and
required disclosures of assets and liabilities measured at fair value based on
their level in the hierarchy. This standard applies under other accounting
standards that require or permit fair value measurements. One of the amendments
deferred the effective date for one year relative to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at
fair value on a nonrecurring basis. This deferral applied to such items as
nonfinancial assets and liabilities initially measured at fair value in a
business combination (but not measured at fair value in subsequent periods) or
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. The adoption of the fair value measurement standard did not
have a material impact on the Company’s consolidated results of operations or
financial condition.
In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The Company adopted the standard for business
combinations for its business combination during the period ended June 30,
2009.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. For the Company, this standard was effective
beginning April 1, 2009. The adoption
did not have an impact on the Company’s consolidated results of operations or
financial condition.
F-15
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. The
Company is currently evaluating the impact of this standard, but does not expect
it to have a material impact on the Company’s consolidated results of operations
or financial condition.
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under ASC 820
by adding required disclosures about items transferring into and out of levels 1
and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and
clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for the first quarter of 2010,
except for the requirement to provide level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which is effective beginning the
first quarter of 2011. Since this standard impacts disclosure requirements only,
its adoption will not have a material impact on the Company's consolidated
results of operations or financial condition.
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Accounts
receivable-trade
|
$ | 8,526,451 | $ | 5,243,033 | ||||
Allowance
for doubtful accounts
|
- | (3,248 | ) | |||||
Accounts
receivable-trade, net
|
$ | 8,526,451 | $ | 5,239,785 |
NOTE
4 – INVENTORY
Inventory
includes raw materials, work-in-process (“WIP”), and finished goods. Finished
goods contain direct material, direct labor and manufacturing overhead and do
not contain general and administrative costs.
Inventory
consists of the following:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 2,348,911 | $ | 2,524,124 | ||||
Finished
goods
|
2,472,236 | 2,544,534 | ||||||
Work-in-process
|
2,373,509 | 2,224,886 | ||||||
Total
|
$ | 7,194,656 | $ | 7,293,544 |
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and Equipment consist of the following:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Building
|
$ | 3,707,135 | $ | - | ||||
Machinery
and equipment
|
6,477,478 | 4,314,429 | ||||||
Electronic,
office and other equipment
|
149,693 | 182,963 | ||||||
Accumulated
depreciation
|
(2,398,022 | ) | (1,726,610 | ) | ||||
Property
and equipment, net
|
$ | 7,936,284 | $ | 2,770,782 |
F-16
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 are as
follows:
|
Year ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Cost
of goods sold
|
$ | 657,129 | $ | 496,378 | $ | 358,713 | ||||||
Operating
expenses
|
20,910 | 22,636 | 21,172 | |||||||||
Total
|
$ | 678,039 | $ | 519,014 | $ | 379,885 |
NOTE
6 – RELATED PARTY TRANSACTIONS
Due to
director
Due to
director consists of the following:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Due
to director - Li, Jianrong: Luck Loyal loans
|
1,581,376 | 1,339,337 | ||||||
Total
|
$ | 1,581,376 | $ | 1,339,337 |
In
November 2007, Luck Loyal acquired a 25% ownership interest in YuePengCheng from
Qiling; and in September 2008 acquired the remaining 75% ownership interest in
YuePengCheng from YuePengDa. Pursuant to the agreements, Luck Loyal paid Qiling
and YuePengDa RMB 2.5 million and RMB 7.5 million, respectively. These amounts
were contributed by a director of Luck Loyal, Ms. Li, Jianrong, in 2007 and
2008.
On
February 2, 2010, Ms. Li, Jianrong entered into an agreement to convert the debt
outstanding into corresponding equity of China Electric Motor, Inc. at the time
of China Electric Motor, Inc.’s anticipated public offering of its common stock
based on the per share offering price.
We
evaluated the conversion agreement for potential embedded derivatives under ASC
815 and determined that that the conversion feature did not meet the embedded
derivative criteria. Therefore, no fair value has been recorded for this
item.
The other
amounts that are due to Ms. Li, Jianrong consist of unsecured loans for working
capital with no fixed repayment date.
