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EX-31.1 - EXHIBIT 31.1 - Titanium Group LTDv329210_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

  

¨   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012  
    or
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to  

 

Commission File Number: 0-52415

 

TITANIUM GROUP LIMITED

(Exact Name of Registrant as Specified in Its Charter)

 

British Virgin Islands  
(State of Other Jurisdiction of Incorporation or Organization)  
  Not Applicable
(I.R.S. Employer Identification No.)  
     
Suite 2101, 21/F, Chinachem Century Tower,  
178 Gloucester Road, Wanchai, Hong Kong
(Address of Principal Executive Offices)  
  Not Applicable
(ZIP Code)  

 

 

+(852) 3679 3110

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 ¨                      No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ¨                     No ¨

 

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. (Check one):

  

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer ¨   Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨                      No ¨

  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 16,775,113 as of November 30, 2012. 

 

 
 

 

TABLE OF CONTENTS

 

   Page
    
PART I—FINANCIAL INFORMATION   
Item 1. Financial Statements.  5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.  29
Item 4. Controls and Procedures.  30
    
PART II—OTHER INFORMATION   
Item 1A. Risk Factors.  31
Item 6. Exhibits.  31

  

Throughout this Quarterly Report on Form 10-Q, the “Company”, “we,” “us,” and “our,” refer to Titanium Group Limited unless otherwise indicated or the context otherwise requires.

 

2
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

 

3
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page
    
Unaudited Condensed Consolidated Balance Sheets  5
    
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss  6
    
Unaudited Condensed Consolidated Statements of Cash Flows  7
    
Notes to Unaudited Condensed Consolidated Financial Statements  8-22

 

4
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Currency expressed in US Dollars (“US$”))

 

   September 30   December 31 
   2012   2011 
ASSETS          
Current assets:          
Cash and cash equivalents  $229,957   $917,724 
Accounts receivable, net   132,686    131,990 
Amounts due from related parties   4,971,617    4,917,570 
Inventories   1,077,705    744,087 
Deposits and other receivables   141,536    123,611 
           
Total current assets   6,553,501    6,834,982 
           
Non-current assets:          
Plant and equipment, net   177,758    189,170 
           
TOTAL ASSETS  $6,731,259   $7,024,152 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable, net  $907,962   $826,430 
Amounts due to related parties   1,207,595    1,324,908 
Short-term secured bank loan   4,431,081    4,407,852 
Income tax payable   7,603    7,562 
Accrued liabilities and other payables   343,617    421,011 
           
Total current liabilities   6,897,858    6,987,763 
           
Total liabilities   6,897,858    6,987,763 
           
Commitments and contingencies          
           
Equity          
Stockholders’ equity:          
Common stock, US$0.01 par value, 100,000,000 shares authorized, 100,000,000 shares issued and outstanding  $1,000,000   $1,000,000 
Accumulated other comprehensive loss/ (income)   16,360    (63,401)
Accumulated losses   (1,182,959)   (900,210)
Total  stockholders’ (deficit)/equity   (166,599)   36,389 
           
TOTAL LIABILITIES AND EQUITY  $6,731,259   $7,024,152 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE LOSS

(Currency expressed in US Dollars (“US$”))

 

   Three months ended
September 30
   Nine months ended
September 30
 
   2012   2011   2012   2011 
                 
REVENUE, NET                    
Revenue – related party, net  $908,295   $2,021,438   $3,083,674   $4,197,062 
                     
COST OF REVENUE                    
Cost of revenue (including depreciation)   (938,998)   (2,048,672)   (3,119,102)   (4,187,901)
                     
GROSS (LOSS)/INCOME   (30,703)   (27,234)   (35,428)   9,161 
                     
OPERATING EXPENSES                    
Selling, general and administrative   (276,313)   (167,164)   (419,111)   (451,052)
                     
(LOSS)/INCOME FROM OPERATIONS   (307,016)   (194,398)   (454,539)   (441,891)
                     
Other income (expense):                    
Sundry income   36,807    -    36,807    - 
Interest income   31,565    10,922    182,294    67 
Gain from disposal of a subsidiary   -    555,403    -    555,403 
Interest expense   123,131         (47,314)   (450)
                     
LOSS BEFORE INCOME TAX   (115,513)   371,927    (282,752)   113,129 
                     
Income tax expense   -    8,116    -    - 
                     
NET LOSS  $(115,513)  $380,043   $(282,752)  $113,129 
                     
Other comprehensive income                    
-  Foreign currency translation gain   (154)   222,810    16,360    223,891 
                     
COMPREHENSIVE LOSS   (115,667)   602,853    (266,392)   337,020 
                
Net loss per share - Basic and diluted  $-   $-   $-   $- 
                     
Weighted average common shares outstanding – basic and diluted   100,000,000    10,000,000    100,000,000    73,879,904 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Currency expressed in US Dollars (“US$”))

 

   Nine months ended September 30, 
   2012   2011 
         
Cash flow from operating activities:          
Net loss  $(282,752)  $113,129 
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation of plant and equipment   24,217    - 
Exchange loss   -    1,114 
Gain from disposal of a subsidiary   -    (555,403)
           
