UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
OR
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION FROM _______ TO ________.
COMMISSION FILE NUMBER 000-27159
SUNWAY GLOBAL INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada | 26-1650042 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
Daqing Hi-Tech Industry Development Zone, Daqing, Heilongjiang, People’s Republic of China, 163316
(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: 86-10-51905986
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 x 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.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 18, 2012, there were 18,499,736 outstanding shares of the Registrant's Common Stock, $0.0000001 par value.
TABLE OF CONTENTS
Page | |||
PART I | |||
Item 1. | Financial Statements | 3 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 4 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 8 | |
Item 4. | Controls and Procedures | 8 | |
PART II | |||
Item 1. | Legal Proceedings | 9 | |
Item 1A. | Risk Factors | 9 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 9 | |
Item 3. | Defaults Upon Senior Securities | 9 | |
Item 4. | Mine Safety Disclosures | 9 | |
Item 5. | Other Information | 9 | |
Item 6. | Exhibits | 9 | |
SIGNATURES | 10 |
2 |
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNWAY GLOBAL INC.
CONTENTS | PAGES | |
CONSOLIDATED BALANCE SHEETS | F-1 | |
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME | F-3 | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | F-4 | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | F-5 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | F-7 |
3 |
SUNWAY GLOBAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)
Notes | March 31, 2012 (Unaudited) | December 31, 2011 (Audited) | ||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | 2(k) | $ | 547,297 | $ | 1,550,911 | |||||
Trade receivables, net | 5 | 7,500,115 | 6,883,677 | |||||||
Notes receivables | 79,212 | 283,362 | ||||||||
Inventories | 8 | 3,431,261 | 2,764,560 | |||||||
Advances to suppliers | 1,735,738 | 837,170 | ||||||||
Prepayments | 622,748 | 852,017 | ||||||||
Tender deposits | 218,189 | 176,860 | ||||||||
Travel advances to shareholders | 6 | 42,399 | 10,639 | |||||||
Advances to employees | 7 | 476,202 | 455,666 | |||||||
Deferred tax assets | 637,611 | 600,835 | ||||||||
Total current assets | $ | 15,290,772 | 14,415,697 | |||||||
Restricted cash | 2(l) | 1,094 | 1,094 | |||||||
Amount due from a related company | 4 | 80,042 | 126,769 | |||||||
Property, plant and equipment, net | 9 | 6,393,535 | 6,855,505 | |||||||
Intangibles, net | 10 | 14,245,714 | 14,644,804 | |||||||
Deposit for technology-based designed | 3,424,163 | 3,402,547 | ||||||||
Deposit for purchase of plant and equipment | - | - | ||||||||
TOTAL ASSETS | $ | 39,435,320 | 39,446,416 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current liabilities | ||||||||||
Short term bank loans | 11 | $ | - | - | ||||||
Accounts payable | 1,102,195 | 621,997 | ||||||||
Income tax payable | 3,771 | 4,307 | ||||||||
Turnover and other taxes | 29,686 | 77,512 | ||||||||
Expected warranty liabilities | 12 | 21,129 | 20,995 | |||||||
Customer deposits | 2,072,894 | 1,748,881 | ||||||||
Accrued liabilities | 820,746 | 627,211 | ||||||||
Total current liabilities | $ | 4,050,421 | 3,100,903 | |||||||
Warrants liabilities | 13 | 197,824 | 1,165,692 | |||||||
TOTAL LIABILITIES | $ | 4,248,245 | 4,266,595 |
See accompanying notes to consolidated financial statements
F-1 |
SUNWAY GLOBAL INC.
CONSOLIDATED BALANCE SHEETS (Continued)
AS AT MARCH 31, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)
Notes | March 31, 2012 (Unaudited) | December 31, 2011 (Audited) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||||
Series B Convertible Preferred Stock $0.0000001 par value; 400,000 shares authorized; 160,494 shares issued and outstanding at MARCH 31, 2012 AND DECEMBER 31, 2011 | 13 | $ | 1 | $ | 1 | |||||
Common stock at $0.0000001 par value; 100,000,000 shares authorized; 18,499,736 shares issued and outstanding at MARCH 31, 2012 AND DECEMBER 31, 2011 | 2 | 2 | ||||||||
Additional paid-in capital | 13,833,383 | 13,833,383 | ||||||||
Statutory reserves | 4,267,115 | 4,267,115 | ||||||||
Retained earnings | 10,122,726 | 10,331,224 | ||||||||
Accumulated other comprehensive income | 6,963,848 | 6,748,096 | ||||||||
$ | 35,187,075 | $ | 35,179,821 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 39,435,320 | $ | 39,446,416 |
See accompanying notes to consolidated financial statements
F-2 |
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
AS AT MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
Notes | The three months ended March 31, | |||||||||
2012 | 2011 | |||||||||
Net revenues | 17 | $ | 2,010,575 | $ | 1,561,014 | |||||
Cost of net revenues | 17 | (949,675 | ) | (729,868 | ) | |||||
Gross profit | $ | 1,060,900 | $ | 831,146 | ||||||
Selling expenses | (542,548 | ) | (231,639 | ) | ||||||
General and administrative expenses | (1,732,917 | ) | (981,838 | ) | ||||||
(Loss)/Income from operations | $ | (1,214,565 | ) | $ | (382,331 | ) | ||||
Interest income | 1,524 | 8,528 | ||||||||
Changes in fair value of warrants | 967,868 | (2,329,880 | ) | |||||||
(Loss)/Income before income tax | $ | (245,173 | ) | $ | (2,703,683 | ) | ||||
Income tax expense | 14 | 36,675 | 57,350 | |||||||
Net (loss)/income | $ | (208,498 | ) | $ | (2,646,333 | ) | ||||
Net income/(loss) per share: | ||||||||||
-Basic | 15 | $ | (0.01 | ) | $ | (0.14 | ) | |||
-Diluted | 15 | $ | (0.01 | ) | $ | (0.11 | ) | |||
Weighted average number of common stock | ||||||||||
-Basic | 15 | 18,499,736 | 18,499,736 | |||||||
-Diluted | 15 | 23,314,556 | 23,338,995 |
See accompanying notes to consolidated financial statements
F-3 |
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AS AT MARCH 31, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)
Additional | Retained | Accumulated | ||||||||||||||||||||||||||||||||||
Preferred | Preferred | No. of | paid | earnings/ | other | |||||||||||||||||||||||||||||||
Series | Series | shares | Common | in | Statutory | (Accumulated | comprehensive | |||||||||||||||||||||||||||||
A | B | outstanding | stock | capital | reserves | deficit) | income | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2011 | $ | - | $ | 1 | 18,499,736 | $ | 2 | $ | 13,833,383 | $ | 4,267,115 | $ | 8,542,065 | $ | 4,907,103 | $ | 31,549,669 | |||||||||||||||||||
Net income | - | - | - | - | - | - | 1,789,159 | - | 1,789,159 | |||||||||||||||||||||||||||
Appropriations to statutory | ||||||||||||||||||||||||||||||||||||
Reserves | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Foreign currency translation | 1,840,993 | 1,840,993 | ||||||||||||||||||||||||||||||||||
Adjustment | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Balance, December 31, 2011 | $ | - | $ | 1 | 18,499,736 | $ | 2 | $ | 13,833,383 | $ | 4,267,115 | $ | 10,331,224 | $ | 6,748,096 | $ | 35,179,821 | |||||||||||||||||||
Balance, January 1, 2012 | $ | - | $ | 1 | 18,499,736 | $ | 2 | $ | 13,833,383 | $ | 4,267,115 | $ | 10,331,224 | $ | 6,748,096 | $ | 35,179,821 | |||||||||||||||||||
Net income/(loss) | - | - | - | - | - | - | (208,498 | ) | - | (208,498 | ) | |||||||||||||||||||||||||
Foreign currency translation | ||||||||||||||||||||||||||||||||||||
Adjustment | - | - | - | - | - | - | - | 215,752 | 215,752 | |||||||||||||||||||||||||||
Balance, March 31, 2012 | $ | - | $ | 1 | 18,499,736 | $ | 2 | $ | 13,833,383 | $ | 4,267,115 | $ | 10,122,726 | $ | 6,963,848 | $ | 35,187,075 |
See accompanying notes to consolidated financial statements
F-4 |
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
The three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities | ||||||||
Net (loss)/income | $ | (208,498 | ) | $ | (2,646,333 | ) | ||
Depreciation | 526,112 | 461,944 | ||||||
Amortization | 493,266 | 561,753 | ||||||
Changes in fair value of warrants | (967,868 | ) | 2,329,880 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Trade receivables, net | (574,035 | ) | 809,154 | |||||
Inventories | 206,428 | (728,405 | ) | |||||
Note receivables | (650,643 | ) | - | |||||
Advances to suppliers | (895,321 | ) | 191,508 | |||||
Prepayments | 235,225 | (402,737 | ) | |||||
Tender deposits | (40,298 | ) | 69,502 | |||||
Travel advances to shareholders | (31,766 | ) | 616,081 | |||||
Advances to employees | (17,682 | ) | 43,243 | |||||
Deferred tax assets | (24,753 | ) | (57,350 | ) | ||||
Receivables from relationship | (36,776 | ) | - | |||||
Accounts payable | 477,350 | (225,802 | ) | |||||
Income tax payable | (564 | ) | 378,286 | |||||
