ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
|
|
NOTE 7.
|
Related Party Transactions (Continued)
|
Transactions with Systematic Information
Limited
Mr. Yang, the Companys Chief Executive Officer, majority shareholder
and a director, is a director and shareholder of Systematic Information Ltd.
(Systematic Information) with a total of 100% interest. On September 1, 2008,
we entered into a lease agreement with Systematic Information pursuant to which
we lease one facility. The lease agreement for this facility expires on August
31, 2010. The monthly lease payment for this lease totals $641. We incurred and
paid an aggregate rent expense of $1,923 to Systematic Information during the
three months ended March 31, 2010 and 2009, respectively.
During the three months ended March 31, 2010 and 2009, we received
service charges of $2,038 and $0 respectively from Systematic Information. The
service fee was charged for back office support for Systematic Information.
During the three months ended March 31, 2010 and 2009, we sold products
for $767,981 and $74,688 respectively, to Systematic Information. As of March
31, 2010 and December 31, 2009, there were no outstanding accounts receivables
from Systematic Information.
During the three months ended March 31, 2010 and 2009, we purchased
inventories of $0 and $74,688 respectively from Systematic Information. As of
March 31, 2010 and December 31, 2009, there were no outstanding accounts
payable to Systematic Information.
A workshop located in Hong Kong owned by Systematic Information was
used by the Company as collateral for loans from BEA Bank.
Transactions with Global Mega Development
Limited
Mr. Yang is the sole beneficial owner of the equity interests of Global
Mega Development Ltd. (Global). During the three months ended March 31, 2010
and 2009, we sold products for $3,580 and $0 respectively, to Global. As of
March 31, 2010 and December 31, 2009, there were no outstanding accounts
receivables from Global.
Transactions with Systematic Semiconductor
Limited
Mr. Yang is a director and sole beneficial owner of the equity
interests of Systematic Semiconductor Ltd. (Systematic). During the three
months ended March 31, 2010 and 2009, we received a management fee of $1,923
and $3,846 respectively from Systematic. The management fee was charged for
back office support for Systematic.
During the three months ended March 31, 2010 and 2009, we sold products
for $0 and $18,144 respectively, to Systematic. As of March 31, 2010 and
December 31, 2009, there were no outstanding accounts receivables from
Systematic.
Transactions with Aristo Components Limited
Mr. Ben Wong, one of the Companys directors, is a 90% shareholder of
Aristo Components Ltd. (Aristo Comp). During the three months ended March 31,
2010 and 2009, we received a management fee of $3,077 and $2,692 respectively
from Aristo Comp. The management fee was charged for back office support for
Aristo Comp.
During the three months ended March 31, 2010 and 2009, we sold products
for $0 and $12,060 respectively, to Aristo Comp. As of March 31, 2010 and
December 31, 2009, there were no outstanding accounts receivables from Aristo
Comp.
During the three months ended March 31, 2010 and 2009, we purchased
inventories of $0 and $241,325 respectively from Aristo Comp. As of March 31,
2010 and December 31, 2009, there were no outstanding accounts payable to Aristo
Comp.
18
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
|
|
NOTE 7.
|
Related Party Transactions (Continued)
|
Transactions with Atlantic Storage Devices
Limited
Mr. Yang is a director and 40% shareholder of Atlantic Storage Devices
Ltd. (Atlantic Storage). During the three months ended March 31, 2010 and
2009, we sold products for $440 and $154,785 respectively, to Atlantic Storage.
As of March 31, 2010 and December 31, 2009, there were no outstanding accounts
receivables from Atlantic Storage.
Transactions with Rambo Technologies Limited
Mr. Ben Wong is a director and 60% shareholder of Rambo Technologies
Ltd. (Rambo). During the three months ended March 31, 2010 and 2009, we sold
products for $9,878 and $10,170 respectively, to Rambo. As of March 31, 2010
and December 31, 2009, there were no outstanding accounts receivables from
Rambo.
During the three months ended March 31, 2010 and 2009, we purchased
inventories of $0 and $54,930 respectively, from Rambo. As of December 31, 2009
and 2008, there were no outstanding accounts payable to Rambo.
Transactions with Usmart Electronic Products
Limited
Mr. Yang is a director and the sole beneficial
owner of the equity interests of Usmart Electronic Products Ltd. (Usmart).
On October 7, 2009, we entered into a leasing payment agreement with Usmart
pursuant to which we lease one lot machinery facility to Usmart. The leasing
payment agreement for this facility expires on September 16, 2011. The monthly
lease income for this lease totals $3,846. We received aggregate lease income
of $11,538 and $0 from Usmart during the three months ended March 31, 2010
and 2009 respectively.