Due to affiliated
company
Due to
affiliated company consists of the following:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Due
to affiliated company, Excel Profit
|
334,977 | - | ||||||
Total
|
$ | 334,977 | $ | - |
In
connection with the initial closing of the Private Placement on May 6, 2009, a
shareholder (Excel Profit) of the Company issued a promissory note in the
principal amount of $335,000 bearing no interest to Chen Dong (the
“Note”). The Company assumed the obligations of the Note since the
note proceeds were received by Luck Loyal but not transferred to the shareholder
as of year end. The principal was originally due and payable on or
before the earlier of (a) nine months from the date of issuance of the Note or
(b) upon the receipt by the Company after the date of the Note of at least $1
million in additional proceeds in the Private Placement. The Company repaid the
note in full in February 2010.
NOTE
7 – STATUTORY RESERVES
As
stipulated by the relevant laws and regulations for enterprises operating in
PRC, the Company is required to make annual appropriations to a statutory
surplus reserve fund. Specifically, the Company is required to allocate 10% of
its profits after taxes, as determined in accordance with the PRC accounting
standards applicable to the Company, to a statutory surplus reserve until such
reserve reaches 50% of the registered capital of the Company. The Company
reserved $1,177.075 for the years ended December 31, 2009 and
2008,
F-17
NOTE
8 – INCOME TAX AND VARIOUS TAXES
Income
Tax
Luck
Loyal is a holding company registered in Hong Kong and has no operating profit
for tax liabilities.
The
Company is registered and entitled as a “Hi-Tech Corporation” in the
PRC. The Company has tax advantages granted by the local government
for corporate income taxes and sales taxes. The Company is
entitled to have a 50% reduction on the normal tax rate of 15% commencing year
2005 for the following three consecutive years. The Company’s tax
advantages were abolished after the Enterprise Income Tax Law that took effect
on January 1, 2008. The Company’s prior tax rate of 15% was changed to a rate of
18% in 2008.
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities.
Years ended December 31
|
||||||||||||
Current income tax expense:
|
2009
|
2008
|
2007
|
|||||||||
PRC
Enterprises Income Tax
|
$ | 3,262,067 | $ | 1,797,721 | $ | 383,308 | ||||||
U.S.
Federal Tax
|
$ | - | $ | - | $ | - |
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group’s provision for income tax is as follows:
Tax Year
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
U.S.
statutory rate
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||||
Foreign
income not recognized in the U.S.
|
-34.0
|
%
|
-34.0
|
%
|
-34.0
|
%
|
||||||
PRC
preferential enterprise income tax rate
|
25.0
|
%
|
25.0
|
%
|
15.0
|
%
|
||||||
Tax
holiday and relief granted to the Subsidiary
|
-2.9
|
%
|
-6.7
|
%
|
-7.4
|
%
|
||||||
Provision
for income tax
|
22.1
|
%
|
18.3
|
%
|
7.6
|
%
|
Effective
January 1, 2008, the new "Law of the People's Republic of China on Enterprise
Income Tax" was implemented. The new law requires that:
|
(i)
|
For
all resident enterprises, domestic or foreign, the Enterprise Income Tax
rate is unified 25%.
|
|
(ii)
|
Enterprises
that are categorized as the "High Tech Enterprise" will have a reduced tax
rate of 15%.
|
|
(iii)
|
From
January 1, 2008 onwards, enterprises that enjoyed a preferential tax rate
before, will need to adopt the new law within the next five years.
Specifically; enterprises with a current preferential tax rate of 15% for
2007, the tax rate will be 18%, 20%, 22%, 24%, and 25% for the years ended
December 31 2008, 2009, 2010, 2011, and 2012,
respectively.
|
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities. There were no significant temporary
differences.
Accounting for Uncertainty
in Income Taxes
The
Company adopted the provisions of Accounting for Uncertainty in Income Taxes on
January 1, 2007. The provisions clarify the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with the
standard “Accounting for Income Taxes,” and prescribes a recognition threshold
and measurement process for financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. The provisions of
Accounting for Uncertainty in Income Taxes also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
F-18
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event it receives an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.
