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EX-31.2 - EXHIBIT 31.2 - Eagle Mountain Corpv360967_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Eagle Mountain Corpv360967_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Eagle Mountain Corpv360967_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - Eagle Mountain Corpv360967_ex32-2.htm

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
  (Mark One)
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
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: 000-50140
 
USmart Mobile Device Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
16-1642709
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
   
 
Room 1703, 17/F., Tower 1, Enterprise Square,
 
 
9 Sheung Yuet Road, Kowloon Bay,
 
 
Kowloon, Hong Kong.
 
 
(Address of principal executive offices) (Zip code)
 
 
 
 
 
011-852-3666-9939
 
 
(Registrant’s telephone number including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                           
Yes þ   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                                                                                                     
Yes  þ   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
þ
(Do not check if a 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  þ 
 
The Registrant had 39,684,495 shares of common stock outstanding as of November 14, 2013.
 
 
  
TABLE OF CONTENTS
   
 
 
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
1
 
 
 
 
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
1
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
1
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
3
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
4
 
 
 
 
 
 
 
 
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
6
 
 
 
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
31
 
 
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
42
 
 
 
 
 
 
 
 
Item 4.
Controls and Procedures
 
43
 
 
 
 
 
 
PART II
OTHER INFORMATION
 
44
 
 
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
44
 
 
 
 
 
 
 
 
Item 1A.
Risk Factors
 
44
 
 
 
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
44
 
 
 
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
44
 
 
 
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
44
 
 
 
 
 
 
 
 
Item 5.
Other Information
 
44
 
 
 
 
 
 
 
 
Item 6.
Exhibits
 
45
 
 
 
 
 
 
SIGNATURES
 
 
 
46
 
 
 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Item 1.                    Financial Statements
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
Notes
 
As of
September 30, 2013
(Unaudited)
 
As of 
December 31, 2012
(Audited)
 
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
$
743,020
 
$
639,462
 
Restricted cash
 
 
 
 
0
 
 
838,413
 
Accounts receivable, net of allowance for doubtful accounts of $98,061 for 2013 and 2012
 
 
 
 
743,719
 
 
1,227,703
 
Amount due from related companies
 
 
 
 
550,131
 
 
0
 
Inventories, net
 
3
 
 
1,134,508
 
 
4,616,148
 
Other current assets
 
 
 
 
748,620
 
 
776,868
 
 
 
 
 
 
 
 
 
 
 
Total current assets
 
 
 
$
3,919,998
 
$
8,098,594
 
 
 
 
 
 
 
 
 
 
 
Long-term assets:
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
4
 
 
8,414,801
 
 
9,586,055
 
Investments in a jointly-controlled entity
 
14
 
 
3,701,506
 
 
2,818,307
 
Intangible assets
 
16
 
 
5,670,562
 
 
11,341,123
 
Other deposits
 
 
 
 
142,465
 
 
165,325
 
Amounts due from Aristo / Mr. Yang
 
7
 
 
1,969,838
 
 
3,658,359
 
 
 
 
 
 
 
 
 
 
 
TOTAL ASSETS
 
 
 
$
23,819,170
 
$
35,667,763
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
 
 
 
$
399,262
 
$
358,006
 
Amount due to related companies
 
 
 
 
0
 
 
9,209,313
 
Accruals
 
 
 
 
421,467
 
 
375,513
 
Lines of credit and loan facilities
 
8
 
 
1,914,685
 
 
8,319,321
 
Bank loans
 
9
 
 
5,099,079
 
 
6,099,309
 
Loan from a third party (current portion)
 
11
 
 
641,026
 
 
0
 
Current portion of capital lease
 
5
 
 
80,376
 
 
96,506
 
Income tax payable
 
 
 
 
(177,291)
 
 
(177,291)
 
Due to shareholders for converted pledged collateral
 
 
 
 
112,385
 
 
112,385
 
Other current liabilities
 
10
 
 
16,353,908
 
 
12,386,002
 
 
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
 
$
24,844,897
 
$
36,779,064
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
1

 
 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
Notes
 
As of
September 30, 2013
(Unaudited)
 
As of
December 31, 2012
(Audited)
 
Long-term liabilities
 
 
 
 
 
 
 
 
 
Loan from a third party, non-current portion
 
11
 
 
6,410,256
 
 
0
 
Capital lease, less current portion
 
5
 
$
75,003
 
 
133,428
 
Deferred tax liabilities
 
 
 
 
5,569
 
 
74,289
 
 
 
 
 
 
 
 
 
 
 
Total long-term liabilities
 
 
 
 
6,490,828
 
 
207,717
 
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES
 
 
 
$
31,335,725
 
 
36,986,781
 
 
 
 
 
 
 
 
 
 
 
NET ASSETS (LIABILITIES)
 
 
 
$
(7,516,555)
 
 
(1,319,018)
 
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
$
0
 
$
0
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Preferred stock, 20,000,000 shares authorized; 0 shares issued
and outstanding as of September 30, 2013 and December 31,
2012
 
 
 
$
0
 
$
0
 
Common stock, $0.001 par value; 50,000,000 shares
authorized; 39,684,495 and 39,474,495 shares issued and
outstanding as of September 30, 2013 and December 31, 2012
 
 
 
 
39,685
 
 
39,475
 
Additional paid in capital
 
 
 
 
4,333,723
 
 
4,321,333
 
Exchange reserve
 
 
 
 
(1,810)
 
 
2,072
 
Retained earnings (deficits)
 
 
 
 
(9,466,411)
 
 
(3,539,251)
 
 
 
 
 
 
(5,094,813)
 
 
823,629
 
Non-controlling interest
 
 
 
 
(2,421,742)
 
 
(2,142,647)
 
 
 
 
 
 
 
 
 
 
 
TOTAL STOCKHOLDERS’ EQUITY
 
 
 
$
(7,516,555)
 
$
(1,319,018)
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
2

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
Notes
 
September 30,
2013
(Unaudited)
 
September 30,
2012
(Unaudited)
 
September 30,
2013
(Unaudited)
 
September 30,
2012
(Unaudited)
 
Net sales
 
 
 
$
19,859,776
 
$
49,488,031
 
$
59,327,919
 
$
123,266,932
 
Costs of sales
 
 
 
 
19,569,973
 
 
48,626,491
 
 
58,957,261
 
 
121,650,790
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit (loss)
 
 
 
$
289,803
 
$
861,540
 
$
370,658
 
$
1,616,142
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and distribution costs
 
 
 
 
34,673
 
 
69,580
 
 
104,392
 
 
237,220
 
General and administrative expenses
 
 
 
 
1,283,968
 
 
1,089,389
 
 
3,357,584
 
 
3,228,567
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
 
 
$
(1,028,838)
 
$
(297,429)
 
$
(3,091,318)
 
$
(1,849,645)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other expenses (income)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
 
 
 
(42,605)
 
 
(54,125)
 
 
(131,365)
 
 
(144,510)
 
Interest expenses
 
 
 