Changes in operating assets and liabilities:          
Restricted cash   -    182,304 
Accounts receivable   (696)   (3,356,273)
Inventories   (333,618)   (795,873)
Deposits and other receivables   (17,925)   (408,151)
Amount due from related parties   (54,047)   - 
Accounts payable   81,532    722,113 
Amount due to related parties   (117,313)   - 
Income tax payable   41    7,265 
Accrued liabilities and other payables   (77,394)   771,308 
Net cash used in operating activities   (777,955)   (3,318,467)
           
Cash flows from investing activities          
Purchase of plant and equipment   (11,768)   - 
Net cash used in investing activities   (11,768)   - 
           
Cash flows from financing activities:          
New Loan from third party   23,229    4,369,691 
Advance from related parties   -    (40,205)
Net cash provided by financing activities   23,229    4,329,486 
           
Effect of exchange rate changes on cash and cash equivalent   78,727    (315,192)
           
Net (decrease) /increase in cash and cash equivalents   (687,767)   695,827 
           
Cash and cash equivalents – beginning of period   917,724    91,834 
           
Cash and cash equivalents – end of period  $229,957   $787,661 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
           
Cash paid for income taxes  $-   $- 
           
Cash paid for interest  $-   $- 

 

See accompanying notes to unaudited condensed consolidated financial statement

 

7
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 1 – ORGANIZATION AND BACKGROUND

 

Titanium Group Limited (the “Company” or “TTNUF”) was incorporated as an International Business Company with limited liability in the British Virgin Islands (“BVI”) under the International Business Companies Act (“IBC Act”) of the British Virgin Islands on May 17, 2004 and subsequently registered under the BVI Business Companies Act (“BVIBC Act”) on January 1, 2007 when the IBC Act was repealed and replaced with the BVIBC Act. The Company, through its subsidiaries, mainly engages in the manufacture and sales of electric wire products in the PRC, with its principal place of business in Shenzhen City, the PRC.

 

On May 31, 2011, the Company closed on the transactions described in a Memorandum of Understanding dated September 1, 2010 and amended on November 18, 2010 and March 18, 2011 (the “MOU”). Under the terms of the MOU:

 

1.The Company agreed to effect a 1-for-10 consolidation of its issued and outstanding shares of common stock.

 

2.The holders of the Company’s outstanding convertible debentures in the aggregate principal amount of US$1,400,000 (HK$10,920,000) agreed to accept a total of 3,500,000 post-consolidation common shares as full and complete payment of the debentures and all accrued and unpaid interest thereon.

 

3.Zili Industrial Co., Limited, an entity owned and/or controlled by Mr. XU Zhigang, agreed to purchase 38,700,000 post-consolidation common shares and deposit the purchase price of US$387,000 into escrow.

 

4.Huabao Asia Limited, an entity owned and controlled by Mr. CHEN Tianju, agreed that it would transfer ownership of Shenzhen Kanglv Technology Company Limited (“Shenzhen Kanglv”) to the Company, in exchange for 52,635,560 post-consolidation common shares.

 

The stock exchange transaction has been accounted for as a reverse acquisition and recapitalization of the Company whereby Shenzhen Kanglv is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The accompanying condensed consolidated financial statements are in substance those of Shenzhen Kanglv, with the assets and liabilities, and revenues and expenses, of the Company being included effective from the date of stock exchange transaction. The Company is deemed to be a continuation of the business of Shenzhen Kanglv.

 

Shenzhen Kanglv Technology Company Limited (“Shenzhen Kanglv”) was registered as a limited liability company in Shenzhen City, the People’s Republic of China (the “PRC”) on June 16, 2005. Shenzhen Kanglv is mainly engaged in the manufacture and sales of electric wire products in the PRC, with its principal place of business in Shenzhen City, the PRC, which was commenced in August 2010. The Company is a sub-contractor to manufacture and sells the electric wire products to its single customer. Under the sub-contracting agreement between Shenzhen Kanglv and Cancare Electric Wire (Shanzhen) Co., Ltd (“Cancare”), which is controlled by the same individual of its majority owner, Cancare provided the core components and materials to Shenzhen Kanglv for the production and Shenzhen Kanglv exclusively sold these finished products, based upon the reauired specification and customization to Cancare at the current market value in the normal course of business.

 

8
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

Accordingly, the accompanying consolidated financial statements include the following:

 

1.The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost; and

 

2.The financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.

 

On 2 September, 2011, the subsidiary, Titanium Technology Limited, was winding up by the Hong Kong Special Administrative Region Government.

 

The Company entered into a share exchange agreement (“the agreement”) with Zili Industrial Co. Limited, Snow Hill Developments Limited and Cancare Investment Limited dated September 10, 2012. Under the terms of the agreement:

 

1.Zili agrees to sell to Snow Hill 20,000,000 restricted shares of the common stock, $0.01 par value, representing in aggregate of 20% of the total issued and outstanding shares of Titanium owned by Zili in Titanium (the “Titanium Exchange Shares”) in exchange (the “Exchange”) for 2,500,000 shares of Cancare Investment representing in aggregate 20% of the total issued and outstanding equity securities of Cancare Investment owned by Snow Hill in Cancare Investment (the “Cancare Exchange Shares”), a Hong Kong company unrelated to Titanium.