During the three months ended March 31, 2010 and 2009, we sold products
for $17 and $0 respectively, to Usmart. As of March 31, 2010 and December 31,
2009, there were no outstanding accounts receivables from Usmart.
During the three months ended March 31, 2010 and 2009, we purchased
inventories of $1,705 and $130 respectively, from Usmart. As of March 31, 2010
and December 31, 2009, there were no outstanding accounts payable to Usmart.
Transactions with Kasontech Electronics
Limited
Mr. Kenneth Lap-Yin Chan, the Company Chief Financial Officer, is a 33%
shareholder of Kasontech Electronics Limited (Kasontech). During the three
months ended March 31, 2010 and 2009, we received a management fee of $1,282
and $0 respectively from Kasontech. The management fee was charged for back
office support for Kasontech.
Transactions with Ibcom Electronics (HK)
Limited
Mr. Ben Wong is a director and 50% shareholder of Ibcom Electronics
(HK) Limited (Ibcom). During the three months ended March 31, 2010 and 2009,
we sold products for $659,539 and $0 respectively, to Ibcom. As of March 31,
2010 and December 31, 2009, there were no outstanding accounts receivables from
Ibcom.
Transactions with City Royal Limited
Mr. Yang is a 50% shareholder of City Royal Limited (City). The
remaining 50% of City is owned by the wife of Mr. Yang. A residential property
located in Hong Kong owned by City was used by the Company as collateral for
loans from DBS Bank.
19
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
With respect to all of the debt and credit arrangements referred to in
this Note 8 and Note 9, the Company pledged its assets to a bank group in Hong
Kong comprised of DBS Bank, BEA and Standard Chartered Bank, as collateral for
all current and future borrowings from the bank group by the Company. In
addition to the above pledged collateral, the debt is also secured by:
|
|
|
|
1.
|
a fixed cash
deposit of $703,974 (HK$5,491,000), a security interest on two residential
properties and a workshop located in Hong Kong owned by Atlantic, a wholly
owned subsidiary of ACL, a security interest on a residential property
located in Hong Kong owned by City, a related party, a workshop located in
Hong Kong owned by Solution, a related party, plus a personal guarantee by
Mr. Yang as collateral for loans from DBS Bank;
|
|
|
|
|
2.
|
a fixed cash
deposit of $1,382,662 (HK$10,784,762), a workshop located in Hong Kong owned
by Systematic Information, a related party, a workshop located in Hong Kong
owned by Solution, a related party, plus an unlimited personal guarantee by
Mr. Yang as collateral for loans from BEA;
|
|
|
|
|
3.
|
an unlimited
personal guarantee by Mr. Yang as collateral for loans from Standard
Chartered Bank;
|
|
|
|
|
4.
|
a security
interest on residential properties located in Hong Kong owned by Aristo, a
wholly owned company by Mr. Yang plus a personal guarantee by Mr. Yang as
collateral for loans from Fubon.
|
The summary of
banking facilities at March 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted facilities
|
|
Utilized facilities
|
|
Not utilized
facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdraft
|
|
$
|
602,564
|
|
$
|
477,391
|
|
$
|
125,173
|
|
Installment
Loan
|
|
|
2,320,976
|
|
|
2,320,976
|
|
|
0
|
|
Factoring
Loan
|
|
|
8,076,923
|
|
|
2,033,146
|
|
|
6,043,777
|
|
Import/Export
Loan
|
|
|
8,205,128
|
|
|
8,196,944
|
|
|
8,184
|
|
Letter of
Guarantee
|
|
|
384,615
|
|
|
384,615
|
|
|
|
|
Term Loan
|
|
|
778,632
|
|
|
778,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,368,838
|
|
$
|
14,191,704
|
|
$
|
6,177,134
|
|
|
|
|
|
|
|
|
|
|
|
|
With the exception of the $384,615 letter of guarantee issued by DBS
Bank, which will expire on 31 October, 2010, amounts borrowed by the Company
under the revolving lines of credit described above are repayable within a
period of three (3) months of drawdown. Other loan facilities repayable are
referred to in Note 9 Long Term Debt.