 
295,241
 
 
265,807
 
 
720,745
 
 
700,567
 
Management and service income
 
 
 
 
(75,035)
 
 
11,589
 
 
(159,703)
 
 
(71,284)
 
Interest income
 
 
 
 
(208)
 
 
(572)
 
 
(1,278)
 
 
(2,165)
 
Loss (profit) on disposals of fixed assets
 
 
 
 
0
 
 
0
 
 
(1,872,724)
 
 
(256)
 
Exchange differences
 
 
 
 
(35,214)
 
 
(5,709)
 
 
(38,910)
 
 
(10,469)
 
Reverse for provision of doubtful account
 
 
 
 
 
 
 
(1,648,390)
 
 
0
 
 
(1,648,390)
 
Miscellaneous
 
 
 
 
(13,234)
 
 
(36,803)
 
 
(120,470)
 
 
(113,895)
 
Amortization of intangible assets
 
16
 
 
5,670,561
 
 
0
 
 
5,670,561
 
 
0
 
Share result of a jointly-controlled entity
 
14
 
 
(313,142)
 
 
(16,985)
 
 
(883,199)
 
 
238,371
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
 
 
$
(6,515,202)
 
$
1,187,759
 
$
(6,274,975)
 
$
(797,614)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes provision (reversal)
 
 
 
 
(68,720)
 
 
32,950
 
 
(68,720)
 
 
32,950
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
$
(6,446,482)
 
$
1,154,809
 
$
(6,206,255)
 
$
(830,564)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend paid
 
 
 
 
0
 
 
0
 
 
0
 
 
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(6,446,482)
 
$
1,154,809
 
$
(6,206,255)
 
$
(830,571)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-controlling interest
 
 
 
 
(141,586)
 
 
0
 
 
(279,095)
 
 
0
 
Shareholders of the Company
 
 
 
 
(6,304,896)
 
 
1,154,809
 
 
(5,927,160)
 
 
(830,564)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(6,446,482)
 
$
1,154,809
 
$
(6,206,255)
 
$
(830,564)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share – basic and diluted
 
 
 
$
(0.17)
 
$
0.04
 
$
(0.16)
 
$
(0.03)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares – basic and diluted
 
13
 
 
38,591,443
 
 
31,694,916
 
 
38,591,443
 
 
31,694,916
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
As of 
 
As of 
 
 
 
 
 
September 30, 2013
 
September 30, 2012  
 
 
 
Notes
 
(Unaudited)
 
(Unaudited)
 
Cash flows provided by (used for) operating activities :
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
$
(6,206,255)
 
$
(830,564)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:
 
 
 
 
 
 
 
 
 
Reversal for provision of doubtful account
 
 
 
 
0
 
 
1,648,390
 
Depreciation and amortization
 
 
 
 
512,587
 
 
362,647
 
Change in inventory reserve
 
 
 
 
(177,286)
 
 
0
 
Loss (gain) on disposal of fixed assets
 
 
 
 
(1,872,724)
 
 
(256)
 
Loss (gain) on investment in a jointly-controlled entity
 
 
 
 
(884,199)
 
 
238,371
 
Dividend paid
 
 
 
 
0
 
 
(7)
 
Change in exchange reserve
 
 
 
 
(3,882)
 
 
0
 
Amortization of intangible assets
 
16
 
 
5,670,561
 
 
0
 
Issuance of common stocks under render of consultancy services
 
 
 
 
12,600
 
 
0
 
 
 
 
 
 
 
 
 
 
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
(Increase) decrease in assets
 
 
 
 
 
 
 
 
 
Accounts receivable - other
 
 
 
 
483,984
 
 
10,581,548
 
Accounts receivable - related parties
 
 
 
 
(550,131)
 
 
0
 
Inventories
 
 
 
 
3,658,926
 
 
(2,201,061)
 
Other current assets
 
 
 
 
28,248
 
 
(83,607)
 
Other assets
 
 
 
 
22,860
 
 
(55,628)
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in liabilities
 
 
 
 
 
 
 
 
 
Accounts payable - other
 
 
 
 
41,256
 
 
(23,782,861)
 
Accounts payable - related parties
 
 
 
 
(9,209,313)
 
 
11,957,235
 
Accrued expenses
 
 
 
 
45,954
 
 
(166,936)
 
Income tax payable
 
 
 
 
0
 
 
24,777
 
Deferred tax
 
 
 
 
(68,720)
 
 
11,044
 
Other current liabilities
 
 
 
 
3,967,906
 
 
4,478,377
 
 
 
 
 
 
 
 
 
 
 
Total adjustments
 
 
 
$
(2,573,294)
 
$
3,012,033
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used for) operating activities
 
 
 
$
(4,526,628)
 
$
2,181,469
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
As of
 
As of 
 
 
 
 
 
September 30, 2013
 
September 30, 2012
 
 
 
Notes
 
(Unaudited)
 
(Unaudited)
 
Cash flows provided by (used for) investing activities:
 
 
 
 
 
 
 
 
 
Advanced from Aristo / Mr. Yang
 
 
 
$
1,688,521
 
$
3,235,208
 
Advanced to Aristo / Mr. Yang
 
 
 
 
0
 
 
(3,337,123)
 
Net cash inflow on acquisition of subsidiaries
 
14
 
 
0
 
 
157,259
 
Investment in a jointly-controlled entity
 
 
 
 
0
 
 
(2,974,024)
 
Decrease (increase) of restricted cash
 
 
 
 
838,413
 
 
1,383,400
 
Cash proceeds from sales of fixed assets
 
 
 
 
2,531,391
 
 
256
 
Purchase of fixed assets
 
 
 
 
0
 
 
(175)
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used for) investing activities
 
 
 
$
5,058,325
 
$
(1,535,199)
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used for) financing activities:
 
 
 
 
 
 
 
 
 
Net repayments on lines of credit and notes payable
 
 
 
$
(6,404,636)
 
$
(5,262,460)
 
Principal payments to bank
 
 
 
 
(4,141,256)
 
 
(739,778)
 
Borrowings from bank
 
 
 
 
3,141,026
 
 
5,064,103
 
Borrowings from a third party
 
11
 
 
7,051,282
 
 
0
 
Principal payments under capital lease obligation
 
 
 
 
(74,555)
 
 
(82,970)
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used for) financing activities
 
 
 
$
(428,139)
 
$
(1,021,105)
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
 
$
103,558
 
$
(374,835)
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents–beginning of year
 
 
 
 
639,462
 
 
672,819
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents–end of period
 
 
 
$
743,020
 
$
297,984
 
 
 
 
 
 
 
 
 
 
 
Supplementary disclosure of cash flow information:
 
 
 
 
 
 
 
 
 
Interest paid
 
 
 
$
720,745
 
$
700,567
 
 
 
 
 
 
 
 
 
 
 
Income tax paid (reversal)
 
 
 
$
0
 
$
118,638
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
5

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 1.               Organization and Principal Activities
 
USmart Mobile Device Inc. (“USmart”) and its subsidiaries are referred to herein collectively and on a consolidated basis as the “Company” or “we”, “us” or “our” or similar terminology.
 