Turnover and other taxes | (48,431 | ) | 328,771 | |||||
Customer deposits | 313,628 | (327,678 | ) | |||||
Accrued liabilities | 189,990 | (350,104 | ) | |||||
Net cash provided/(used) by operating activities | $ | (1,054,636 | ) | $ | 1,051,713 | |||
Cash flows from investing activities | ||||||||
Decrease in restricted cash | $ | - | $ | 50,026 | ||||
Purchase of plant and equipment | (19,419 | ) | (24,251 | ) | ||||
Purchase of intangibles | - | (1,459,896 | ) | |||||
Deposit for technology-based designed | - | - | ||||||
Net cash used in investing activities | $ | (19,419 | ) | $ | (1,434,121 | ) | ||
Cash flows from financing activities | $ | - | $ | - | ||||
Net cash provided by financing activities | $ | - | $ | - |
F-5 |
SUNWAY GLOBAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
The three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Net in cash and cash equivalents (used)/sourced | $ | (1,074,055 | ) | $ | (382,408 | ) | ||
Effect of foreign currency translation on | ||||||||
cash and cash equivalents | 70,441 | (275,433 | ) | |||||
Cash and cash equivalents–beginning period | 1,550,911 | 9,587,765 | ||||||
Cash and cash equivalents–end period | $ | 547,297 | $ | 8,929,924 |
The three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Supplementary cash flow information: | ||||||||
Tax paid | $ | 101 | $ | 378,287 | ||||
Interest received | 1,524 | 8,528 | ||||||
Interest paid | - | - |
SUPPLEMENTAL NON-CASH DISCLOSURES:
1. | During the three months ended March 31, 2012 and 2011, an amount of nil and $1,342,184 were transferred from “Deposit for technology-based designed” to “property, plant and equipment”, respectively. |
See accompanying notes to consolidated financial statements
F-6 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
Sunway Global Inc. (the “Company”) was incorporated in the state of Nevada on October 18, 1971. Prior to June 6, 2007 the company has only nominal operations and assets.
On June 6, 2007, the Company executed a reverse-merger with Rise Elite International Limited (“Rise Elite (BVI)”) by an exchange of shares whereby the Company issued 210,886 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0000001 per share in exchange for all shares in World Through Limited, a British Virgin Islands corporation (“World Through (BVI)”).
World Through (BVI) holds Sunway World Through Technology (Daqing) Co Ltd (“SWT” or “WFOE”), which entered into a series of agreements with Daqing Sunway Technology Co., Ltd (“Sunway”) including but not limited to management, loan, purchase option, consignment, trademark licensing, non-competition, etc. As a result of entering the abovementioned agreements, WFOE deems to control Sunway as a Variable Interest Entity as required by Accounting Standards Codification ASC 810-10-05 to 10-65 which codified FASB Interpretation No. 46 (revised December 2003) Consolidated of Variable Interest Entities, an Interpretation of ARB No. 51 since SWT was the primary beneficiary. On March 16, 2008, SWT acquired Beijing Sunway New-force Medical Treatment Tech Co., Ltd (“Beijing Sunway”) as its wholly-owned subsidiary. Beijing Sunway was incorporated in Beijing, PRC on May 24, 2007.
On January 16, 2009, World Through (BVI) acquired Qingdao Liheng Textiles Co Ltd (“Liheng”) as its wholly-owned subsidiary. Liheng was incorporated in PRC on June 6, 2003.
The Company, through its subsidiaries and Sunway, (hereinafter, collectively referred to as “the Group”), is now in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment.
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 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 financial statements.
F-7 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
(b) | Principles of consolidation |
The consolidated financial statements, which include the Company and its subsidiaries, are compiled in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly-owned subsidiaries.
The Company owned five subsidiaries since its reverse-merger on June 6, 2007. The detailed identities of the consolidating subsidiaries would have been as follows:
Name of subsidiaries
|
Place of
incorporation
|
Attributable
interest
|
||||
World Through Ltd | British Virgin Islands | 100 | % | |||
Sunway World Through Technology (Daqing) Co Ltd | PRC | 100 | % | |||
*Daqing Sunway Technology Co Ltd | PRC | 100 | % | |||
Beijing Sunway New-force Medical Treatment Tech Co., Ltd | PRC | 100 | % | |||
Qingdao Liheng Textiles Co Ltd | PRC | 100 | % | |||
*Note: Deemed variable interest entity |
(c) | Use of estimates |
The preparation of the financial statements in conformity 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 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 the estimates are made; however actual results could differ materially from those estimates.
(d) | Economic and political risks |
The Group’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 Group’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 Group’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, among other things.
F-8 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) | Intangibles |
Intangibles are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:
Land use rights | Over the lease terms |
Technology-based design | 10 years |
(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 property, plant and equipment are as follows:
Buildings | 20 years | |||
Machinery and equipment | 6 years | |||
Moldings | 10 years | |||
Computer software | 3 - 10 years | |||
Office equipment and motor vehicles | 6 - 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) | Maintenance and repairs |
The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
(h) | Accounting for the impairment of long-lived assets |
The Group 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 FASB ASC 360. 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.
F-9 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) | Inventories |
Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
(j) | Trade receivables |
Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. There were bad debts of $294,869 and $20,926 for the years ended December 31, 2011 and 2010 respectively.
Outstanding accounts balances are reviewed individually for collectability. The Company do not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
(k) | 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 the PRC and Hong Kong. The Company does not maintain any bank accounts in the United States of America.
March 31, 2012 | December 31, 2011 | |||||||
Bank of Communications, Branch of Daqing | ||||||||
City Economic Zone | 33,574 | $ | 198,988 | |||||
China Construction Bank, Beijing Branch | 455,046 | 1,209,771 | ||||||
Qingdao bank | 1,243 | 1,461 | ||||||
Agricultural Bank of China | 26,914 | 122,803 | ||||||
HSBC | 1,162 | 1,186 | ||||||
Cash on hand | 29,358 | 16,702 | ||||||
547,297 | $ | 1,550,911 |
(l) | Restricted cash |
Restricted cash are pledged deposits in an escrow account for investor relations purpose.
(m) | Revenue recognition |
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenues from services recognizes when the agreed services have been performed, provided, completed or virtual completed at an agreed period(s) of time, and are measurable.
Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable; and
- Collection is reasonably assured.
F-10 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) | Revenue recognition (Continued) |
Contract revenues are recognized when the manufacturing and installation of the medical equipment is completed. Generally, the company receives total contract sum from clients in 4 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. Third payment of 30% is received after the construction is completed within 4 months. The final sum of the remaining portion is received after the construction is completed until one year.
(n) | Expected warranty liabilities |
The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.
(o) | Cost of sales |
Cost of sales consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. All inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of distribution network are also included. Write-down of inventory to lower of cost or market is also recorded in cost of revenues.
(p) | Leases |
The Group did not have lease which met the criteria of capital lease. Leases which do not qualify as capital lease are classified as operating lease. Operating lease rental payment included in general and administrative expenses were $31,487 and $20,596 and cost of sales were nil and $1,685 for the three months ended March 31, 2012 and 2011 respectively.