2.Concurrent with the share exchange transaction, Zili transferred the remaining 17,700,000 shares of common stock it held in the Company to Huabao Asia Limited (“Huabao”), representing in aggregate 17.7% of the issued and outstanding shares of the Company’s common stock. The transferred shares from Zili to Huabao constitutes approximately 17.7% of the issued and outstanding shares of the Company’s common stock, resulting in Huabao holding approximately 70.33% of the Company's issued and outstanding shares of common stock.

 

The accompanying consolidated financial statements present the financial position and results of operations of the Company. The Company’s functional currency is RMB, except otherwise indicated.

 

As of September, 2012, details of the Company’s subsidiaries are as follows:

 

Name  Date of
incorporation/
establishment
  Place of
incorporation/
registration
and operation
  Percentage of
equity interest
attributable to
the Company
   Principal activities
              
Hong Kong Kanglv Technology Limited  September 17, 2010  Hong Kong   100%  Investment holding
               
Shenzhen Kanglv Technology  Limited  June 16, 2005  PRC   100%  Manufacture and sales of electric wire products
               
Kanglv Cable Technology (Hong Kong) Limited  September 17,2010  Hong Kong
   100%  Dormant

 

9
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 2 - Summary of Significant Accounting Policies

 

· Basis of presentation

 

These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

 

· Use of estimates

 

In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

 

 · Cash and cash equivalents

 

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

 

· Accounts receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. For nine months ended September 30, 2012 and 2011, the Company did not record an allowance for doubtful accounts.

 

· Inventories

 

Inventories consist primarily of raw materials, work-in-process and finished goods of electric wire products and are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Costs include material, direct labor and manufacturing overhead costs. Allowance for slow-moving and obsolescence is an estimate amount based on an analysis of current business and economic risks, the duration of the inventories held and other specific identifiable risks that may indicate a potential loss. The allowance is reviewed regularly to ensure that it adequately provides for all reasonable expected losses. For nine months ended September 30, 2012 and 2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

 

· Plant and equipment

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

   Depreciable life  Residual value 
Plant and machinery  5-12 years   5%
Furniture, fittings and office equipment  9-12 years   5%
Motor vehicles  9-12 years   5%

 

Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statement of operations.

 

10
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 2 - Summary of Significant Accounting Policies (Continued)

 

· Impairment of long-lived assets

 

In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment held by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment charge for the years presented.

 

· Revenue recognition

 

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.

 

(a)   Sales of products

 

The Company has adopted ASC Topic 605-45, “Principal Agent Considerations” (“ASC Topic 605-45”) whereby the Company evaluates to determine whether the transaction should be recorded on a gross basis as a principal or net basis as an agent. This evaluation includes, but not limited to, assessing whether the Company (1) or third-party supplier is a primary obligor in the arrangement, (2) has general inventory risk, (3) has latitude in establishing pricing, (4) has discretion in supplier selection, (5) has credit risk and (6) acts as an agent or broker with compensation on a commission or fixed fee basis.

 

Based on its assessment of the indicators listed in the ASC Topic 605-45, the Company has concluded that the existing business should be accounted for on a gross basis. The Company assumes the position of primary obligor and thus will recognize revenue on the gross amount billed to the customers when persuasive evidence of an arrangement exists, the products are delivered, the fee is fixed and determined and the collection of the resulting receivable is probable. Revenue from the sale of electric wire products is recognized when the products are delivered to and received by the customers, collectability is reasonably assured and the prices are fixed and determinable.

 

Revenue represents the invoiced value of goods, net of value-added tax (“VAT”). The Company's products that are locally sold in the PRC are subject to VAT which is levied at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

(b)   Interest income

 

Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

 

· Cost of revenue

 

Cost of revenue includes cost of raw materials, direct labor, packing cost and production overhead directly attributable to the manufacture of electric wire products. Shipping and handling cost are recorded in cost of revenue and are recognized when the related product is delivered to the customer.

11
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 2 - Summary of Significant Accounting Policies (Continued)

 

· Advertising expenses

 

Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. There was no advertising cost incurred for nine months ended September 30, 2012 and 2011.

 

· Comprehensive income or loss

 

ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income or loss, its components and accumulated balances. Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of owners’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income or loss is not included in the computation of income tax expense or benefit.

 

· Income taxes

 

Income taxes are determined with the provisions of ASC Topic 740, “Income Taxes” (“ASC Topic 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC Topic 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC Topic 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the nine months ended September 30, 2012 and 2011, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2012 and 2011, the Company did not have any significant unrecognized uncertain tax positions.

 

The Company conducts its major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority.

12
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 2 - Summary of Significant Accounting Policies (Continued)

 

· Foreign currencies translation

 

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. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations.