The Company was incorporated under the laws of the State of Delaware on September 17, 2002 and previously known as ACL Semiconductors Inc. The Company acquired Atlantic Components Limited, a Hong Kong incorporated company (“Atlantic”) through a reverse-acquisition that was effective September 30, 2003. On September 28, 2012, the Company acquired Jussey Investments Limited, a company incorporated in British Virgin Islands (“Jussey”) (please refer to Note 14 for more information on the acquisition).
 
The Company is currently engaged in the production, manufacturing and distribution of smartphones, electronic products and components in Hong Kong Special Administrative Region (“Hong Kong”) and the People’s Republic of China (“China” or the “PRC”) through its operating subsidiaries and VIE:
 
(i)
Atlantic Components Limited, a Hong Kong incorporated company and the Company’s original principle operating subsidiary which is controlled by the Company through its subsidiary, ACL International Holdings Limited (“ACL Holdings”); and
 
(ii)
Aristo Technologies Limited, a Hong Kong incorporated company (“Aristo”), solely owned by Mr. Chung-Lun Yang, the Company’s Chairman of the Board of Directors (“Mr. Yang”); and
 
(iii)
eVision Telecom Ltd. (“eVision”), a Hong Kong incorporated company which was acquired through an acquisition of its holding company, Jussey; and
 
(iv)
USmart Electronic Products Ltd. (“UEP”), a Hong Kong incorporated company which was acquired through an acquisition of its holding company, Jussey; and
 
(v)
Dongguan Kezheng Electronics Ltd. (“Kezheng”), a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the PRC which is acquired through an acquisition of its ultimate holding company, Jussey.
 
The Company owns 100% equity interest of ACL International Holdings Limited, a Hong Kong incorporated company, which owns:
 
(i)
100% equity interest of Atlantic (restructured on December 17, 2010); and
 
(ii)
30% equity interest of ATMD, a joint venture with Tomen Devices Corporation (“Tomen”) and IBCom Electronics (HK) Limited (“IBCom”); and
 
(iii)
100% equity interest of Jussey Investments Limited, a company incorporated in British Virgin Islands (acquired by ACL Holdings on September 28, 2012) which owns:
 
a.
100% equity interest in eVision; and
 
b.
80% equity interest in UEP, which owns 100% equity interest in Kezheng.
 
 
6

   
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 1.               Organization and Principal Activities (Continued)
 
 
On March 23, 2010, USmart concluded that Aristo, a related company solely owned by Mr. Yang is a variable interest entity under FASB ASC 810-10-25 and is therefore subject to consolidation with USmart beginning fiscal year 2007 under the guidance applicable to variable interest entities.
 
Business Activity
 
USmart was incorporated under the laws of the State of Delaware on September 17, 2002. The Company has been primarily engaged in the business of distribution of memory products mainly under “Samsung” brand name which principally comprised Dynamic Random Access Memory (“DRAM”), Graphic Random Access Memory (“Graphic RAM”), and Flash memory components for the Hong Kong Special Administrative Region (“Hong Kong”) and People’s Republic of China (the “PRC” or “China”) markets formerly through its indirectly wholly owned subsidiary Atlantic Components Limited (“Atlantic”), a Hong Kong incorporated company, and ATMD (Hong Kong) Limited (“ATMD”) after April 1, 2012. The Company, through its wholly owned subsidiary ACL International Holdings Limited (“ACL Holdings”), owns 30% equity interest in ATMD, the joint venture with Tomen Devices Corporation (“Tomen”) and IBCom Electronics (HK) Limited (“IBCom”). ATMD offers a broad range of industry-leading Samsung semiconductor products, and additional components from SAMCO (such as wifi and camera modules) and SMD (smartphone panels). Atlantic integrated around 90% of its business relating to procurement of semiconductors and electronic parts from Samsung to ATMD. Subsequent to the start of the operations of ATMD, the Company’s sales, the cost of sales and operating expenses are expected to evolve in accordance with the transition of the Company’s business as described above. Through the acquisition of Jussey Investments Limited (“Jussey”) on September 28, 2012, the Company has diversified its product portfolio and customer network, obtained design and manufacturing capabilities, and tapped into the blooming telecommunication industry with access to the 3G baseband licenses.
 
 
7

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.               Summary of Significant Accounting Policies
 
(a)
Method of Accounting
 
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The consolidated financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of consolidated financial statements.
 
(b)
Principles of Consolidation
 
The consolidated financial statements are presented in US Dollars and include the accounts of the Company and its subsidiary. All significant inter-company balances and transactions are eliminated in consolidation.
 
The Company owned its subsidiary soon after its inception and continued to own the equity’s interests through September 30, 2013. The following table depicts the identity of each subsidiary:
 
Name of Subsidiary
 
Place of
Incorporation
 
Attributable Equity
Interest %
 
Registered
Capital
 
ACL International Holdings Limited
 
 
Hong Kong
 
 
100
 
$
0.13
 
Alpha Perform Technology Limited
 
 
BVI
 
 
100
 
$
1,000
 
Atlantic Components Limited (1)
 
 
Hong Kong
 
 
100
 
$
384,615
 
Aristo Technologies Limited (2)
 
 
Hong Kong
 
 
100
 
$
1,282
 
Dongguan Kezheng Electronics Limited (3) (5)
 
 
PRC
 
 
80
 
$
580,499
 
eVision Telecom Limited (4) (5)
 
 
Hong Kong
 
 
100
 
$
25,641
 
Jussey Investments Limited (1) (5)
 
 
BVI
 
 
100
 
$
1
 
USmart Electronic Products Limited (4) (5)
 
 
Hong Kong
 
 
80
 
$
1.28
 
Note:        (1) Wholly owned subsidiary of ACL International Holdings Limited
                (2) Deemed variable interest entity
                (3) Wholly owned subsidiary of USmart Electronic Products Limited
                (4) Wholly or partially owned by Jussey Investments Limited
                (5) These subsidiaries are not consolidated to the Company’s consolidated financial statements as of June 30, 2012
 
Variable Interests Entities
According to ASC 810-10-25 which codified FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities — an interpretation of ARB No. 51 (FIN 46R), an entity that has one or more of the three characteristics set forth therein is considered a variable interest entity. One of such characteristics is that the equity investment at risk in the relevant entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders.
 
ASC 810-05-08A specifies the two characteristics of a controlling financial interest in a variable interest entity (“VIE”): (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company is the primary beneficiary of Aristo because the Company can direct the activities of Aristo through the common director and major shareholder. Also, the Company extended substantial account receivable to Aristo and created an obligation to absorb loss if Aristo failed. Moreover, ASC 810-25-42 & 43 provides guidance on related parties treatment of VIE and specifies the relationship of de-facto agent and principal. This guidance will help to determine whether the Company will consolidate Aristo.
 