(q) | Advertising |
The Group expensed all advertising costs as incurred. Advertising expenses included in selling expenses were 15,257 and $nil for the three months ended March 31, 2012 and 2011 respectively.
(r) | Shipping and handling |
All shipping and handling are expensed as incurred. Shipping and handling expenses included in selling expenses were $9,005 and $15,257 for the three months ended March 31, 2012 and 2011 respectively.
(s) | Research and development |
All research and development costs are expensed as incurred. The research and development costs included in general and administrative expenses were $70,941 and $22,783 for the three months ended March 31, 2012 and 2011 respectively.
F-11 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(t) | Retirement benefits |
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred. The retirement benefit expenses included in general and administrative expenses were $35,369 and $62,404 for the three months ended March 31, 2012 and 2011 respectively.
(u) | Income taxes |
The Group accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future realization is uncertain.
(v) | Foreign currency translation |
The accompanying financial statements are presented in United States dollars. The reporting currency of the Group is the U.S. dollar ($). SWT, Sunway, Beijing Sunway and Liheng use its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Group because it has not engaged in any significant transactions that are subject to the restrictions.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
March 31, 2012 | December 31, 2011 | March 31, 2011 | ||||||||||
Twelve months ended | ||||||||||||
RMB : USD exchange rate | - | 6.5918 | - | |||||||||
Three months ended | ||||||||||||
RMB : USD exchange rate | 6.3122 | - | 6.5701 | |||||||||
Average three months ended | ||||||||||||
RMB : USD exchange rate | 6.2976 | - | 6.5894 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
F-12 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(w) | Statutory reserves |
As stipulated by the PRC’s Company Law and as provided in the SWT, Sunway, Beijing Sunway and Liheng’
s Articles of Association, SWT, Sunway, Beijing Sunway and Liheng’s net income after taxation can only be distributed as dividends after appropriation has been made for the following:
(i) | Making up cumulative prior years’ losses, if any; |
(ii) | Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital, which is restricted for set off against losses, expansion of production and operation or increase in registered capital; |
(iii) | Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's “Statutory common welfare fund”, which is restricted for capital expenditure for the collective benefits of the Company's employees; and |
(iv) | Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting. |
(x) | 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 financial statements. The Group’s current component of other comprehensive income is the foreign currency translation adjustment.
(y) | Warrant Liability |
Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, the outstanding warrants of the Company previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.
As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in June 2007. On January 1, 2009 the Company recorded as a cumulative effect adjustment by decreasing additional paid-in capital amounting to $3,990,942 and decreasing beginning retained earnings by the amount of $65,910,931 and recording $69,901,873 as a warrant liability to recognize the fair value of such warrants on January 1, 2009. The fair value of the warrants was $197,824 and $1,165,692 on March 31, 2012 and December 31, 2011 respectively. The Company recognized $967,868 as income and $23,29,880 as loss from the change in fair value of warrants for the three months ended March 31, 2012 and 2011 respectively.
F-13 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
(z) | Recent accounting pronouncements |
In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”, which temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 is effective January 19, 2011 (date of issuance).
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.
F-14 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
(z) | Recent accounting pronouncements (Continued) |
In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which requires an entity 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. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. However, it will impact the presentation of comprehensive income.
In July 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers. This ASU amends the FASB Accounting Standards CodificationTM (Codification) to provide guidance about how health insurers should recognize and classify in their income statements fees mandated by the "Patient Protection and Affordable Care Act," as amended by the "Health Care and Education Reconciliation Act." ASU 2011-06 represents a consensus of the EITF on Issue No. 10-H, “Fees Paid to the Federal Government by Health Insurers.” ASU 2011-06 requires that the liability for the fee be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2011-06 is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective.
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. ASU 2011-09 is intended to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. Users of financial statements have requested additional disclosure to increase awareness of the commitments and risks involved with participating in multiemployer pension plans. The amendments in this ASU will require additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. For public entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. For nonpublic entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2012. Early adoption is permissible for both public and nonpublic entities. ASU 2011-09 should be applied retrospectively for all prior periods presented.
F-15 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
(z) | Recent accounting pronouncements (Continued) |
ASC Update (“ASU”) No. 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds. This update is to defer the effective date of certain amendments to the consolidation requirements of FASB Accounting Standards Codification TM (Codification) Topic 810, Consolidation, resulting from the issuance of FASB Accounting Standard No. 167, Amendments to FASB Interpretation 46(R). Specifically, the amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity:
•That has all the attributes of an investment company; or
•For which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies.
The ASU does not defer the disclosure requirements in the Statement 167 amendments to Topic 810. The amendments in this ASU are effective as of the beginning of a reporting entity's first annual period that begins after November 15, 2009, and for interim for interim periods within that first annual reporting period. Early application is not permitted.
ASC Update (“ASU”) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update is to codify the consensus reached in EITF Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or services condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The adoption of this update did not have any material impact on the Company’s financial statements.
ASC Update (“ASU”) No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This update amends various SEC paragraphs in the FASB Accounting Standards Codification pursuant to SEC Final Rule, “Technical Amendments to Rules Forms, Schedules and Codification of Financial Reporting Policies”. The adoption of this update did not have any material impact on the Company’s financial statements.
ASC Update (“ASU”) No. 2010-22, Accounting for Various Topics. This update amends various SEC paragraphs in the FASB Accounting Standards Codification based on external comments received and the issuance of Staff Accounting Bulletin (SAB) No. 112 which amends or rescinds portion of certain SAB topics. SAB 112 was issued to bring existing SEC guidance into conformity with ASC 805 “Business Combination” and ASC 810 “Consolidation”. The adoption of this update did not have any material impact on the Company’s financial statements.
F-16 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
(z) | Recent accounting pronouncements (Continued) |
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. ASU No. 2011-10 is intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, ASU 2011-10 is effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 is intended to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-11 is intended to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.
F-17 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
3. | CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS |
Financial instruments which potentially expose the Group to concentrations of credit risk, consists of cash and trade receivables as of March 31, 2012 and December 31, 2011. The group performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.
as of March 31, 2012 and December 31, 2011, the Group’s bank deposits were all placed with banks in the PRC and Hong Kong where there is currently no rule or regulation in place for obligatory insurance of bank accounts.
For the three months ended March 31, 2012, the group’s sales were generated from the PRC and Western Europe. Trade receivables as of March 31, 2012 and December 31, 2011 arose in the PRC and overseas.
The maximum amount of loss due to credit risk that the group would incur if the counter parties to the financial instruments failed to perform is represented the carrying amount of each financial asset in the balance sheet.
Normally the Group does not obtain collateral from customers or debtors.
Details of the customers accounting for 10% or more of the Group’s revenue are as follows:
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Customer A | $ | 362,043 | $ | - | ||||
Customer B | 264,752 | - | ||||||
Customer D | 261,211 | - | ||||||
Customer F | - | 228,397 | ||||||
Customer K | - | 583,474 | ||||||
Customer L | - | 168,621 |
Details of customers accounting for 10% or more of the Group’s trade receivables are as follows:
March 31, 2012 | December 31, 2011 | |||||||
Customer A | $ | 298,418 | $ | 332,386 | ||||
Customer B | 273,005 | 256,827 | ||||||
Customer C | 273,005 | 291,466 | ||||||
Customer D | 262,666 | 261,008 | ||||||
Customer E | 525,560 | 291,256 | ||||||
Customer F | 386,138 | 417,594 | ||||||
Customer G | 864,457 | 807,578 |
F-18 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
4. | AMOUNT DUE FROM A RELATED COMPANY |
The following table provides the details of amounts due from related companies:
March 31, 2012 | December 31, 2011 | |||||||
Rise Elite International Ltd. | $ | 830 | $ | 830 | ||||
Daqing Sunway Software Tech Co., Ltd. | 79,212 | 125,939 | ||||||
$ | 80,042 | $ | 126,769 | |||||
Amount due from Rise Elite International Ltd. (Rise Elite) was $830, a related company where Mr. Liang Deli, the director of the Group is a shareholder. The amount is held by Rise Elite for the initial setup expenses. The amount was unsecured, interest free and repayable on demand.
Amount due from Daqing Sunway Software Tech Co., Ltd. was $79,212, a related company where Mr. Zhao Qichao, the director of the Group is a shareholder. The amount was unsecured, interest free and repayable on demand.