 

The reporting currency of the Company is the United States Dollars (“US$”) and the accompanying financial statements have been expressed in US$. The Company maintains its books and record in its local currency, Renminbi Yuan (“RMB”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. In accordance with ASC Topic 830-30, “Translation of Financial Statement”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements are recorded as a separate component of accumulated other comprehensive income within the statements of owners’ equity.

 

Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates for the respective year:

 

   September 30,
2012
   December
31, 2011
 
Year-end RMB: US$1 exchange rate   6.3190    6.3523 
Annual average RMB: US$1 exchange rate   6.3085    6.4544 

 

· Retirement plan costs

 

Contributions to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the statements of operation and comprehensive loss as and when the related employee service is provided.

 

· Related parties

 

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

 

· Segment reporting

 

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the nine months ended September 30, 2012 and 2011, the Company operates in one reportable business segment in the PRC.

13
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 2 - Summary of Significant Accounting Policies (Continued)

 

· Fair value of financial instruments

 

The carrying value of the Company’s financial instruments: cash, accounts receivable, prepayments and other current assets, accounts payable, amount due from (to) a related party and the owner, accrued liabilities and other payables approximate at their fair values because of the short-term nature of these financial instruments.

 

The Company also follows the guidance of ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

 

  Level 1 : Observable inputs such as quoted prices in active markets;

 

  Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

  Level 3 : Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions

 

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

14
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

2.Summary of Significant Accounting Policies (Continued)

 

Recently issued accounting pronouncements

 

Fair Value Measurement

 

In May 2011, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards ("IFRS"). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation process used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity's use of a nonfinancial asset that is different from the asset's highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. This update is effective for annual and interim periods beginning on or after December 15, 2011. The effect of ASU 2011-04 on the consolidated financial statements and related disclosures is not expected to be significant.

 

Comprehensive Income

 

In June 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 220). ASU 2011-05 gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. This update is effective for annual and interim periods beginning on or after December 15, 2011. The effect of ASU 2011-05 on the consolidated financial statements and related disclosures is not expected to be significant.

 

Intangibles—Goodwill and Other

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350) that permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two step goodwill impairment test. The updated guidance requires that, if an entity concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount; it would not be required to perform the two-step impairment test for the reporting unit. The provisions of the updated guidance are effective for annual and interim periods beginning after December 15, 2011 with early adoption permitted. The Company adopted ASU 2011-08 in the third quarter of 2011. The adoption of this guidance did not affect the Company's results of operations, financial position or liquidity.

 

15
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

2.Summary of Significant Accounting Policies (Continued)

 

Recently issued accounting pronouncements (continued)

 

Disclosures about Offsetting Assets and Liabilities

 

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amendments are effective for annual reporting periods beginning on or after January 1, 2013. An entity would be required to provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU will not impact our results of operations.

 

NOTE 3 – GOING CONCERN UNCERTAINTIES

 

These consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

 

For the nine months ended September 30, 2012, the Group incurred accumulated losses of US$ 1,182,959 and a shareholders’ deficit of US$166,599) at that date. The continuation of the Group as a going concern through September 30, 2013 is dependent upon the continuing financial support from its stockholders. Management believes the existing majority stockholders will provide the additional cash to meet with the Company’s obligations as they become due.

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.

 

NOTE 4 – AMOUNT DUE FROM RELATED PARTIES

 

The amounts due from related parties were unsecured, interest-free and repayable on demand.

16
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 5 – INCOME TAXES

 

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the nine months ended September 30, 2012 and 2011, the components of loss before income taxes were comprised of the following:

 

   Nine months ended September 30 
   2012   2011 
Tax jurisdictions from:          
           
– BVI  $(121,918)  $474,231 
– Hong Kong   (42,260)   (248,874)
– The PRC   (118,574)   (112,228)
           
 (Loss) / Profit before income taxes  $(282,752)  $113,129 

 

Pursuant to the rules and regulations of the BVI, Titanium Group Limited which is incorporated in the BVI is not subject to taxation in the BVI under the current BVI law.

 

For the nine months ended September, 2012, the operations in Hong Kong and the PRC incurred the aggregate net operating losses carry forward of US$133,210 that may be used to offset future taxable income. The Company has provided for a valuation allowance in full amount of deferred tax assets as there is no assurance of future taxable income.

 

During the nine months ended September 30, 2011, Shenshen Kanglv Technology incurred income tax US$8,116, at a unified income tax rate of 25%.

17
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 6 – INVENTORIES

 

Inventories consist of the following:

 

   September 30,
2012
   December 31,
2011
 
         
Raw materials  $190,680   $255,565 
Work-in-process   183,355    46,858 
Finished goods   702,670    441,664 
           
Inventories, net  $1,077,705   $744,087 

 

As of September 30, 2012, the Company recorded no allowance for slow-moving and obsolete inventories.

 

NOTE 7 – AMOUNTS DUE FROM RELATED PARTIES

 

   September 30,
2012
   December 31,
2011
 
           
Cancare Electric Wire (Shenzhen) Co., Ltd  $4,971,617    4,917,570 

 

As of September 30, 2012, the balance represented the temporary advances made by the Company to Cancare Electric Wire (Shenzhen) Co., Ltd., which is controlled by common key management personnel. The amounts were unsecured, interest-free and repayable on demand.