 
8

  
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.                   Summary of Significant Accounting Policies (Continued)
 
(b)
Principles of consolidation (Continued)
 
Owing to the extent of outstanding large amounts of accounts receivable since 2007 together with the nominal amount of paid-up capital contributed by Mr. Yang when Aristo was formed, it has been determined that Aristo cannot finance its operations without subordinated financial support from USmart and accordingly, USmart is considered to be the de facto principal of Aristo, Aristo is considered to be the de facto subsidiary of the Company and Mr. Yang is considered to be the related party of both the Company and Aristo.
 
By virtue of the above analysis, it has been determined that the Company is the primary beneficiary of Aristo.
 
Aristo Technologies Limited
 
The Company used to sell Samsung memory chips to Aristo and allowed long grace periods for Aristo to repay the open accounts receivable. After the establishment of ATMD, the Company will sell different brands of memory products to Aristo. Being the biggest creditor, the Company did not require Aristo to pledge assets or enter into any agreements to bind Aristo to specific repayment terms. The Company did not experience any bad debt from Aristo. Hence, the Company did not provide any bad debt provision derived from Aristo. Although, the Company was not involved in Aristo’s daily operation, it believes that there will not be significant additional risk derived from the trading relationship and transactions with Aristo.
 
Aristo is engaged in the marketing, selling and servicing of computer products and accessories including semiconductors, LCD products, mass storage devices, consumer electronics, computer peripherals and electronic components for different generations of computer related products. Aristo carries various brands of products such as Samsung, Hynix, Micron, Elpida, Qimonda, Lexar, Dane-Elec, Elixir, SanDisk and Winbond. Aristo 2012 and 2011 sales were around $2 million and $14 million; it was a small distributor that accommodated special requirements for specific customers.
 
Aristo supplies different generations of computer related products. Old generation products will move slowly owing to lower market demand. According to the management experience and estimation on the actual market situation, old products carrying on hand for ten years will have no resell value. Therefore, inventories on hand over ten years will be written-off by Aristo immediately.
 
The Company sold to Aristo in order to fulfill Aristo’s periodic need for memory products based on prevailing market prices, which products Aristo, in turn, sells to its customers. The sales to Aristo during the third quarter of 2013 were $1,747,002 as of September 30, 2013. The sales to Aristo during the third quarter of 2012 were $0 as of September 30, 2012. For fiscal year 2012, sales to Aristo were $106,031 as of December 31, 2012.
 
The Company purchases from Aristo, from time to time, LCD panels, Samsung memory chips, DRAM, Flash memory, central processing units, external hard disks, DVD readers and writers that the Company cannot obtain from Samsung directly due to supply limitations.
 
 
9

  
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.               Summary of Significant Accounting Policies (Continued)
 
(b)
Principles of consolidation (Continued)
 
Acquisition
 
The Company uses the acquisition method of accounting for business combinations which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective fair values. Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If the fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined at the date of acquisition, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of acquired business are reflected in the acquirer’s consolidated financial statements and results of operations after the date of the acquisition.
 
(c)
Jointly-controlled entity
 
A jointly-controlled entity is a corporate joint venture that is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity.
 
The Group’s investment in a jointly-controlled entity is stated in equity method for the consolidated statement of financial position the Group’s shares of the equity of a jointly-controlled entity and the consolidated income statement and consolidated reserves, respectively.
 
(d)
Use of estimates
 
The preparation of the consolidated financial statements that conform with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time, however actual results could differ materially from those estimates.
 
(e)
Economic and political risks
 
The Company’s operations are conducted in Hong Kong and China. A large amount of customers are located in Southern China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in Hong Kong and China, and by the general state of the economy in Hong Kong and China.
 
The Company’s operations and customers in Hong Kong and Southern China 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 Hong Kong and China, 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, among other things.
 
 
10

  
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.               Summary of Significant Accounting Policies (Continued)
 
(f)
Property, plant and equipment
 
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method.
 
Estimated useful lives of the plant and equipment are as follows:
 
Automobiles
 
3 1/3 years
 
Computers
 
5 years
 
Leasehold improvement
 
5 years
 
Land and buildings
 
By estimated useful life
 
Office equipment
 
5 years
 
Machinery
 
10 years
 
 
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income.
 
(g)
Intangible assets
 
Intangible assets include license contracts and trademarks, initial measures at fair market value and are subsequently carry at fair value less amortization and impairment, if any.
 
The license contracts and trademarks are measured based on the future economic benefits arising from the mobile business acquired from Jussey. The license contracts and trademarks are individually identified and separately recognized by using income approach. They represent the economic benefits derived from the mobile phone production contracts obtained at the time of the acquisition.
 
The Company will capture the finite life of these intangible assets. Amortization will be provided to license contracts based on the percentage of the completion of these contracts (measured by production and shipment schedules) and their respective economic benefits. The Company will provide 24 equally monthly amortizations to trademark commencing July 2013 till to June 2015.
 
Estimates of the useful lives and residual values of intangible assets are reviewed periodically and adjusted if appropriate.
 
Basically, the estimated useful lives of the intangible assets are as follows:
 
License contracts
 
24 months
 
Trademarks
 
24 months
 
 
The Company will evaluate the procedure on the measurement of these intangible assets from time to time to assess their fair value. Periodically, the Company will re-measure the values of these intangible assets. If their re-calculated fair values are below the carrying value in the ledger, the Company will provide additional impairment to reflect the reduction of future economic benefits and their related fair values.
 
(h)
Accounts receivable
 
Accounts receivable is carried at the net invoiced value charged to customer. The Company records an allowance for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing historical data and estimates of future performance.
 
 
11

  
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.               Summary of Significant Accounting Policies (Continued)
 
(i)   Accounting for impairment of long-lived assets
 
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in ASC No. 360 (formerly Statement of Financial Accounting Standards No. 144). The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
 
During the reporting years, there was no impairment loss.
 
(j)    Cash and cash equivalents
 
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in Hong Kong. The Company does not maintain any bank accounts in the United States of America.
 
(k)  Inventories
 
Inventories are stated at the lower of cost or market and are comprised of purchased computer technology resale products. Cost is determined using the first-in, first-out method. The reserve for obsolescence was decreased by $177,286 during the first nine months of 2013  compare to December 31, 2012 and no change for the same period of September 30, 2012 compare to December 31, 2011. Inventory obsolescence reserves totaled $2,109,011 as of September 30, 2013 and $2,286,297 as of December 31, 2012.
 
(l)   Lease assets
 
Leases that substantially transfer all the benefits and risks of ownership of assets to the company are accounted for as capital leases. At the inception of a capital lease, the asset is recorded together with its long term obligation (excluding interest element) to reflect the purchase and the financing.
 
Leases which do not transfer substantially all the risks and rewards of ownership to the company are classified as operating leases. Payments made under operating leases are charged to income statement in equal installments over the accounting periods covered by the lease term. Lease incentives received are recognized in income statement as an integral part of the aggregate net lease payments made. Contingent rentals are charged to income statement in the accounting period which they are incurred.
 