5. | TRADE RECEIVABLES, NET |
Trade receivables comprise the followings:
March 31, 2012 | December 31, 2011 | |||||||
Trade receivables, gross | $ | 7,541,447 | $ | 7,219,617 | ||||
Provision for doubtful debts | (41,332 | ) | (335,940 | ) | ||||
Trade receivables, net | $ | 7,500,115 | $ | 6,883,677 |
All of the above trade receivables are due within one year of aging.
An analysis of the allowance for doubtful accounts for the three months ended March 31, 2012 and 2011 is as follows:
March 31, 2012 | March 31, 2011 | |||||||
Balance at beginning of period | $ | 335,940 | $ | 39,579 | ||||
Addition of the provision | (295,519 | ) | - | |||||
Foreign exchange adjustment | 911 | 130 | ||||||
Balance at end of period | $ | 41,332 | $ | 39,709 | ||||
Allowance was made when collection of the full amount is no longer probable. Management reviews and adjusts this allowance periodically based on historical experience, current economic climate as well as its evaluation of the collectability of outstanding accounts. The Group evaluates the credit risks of its customers utilizing historical data and estimates of future performance.
F-19 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
6. | TRAVEL ADVANCES TO SHAREHOLDERS |
Travel advances were made to shareholders. These shareholders are also the management of the company and these advances are used to enable their execution of operational duties such as marketing and sales promotion. The following table provides the details of the outstanding accounts. They are unsecured, interest free and repayable on demand.
March 31, 2012 | December 31, 2011 | |||||||
Deli Liang | 42,399 | 10,639 | ||||||
$ | 42,399 | $ | 10,639 |
The following table provides the activity in the travel advances to shareholders:
March 31, 2012 | December 31, 2011 | |||||||
Beginning balance | $ | 10,639 | $ | 332,709 | ||||
Add: Advanced during the period/year | 41,553 | 85,345 | ||||||
Less: Transferred to income statement | (9,793 | ) | (94,333 | ) | ||||
Repayment by directors | - | (313,082 | ) | |||||
Ending balance | $ | 42,399 | $ | 10,639 | ||||
7. | ADVANCES TO EMPLOYEES |
Advances to employees are advances for purchases and travelling. They are unsecured, interest free and repayable on demand. The following table provides the activity in the advances to employees:
March 31, 2012 | December 31, 2011 | |||||||
Beginning balance | $ | 455,666 | $ | 269,303 | ||||
Add: Advanced during the period/year | 540,393 | 1,415,966 | ||||||
Less: Transferred to income statement | (215,404 | ) | (925,341 | ) | ||||
Recollected from employees | (304,453 | ) | (304,262 | ) | ||||
Ending balance | $ | 476,202 | $ | 455,666 |
8. | INVENTORIES |
Inventories comprise the followings:
March 31, 2012 | December 31, 2011 | |||||||
Finished goods | $ | 2,381,423 | $ | 2,093,393 | ||||
Work in process | 366,094 | 218,788 | ||||||
Raw materials | 683,744 | 452,379 | ||||||
$ | 3,431,261 | $ | 2,764,560 |
F-20 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
9. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment, net comprise the followings:
March 31, 2012 | December 31, 2011 | |||||||
At cost | ||||||||
Buildings | $ | 2,252,219 | $ | 2,195,166 | ||||
Machinery and equipment | 973,361 | 953,761 | ||||||
Moldings | 9,712,342 | 9,651,031 | ||||||
Computer software | 2,298,295 | 2,283,786 | ||||||
Office equipment and motor vehicles | 721,640 | 713,585 | ||||||
$ | 15,957,857 | $ | 15,797,329 | |||||
Less: accumulated depreciation | (8,969,991 | ) | (8,391,785 | ) | ||||
Less: accumulated impairment | (594,331 | ) | (590,579 | ) | ||||
$ | 6,393,535 | $ | 6,814,965 | |||||
Construction in progress | - | 40,540 | ||||||
$ | 6,393,535 | $ | 6,855,505 | |||||
Construction in progress represents direct costs of construction incurred for factory infrastructure. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use.
In 2011, the Company recorded an impairment loss of moldings in the amount of $590,579. The circumstances leading to the impairment are attributed to the forecasted results of the product - Sunway Automatic Medicament Emitting (“SAME”). The Company considered historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, it may be required to record further impairment charges.
Depreciation expenses are included in the statement of income as follows:
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Cost of net revenues | $ | 391,992 | $ | 414,804 | ||||
General and administrative expenses | 16,866 | 29,327 | ||||||
Selling expenses | 117,254 | 17,813 | ||||||
Total depreciation expenses | $ | 526,112 | $ | 461,944 |
F-21 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
10. | INTANGIBLES, NET |
Details of intangibles are as follows:
March 31, 2012 | December 31, 2011 | |||||||
Land use rights, at cost | $ | 1,351,794 | $ | 1,343,261 | ||||
Technology-based design, at cost | 21,263,981 | 21,129,748 | ||||||
$ | 22,615,775 | $ | 22,473,009 | |||||
Less: accumulated amortization | (6,470,169 | ) | (5,940,306 | ) | ||||
Less: accumulated impairment | (1,899,892 | ) | (1,887,899 | ) | ||||
Total intangibles, net | $ | 14,245,714 | $ | 14,644,804 |
During the year of 2009, the Group acquired the rights to use a parcel of land totaling 9,082 square meters, for a consideration of $89,552 (RMB613,035), located at Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China for a term of 48 years from November 3, 2006 to July 24, 2053. The Group acquired secondly the rights to use a parcel of land totaling 10,841 square meters, for a consideration of $106,709 (RMB730,485), located at Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China for a term of 50 years from January 14, 2009 to January 13, 2059. Both lands have been used to build the Liheng’s facility.
During the year of 2009, the Group acquired the design and internal device control of medicine dispensing and packing machine, for a consideration of $6,988,882 (RMB47,300,000).
Amortization expense included in the general and administrative expenses for the three months ended 2012 and 2011 were $493,266 and $561,753 respectively.
In 2011, the Company recorded an impairment loss of technology-based design in the amount of $1,887,899. The circumstances leading to the impairment are attributed to the forecasted results of the product - Sunway Automatic Medicament Emitting (“SAME”). The Company considered historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, it may be required to record further impairment charges.
F-22 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
11. | SHORT-TERM BANK LOANS |
A short-term bank loan was initiated on August 31, 2010 and paid-off on February 25, 2011 by a director.
As of March 31, 2012, the bank loan balance was as follows:
March 31, 2012 | December 31, 2011 | |||||||
Loans from Bank of Qingdao, interest rates at 6.37% per annum, due August 30, 2011 | $ | - | $ | 303,407 | ||||
Less: Repayment during the period | - | 303,407 | ||||||
$ | - | $ | - |
12. | EXPECTED WARRANTY LIABILITIES |
An analysis of the expected warranty liabilities for the three months ended March 31, 2012 and 2011 is as follows:
March 31, 2012 | December 31, 2011 | |||||||
Beginning balance | $ | 20,995 | $ | 53,308 | ||||
Warranty expense for the year | - | (33,780 | ) | |||||
Foreign currency difference | 134 | 1,467 | ||||||
Ending balance | $ | 21,129 | $ | 20,995 |
F-23 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
13. | SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS |
On June 5, 2007, the Company entered into a purchase agreement, whereby the company agreed to sell 165,432 shares of the Company’s Series B Preferred shares and various stock purchase warrants to purchase up to 18,686,054 shares of the Company’s common shares. The exercise price, expiration date and number of share eligible to be purchased with the warrants is summary in the following table:
Investment
Amount
|
Preferred
B
|
A
Warrant
|
B
Warrant
|
J
Warrant
|
C
Warrant
|
D
Warrant
|
|||||||||||||
Vision Opportunity Master Fund, Ltd. | 6,500,000 | 160,494 | 4,814,815 | 2,407,407 | 4,362,416 | 4,362,416 | 2,181,208 | ||||||||||||
Columbia China Capital Group, Inc. | 200,000 | 4,938 | 148,148 | 74,074 | 134,228 | 134,228 | 67,114 |
Series of Warrant | Number of shares | Exercise Price | Expiry Date | |||||
Series A | 4,962,963 | $ | 1.76 | 6 /5 /2012 | ||||
Series B | 2,481,481 | 2.30 | 6 /5 /2012 | |||||
Series J | 4,496,644 | 1.49 | 6 /5 /2008 | |||||
Series C | 4,496,644 | 1.94 | 6 /5 /2012 | |||||
Series D | 2,248,322 | 2.53 | 6 /5 /2012 |
On June 6, 2007, we issued to Kuhns Brothers, Inc. and its designees an aggregate of 17,646 shares of Series A Preferred and a Series J warrant to purchase an aggregate of 496,296 shares of common stock of the Company at $1.62 per share in connection with the reverse merger transaction pursuant to the placement agent agreement with the Kuhns Brothers, Inc.