 

NOTE 8 - DEPOSITS AND OTHER RECEIVABLES

 

Deposits and other receivables consisted of the following:

 

   September 30,
2012
   December 31,
2011
 
         
Prepayment  $738   $4,559 
Other receivables   140,798    119,052 
           
   $141,536   $123,611 

 

18
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 9 – PLANT AND EQUIPMENT

 

Plant and equipment consist of the following:

 

   September 30,
2012
   December 31,
2011
 
         
Plant and machinery  $224,896   $213,128 
Furniture, fittings and office equipment   2,583    2,583 
Motor vehicles   20,448    20,448 
Foreign translation difference   13,758    13,758 
    261,685    249,917 
Less: accumulated depreciation   (84,121)   (59,904)
Less: foreign translation difference   194    (843)
   $177,758   $189,170 

 

NOTE 10 – AMOUNTS DUE TO RELATED PARTIES

 

   September 30,
2012
   December 31,
2011
 
         
Amount due to a former director, Mr. Wen Jialong  $50,641   $50,376 
Amount due to Cancare Electric Wire (Shenzhen) Co., Ltd   -    293,958 
Amount due to former owner, Cancare Enterprise Co., Limited   1,042,215    980,574 
Amount due to Huabao Asia Limited   25,641    - 
Amount due to Cancare Group HK Limited   89,098    - 
   $1,207,595   $1,324,908 

 

As of September 30, 2012, the amounts due to related parties represented temporary advances made to the Company, which were unsecured, interest-free and repayable within the next twelve months.

 

NOTE 11– ACCRUED LIABILITIES NAD OTHER PAYABLE

 

Accrued liabilities and other payables consist of the following:

 

   September 30,
 2012
   December 31,
2011
 
         
Accrued salaries and benefits  $183,336   $181,009 
Accrued operating expenses   45,167    40,707 
VAT payable   16,394    87,674 
Other payable   78,720    111,621 
           
   $323,617   $421,011 
19
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 12– SHORT-TERM SECURED BANK LOAN

 

The bank loan is denominated in Renminbi and repayable within 1 year. It carries interest at 7.544% per annum and is guaranteed by (i) Mr. Wen Jialong, who does not receive any compensation for acting as guarantor; (ii) the property owned by the third party, 史蒂文服裝(堔圳)有限公司, who does not receive any compensation for the guarantee.

 

NOTE 13– RELATED PARTY TRANSACTIONS

 

(a) For the three months ended September 30, 2012 and 2011 the Company sold its products at its current market value totaling $908,295, $2,021,438 and for the nine months ended September 30, 2012 and 2011 was totaling $3,083,674 and $4,197,062 to a related company which is controlled by the majority owner of the Company in a normal course of business.

 

(b) For the three months ended September 30, 2012 and 2011 there have purchase from a related party totaling $582,346 and $nil and for the nine months ended September 30, 2012 and 2011, was totaling $1,637,986 and $nil from a related company which is controlled by the majority owner of the Company in a normal course of business. .

 

(c) For the three months ended September 30, 2012 and 2011 there have no interest income from a related party. For the nine months ended September 30, 2012 and 2011, the Company received an interest income totaling, $182,294 and $ nil from a related party.

 

NOTE 14– CONCENTRATIONS OF RISK

 

The Company is exposed to the following concentrations of risk:

 

(a)Major customers

 

For the three months ended September 30, 2012, there was a single customer who accounted for 100% of the Company’s revenue amounting to $908,295 with accounts receivable balance of $nil at period-end date.

 

For the nine months ended September 30, 2012, there was a single customer who accounted for 100% of the Company’s revenue amounting to $3,083,674 with accounts receivable balance of $nil at period-end date.

 

20
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 14– CONCENTRATIONS OF RISK (CONTINUED)

 

(b)Major vendors

 

For the three months and nine months ended September 30, 2012, the vendor who accounted for 10% or more of the Company’s purchases and its outstanding balance at period-end date, are presented as follows:

 

   Three months ended September 30, 2012   September 30,
2012
 
   Purchases   Percentage
of purchases
   Accounts
payable, trade
 
             
Vendor A (a related party)  $582,346    55%   145,093 
Vendor B   128,905    14%   203,397 
                
Total:  $711,251    69%   348,490 

 

   Nine months ended September 30,
2012
   September 30,
2012
 
   Purchases   Percentage
of purchases
   Accounts
payable, trade
 
             
Vendor A (a related party)  $1,637,986    53%   145,093 
Vendor B   354,285    11%   203,397 
                
Total:  $1,992,271    64%   348,490 

 

(c)Credit risk

 

Financial instruments that are potentially subject to credit risk consist principally of accounts receivable. The Company believes the concentration of credit risk in its accounts receivable is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

(d)Exchange rate risk

 

The reporting currency of the Company is US$, while the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

21
 

 

TITANIUM GROUP LIMITED AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Currency expressed in US Dollars (“US$”))

 

NOTE 14– CONCENTRATIONS OF RISK (CONTINUED)

 

(e)Economic and political risks

 

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.