(m)  Income taxes
 
We are governed by the Internal Revenue Code of the United States, the Hong Kong Inland Revenue Department and the PRC’s Income Tax Laws. 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 bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income of the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
 
12

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.
Summary of Significant Accounting Policies (Continued)
   
(m)  Income taxes (Continued)
 
The Company did not have any interest or penalty recognized in the income statements for the period ended September 30, 2013 and September 30, 2012 or balance sheet as of September 30, 2013 and December 31, 2012. The Company did not have uncertain tax positions or events leading to uncertain tax position within the next 12 months. The Company’s 2010, 2011 and 2012 U.S. federal income tax returns are subject to U.S. Internal Revenue Service examination and the Company’s 2006/7, 2007/8, 2008/9, 2009/2010, 2010/11, 2011/12 and 2012/13, Hong Kong Company Income Tax filing are subject to Hong Kong Inland Revenue Department examination. The Company’s 2008, 2009, 2010, 2011, and 2012 PRC income tax returns are subject to PRC State Administration of Taxation examination.
 
(n)  Foreign currency translation
 
The accompanying consolidated financial statements are presented in United States dollars (USD). The functional currencies of the Company’s operating business based in Hong Kong and PRC are the Hong Kong Dollar (HKD) and Renminbi (RMB) respectively. The consolidated financial statements are translated into United States dollars from HKD with a ratio of USD1.00=HKD7.80, a fixed exchange rate maintained between Hong Kong and United States derived from the Hong Kong Monetary Authority pegging HKD and USD monetary policy. For our subsidiaries whose functional currency are the RMB, statement of income, balance sheets and cash flows are translated with a ratio of RMB1.00=HKD1.26 an average exchange rate during the period.
 
Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods. All of our revenue transactions are transacted in the functional currencies. We have not entered into any material transactions that are either originated, or to be settled, in currencies other than the HKD, RMB and USD. Accordingly, transaction gains or losses have not had, and are not expected to have a material effect on our results of operations.
 
The RMB is not freely convertible into any other currencies. In addition, all foreign exchange transactions in the PRC must be conducted through authorized institutions. Accordingly, management cannot provide any assurance that the RMB underlying the consolidated financial statement amounts could have been, or could be, converted into HKD or USD at the exchange rates used to translate the functional currency into the reporting currency.
 
(o)  Revenue recognition
 
The Company derives revenues from resale of computer memory products, providing both ODM (Original Design Manufacturing) and OEM (Original Equipment Manufacturing) services for various electronic products, such as computer and peripherals, flash storage devices and home electronic products. The Company recognizes revenue in accordance with the ASC 605 “Revenue Recognition”. Under ASC 605, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates, and returns, which historically were not material.
 
(p)  Advertising
 
The Group expensed all advertising costs as incurred. Advertising expenses included in general and administrative expenses were $1,056 and $1,136 as of September 30, 2013 and 2012, respectively.
 
(q)  Segment reporting
 
The Company’s sales are generated from Hong Kong and the rest of China and substantially all of its assets are located in Hong Kong.
 
 
13

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.
Summary of Significant Accounting Policies (Continued)
     
(r)   Fair value of financial instruments
 
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, lines of credit, convertible debt, accounts payable, accrued expenses, and long-term debt approximates their estimated fair values due to the short-term maturities of those financial instruments.
 
(s)   Comprehensive income
 
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company has no items that represent other comprehensive income and, therefore, has not included a schedule of comprehensive income in the consolidated financial statements.
 
(t)   Basic and diluted earnings (loss) per share
 
In accordance with ASC No. 260 (formerly SFAS No. 128), “Earnings Per Share,” the basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed similarly to basic earnings (loss) per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
 
(u)  Reclassification
 
Certain amounts in the prior period have been reclassified to conform to the current consolidated financial statement presentation.
 
(v)   Recently implemented standards
 
In January 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification™ (Codification) or subject to a master netting arrangement or similar agreement. The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11.
 
 
14

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 2.
Summary of Significant Accounting Policies (Continued)
     
(v)   Recently implemented standards (Continued)
 
In February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.
 
The new amendments will require an organization to:
 
      Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
 
      Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
 
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). A private company is required to meet the reporting requirements of the amended paragraphs about the roll forward of accumulated other comprehensive income for both interim and annual reporting periods. However, private companies are only required to provide the information about the effect of reclassifications on line items of net income for annual reporting periods, not for interim reporting periods. The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted.
 
In February 2013, FASB issued Accounting Standards Update (ASU) No. 2013-03, Financial Instruments (Topic 825). This ASU clarifies the scope and applicability of a disclosure exemption that resulted from the issuance of Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendment clarifies that the requirement to disclose "the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)" does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. This ASU is the final version of Proposed Accounting Standards Update 2013-200—Financial Instruments (Topic 825) which has been deleted. The amendments are effective upon issuance.
 
In February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The amendments in this ASU should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this ASU) and should disclose that fact. Early adoption is permitted.
 
 
15

  
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited) 
 
Note 2.
Summary of Significant Accounting Policies (Continued)
     
(v)   Recently implemented standards (Continued)
 
In March 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830). This ASU resolve the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights)within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This ASU is the final version of Proposed Accounting Standards Update EITF11Ar—Foreign Currency Matters (Topic 830), which has been deleted. The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic entities the amendments in this Update are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption.
 
In April 2013, FASB Accounting Standards Update 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. This ASU clarifies when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. Liquidation is the process by which a company converts its assets to cash or other assets and settles its obligations with creditors in anticipation of ceasing all of its activities. An organization in liquidation must prepare its financial statements using a basis of accounting that communicates information to users of those financial statements to enable those users to develop expectations about how much the organization will have available for distribution to investors after disposing of its assets and settling its obligations. The ASU requires organization to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent.” Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces (e.g., involuntary bankruptcy). In cases where a plan for liquidation was specified in the organization’s governing documents at inception (e.g., limited-life entities), the organization should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified in the organization’s governing documents. The ASU requires financial statements prepared using the liquidation basis to present relevant information about a company’s resources and obligations in liquidation, including the following:
 
     The organization’s assets measured at the amount of the expected cash proceeds from liquidation, including any items it had not previously recognized under U.S. GAAP that it expects to either sell in liquidation or use in settling liabilities (e.g., trademarks).
 
     The organization’s liabilities as recognized and measured in accordance with existing guidance that applies to those liabilities.
 
     Accrual of the costs it expects to incur and the income it expects to earn during liquidation, including any anticipated disposal costs.
 
This ASU is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted.
 
In July 2013, The FASB has published Accounting Standards Update 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. This ASU defers indefinitely certain disclosures about investments held by nonpublic employee benefit plans in their plan sponsors’ own nonpublic equity securities. The ASU was approved by the FASB on June 12, 2013. ASU No. 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, applies to disclosures of certain quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for investments held by certain employee benefit plans.
 