The Series B preferred stock has liquidation rights senior to common stock and Series A preferred stock. In the event of a liquidation of the Company, holders of Series B preferred stock are entitled to receive a distribution equal to $40.50 per share of Series B preferred stock prior to any distribution to the holders of common stock and Series A preferred stock. The Series B preferred stock is entitled to non-cumulative dividends only upon declaration of dividends by the Company. To date, no dividends have been declared or accrued. The Series B preferred stock will participate based on their respective as-if conversion rates if the Company declares any dividends. After the Amendment were filed effect the Reverse Split, each share of Series B preferred stock would be convertible into 30 shares of Common Stock for $1.35 each, which both may be adjusted from time to time pursuant to the conversion rate.
F-24 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
13. | SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS |
(Continued)
The holders of Series B preferred stock shall be entitled to voting rights by applicable law and the right to vote together with the holders of Common and Series A Preferred Stock.
The gross proceeds of the transaction were $6.7 million. The proceeds from the transaction were allocated to the Series B preferred stock, warrants and beneficial conversion feature based on the relative fair value of the securities. The value of the Preferred Series B was determined by reference to the market price of the common shares into which it converts, and the gross value of the warrants was calculated using the Black –Scholes model with the following assumptions: expected life of 1 year, volatility of 117% and an interest rate of 4.99%.
The Company recognized a beneficial conversion feature discount on the Series B preferred stock at its intrinsic value, which was the fair value of the common stock at the commitment date for the Series B preferred stock investment, less the effective conversion price but limited to the $6.7 million of proceeds received from the sale. The Company recognized the $6.7 million beneficial conversion feature as an increase in paid in capital in the accompanying consolidated balance sheets on the date of issuance of the Series B preferred shares since the Series B preferred shares were convertible at the issuance date.
The agreement, also provided that if a Registration Statement is not effective within a certain period of time or the common shares are not listed on the NASDAQ or American exchange by December 31, 2008, the Company will pay the holders of the shares a penalty that can range from $67,000 to $670,000 and certain principal shareholders would issue up to 1,000,000 additional shares to the purchasers of the Preferred Series B shares. The company is accounting for these penalties in accordance with ASC 450 “Contingencies” which codified FAS 5 - Accounting for Contingencies, whereby the penalty will not be recorded as a liability until and if it is probable the penalty will be incurred. No penalty has been recorded in the accompanying financial statements for this contingency.
Under the agreement, Warrant J was expired on June 5, 2008. On that day, Vision Opportunity Master Fund Ltd. converted all the Warrant J, totally 4,362,416 shares into 4,362,416 of common stock.
On February 7, 2008, 12 shareholders of Preferred Series A converted 228,530 shares into 13,711,831 shares of common stock, in which Rise Elite International Limited, Vision Opportunity Master Fund, Ltd and Kuhns Brothers, Inc converted 210,886, 7,990 and 2,647 shares of Preferred Series A into 12,653,160, 479,400 and 158,820 shares of common stock respectively.
On June 18, 2008, Columbia China Capital Group, Inc. converted 4,938 shares of Preferred Series B into 148,140 shares of common stock.
On November 10, 2008, Columbia China Capital Group, Inc. converted the Warrant J, totally 53,691 shares into 53,691 of common stock.
F-25 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
13. | SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS |
(Continued)
Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, the outstanding warrants of the Company previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.
As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in June 2007. On January 1, 2009 the Company recorded as a cumulative effect adjustment by decreasing additional paid-in capital amounting to $3,990,942 and decreasing beginning retained earnings by the amount of $65,910,931 and recording $69,901,873 as a warrant liability to recognize the fair value of such warrants on January 1, 2009. The fair value of the warrants was $197,824 and $1,165,692 on March 31, 2012 and December 31, 2011 respectively. The Company recognized $967,868 as income and $23,29,880 as loss from the change in fair value of warrants for the three months ended March 31, 2012 and 2011 respectively.
As of March 31, 2011, the Company adopts lattice model with Monte Carlo Simulations to measure the various outcome so as to calculate the most likely expected future value of the convertible shares at a define time period. The Company believes that the lattice model can improve the valuation of the existing warrants with consideration of early exercise rights and down ratchet exercise price reset provision. The change is accounted for as change in accounting estimates. As opposed to closed form model like Black Scholes which assumes warrants be exercised on expiry date, the lattice model assumes a low probability of early exercise due to declining stock prices and sample different price paths using Monte Carlo simulation.
F-26 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
14. | INCOME TAXES |
The Company, being registered in the State of Nevada and which conducts all of its business through its subsidiaries incorporated in PRC, is not subject to federal income tax until the operating profits was rebounded back to Untied States. The subsidiaries are SWT, Sunway, Beijing Sunway, Liheng (see note 1).
SWT, Sunway, Beijing Sunway and Liheng, being registered in the PRC, are subject to PRC’s Corporate Income Tax (“CIT”). Under applicable income tax laws and regulations, an enterprise located in PRC, including the district where our operations are located, is subject to a rate of 25% for the three months ended March 31, 2012 and 2011.
However, Sunway is a high technology company, and in accordance with the relevant regulations regarding the favourable tax treatment for high technology companies, Sunway is entitled to a reduced tax rate of 15% as long as Sunway is physically located and registered in the high and advance technology development zone.
The Group uses the asset and liability method, where deferred tax assets and liabilities are determined based in the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. There are temporary differences on deferred tax asset $36,776 on net operating loss as of March 31, 2012 and 600,835 as of December 31, 2011.
F-27 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
14. | INCOME TAXES (Continued) |
A reconciliation between the income tax computed at the U.S. statutory rate and the Group’s provision for income tax is as follows:
March 31, 2012 | December 31, 2011 | |||||||
U.S. statutory rate | 34 | % | 34 | % | ||||
Foreign income not recognized in the U.S. | (34 | )% | (34 | )% | ||||
PRC CIT | 25 | % | 25 | % | ||||
Tax holiday | (10 | )% | (10 | )% | ||||
Provision for income taxes | 15 | % | 15 | % |
The provision for income taxes consists of the following:
March 31, 2012 | December 31, 2011 | |||||||
Current tax - PRC CIT | $ | 101 | $ | 15,670 | ||||
Deferred tax provision | (36,776 | ) | (600,835 | ) | ||||
Income tax | $ | 36,675 | $ | (585,165 | ) |
Reconciliation of these items is as follows:
March 31, 2012 | December 31, 2011 | |||||||
(Loss) / Income before tax | $ | (245,173 | ) | $ | 1,789,159 | |||
Add: Impairment of fixed assets and intangible assets | - | 2,439,271 | ||||||
Loss on disposal of fixed assets and intangible assets | - | 2,318,889 | ||||||
Tax loss not deductible among subsidiaries | - | 9,773,554 | ||||||
Other non-tax deductible items | 1,217,287 | 137,417 | ||||||
Less: Change in fair value of warrants | (967,868 | ) | (16,353,823 | ) | ||||
Taxable income (adjusted) | $ | 4,246 | $ | 104,467 |
F-28 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
15. | EARNINGS PER SHARE |
The calculation of the basic and diluted earnings per share attributable to the common stock holders is based on the following data:
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Income: | ||||||||
Income/(loss) for the purpose of basic earnings per share | $ | (208,498 | ) | $ | (2,646,333 | ) | ||
Effect of dilutive potential common stock | - | - | ||||||
Income for the purpose of dilutive earnings per share | $ | (208,498 | ) | $ | (2,646,333 | ) | ||
Number of shares: | ||||||||
Weighted average number of common stock for the purpose of basic earnings per share | 18,499,736 | 18,499,736 | ||||||
Effect of dilutive potential common stock | ||||||||
-conversion of Series A | ||||||||
convertible preferred stock | - | - | ||||||
-conversion of Series B | ||||||||
convertible preferred stock | 4,814,820 | 4,814,820 | ||||||
-conversion of Warrant Series A | - | - | ||||||
-conversion of Warrant Series B | - | 24,439 | ||||||
-conversion of Warrant Series J | - | - | ||||||
-conversion of Warrant Series C | - | - | ||||||
-conversion of Warrant Series D | - | - | ||||||
Weighted average number of common stock for the purpose of dilutive earnings per share | 23,314,556 | 23,338,995 |
F-29 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
16. | COMMITMENTS AND CONTINGENCIES |
The Group has entered into a tenancy agreement for factory expiring through 2011. Total rental expenses for the months ended March 31, 2012 and 2011 amounted to $31,487 and $22,281 respectively.