 

The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

 

NOTE 15– SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, We have evaluated significant events and transactions that occurred after September 30, 2012 through the date of the condensed consolidated financial statements were issued and filed with this Form 10-Q. During the period, the Company did not have any material recognizable subsequent events.

 

22
 

 

  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of the Company for the nine months ended September 30, 2012 and 2011, and should be read in conjunction with such financial statements and related notes included in this report. Those statements in the following discussion that are not historical in nature should be considered to be forward looking statements that are inherently uncertain. Actual results and the timing of the events may differ materially from those contained in these forward looking statements due to a number of factors, including those discussed in the “Forward-Looking Statements” set forth elsewhere in this Quarterly Report on Form 10-Q.

  

Overview

  

Shenzhen Kanglv Technology Company Limited (“Shenzhen Kanglv” and the “Company”) was registered as a limited liability company in Shenzhen City, the People’s Republic of China (the “PRC”) on June 16, 2005. Shenzhen Kanglv is mainly engaged in the manufacture and sales of electric wire products in the PRC, with its principal place of business in Shenzhen City, the PRC, which was commenced in August 2010. The Company is a sub-contractor to manufacture and sells the electric wire products to its single customer. Under the sub-contracting agreement between Shenzhen Kanglv and Cancare Electric Wire (Shanzhen) Co., Ltd (“Cancare”), which is controlled by the same individual of its majority owner, Cancare provided the core components and materials to Shenzhen Kanglv for the production and Shenzhen Kanglv exclusively sold these finished products, based upon the required specification and customization to Cancare at the current market value in the normal course of business.

 

On May 31, 2011, Shenzhen Kanglv entered into a Memorandum of Understanding dated September 1, 2010 and amended on November 18, 2010 and March 18, 2011 (the “ MOU ”) with Titanium Group Limited (“TTNUF”), which was incorporated as an International Business Company with limited liability in the British Virgin Islands (“BVI”) under the International Business Companies Act (“IBC Act”) of the British Virgin Islands on May 17, 2004 and subsequently registered under the BVI Business Companies Act (“BVIBC Act”) on January 1, 2007 when the IBC Act was repealed and replaced with the BVIBC Act. TTNUF, through its subsidiaries, mainly engages in the manufacture and sales of electric wire products in the PRC, with its principal place of business in Shenzhen City, the PRC.

  

As used herein, the “Group” refers to TTNUF and its wholly-owned subsidiaries, Hong Kong Kanglv Technology Limited, Shenzhen Kanglv Technology Limited and Kanglv Cable Technology (Hong Kong) Limited.

  

Pursuant to the MOU, TTNUF agreed to issue 52,635,560 common shares to Huabao Asia Limited, an entity owned and controlled by Mr. CHEN Tianju, in exchange of the ownership of Shenzhen Kanglv. Although Shenzhen Kanglv became TTNUF’s wholly-owned subsidiary, the transaction was accounted for as a recapitalization in the form of a reverse merger of Shenzhen Kanglv, whereby Shenzhen Kanglv was deemed to be the accounting acquirer and was deemed to have retroactively adopted the capital structure of TTNUF. Since the transaction was accounted for as a reverse merger, the accompanying consolidated financial statements reflect the historical consolidated financial statements of Shenzhen Kanglv for all periods presented, and do not include the historical financial statements of TTNUF.

 

23
 

 

Pursuant to the MOU, TTNUF also agreed the following terms:

 

1.TTNUF agreed to effect a 1-for-10 consolidation of its issued and outstanding shares of common stock.

 

2.The holders of TTNUF’s outstanding convertible debentures in the aggregate principal amount of US$1,400,000 (HK$10,920,000) agreed to accept a total of 3,500,000 common shares as full and complete payment of the debentures and all accrued and unpaid interest thereon.

 

3.Zili Industrial Co., Limited, an entity owned and/or controlled by Mr. XU Zhigang, agreed to purchase 38,700,000 common shares and deposit the purchase price of US$387,000 into escrow.

 

On May 31, 2011, the acquisition of Shenzhen Kanglv was completed, and the business of Shenzhen Kanglv was adopted as the Company’s business.  As such, the following discussion is focused on the current and historical operations of Shenzhen Kanglv, and excludes prior operations of Titanium Group Limited.

  

Shenzhen Kanglv is engaged in the manufacture and sales of electronic cable products in the PRC, with its principal place of business in Shenzhen City, the PRC.  Its principal products are various types of computer cables, such as HDMI, DVI, VGA and USB cables, as well as electric power cables.

  

Shenzhen Kanglv is a subcontractor for Cancare Electric Wire (Shenzhen) Co., Ltd., an affiliate (“Cancare Electric”), and manufactures the products for Cancare Electric to its specifications and customization requirements.  Cancare Electric provides the core components and materials to Shenzhen Kanglv.  Cancare Electric sells the products to companies in the PRC, such as Great Wall Tech, Chi- Yuan Technology Limited, and Ya Lida Company limited.