 
16

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
In July 2013, The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). U.S. GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
 
 
17

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 3.               Inventories
 
Inventories consisted of the following at September 30, 2013 and December 31, 2012:
 
 
 
September 30, 2013
 
December 31, 2012
 
Finished goods
 
$
3,243,519
 
$
6,902,445
 
Less allowance for excess and obsolete inventory
 
 
(2,109,011)
 
 
(2,286,297)
 
 
 
 
 
 
 
 
 
Inventory, net
 
$
1,134,508
 
$
4,616,148
 
 
The following is a summary of the change in the Company’s inventory valuation allowance:
 
 
 
September 30, 2013
 
December 31, 2012
 
Inventory valuation allowance, beginning of the quarter / year
 
$
2,286,297
 
$
709,374
 
Obsolete inventory sold
 
 
(177,286)
 
 
0
 
Additional inventory provision
 
 
0
 
 
1,576,923
 
 
 
 
 
 
 
 
 
Inventory valuation allowance, end of period
 
$
2,109,011
 
$
2,286,297
 

Note 4.               Property, Plant and Equipment, net
 
Property, plant and equipment, net consisted of the following at September 30, 2013 and December 31, 2012:
 
 
 
September 30, 2013
 
December 31, 2012
 
At cost
 
 
 
 
 
 
 
Land and buildings
 
$
8,574,682
 
$
9,375,558
 
Automobiles
 
 
658,772
 
 
658,772
 
Office equipment
 
 
268,863
 
 
268,863
 
Leasehold improvements
 
 
543,550
 
 
543,550
 
Furniture and fixtures
 
 
57,302
 
 
57,302
 
Machinery
 
 
668,185
 
 
668,185
 
 
 
 
 
 
 
 
 
 
 
$
10,771,354
 
$
11,572,230
 
Less: accumulated depreciation
 
 
(2,356,553)
 
 
(1,986,175)
 
 
 
 
 
 
 
 
 
 
 
$
8,414,801
 
$
9,586,055
 
 
Depreciation and amortization expense totaled $320,694 and $120,500 for the three months ended September 30, 2013 and 2012, respectively, and $512,587 and $362,647 for the nine months ended September 30, 2013 and 2012, respectively.
 
Automobiles include the following amounts under capital leases: 
 
 
 
September 30, 2013
 
December 31, 2012
 
Cost
 
$
399,473
 
$
469,754
 
Less accumulated depreciation
 
 
(324,108)
 
 
(302,106)
 
 
 
 
 
 
 
 
 
Total
 
$
75,365
 
$
167,648
 
 
 
18

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 5.               Capital Lease Obligations
 
The Company leases automobiles under three capital leases that expire between April 2014 and December 2015. Aggregate future obligations under the capital leases in effect as of September 30, 2013 and December 31, 2012 are as follows:
 
The Company has several non-cancellable capital leases relating to automobiles:
 
 
 
September 30, 2013
 
December 31, 2012
 
Current portion
 
$
80,376
 
$
96,506
 
Non-current portion
 
 
75,003
 
 
133,428
 
 
 
$
155,379
 
$
229,934
 
               
At September 30, 2013 and December 31, 2012, the values of automobiles under capital leases are as follows:
 
 
 
September 30, 2013
 
December 31, 2012
 
Cost
 
$
399,473
 
$
469,754
 
Less: accumulated depreciation
 
 
(324,108)
 
 
(302,106)
 
 
 
 
 
 
 
 
 
 
 
$
75,365
 
$
167,648
 
 
At September 30, 2013 and December 31, 2012, the Company had obligations under capital leases repayable as follows:
 
 
 
September 30, 2013
 
December 31, 2012
 
Total minimum lease payments
 
 
 
 
 
 
 
- Within one year
 
$
86,897
 
$
103,890
 
- After one year but within 5 years
 
 
79,163
 
 
143,430
 
 
 
 
 
 
 
 
 
 
 
$
166,060
 
$
247,320
 
Interest expenses relating to future periods
 
 
(10,681)
 
 
(17,386)
 
 
 
 
 
 
 
 
 
Present value of the minimum lease payments
 
$
155,379
 
$
229,934
 
 
Interest expense related to capital leases totaled $2,076, $3,253, $6,705 and $10,272 for the three months ended September 30, 2013 and 2012, and for nine months ended September 30, 2013 and 2012, respectively.
 
 
19

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 6.               Stock Options
 
On March 31, 2006, the Board of Directors adopted the 2006 Equity Incentive Stock Plan (the “Plan”) and the majority stockholder approved the Plan by written consent. The purpose of the Plan is to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The Plan permits the Company to grant both incentive stock options (“Incentive Stock Options” or “ISOs”) within the meaning of Section 422 of the Internal Revenue Code (the “Code”), and other options which do not qualify as Incentive Stock Options (the “Non-Qualified Options”) and stock awards.
 
Unless earlier terminated by the Board of Directors, the Plan (but not outstanding options) terminates on March 31, 2016, after which no further awards may be granted under the Plan. The Plan is administered by the full Board of Directors or, at the Board of Director’s discretion, by a committee of the Board of Directors consisting of at least two persons who are “disinterested persons” defined under Rule 16b-2(c)(ii) under the Securities Exchange Act of 1934, as amended (the “Committee”).
 
Recipients of options under the Plan (“Optionees”) are selected by the Board of Directors or the Committee. The Board of Directors or Committee determines the terms of each option grant, including (1) the purchase price of shares subject to options, (2) the dates on which options become exercisable and (3) the expiration date of each option (which may not exceed ten years from the date of grant). The minimum per share purchase price of options granted under the Plan for Incentive Stock Options and Non-Qualified Options is the fair market value (as defined in the Plan) on the date the option is granted.
 
Optionees will have no voting, dividend or other rights as stockholders with respect to shares of Common Stock covered by options prior to becoming the holders of record of such shares. The purchase price upon the exercise of options may be paid in cash, by certified bank or cashier’s check, by tendering stock held by the Optionee, as well as by cashless exercise either through the surrender of other shares subject to the option or through a broker. The total number of shares of Common Stock available under the Plan, and the number of shares and per share exercise price under outstanding options will be appropriately adjusted in the event of any stock dividend, reorganization, merger or recapitalization or similar corporate event.
 
The Board of Directors may at any time terminate the Plan or from time to time make such modifications or amendments to the Plan as it may deem advisable and the Board of Directors or Committee may adjust, reduce, cancel and regrant an unexercised option if the fair market value declines below the exercise price except as may be required by any national stock exchange or national market association on which the Common Stock is then listed. In no event may the Board of Directors, without the approval of stockholders, amend the Plan if required by any federal, state, local or foreign laws or regulations or any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where options or stock purchase rights are granted under the Plan.
 
Subject to limitations set forth in the Plan, the terms of option agreements will be determined by the Board of Directors or Committee, and need not be uniform among Optionees.
 
As of September 30, 2013, the Company has not granted any options according to the condition set forth in the 2006 Equity Incentive Stock Plan and therefore, there were no options outstanding under this Plan.
 
 
20

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 7.               Related Party Transactions
 
Related party receivables are payable on demand upon the same terms as receivables from unrelated parties.
 
Transactions with Aristo Technologies Limited / Mr. Yang
 
This represented Aristo transactions with various related parties of Mr. Yang.
 