As at March 31, 2012, the Group’s commitments for minimum lease payments under these leases for the next one year are as follows:
March 31, | ||||
2012 | $ | 63,218 | ||
2013 and thereafter | - | |||
$ | 63,218 |
17. | SEGMENT INFORMATION |
The Group currently is engaged in the manufacturing and selling of logistic transport systems and categorized in one segment. The Group has contracted with customers with four types of product altogether, workstation type A, workstation type B, workstation type C and Sunway Automatic Dispensing and Packing (“SADP”) and others . Workstation types A, B and C are of the same function but with different product design.
Net revenues and cost of revenues by product:
For the three | ||||||||||||||||||||||||
months ended | ||||||||||||||||||||||||
March 31, | Workstation | Workstation | Workstation | |||||||||||||||||||||
2012 | Type A | Type B | Type C | SADP | Other | Consolidated | ||||||||||||||||||
Net revenues | $ | - | $ | - | $ | 1,154,139 | $ | 246,147 | 610,289 | 2,010,575 | ||||||||||||||
Cost of net revenues | - | - | (377,670 | ) | (152,842 | ) | (419,163 | ) | (949,675 | ) | ||||||||||||||
$ | - | $ | - | $ | 776,469 | $ | 93,305 | 191,126 | 1,060,900 |
For the three | ||||||||||||||||||||||||
months ended | ||||||||||||||||||||||||
March 31, | Workstation | Workstation | Workstation | |||||||||||||||||||||
2011 | Type A | Type B | Type C | SADP | Other | Consolidated | ||||||||||||||||||
Net revenues | $ | 90,297 | $ | - | $ | 328,921 | $ | 988,461 | $ | 153,335 | $ | 1,561,014 | ||||||||||||
Cost of net revenues | (28,639 | ) | - | (117,381 | ) | (546,484 | ) | (37,364 | ) | (729,868 | ) | |||||||||||||
$ | 61,658 | $ | - | $ | 211,540 | $ | 441,977 | $ | 115,971 | $ | 831,146 |
The Group’s operations are located in the PRC. All revenues are derived from customers in the PRC and Europe. All of the Group’s assets are located in the PRC. Sales of workstations are carried out in the PRC. Accordingly, no analysis of the Group's sales and assets by geographical market is presented.
F-30 |
SUNWAY GLOBAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Stated in US Dollars) (Unaudited)
18. | FAIR VALUE MEASUREMENTS |
The Company has adopted FASB Statement No. 157, Fair Value Measurements (ASC 820), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB Statement No. 157 are described as follows:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. |
Level 2 |
Inputs to the valuation methodology include
· quoted prices for similar assets or liabilities in active markets
· quoted prices for identical or similar assets or liabilities in inactive markets
·inputs other than quoted prices that are observable for the asset or liability
·inputs that are derived principally from or corroborated by observable market data by correlation or other means
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
Warrant Liability: As of March 31, 2012, the Company adopted the lattice valuation method to improve the valuation of the existing warrants with early exercise rights and down ratchet exercise price reset provision. The change is accounted for as change in accounting estimates. As opposed to closed
F-31 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Overview
Since June 27, 2007, the Company has operated as a holding company for entities that, through contractual relationships, control the business of Daqing Sunway Technology Co., Ltd. (“Daqing Sunway”), a company organized under the laws of the PRC that designs, manufactures and sells logistic transport systems and medicine dispensing systems and equipment that are principally used by hospitals and other medical facilities in the PRC. Currently our Company is the only producer of two products in the PRC. We have served approximately 300 customers in the PRC from our facilities in Daqing and Qingdao. We generate our revenue from sales in three product categories: pneumatic transport systems (“PTS”), Sunway Automatic Dispensing and Packing (“SADP”), and automatic medicament emitting systems.
This discussion and analysis focuses on the business results of Sunway Group (consisting of Daqing Sunway, the Company’s primary operating entity, along with its other indirectly-owned subsidiaries Beijing Sunway New-force Medical Treatment Tech Co., Ltd. and Qingdao Liheng Textile Co., Ltd), comparing its results in the three months ended March 31, 2012 to the three months ended March 31, 2011.
Affected by the Daqing Sunway’s factory have removed since December of 2010, brought about output of the products ceased. The Company sales growth was slow in the first quarter of 2012 as compared with the same period of 2011.
This discussion and analysis focuses on the business results of Sunway Group, comparing its results in the three months period ended March 31, 2012 with the three months period ended March 31, 2011.
Three-month period ended March 31, 2012 and March 31, 2011
Results of Operations
In the three months ended March 31, 2012, the Company’s net revenue and gross profit was increased slowly as compared with the same period of 2011. These increases were primarily attributable to a result of Daqing factory closed, brought about factory output decline.
The following table summarizes the results of our operations during the three months ended March 31, 2012 and 2011, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the three months ended March 31, 2012 and 2011.
4 |
Three Months Ended March 31 | ||||||||||||||||
2012 | 2011 | Change | Change rate | |||||||||||||
Net Revenue | $ | 2,010,575 | $ | 1,561,014 | $ | 449,561 | 28.80 | % | ||||||||
Cost of net revenue | $ | 949,675 | $ | 729,868 | $ | 219,807 | 30.12 | % | ||||||||
Gross Profit | $ | 1,060,900 | $ | 831,146 | $ | 229,754 | 27.64 | % | ||||||||
Gross Margin | 52.77 | % | 53.24 | % | (0.47 | )% | ||||||||||
Operating (loss)/ Income | $ | (1,214,565 | ) | $ | (382,331 | ) | $ | (832,234 | ) | 217.67 | % | |||||
Changes in fair value of warrants | $ | 967,868 | $ | (2,329,880 | ) | $ | 3,297,748 | (141,54 | )% | |||||||
(loss)/ Net Income | $ | (208,498 | ) | $ | (2,646,333 | ) | $ | 2,437,835 | (92.86 | )% | ||||||
Net (loss) / profit margin | (10.37 | )% | (169.53 | )% | - |
Net Revenues
Net revenues for the three months ended March 31, 2012, was $2,010,575, an increase of 28.80% as compared with net revenues of $1,561,014 for the three months ended March 31, 2011. In the three months ended March 31, 2012, we sold 210 workstations, an increase of 195.77% as compared with 71 workstations in the three months ended March 31, 2011. During the same period of 2012, we also sold 3 units of SADP, a decrease of 75.00% as compared with 12 units in the three months ended March 31, 2011. The decrease in workstations was primarily because Daqing’s factory was closed and the production of SADP ceased.
The following table breaks down application categories as percentage of total net revenue.
Three Months Ended March 31, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Sales | % of total sales | Sales | % of total sales | |||||||||||||
PTS | $ | 1,154,139 | 57.41 | % | $ | 419,218 | 26.86 | % | ||||||||
SADP | $ | 246,147 | 12.24 | % | $ | 988,461 | 63.32 | % | ||||||||
Other | $ | 610,289 | 30.35 | % | $ | 153,335 | 9.82 | % | ||||||||
Total net revenue | $ | 2,010,575 | 100.00 | % | $ | 1,561,014 | 100.00 | % |
Gross Profit
Gross profit increased 27.64% to $1,060,900 for the three months ended March 31, 2012, as compared to $831,146 for the three months ended March 31, 2011. Our gross profit margin dropped 0.47% from 53.24% as of the three months ended March 31, 2011 to 52.77% as of the same period of 2012, mainly due to the closing of our Daqing factory, resulting in a shortage of products to supply our clients. In an effort to increase supply, we hired new employees at our Qingdao factory in 2011. However, many of these new employees did not have sufficient experience in manufacturing which affected the quality of some of our products. These new employees would need to adapt and learn our techniques, and as a result, our direct labor fees and direct material increased for the three months ended March 31, 2012.