Various
Taxes
The
Company is subject to pay various taxes such as Value added tax (VAT), City
development tax, and Education tax to the local government tax authorities. The
Value added tax (VAT) collected on sales is netted against taxes paid for
purchases of cost of goods sold to determine the amounts payable and refundable.
The city development tax and education tax are expensed as general and
administrative expense.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
The
Company leased its factory premises and staff quarters for approximately
$300,000 per year. This lease was terminated effective September 30, 2009, after
the Company purchased this factory building. The lease agreement was terminated
without penalties.
The
Company signed a new lease agreement for the remaining buildings from the lesser
for approximately $176,000 per year.
A
schedule by year of future minimum lease payments under the operating leases as
of December 31, 2009 is as follows:
Payments due by Period (in $)
|
|||||||||||||||||
Total
|
Less Than
1 Year
|
1 - 3
Years
|
3 - 5
Years
|
More Than
5 Years
|
|||||||||||||
Operating
lease obligations
|
$
|
167,531
|
$
|
167,531
|
$
|
$
|
-
|
$
|
-
|
Rent
expense totaled $272,041, $301,729 and $275,607 for the years ended December 31,
2009, 2008 and 2007, respectively.
NOTE
10 – OPERATING RISK
Country
Risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Lack of insurance
risk
The
Company could be exposed to liabilities or other claims for which the Company
would have no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy except for property insurance policies with
limited coverage. For example, because the Company does not carry products
liability insurance, a failure of any of the products marketed by the Company
may subject it to the risk of product liability claims and litigation arising
from injuries allegedly caused by the improper functioning or design of its
products. The Company cannot assure that it will have enough funds to defend or
pay for liabilities arising out of a products liability claim. To the extent the
Company incurs any product liability or other litigation losses, its expenses
could materially increase substantially. There can be no assurance that the
Company will have sufficient funds to pay for such expenses, which could end its
operations. There can be no guarantee that the Company will be able to obtain
additional insurance coverage in the future, and even if it can obtain
additional coverage, the Company may not carry sufficient insurance coverage to
satisfy potential claims. All investors of the Company could lose their entire
investment should uninsured losses occur.
F-19
Exchange
risk
The
Company cannot guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore, the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on changes in
the political and economic environments without notice.
Political
risk
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
Concentration of Credit
Risk
A
significant portion of the Company’s cash is maintained at various financial
institutions in the PRC which do not provide insurance for amounts on
deposit. The Company has not experienced any losses in such accounts
and believes it is not exposed to significant credit risk in this
area.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
For the
years ended December 31, 2009, three customers accounted for 9.4%, 9.3% and 9.1%
of total sales, respectively. At December 31, 2009, these three customers
accounted for 14.2%, 6.5% and 8.4% of accounts receivable,
respectively.
For the
year ended December 31, 2008, three customers accounted for 11%, 10% and 10% of
total sales, respectively. At December 31, 2008, these three customers accounted
for 11%, 9%, and 10% of accounts receivable, respectively.
For the
year ended December 31, 2007, seven customers accounted for at least 5% with one
of seven customers accounted for at least 10% of total sales. These
seven customers accounted for a total of approximately 54% of total sales for
the year ended December 31, 2007.
Supply
Risk
The
suppliers for the Company's key raw materials are located in
China. For the year ended December 31, 2009, three suppliers
accounted for 13%, 10.4% and 10.3% of the Company's total purchases,
respectively. At December 31, 2009, three suppliers accounted for
17.6%, 21.6% and 0% of accounts payable, respectively.
For the
year ended December 31, 2008, one supplier accounted for 21.7% of the Company's
total purchases. At December 31, 2008, this supplier accounted for
10% of accounts payable.
For the
year ended December 31, 2007, one supplier accounted for17% of the Company's
total purchases. At December 31, 2007, this supplier accounted for
11% of accounts payable.
NOTE
11– SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
The
Company has not segregated business units for managing different products and
services that the Company has been carrying and selling on the
market. The assets and resources of the Company have been utilized,
on a corporate basis, for overall operations of the Company. The
Company has not segregated its operating assets by segments as it is
impracticable to do so since the same assets are used to produce products as one
segment.