As of September 30, 2013 and December 31, 2012, we had an outstanding receivable from Aristo / Mr. Yang, the Chairman of our Board of Directors, totaling $1,969,838 and $3,658,359 respectively. These advances bear no interest and are payable on demand. The receivable due from Aristo / Mr. Yang to the Company is derived from the consolidation of the financial statements of Aristo, a variable interest entity, with the Company. A repayment plan has been entered with Mr. Yang.
 
Transactions with Solution Semiconductor (China) Limited
 
Mr. Yang is a director and the sole beneficial owner of the equity interests of Solution Semiconductor (China) Ltd. (“Solution”).
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we received service fees of $3,846, $3,846, $7,692 and $17,308 respectively from Solution. The service fees were charged for back office support for Solution.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products of $1,712,978, $0, $1,741,492 and $1,000 respectively to Solution. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts receivables from Solution.
 
Two facilities located in Hong Kong owned by Solution were used by the Company as collateral for loans from DBS Bank (Hong Kong) Limited (“DBS Bank”) (formerly Overseas Trust Bank Limited) and The Bank of East Asia, Limited (“BEA Bank”) respectively.
 
Transactions with Systematic Information Limited
 
Mr. Yang, the Company’s Chairman of the Board of Directors, is a director and shareholder of Systematic Information Ltd. (“Systematic Information”) with a total of 100% interest.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we received service fees of $1,231, $1,846, $3,077 and $5,923 respectively from Systematic Information. The service fees were charged for back office support for Systematic Information.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products of $0, $17,457, $680,016 and $17,457 respectively to Systematic Information. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts receivables from Systematic Information.
 
A workshop located in Hong Kong owned by Systematic Information was used by the Company as collateral for loans from BEA Bank.
 
Transactions with Atlantic Storage Devices Limited
 
Mr. Yang is a director and 40% shareholder of Atlantic Storage Devices Ltd. (“Atlantic Storage”). The remaining 60% of Atlantic Storage is owned by a non-related party.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products for $25,526, $1,231, $25,536 and $21,784 respectively to Atlantic Storage. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts receivables from Atlantic Storage.
   
 
21

   
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 7.               Related Party Transactions (Continued)
 
Transactions with City Royal Limited
 
Mr. Yang, the Company’s Chairman of the Board of Directors, is a 50% shareholder of City Royal Limited (“City”). The remaining 50% of City is owned by the spouse of Mr. Yang. A residential property located in Hong Kong owned by City was used by the Company as collateral for loans from DBS Bank.
 
Transactions with Aristo Components Limited
 
Mr. Ben Wong, the Company’s Chief Executive Officer, is a 90% shareholder of Aristo Components Ltd. (“Aristo Comp”). The remaining 10% of Aristo Comp is owned by a non-related party. 
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we received service fees of $3,077, $0, $6,154 and $0 respectively from Aristo Comp. The service fees were charged for back office support for Aristo Comp.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we purchased inventories of $0, $0, $0 and $39,107 respectively from Aristo Comp. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts payable to Aristo Comp.
 
Transactions with Atlantic Ocean (HK) Limited
 
Mr. Yang is a director and 60% shareholder of Atlantic Ocean (HK) Limited (“Ocean”).
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products for $3,287, $0, $10,357 and $0 respectively to Ocean. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts receivables from Ocean.
 
Transactions with ATMD (Hong Kong) Limited
 
Effective April 1, 2012, ATMD became a jointly-controlled entity of the Company. The Company holds a 30% interest of ATMD, and Tomen holds 68% interest of ATMD. The remaining 2% interest is owned by IBCom.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we received service fees of $29,022, $25,796, $53,803 and $56,515 respectively from ATMD. The service fees were charged for back office support for ATMD.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products for $0, $0, $0 and $30,525 respectively to ATMD. As of September 30, 2013 and December 31, 2012, there was no outstanding accounts receivable from ATMD.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we purchased inventories of $0,  $0, $0 and $116,846 respectively from ATMD.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we paid $0,  $62,779, $0 and $202,856 respectively to ATMD as compensation for the services provided by ATMD to the Company regarding the sales of Samsung products during the transition period. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts payable to ATMD. 
 
 
22

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 7.   Related Party Transactions (Continued)
 
Transactions with Tomen Devices Corporation
 
On April 1, 2012, the Company established ATMD, a joint venture with Tomen and IBCom. The Company holds a 30% interest of ATMD, and Tomen holds 68% interest of ATMD. The remaining 2% interest is owned by IBCom.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products for $0, $0, $0 and $32,195 respectively to Tomen. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts receivables from Tomen.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we purchased inventories of $0, $36,868,541, $0 and $78,281,961 respectively from Tomen. As of September 30, 2013 and December 31, 2012, there were $0 and $9,209,313 accounts payables to Tomen.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we paid $153,420, $0, $271,931 and $0 respectively to Tomen as for interest on the accounts payable balance.
 
Transactions with IBCom Electronics (HK) Limited
 
On April 1, 2012, the Company established ATMD, a joint venture with Tomen and IBCom. The Company holds a 30% interest of ATMD, and Tomen holds 68% interest of ATMD. The remaining 2% interest is owned by IBCom.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we received service fees of $30,769, $30,769, $92,307 and $99,364 respectively from IBCom. The service fees were charged for back office support for IBCom.
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products for $0, $0, $0 and $251,680 respectively to IBCom. As of September 30, 2013 and December 31, 2012, there were $550,131 and $634,862 accounts receivables from IBCom.
 
Transactions with Global Mega Development Limited
 
Mr. Yang is a director and the sole beneficial owner of the equity interests of Global Mega Development Ltd. (“Global”).
 
During the three months ended September 30, 2013 and 2012, and the nine months ended September 30, 2013 and 2012, we sold products of $710,350, $0, $1,564,213 and $0 respectively to Global. As of September 30, 2013 and December 31, 2012, there were no outstanding accounts receivables from Global

Note 8.               Revolving Lines of Credit and Loan Facilities
 
The summary of banking facilities at September 30, 2013 is as follows:
 
 
 
 
 
 
 
 
 
 
Not Utilized
 
 
 
Granted facilities
 
 
Utilized facilities
 
Facilities
 
Lines of credit and loan facilities
 
 
 
 
 
 
 
 
 
 
 
Import/Export Loan
 
$
3,205,129
 
 
$
1,914,685
 
$
1,290,444
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank Loans
 
 
5,099,079
(a)
 
 
5,099,079
 
 
0
 
Revolving Short Term Loan
 
 
1,538,462
(a)
 
 
1,536,688
 
 
1,774
 
Overdraft
 
 
64,103
(b)
 
 
0
 
 
64,103
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,906,773
 
 
$
8,550,452
 
$
1,356,321
 
 
(a) The bank loans are combined from the summary of Note 9, total bank loans amount to $6,637,541 with a revolving short term loan of $1,536,688. The revolving short term loan is recorded under Other Current Liabilities on the balance sheet. It has a facility limit of $1,538,462, bearing an interest rate of 0.5% below Hong Kong prime rate per annum.
(b) Including cash and cash equivalents
 