The table below presents information about our gross profit for the periods indicated:
Three Months Ended March 31, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
US$ | Gross profit Margin | US$ | Gross profit Margin | |||||||||||||
Gross Profit | $ | 1,060,900 | 52.77 | % | $ | 831,146 | 53.24 | % |
Income from Operations
Operating loss was $1,214,565 for the three months ended March 31, 2012, as compared to $382,331 for the three months ended March 31, 2011. The decrease was primarily due to the closing of our Daqing factory, which reduced the supply of our products.
5 |
Cost of Net Revenue
Cost of net revenue increased to $949,675 for the three months ended March 31, 2012, representing a 30.12% increase as compared with $729,868 for the same period of 2011. This increase is primarily due to increase in sale.
The table below presents information about our cost of net revenue for the periods indicated:
Three Months Ended March 31, | ||||||||||||
2012 | 2011 | Change | ||||||||||
Cost of net revenue | $ | 949,675 | $ | 729,868 | 30.12 | % | ||||||
Operating Expenses
Operating expenses were $2,275,465 for the three months ended March 31, 2012, an increase of 87.52% as compared with $1,213,477 for the same period of 2011. The increase was primarily due to two reasons: (i) selling expenses increased $310,909, or 134.22% to $542,548 in the three months ended March 31, 2012 from $231,639 for the same period of 2011; and (ii) general and administration expenses increased $751,079, or 76.50% to $1,732,917 in the three months ended March 31, 2012 from $981,838 for the same period of 2011.
The table below presents information about our operating expenses for the periods indicated:
Three Months Ended March 31, | ||||||||||||
2012 | 2011 | Change | ||||||||||
Selling expenses | $ | 542,548 | $ | 231,639 | 134.22 | % | ||||||
General & Administrative expenses | $ | 1,732,917 | $ | 981,838 | 76.50 | % | ||||||
Total operating expenses | $ | 2,275,465 | $ | 1,213,477 | 87.52 | % |
Changes in fair value of warrants
Changes in fair value of warrants were $967,868 for the three months ended March 31, 2012. This is recorded as a non-cash charge, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FASB ASC Topic 815, “Derivative and Hedging” (ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders.
Net Income
Net loss was $208,498 for the three months ended March 31, 2012. In the first quarter of 2012, our net income was impacted by a non-cash charge of $967,868 unrelated to the Company’s operations. Excluding the changes in fair value of warrants in non-cash charge, the Company’s net loss from operations would have been $1,176,366 for the three months ended March 31, 2012 and $316,453 for the three months ended March 31, 2011, due to the decrease in net revenue, increase in cost of net revenue and operating expenses
Earnings Per Share
Basic and diluted loss per share for the three months ended March 31, 2012 were $0.01 and $0.01 compared to loss per share for the same period of 2011 was $0.14 and $0.11. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the three months ended March 31, 2012 and March 31, 2011, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 23,314,556 and 23,338,995 for the three months ended March 31, 2012 and 2011 respectively.
6 |
Trade Receivables, net
Trade receivables, net increased to $7,500,115 as of March 31, 2012, compared with $6,883,677 as of December 31, 2011. This increase in trade receivables was primarily attributable to increase in sale.
Inventory
Inventory consists of raw materials, finished goods and work in progress. As of March 31, 2012, the recorded value of our inventory has increased 24.12% to $3,431,261 from $2,764,560 as of December 31, 2011. The increase resulted from a increase of 13.76% in finished goods from $2,093,393 as of December 31, 2011 to $ 2,381,423 as of March 31, 2012; an increase of 51.14% in raw material inventory from $452,379 as of December 31, 2011 to $ 683,744 as of March 31, 2012, and an increase of 67.33% in work in progress inventory from $218,788 as of December 31, 2011 to $366,094 as of March 31, 2012. The increase was primarily attributable to our Qingdao factory’s augmented output of the SADP and PTS, so that we have adequate supply to meet our customers’ needs.
The table below presents information about our inventory for the periods indicated:
Item | March 31, 2012 | December 31, 2011 | Change | |||||||||
Finished goods | $ | 2,381,423 | $ | 2,093,393 | 13.76 | % | ||||||
Work in progress | $ | 366,094 | $ | 218,788 | 67.33 | % | ||||||
Raw material | $ | 683,744 | $ | 452,379 | 51.14 | % | ||||||
Total | $ | 3,431,261 | $ | 2,764,560 | 24.12 | % |
Accounts Payable
Accounts payable amounted to $1,102,195 as of March 31, 2012, an increase as compared with $621,997 as of December 31, 2011. The increase was primarily attributable to produce plan growth, which resulted in an increase in raw material purchases.
Liquidity and Capital Resources
We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings and cash provided by operations.
The table below presents information about our cash flow for the periods indicated:
Three months ended March 31, | ||||||||||||
2012 | 2011 | Change | ||||||||||
Net cash provided by (used in) operating activities | $ | (1,054,636 | ) | $ | 1,051,713 | $ | (2,106,349 | ) | ||||
Net cash provided by (used in) investing activities | $ | (19,419 | ) | $ | (1,434,121 | ) | $ | 1,414,702 | ||||
Net cash provided by (used in) financing activities | $ | - | $ | - | $ | - | ||||||
Effect of foreign currency translation on cash and cash equivalents | $ | 70,441 | $ | (275,433 | ) | $ | 345,874 | |||||
Beginning cash and cash equivalent | $ | 1,550,911 | $ | 9,587,765 | $ | (8,036,854 | ) | |||||
Ending cash and cash equivalent | $ | 547,297 | $ | 8,929,924 | $ | (8,382,627 | ) |
7 |
Operating Activities
For the three months ended March 31, 2012, net cash provided by used in operating activities was $1,054,636. This was primarily attributable to our net loss of $208,498, adjusted by an add-back of non-cash charges mainly consisting of depreciation, amortization, and charges in fair value of warrants of $526,112, $493,266, $967,868 as loss respectively, offset by a $897,648 decrease in working capital. Specifically, increase in working capital was primarily due to: (i) a $574,035 trade receivables increase driven by sales; (ii) a $650,643 increase in inventories, principally of finished goods and work in progress inventory, due to Daqing factory is removing, bring about order form did not finished on time; (iii) a $895,321 increase in advances to suppliers to buy raw materials; (iv) a $290,378 decrease in prepayments, travel advances to shareholders, tender deposits and advances to employees, consisting primarily of prepayments for raw materials and other supplies in advance of shipment, working capital for sales staff and payment of client deposits; partially offset by a $931,973 increase in accounts payable, tax payable, customer deposits, accrued liabilities and other payables.
Investing Activities
For the three months ended March 31, 2012, net cash used in investing activities was $19,419. This was primarily attributable to a $24,251 capital expenditure for purchase of new plant and equipment.
Cash and Cash Equivalents
Our cash and cash equivalents as at the beginning of March 31, 2012, were $1,550,911 and decreased to $547,297 by the end of the period.
In future periods, we need extra operating cash from commercial bank, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 9 months.
Trends
We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the period ended September 30, 2011. Based upon that evaluation, the Company’s management concluded that, as of the date of evaluation, the Company’s disclosure controls and procedures were not effective. Based upon that evaluation and due to the material weaknesses existing in our internal controls as of December 31, 2011 (as described in the Company's form 10-K) which have not been fully remediated as of March 31, 2012, we have concluded that as of March 31, 2012, our disclosure controls and procedures were not effective.
8 |
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
To our knowledge, there is no material litigation pending or threatened against us.
ITEM 1A. | RISK FACTORS. |
Not Applicable.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
To our knowledge, there are no material defaults upon senior securities.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not Applicable.
ITEM 5. | OTHER INFORMATION. |
None.
ITEM6 - EXHIBITS.
Exhibit No. | Description of Exhibit | |
31.1 | Certification by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section 302. | |
31.2 | Certification by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section 302. | |
32.1 | Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906. | |
32.2 | Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906. |
101.INS XBRL Instance Document*
101.SCH XBRL Schema Document*
101.CAL XBRL Calculation Linkbase Document*
101.LAB XBRL Label Linkbase Document*
101.PRE XBRL Presentation Linkbase Document*
101. DEF XBRL Definition Linkbase Document*
* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
9 |
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.