The
geographic information for revenue is as follows:
Year
ended December 31
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
China
Mainland
|
$ | 50,727,990 | 59.4 | % | $ | 30,062,110 | 56.6 | % | $ | 14,265,456 | 51.2 | % | ||||||||||||
Korea
|
17,239,205 | 20.2 | % | 13,439,092 | 25.3 | % | 8,914,769 | 32 | % | |||||||||||||||
Hong
Kong
|
17,412,179 | 20.4 | % | 9,571,345 | 18.1 | % | 4,674,934 | 16.8 | % | |||||||||||||||
Total
|
$ | 85,379,374 | $ | 53,072,547 | $ | 27,855,159 |
F-20
The
geographic information for accounts receivables which are classified based on
the customers is as follows:
Year ended December 31
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
China
Mainland
|
$ | 6,037,505 | $ | 3,047,889 | $ | 1,261,754 | ||||||
Korea
|
1,428,311 | 969,170 | 833,159 | |||||||||
Hong
Kong
|
1,080,635 | 1,222,726 | 550,210 | |||||||||
Total
|
$ | 8,526,451 | $ | 5,239,785 | $ | 2,645,123 |
NOTE
13 – COMMON STOCK
In
January 31, 2008, the Company declared dividends of $2,088,600. The
dividends were paid in May 2008 to its then current owners.
The
Company has 10 million preferred stock authorized with none issued.
On May 6,
2009, concurrently with the close of the Share Exchange, the
Company conducted an initial closing of a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered
into with the investors, the Company sold an aggregate of 320,186 shares of
common stock, $0.0001 par value per share, at $2.08 per share, for gross
proceeds of approximately $665,000.
On June
19, 2009, the Company conducted a second closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 208,868 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $433,800.
On July
17, 2009, the Company conducted a third closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 272,342 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $565,625.
On
September 4, 2009, the Company conducted a fourth closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 481,383 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $999,775.
On
October 6, 2009, the Company conducted a final closing of a private
placement. Pursuant to subscription agreements entered into with the
investors, the Company sold an aggregate of 768,988 shares of common stock,
$0.0001 par value per share, at $2.08 per share, for gross proceeds of
approximately $1,597,095.
NOTE
14 – WARRANTS
Warrants remaining from
Share Exchange
Prior to
the Share Exchange and Private Placement, the shareholders of SRKP 21 held an
aggregate of 4,612,662 warrants to purchase shares of the Company’s common
stock, and an aggregate of 3,985,768 warrants were cancelled in conjunction with
the closing of the Share Exchange. Immediately after the closing of
the Share Exchange and Private Placement, the shareholders held an aggregate of
626,894 warrants with an exercise price of $0.000154. As at December
31, 2009, the warrants were all vested and had a remaining life of 4.5
years
F-21
The
summary of the status of the Company’s outstanding warrants and changes as of
December 31, 2009 is as follows:
December 31, 2009
|
||||||||
Number of
|
Average
|
|||||||
Warrants
|
Exercise Price
|
|||||||
Warrants
remaining from Share Exchange
|
626,894 | $ | 0.000154 | |||||
Exercised
|
- | $ | - | |||||
Forfeited/canceled
|
- | $ | - | |||||
December
31, 2009
|
626,894 |
NOTE
15 – REGISTRATION PAYMENT ARRANGEMENT
Pursuant
to the Registration Rights Agreement (“Agreement”) dated May 6, 2009, by and
among the Company, Attainment Holdings and certain of the original stockholders
of the Company prior to the Share Exchange who are affiliates of WestPark
Capital, Inc. (the “Original Stockholders”), the Company agreed to file a
registration statement covering the resale of the shares held by the Original
Stockholders (the “Subsequent Registration Statement”) no later than the tenth
(10th) day
after the end of the six month period immediately following the filing date of
the registration statement covering the shares of common stock sold in the
Private Placement (the “Required Filing Date”). The Company agreed to
use its reasonable best efforts to cause the Subsequent Registration Statement
to become effective within one hundred fifty (150) days after the Required
Filing Date or the actual filing date, whichever is earlier, or one hundred
eighty (180) days after the Required Filing Date or the actual filing date,
whichever is earlier, if the Registration Statement is subject to a full review
by the SEC (the “Required Effectiveness Date”).