  

On 2 September, 2011, the subsidiary, Titanium Technology Limited, was winding up by the Hong Kong Special Administrative Region Government.

  

The Company entered into a share exchange agreement (“the agreement”) with Zili Industrial Co. Limited, Snow Hill Developments Limited and Cancare Investment Limited dated September 10, 2012. Under the terms of the agreement:

  

3.Zili agrees to sell to Snow Hill 20,000,000 restricted shares of the common stock, $0.01 par value, representing in aggregate of 20% of the total issued and outstanding shares of Titanium owned by Zili in Titanium (the “Titanium Exchange Shares”) in exchange (the “Exchange”) for 2,500,000 shares of Cancare Investment representing in aggregate 20% of the total issued and outstanding equity securities of Cancare Investment owned by Snow Hill in Cancare Investment (the “Cancare Exchange Shares”), a Hong Kong company unrelated to Titanium.

  

4.Concurrent with the share exchange transaction, Zili transferred the remaining 17,700,000 shares of common stock it held in the Company to Huabao Asia Limited (“Huabao”), representing in aggregate 17.7% of the issued and outstanding shares of the Company’s common stock. The transferred shares from Zili to Huabao constitutes approximately 17.7% of the issued and outstanding shares of the Company’s common stock, resulting in Huabao holding approximately 70.33% of the Company's issued and outstanding shares of common stock.

 

24
 

 

Accordingly, the accompanying condensed consolidated financial statements include the following:

 

The condensed consolidated balance sheets, consolidated statements of operations and comprehensive loss, and condensed consolidated statements of cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.

 

As of June, 2012, details of the Company’s subsidiaries are as follows:

 

Name     Date of incorporation/ establishment   Place of incorporation/   registration and operation     Percentage of equity interest attributable to the Company     Principal activities  
                 
Hong Kong Kanglv Technology Limited   September 17, 2010   Hong Kong   100%   Investment holding
                 
Shenzhen Kanglv Technology Limited   June 16, 2005   PRC   100%   Manufacture and sales of electric wire products
                 
Kanglv Cable Technology (Hong Kong) Limited   September 17, 2010   Hong Kong         100%   Dormant

 

Critical Accounting Policies

 

Inventories.  Inventories consist primarily of raw materials, work-in-process and finished goods of electric wire products and are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis.  Costs include material, direct labor and manufacturing overhead costs.  Allowance for slow-moving and obsolescence is an estimated amount based on an analysis of current business and economic risks, the duration of the inventories held and other specific identifiable risks that may indicate a potential loss.  The allowance is reviewed regularly to ensure that it adequately provides for all reasonable expected losses.  For the nine month ended September 30, 2012 and 2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

 

25
 

 

Revenue Recognition.  In accordance with ASC Topic 605, “Revenue Recognition,” the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.

 

(a) Sales of products – Revenue from the sales of electric wire products is recognized when the products are delivered to and received by the customers, collectability is reasonably assured and the prices are fixed and determinable.

 

Revenue represents the invoiced value of goods, net of value-added tax (“VAT”).  The Company’s products that are locally sold in the PRC are subject to VAT, which is levied at the rate of 17% on the invoiced value of sales.  Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

(b) Interest income – Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

 

Cost of revenue.  Cost of revenue includes cost of raw materials, direct labor, packing cost and production overhead directly attributable to the manufacture of electric wire products.  Shipping and handling cost are recorded in cost of revenue and are recognized when the related product is delivered to the customer.

 

Comprehensive income or loss.  ASC Topic 220, “Comprehensive Income,” establishes standards for reporting and display of comprehensive income or loss, its components and accumulated balances.  Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources.  Accumulated comprehensive income, as presented in the statements of owners’ equity consists of changes in unrealized gains and losses on foreign currency translation.  This comprehensive income or loss is not included in the computation of income tax expense or benefit.

 

Income taxes.  Income taxes are determined with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”).  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

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ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return.  Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the nine months period ended September 30, 2012 and 2011, the Company did not have any interest and penalties associated with tax positions.  As of September 30, 2012 and 2011, the Company did not have any significant unrecognized uncertain tax positions.

 

The Company conducts its major businesses in the PRC and is subject to tax in this jurisdiction.  As a result of its business activities the Company files tax returns that are subject to examination by the local tax authority. 

 

Foreign currencies translation.  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.  Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates.  The resulting exchange differences are recorded in the statements of operations.

  

The reporting currency of the Company is the United States Dollar (“US$”) and the financial statements of the Company have been expressed in US$.  The Company maintains its books and records in its local currency, Renminbi Yuan (“RMB”), which is a functional currency as being the primary currency of the economic environment in which its operations are conducted.  In accordance with ASC Topic 830-30, “Translation of Financial Statement,” assets and liabilities of a company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date.  Revenues and expenses are translated at average rates prevailing during the period.  The gains and losses resulting from translation of financial statements are recorded as a separate component of accumulated other comprehensive income within the statements of owners’ equity.