 
23

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 9.               Bank Loans
 
Bank loans were comprised of the following as of September 30, 2013 and December 31, 2012:
 
 
 
September 30, 2013
 
December 31, 2012
 
Installment loan provided by BEA Bank having a maturity date in July 28, 2014 and carrying an interest rate of Hong Kong dollar Prime Rate at 5.25% as of September 30, 2013 and December 31, 2012 +0.25%, payable in monthly installments of $13,467 including interest through September 2013 without any balloon payment requirements
 
$
128,205
 
$
243,590
 
 
 
 
 
 
 
 
 
Installment loan provided by BEA Bank having a maturity date in April 18, 2015 and carrying an interest rate of Hong Kong dollar Prime Rate at 5.25% as of September 30, 2013 and December 31, 2012 +0.25%, payable in monthly installments of $46,652 including interest through September 2013 without any balloon payment requirements
 
 
811,966
 
 
1,196,581
 
 
 
 
 
 
 
 
 
Installment loan provided by DBS Bank having a maturity date in April 25, 2015 and carrying an interest rate of Hong Kong Prime dollar Rate at 5.25% as of September 30, 2013 and December 31, 2012 +0.5%, payable in monthly installments of $60,233 including interest through September 2013 without any balloon payment requirements
 
 
1,017,882
 
 
1,574,812
 
 
 
 
 
 
 
 
 
Installment loan provided by DBS Bank having a maturity date in June 2, 2023 and carrying an interest rate of one month HIBOR at 0.28% as of December 31+2%, it was fully repaid on 23 September, 2013
 
 
0
 
 
456,123
 
 
 
 
 
 
 
 
 
Installment loan provided by DBS Bank having a maturity date in September 15, 2023 and carrying an interest rate of Hong Kong dollar Prime Rate at December 31, 2012 -2.5%, it was fully repaid on 23 September, 2013
 
 
0
 
 
584,573
 
 
 
 
 
 
 
 
 
Installment loan provided by DBS Bank having a maturity date in June 2, 2026 and carrying an interest rate of one month HIBOR at December 31, 2012 +2%, it was fully repaid on 23 September, 2013
 
 
0
 
 
703,598
 
 
 
 
 
 
 
 
 
Installment loan provided by DBS Bank having a maturity date in July 21, 2026 and carrying an interest rate of Hong Kong dollar Prime Rate at 5.25% as of December 31, 2012 -2.4%, it was fully repaid on 23 September, 2013
 
 
0
 
 
1,340,032
 
 
 
 
 
 
 
 
 
Installment loan having a maturity date in 23 September, 2028 and carrying an interest rate of 2% per annum over one month HIBOR (0.2071% at September 30, 2013) from Fubon Bank payable in monthly installments of $6,280 including interest through September 2013 without any balloon payment requirements
 
 
961,538
 
 
0
 
 
 
 
 
 
 
 
 
Installment loan having a maturity date in 23 December, 2013 and carrying an interest rate of 3.5% per annum over one month HIBOR (0.2071% at September 30, 2013) from Fubon Bank without any balloon payment requirements
 
 
1,538,462
 
 
0
 
 
 
 
 
 
 
 
 
Term loan having a maturity due in 23 January, 2014 and carrying an interest rate of 3.88429 per annum from Fubon Bank without any balloon payment requirements
 
 
641,026
 
 
0
 
 
 
 
 
 
 
 
 
 
 
$
5,099,079
 
$
6,099,309
 
 
 
24

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 9.               Bank Loans (Continued)
 
An analysis on the repayment of bank loan as of September 30, 2013 and December 31, 2012 are as follow:
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
Carrying amount that are repayable on demand or within twelve months from September 30, 2013 containing a repayable on demand clause:
 
 
 
 
 
 
 
Within twelve months
 
$
3,508,898
 
$
1,529,282
 
 
 
 
 
 
 
 
 
Carrying amount that are not repayable within twelve months from September 30, 2013 containing a repayable on demand clause but shown in current liabilities:
 
 
 
 
 
 
 
After 1 year, but within 2 years
 
$
796,339
 
$
2,142,751
 
After 2 years, but within 5 years
 
 
118,155
 
 
467,232
 
After 5 years
 
 
675,687
 
 
1,960,044
 
 
 
 
 
 
 
 
 
 
 
$
1,590,181
 
$
4,570,027
 
 
 
 
 
 
 
 
 
 
 
$
5,099,079
 
$
6,099,309
 
 
With respect to all of the debt and credit arrangements referred to in this Note 8 and Note 9, the Company pledged its assets to a bank group in Hong Kong comprised of DBS Bank, BEA Bank and Fubon Bank, as collateral for all current and future borrowings from the bank group by the Company. In addition to the above pledged collateral, the debt is also secured by:
 
1.     Collateral for loans from DBS Bank:
(a)   a security interest on a residential property located in Hong Kong owned by City, a related party;
(b)   a workshop located in Hong Kong owned by Solution, a related party; and
(c)   an unlimited personal guarantee by Mr. Yang
 
2.     Collateral for loans from BEA Bank:
(a)   a workshop located in Hong Kong owned by Systematic Information, a related party;
(b)   a workshop located in Hong Kong owned by Solution, a related party; and
(c)   an unlimited personal guarantee by Mr. Yang
 
3.    Collateral for loans from Fubon Bank
(a)    a security interest on two residential properties located in Hong Kong owned by Aristo, a company wholly owned by Mr. Yang; and
(b)    an  unlimited personal guarantee by Mr. Yang

Note 10.             Other Current Liabilities
 
The other current liabilities consisted the following as of September 30, 2013 and December 31, 2012:
 
 
 
September 30, 2013
 
December 31, 2012
 
Revolving short term loan
 
$
1,528,403
 
$
1,531,637
 
Trade deposit from customers
 
 
8,569,820
 
 
9,896,635
 
Deposit received for disposal of a jointly controlled entity
 
 
3,633,173
 
 
0
 
Temporary receipts
 
 
1,815,496
 
 
0
 
Others
 
 
807,016
 
 
957,730
 
 
 
 
 
 
 
 
 
 
 
$
16,353,908
 
$
12,386,002
 
 
The trade deposit from customers consists of letter of credits received from our customers which were financed by the bank.
 
 
25

 
PART I – FINANCIAL INFORMATION
 
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
 
Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
Note 11.                 Loan From a Third Party
 
On September 26, 2013, Atlantic Components Limited entered into a Loan Agreement with Excel Precise International Limited, an unrelated third party, for a loan facility to the aggregate extent of  HKD55 Million (USD7,051,282).  The amount HKD55 Million has been drawn down on September 27, 2013.  The rate of interest is 1.1% per month and payable on the 26th day of each calendar month. The Loan is collateral with mortgage over two Properties owned by Atlantic Components Limited and Personal Guaranteed by Wong, Fung Ming and Yang, Chung Lun.