If the
Company fails to file the Subsequent Registration Statement by the Required
Filing Date or if the Subsequent Registration Statement does not become
effective on or before the Required Effectiveness Date due to the failure of the
Company to fulfill its obligations under the Agreement, the Company is required
to issue, as liquidated damages, to each of the Original Stockholders, shares of
common stock (the “Penalty Shares”) equal to a total of 0.0333% of each Original
Stockholder’s respective shares for each calendar day that the Subsequent
Registration Statement has not been filed or declared effective by the SEC (and
until the Subsequent Registration Statement is filed with or declared effective
by the SEC), as applicable. No Penalty Shares shall be due to the
Original Stockholders if the Company is using its best efforts to cause the
Subsequent Registration Statement to be filed and declared effective in a timely
manner.
The
registration statement covering the shares of common stock sold in the Private
Placement was originally filed with the SEC on October 14,
2009. Therefore, the Required Effectiveness Date is on or about April
24, 2010. The Company has used its best efforts to file the
Subsequent Registration Statement and believes the Original Stockholders agree
that the Company has used its best effort based on the continuing dialogue
between the Company and the Original Stockholders. The Company does not believe
it has incurred any liability to date and as long as the Company keeps using its
best efforts it will not incur a liability.
NOTE
16 – RECONCILIATION OF EARNINGS PER SHARE (EPS)
Year ended December 31,
|
||||||||||||
Numerator
|
2009
|
2008
|
2007
|
|||||||||
Net
income
|
$ | 11,497,698 | $ | 8,015,892 | $ | 4,630,786 | ||||||
Denominator:
|
||||||||||||
Weighted-average
shares outstanding
|
||||||||||||
for
basic earnings per share
|
12,356,530 | 10,679,260 | 10,679,260 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
412,204.00 | - | - | |||||||||
Convertible
debt
|
220,071 | |||||||||||
Weighted-average
shares outstanding
|
||||||||||||
for
diluted earnings per share
|
12,988,805 | 10,679,260 | 10,679,260 | |||||||||
Net
income per share:
|
||||||||||||
Basic
|
$ | 0.93 | $ | 0.75 | $ | 0.43 | ||||||
Diluted
|
$ | 0.89 | $ | 0.75 | $ | 0.43 |
F-22
NOTE
17- QUARTERLY INFORMATION (UNAUDITED)
The table
below presents selected (unaudited) results of operations for the quarters
indicated. All amounts are in thousands, except per share
amounts.
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2009
|
2009
|
2009
|
2009
|
Total
|
||||||||||||||||
Revenues
|
$
|
22,086
|
$
|
22,081
|
$
|
22,319
|
$
|
18,893
|
$
|
85,379
|
||||||||||
Gross
Profit
|
6,504
|
6,483
|
5,996
|
5,354
|
24,337
|
|||||||||||||||
Net
Income
|
2,936
|
3,418
|
2,132
|
3,012
|
11,498
|
|||||||||||||||
Net
income per share
|
||||||||||||||||||||
-
Basic
|
$
|
0.21
|
$
|
0.26
|
$
|
0.18
|
$
|
0.28
|
$
|
0.93
|
||||||||||
-Diluted
|
$
|
0.20
|
$
|
0.24
|
$
|
0.17
|
$
|
0.28
|
$
|
0.89
|
||||||||||
Basic
weighted average shares outstanding
|
14,041,237
|
12,926,571
|
11,735,842
|
10,679,260
|
12,356,530
|
|||||||||||||||
Diluted
weighted average shares outstanding
|
14,952,974
|
13,553,465
|
12,406,466
|
10,701,414
|
12,988,805
|
|||||||||||||||
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2008
|
2008
|
2008
|
2008
|
Total
|
||||||||||||||||
Revenues
|
$
|
14,023
|
$
|
14,163
|
$
|
13,210
|
$
|
11,677
|
$
|
53,073
|
||||||||||
Gross
Profit
|
3,840
|
3,958
|
3,639
|
3,350
|
14,787
|
|||||||||||||||
Net
Income
|
1,979
|
2,187
|
2,050
|
1,800
|
8,016
|
|||||||||||||||
Basic
and diluted net income per share
|
0.19
|
0.20
|
0.19
|
0.17
|
0.75
|
|||||||||||||||
Basic
and diluted weighted average shares outstanding
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
|||||||||||||||
Quarter Ended
|
||||||||||||||||||||
December 31,
|
September 30,
|
June 30,
|
March 31,
|
|||||||||||||||||
2007
|
2007
|
2007
|
2007
|
Total
|
||||||||||||||||
Revenues
|
$
|
7,634
|
$
|
7,738
|
$
|
6,933
|
$
|
5,550
|
$