SUNWAY GLOBAL, INC. | ||
Dated: May 21, 2012 | By: | /s/ Liang Deli |
Name: Liang Deli | ||
Title: Chief Executive Officer (Principal Executive Officer)
|
Dated: May 21, 2012 | By: | /s/ Samuel Sheng |
Name: Samuel Sheng | ||
Title: Chief Financial Officer (Principal Financial and Accounting officer)
|
10 |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Liang Deli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sunway Global Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: May 21, 2012 | By: | /s/ Liang Deli | |
Liang Deli | |||
Chief Executive Officer | |||
(principal executive officer) |
EXHIBIT 31 2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Samuel Sheng, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sunway Global Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: May 21, 2012 | By: | /s/ Samuel Sheng | |
Samuel Sheng | |||
Chief Financial Officer | |||
(principal financial and accounting officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sunway Global Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Liang Deli , Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Dated: May 21, 2012 | By: | /s/ Liang Deli | |
Liang Deli | |||
Chief Executive Officer | |||
(principal executive officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sunway Global Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Samuel Sheng, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Dated: May 21, 2012 | By: | /s/ Samuel Sheng | |
Samuel Sheng | |||
Chief Financial Officer | |||
(principal financial and accounting officer) |
FAIR VALUE MEASUREMENTS
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Mar. 31, 2012
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FAIR VALUE MEASUREMENTS |
The Company has adopted FASB Statement No. 157, Fair Value Measurements (ASC 820), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB Statement No. 157 are described as follows:
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
Warrant Liability: As of March 31, 2012, the Company adopted the lattice valuation method to improve the valuation of the existing warrants with early exercise rights and down ratchet exercise price reset provision. The change is accounted for as change in accounting estimates. As opposed to closed |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Mar. 31, 2012
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The 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 financial statements.
The consolidated financial statements, which include the Company and its subsidiaries, are compiled in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly-owned subsidiaries.
The Company owned five subsidiaries since its reverse-merger on June 6, 2007. The detailed identities of the consolidating subsidiaries would have been as follows:
The preparation of the financial statements in conformity 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 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 the estimates are made; however actual results could differ materially from those estimates.
The Group’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 Group’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 Group’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, among other things.
Intangibles are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:
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 property, plant and equipment are as follows:
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.
The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
The Group 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 FASB ASC 360. 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.
Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. There were bad debts of $294,869 and $20,926 for the years ended December 31, 2011 and 2010 respectively.
Outstanding accounts balances are reviewed individually for collectability. The Company do not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
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 the PRC and Hong Kong. The Company does not maintain any bank accounts in the United States of America.
Restricted cash are pledged deposits in an escrow account for investor relations purpose.
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenues from services recognizes when the agreed services have been performed, provided, completed or virtual completed at an agreed period(s) of time, and are measurable.
Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable; and
- Collection is reasonably assured.
Contract revenues are recognized when the manufacturing and installation of the medical equipment is completed. Generally, the company receives total contract sum from clients in 4 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. Third payment of 30% is received after the construction is completed within 4 months. The final sum of the remaining portion is received after the construction is completed until one year.
The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.
Cost of sales consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. All inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of distribution network are also included. Write-down of inventory to lower of cost or market is also recorded in cost of revenues.
The Group did not have lease which met the criteria of capital lease. Leases which do not qualify as capital lease are classified as operating lease. Operating lease rental payment included in general and administrative expenses were $31,487 and $20,596 and cost of sales were nil and $1,685 for the three months ended March 31, 2012 and 2011 respectively.
The Group expensed all advertising costs as incurred. Advertising expenses included in selling expenses were 15,257 and $nil for the three months ended March 31, 2012 and 2011 respectively.
All shipping and handling are expensed as incurred. Shipping and handling expenses included in selling expenses were $9,005 and $15,257 for the three months ended March 31, 2012 and 2011 respectively.
All research and development costs are expensed as incurred. The research and development costs included in general and administrative expenses were $70,941 and $22,783 for the three months ended March 31, 2012 and 2011 respectively.
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred. The retirement benefit expenses included in general and administrative expenses were $35,369 and $62,404 for the three months ended March 31, 2012 and 2011 respectively.
The Group accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future realization is uncertain.
The accompanying financial statements are presented in United States dollars. The reporting currency of the Group is the U.S. dollar ($). SWT, Sunway, Beijing Sunway and Liheng use its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Group because it has not engaged in any significant transactions that are subject to the restrictions.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
As stipulated by the PRC’s Company Law and as provided in the SWT, Sunway, Beijing Sunway and Liheng’ s Articles of Association, SWT, Sunway, Beijing Sunway and Liheng’s net income after taxation can only be distributed as dividends after appropriation has been made for the following:
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 financial statements. The Group’s current component of other comprehensive income is the foreign currency translation adjustment.
Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, the outstanding warrants of the Company previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.
As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in June 2007. On January 1, 2009 the Company recorded as a cumulative effect adjustment by decreasing additional paid-in capital amounting to $3,990,942 and decreasing beginning retained earnings by the amount of $65,910,931 and recording $69,901,873 as a warrant liability to recognize the fair value of such warrants on January 1, 2009. The fair value of the warrants was $197,824 and $1,165,692 on March 31, 2012 and December 31, 2011 respectively. The Company recognized $967,868 as income and $23,29,880 as loss from the change in fair value of warrants for the three months ended March 31, 2012 and 2011 respectively.
In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”, which temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 is effective January 19, 2011 (date of issuance).
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.
In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which requires an entity 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. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. However, it will impact the presentation of comprehensive income.
In July 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers. This ASU amends the FASB Accounting Standards CodificationTM (Codification) to provide guidance about how health insurers should recognize and classify in their income statements fees mandated by the "Patient Protection and Affordable Care Act," as amended by the "Health Care and Education Reconciliation Act." ASU 2011-06 represents a consensus of the EITF on Issue No. 10-H, “Fees Paid to the Federal Government by Health Insurers.” ASU 2011-06 requires that the liability for the fee be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2011-06 is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective.
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.
In September 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. ASU 2011-09 is intended to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. Users of financial statements have requested additional disclosure to increase awareness of the commitments and risks involved with participating in multiemployer pension plans. The amendments in this ASU will require additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. For public entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. For nonpublic entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2012. Early adoption is permissible for both public and nonpublic entities. ASU 2011-09 should be applied retrospectively for all prior periods presented.
ASC Update (“ASU”) No. 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds. This update is to defer the effective date of certain amendments to the consolidation requirements of FASB Accounting Standards Codification TM (Codification) Topic 810, Consolidation, resulting from the issuance of FASB Accounting Standard No. 167, Amendments to FASB Interpretation 46(R). Specifically, the amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity:
•That has all the attributes of an investment company; or
•For which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies.
The ASU does not defer the disclosure requirements in the Statement 167 amendments to Topic 810. The amendments in this ASU are effective as of the beginning of a reporting entity's first annual period that begins after November 15, 2009, and for interim for interim periods within that first annual reporting period. Early application is not permitted.
ASC Update (“ASU”) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update is to codify the consensus reached in EITF Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or services condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The adoption of this update did not have any material impact on the Company’s financial statements.
ASC Update (“ASU”) No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This update amends various SEC paragraphs in the FASB Accounting Standards Codification pursuant to SEC Final Rule, “Technical Amendments to Rules Forms, Schedules and Codification of Financial Reporting Policies”. The adoption of this update did not have any material impact on the Company’s financial statements.
ASC Update (“ASU”) No. 2010-22, Accounting for Various Topics. This update amends various SEC paragraphs in the FASB Accounting Standards Codification based on external comments received and the issuance of Staff Accounting Bulletin (SAB) No. 112 which amends or rescinds portion of certain SAB topics. SAB 112 was issued to bring existing SEC guidance into conformity with ASC 805 “Business Combination” and ASC 810 “Consolidation”. The adoption of this update did not have any material impact on the Company’s financial statements.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. ASU No. 2011-10 is intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, ASU 2011-10 is effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 is intended to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
In December 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-11 is intended to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. |