  

Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates for the respective periods:

  

   September 30, 2012   December 31, 2011 
Year-end RMB: US$1 exchange rate   6.3190    6.3523 
Annual average RMB: US$1 exchange rate   6.3085    6.4544 

 

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Related Parties.  Parties, which can be a corporation or individual, are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions.  Companies are also considered to be related if they are subject to common control or common significant influence.

  

Results of Operations

  

Comparison of three months ended September 30, 2012 and September 30, 2011. 

 

Net revenue for three months ended September 30, 2012 were US$908,295 compared to US$2,021,438 for the three months ended September 30, 2011, a decrease of 55.1%. The decrease in net revenue for the three months ended September, 2012 over the three month ended September 30, 2011 was mainly due to worldwide economic slow down in 2012 and customers demand decreased.

  

Cost of revenue was US$938,998 for the three months ended September 30, 2012 as compared to US$2,048,672 for the comparable period ended September 30, 2011, a decrease of 54.2% which was in line with the decrease of revenue of the period.

  

Gross loss for the three months ended September 30, 2012 was US$30,703 compared to gross loss of US$27,234 for the comparable period in 2011.

  

Selling, general and administrative expenses were US$42,768, or 4.7%% of net revenue, for the three months ended June 30, 2012, compared to US$167,164, or 8.3% of net revenue, for the comparable period in 2011. The decrease was mainly attributable to better control on expenses.

  

Net interest expenses increased significantly to US$41,0050 for the three months ended September 30, 2012, as compared to net interest income of US$10,922 for the respective comparable period in 2011. The increase was primarily due to bank loan drawdown by end of 2011.

  

Net loss for the three months ended September 30, 2012 was US$115,510 compared to a net income of US$380,043 for the comparable period in 2011 which was mainly due to US$555,403 gain on disposal of a subsidiary in 2011.

  

Comparison of nine months ended September 30, 2012 and September 30, 2011. 

 

Net revenue for nine months ended September 30, 2012 were US$3,083,674 compared to US$4,197,062 for the nine months ended September 30, 2011, a decrease of 26.5%. The decrease in net revenue for the nine months ended September, 2012 over the nine month ended September 30, 2011 was mainly due to decrease in customer demand in 2012 as a result of worldwide economic slow down.

 

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Cost of revenue was US$3,119,102 for the nine months ended September 30, 2012 as compared to that of US$4,187,901 for nine months ended September 30, 2011, a decrease of 25.5% which was in line with the decrease in net revenue.

  

There was a gross loss of US$35,428 for the nine months ended September 30, 2012, compared to gross income of US$9,161 for the comparable period in 2011. The gross loss was mainly due to the significant decrease in revenue and increase of raw material cost in 2012.

  

Selling, general and administrative expenses were US$223407, or 7.3% of net revenue, for the nine months ended September 30, 2012, compared to US$451,052, or 10.7% of net revenue, for the comparable period in 2011. The decrease was mainly attributable to better control on expenses.

  

Net interest expenses increased significantly to US$60,721 for the nine months ended September 30, 2012, as compared to net interest expenses of US$383 for the respective comparable period in 2011. The increase was primarily due to bank loan drawdown by end of 2011.

  

Net loss for the nine months ended September 30, 2012 was US$282,749, compared to a net income of US$113,129 for the comparable period in 2011 which was mainly attributable to US$555,403 gain on disposal of a subsidiary in 2001.

  

Going Concern

 

As at September 30, 2012, the Company recorded an accumulated deficit of US$166,599. The continuation of the Company as a going concern is dependent upon the continuing financial support from its stockholders. Management believes, the existing stockholders will provide the additional cash to meet with the Company’s obligations as they become due.

 

Liquidity and Capital Resources   

 

At September 30, 2012, the company had cash of US$229,957, as compared to cash of US$917,724 at December 31, 2011. Amounts owed to related parties at September 30, 2012 were US$1,077,705 as compared to that of US$1,324,908 at December 31, 2011.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures as required under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of September 30, 2012, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2012.  The Company does not have a Chief Financial Officer that is familiar with the accounting and reporting requirements of a U.S. publicly-listed company, nor does it have a financial staff with accounting and financial expertise in U.S. generally accepted accounting principles (“US GAAP”) reporting. In addition, the Company does not believe it has sufficient documentation concerning its existing financial processes, risk assessment and internal controls. There are also certain deficiencies in the design or operation of the Company’s internal control over financial reporting that has adversely affected its disclosure controls that may be considered to be “material weaknesses.”

 

We plan to designate individuals responsible for identifying reportable developments and to implement procedures designed to remediate the material weakness by focusing additional attention and resources on our internal accounting functions. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

 

Item 1A. Risk Factors

  

The purchase of our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2011 Form 10-K”), our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this report, and our consolidated financial statements and related notes included in Item 1 of Part I of this report.  Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.

 

Item 6 - Exhibits

 

The following exhibits are filed with this report:

  

31.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CHINA ELECTRONICS HOLDINGS, INC.  
     
  By: /s/ Huaming Lai  
  Name:   Huaming Lai  
  Title:   Chief Executive Officer and President
(principal executive officer) & Chief Financial Officer (principal financial officer and principal accounting officer)  
 

 

Date:  December 4, 2012

 

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