|
27,855
|
||||||||||
Gross
Profit
|
2,208
|
2,094
|
1,880
|
1,436
|
7,618
|
|||||||||||||||
Net
Income
|
1,381
|
1,253
|
1,119
|
878
|
4,631
|
|||||||||||||||
Basic
and diluted net income per share
|
0.13
|
0.12
|
0.10
|
0.08
|
0.43
|
|||||||||||||||
Basic
and diluted weighted average shares outstanding
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
10,679,260
|
|||||||||||||||
NOTE
18 – SUBSEQUENT EVENTS
On
January 7, 2010, Jianrong Li informed the Company that she resigned from her
director position with the Company effective immediately. The resignation of Jianrong Li was not
the result of any disagreement with the Company on any matter relating to the
Company's operations, policies or practices, or removal for
cause.
F-23
On
February 3, 2010, the Company completed a public offering consisting of
5,000,000 shares of common stock. Roth Capital Partners, LLC (“Roth”) and
WestPark Capital, Inc. (“WestPark,” and together with Roth, the “Underwriters”)
acted as co-underwriters in the public offering. The Company’s shares
of common stock were sold to the public at a price of $4.50 per share, for gross
proceeds of approximately $22.5 million. Compensation for the
Underwriters’ services included discounts and commissions of $1,462,500, a
$281,250 non-accountable expense allowance, roadshow expenses of approximately
of $10,000, and legal counsel fees (excluding blue sky fees) of
$40,000. The Underwriters also received warrants to purchase an
aggregate of 500,000 shares of common stock at an exercise price of $5.625 per
share. The warrants, which have a term of five years, are not
exercisable until at least one-year from the date of
issuance. The warrants also carry registration
rights.
On
February 24, 2010, the Underwriters exercised their over-allotment option in
full for the offer and sale of 750,000 additional shares of common stock at
$4.50, for gross proceeds of approximately $3.4 million. Discounts
and commissions to the Underwriters totaled $219,375.
On
February 3, 2010, the Company converted $1,281,794 of outstanding debt it owed
to Ms. Jianrong Li into 284,843 shares of the Company’s common stock upon the
closing of the Company’s public offering, based on a conversion price of $4.50
per share. As a result of the conversion of debt to equity, the debt
is no longer outstanding.
On
February 11, 2010, 11 investors with a total number of 626,894 warrants
outstanding as of December 31, 2009 elected to exercise the right of purchase of
the company common stock at an exercise price of $0.0000154. A total of 626,870
of the company common stocks were issued to the investors.
NOTE
19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Basis of
Presentation
The
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of
the subsidiaries of China Electric Motor, Inc. exceed 25% of the consolidated
net assets of China Electric Motor, Inc. The ability of the Company’s Chinese
operating subsidiaries to pay dividends may be restricted due to the foreign
exchange control policies and availability of cash balances of the Chinese
operating subsidiaries. Because substantially all of the Company’s operations
are conducted in China and a substantial majority of the Company’s revenues are
generated in China, a majority of the Company’s revenue being earned and
currency received are denominated in Renminbi (“RMB”). RMB is subject to the
exchange control regulation in China, and, as a result, the Company may be
unable to distribute any dividends outside of China due to PRC exchange control
regulations that restrict the Company’s ability to convert RMB into US
Dollars.
The
condensed parent company financial statements have been prepared using the same
accounting principles and policies described in the notes to the consolidated
financial statements, with the only exception being that the parent company
accounts for its subsidiaries using the equity method. Refer to the consolidated
financial statements and notes presented above for additional information and
disclosures with respect to these financial statements.
F-24
China
Electric Motor, Inc.
(Formerly
SRKP 21, Inc.)
Condensed
Parent Company Balance Sheets
(US
Dollars in Thousands)
December 31,
|
December 31,
|
December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
ASSETS
|
||||||||||||
Investment
in subsidiaries, at equity in net assets
|
$ | 28,603 | $ | 13,281 | $ | 6,723 | ||||||
Total
Assets
|
28,603 | 13,281 | 6,723 | |||||||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||||||
CURRENT
LIABILITIES
|
||||||||||||
Accrued
liabilities and other payable
|
282 | - | - | |||||||||
Total
Current Liabilities
|
282 | - | - | |||||||||
COMMITMENTS
AND CONTINGENCIES
|
- | - | - | |||||||||
STOCKHOLDERS'
EQUITY
|
||||||||||||
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
issued
|
- | - | - | |||||||||
Common
stock, $0.0001 par value, 100,000,000 shares authorized, 14,083,030 and
10,679,260 shares issued and outstanding at September 30, 2009 and
December 31, 2008,
|
1 | 1 | 1 | |||||||||
Additional
paid-in capital
|
3,899 | 158 | 108 | |||||||||
Accumulated
other comprehensive income
|
890 | 1,089 | 508 | |||||||||
Statutory
surplus reserve fund
|
1,177 | 1,177 | 1,177 | |||||||||
Retained
earnings (unrestricted)
|
22,354 | 10,856 | 4,929 | |||||||||
Total
Stockholders' Equity
|
28,321 | 13,281 | 6,723 | |||||||||
Total
Liabilities & Stockholders' Equity
|
$ | 28,603 | $ | 13,281 | $ | 6,723 |
China
Electric Motor, Inc.
(Formerly
SRKP 21, Inc.)
Condensed
Parent Company Statements of Operations
(US
Dollars in Thousands)
For the period from
|
||||||||||||
January 3, 2007
|
||||||||||||
For the year Ended
|
For the Year Ended
|
(Inception) to
|
||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||
Revenue
|
$ | - | $ | - | $ | - | ||||||
Merger
cost
|
820 | - | - | |||||||||
Other
general and administrative
|
497 | - | - | |||||||||
Total
Expenses
|
1,317 | - | - | |||||||||
Equity
in undistributed income of subsidiaries
|
12,815 | 8,016 | 4,631 | |||||||||
Income
before income taxes
|
11,498 | 8,016 | 4,631 | |||||||||
Provision
for income tax
|
- | - | - | |||||||||
Net
income
|
$ | 11,498 | $ | 8,016 | $ | 4,631 |
F-25
China
Electric Motor, Inc.
(Formerly
SRKP 21, Inc.)
Condensed
Parent Company Statements of Cash Flows
(US
Dollars in Thousands)
For
the Year Ended
|
For
the Year Ended
|
For
the period from
January
3, 2007
(Inception)
to
|
||||||||||
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||
Cash
Flows from Operating Activities
|
||||||||||||
Net
income
|
$ | 11,498 | $ | 8,016 | $ | 4,631 | ||||||
Increase
in accrued liability and other payable
|
282 | |||||||||||
Equity
in undistributed income of subsidiaries
|
(12,815 | ) | (8,016 | ) | (4,631 | ) | ||||||
Net
Cash Used in Operating Activities
|
(1,035 | ) | - | - | ||||||||
Cash
Flows from Investing Activities
|
||||||||||||
Capital
contribution to subsidiaries
|
(2,706 | ) | ||||||||||
Net
Cash Used in Investing Activities
|
(2,706 | ) | - | - | ||||||||
Cash
Flows from Financing Activities
|
||||||||||||
Net
proceeds of share issuance
|
3,741 | - | - | |||||||||
Net
Cash Provided by Investing Activities
|
3,741 | - | - | |||||||||
Net
Increase in Cash and Cash Equivalents
|
- | - | - | |||||||||
Cash
and Cash Equivalents, beginning of period
|
- | - | - | |||||||||
Cash
and Cash Equivalents, end of period
|
$ | - | $ | - | $ | - |
F-26