20
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
Long Term Debt
consisted of the following at March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in
July 2026 and carrying an interest rate of 2.75% below the Hong Kong dollar
Prime Rate (5.25% at March 31, 2010 and December 31, 2009) to DBS Bank. The
monthly installments are approximately $9,663 including interest through 2010
without any balloon payment requirements
|
|
$
|
1,553,551
|
|
$
|
1,572,720
|
|
Installment loan having a maturity date in
July 2011 and carrying an interest rate of 2% below the Hong Kong dollar
Prime Rate (5.25% at March 31, 2010 and December 31, 2009) to DBS Bank
payable in monthly installments of $3,782 including interest through 2010
without any balloon payment requirements
|
|
|
59,135
|
|
|
69,949
|
|
Installment loan having a maturity date in
July 2023 and carrying an interest rate of 2.5% below the Hong Kong dollar
Prime Rate (5.25% at March 31, 2010 and December 31, 2009) to DBS Bank
payable in monthly installments of $5,240 including interest through 2010
without any balloon payment requirements
|
|
|
708,290
|
|
|
719,156
|
|
Term loan having a maturity date in July
2014 and carrying an interest rate of 0.25% plus the Hong Kong dollar Prime
Rate (5.25% at March 31, 2010 and December 31, 2009) to BEA Bank payable in
monthly installments of $15,935 including interest through 2010 without any
balloon payment requirements
|
|
|
666,666
|
|
|
705,128
|
|
|
|
|
|
|
|
|
|
|
|
|
2,987,642
|
|
|
3,066,953
|
|
|
|
|
|
|
|
|
|
Less: current maturities
|
|
|
(318,046
|
)
|
|
(318,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,669,596
|
|
$
|
2,747,981
|
|
An analysis of
long-term debt as of March 31, 2010 and December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Current
portion
|
|
$
|
318,046
|
|
$
|
318,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1
year, but within 2 years
|
|
|
573,619
|
|
|
586,013
|
|
After 2
years, but within 5 years
|
|
|
470,300
|
|
|
508,050
|
|
After 5
years
|
|
|
1,625,677
|
|
|
1,653,918
|
|
|
|
|
|
|
|
|
|
|
|
|
2,669,596
|
|
|
2,747,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,987,642
|
|
$
|
3,066,953
|
|
|
|
|
|
|
|
|
|
21
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
|
|
NOTE 10.
|
Cash Flow Information
|
Cash paid
during the three months ended March 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
Interest
|
|
$
|
95,164
|
|
$
|
166,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
paid
|
|
$
|
28,337
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Activities:
|
|
|
|
|
|
|
|
Capital lease
obligations incurred when capital lease was entered into for new automobiles
|
|
$
|
122,213
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
provision
|
|
$
|
256,066
|
|
$
|
217,949
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11.
|
Fair Value of Financial Instruments
|
Fair value measurements are determined under a three-level hierarchy
for fair value measurements that prioritizes the inputs to valuation techniques
used to measure fair value, distinguishing between market participant
assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and the reporting entitys own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
Fair value is the price that would be received to sell an asset or
would be paid to transfer a liability (i.e., the exit price) in an orderly
transaction between market participants at the measurement date. In determining
fair value, we primarily use prices and other relevant information generated by
market transactions involving identical or comparable assets (market
approach). We also consider the impact of a significant decrease in volume and
level of activity for an asset or liability when compared with normal activity
to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active
markets for identical assets (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). Securities are classified in their
entirety based on the lowest level of input that is significant to the fair
value measurement.
The three
hierarchy levels are defined as follows:
|
|
|
|
Level 1 -
|
Quoted prices in active markets that are unadjusted and accessible at
the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
Level 2 -
|
Quoted prices for identical assets and liabilities in markets that
are not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are observable,
either directly or indirectly;
|
|
|
|
|
Level 3 -
|
Prices or valuations that require inputs that are both significant to
the fair value measurement and unobservable.
|
22
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
Credit risk adjustments are applied to reflect the companys own credit
risk when valuing all liabilities measured at fair value. The methodology is
consistent with that applied in developing counterparty credit risk
adjustments, but incorporates the companys own credit risk as observed in the
credit default swap market.
The following table presents the Companys assets and liabilities that
are measured at fair value on a recurring basis at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
|
3,330,275
|
|
|
|
|
|
|
|
|
3,330,275
|
|
Restricted
cash
|
|
|
2,088,170
|
|
|
|
|
|
|
|
|
2,088,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,418,445
|
|
$
|
|
|
$
|
|
|
$
|
5,418,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12.
|
Derivative instruments
|
On February 1, 2009, the Company adopted ASC 815 (formerly SFAS No.
161) as referenced in Note 2. The adoption of ASC 815 requires additional
disclosures about Companys objectives and strategies for using derivative
instruments, the accounting for the derivative instruments and related hedged
items under ASC 815 (formerly SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities, and the effect of derivative instruments
and related hedged items on the financial statements. The adoption had no
financial impact on the consolidated condensed financial statements.
Since all of the Company sales are done in USD, the bank is exposed to
foreign currency exchange rate fluctuations in the normal course of its
business. As part of its risk management strategy, the Company purchases FX
forward contracts from the banks to secure the exchange rate for a period of
time in order to hedge any FX exposure between HKD and USD throughout the
purchase & sale period. The Company applies hedge accounting based upon the
criteria established by ASC 815, whereby the Company designates its derivatives
as cash flow hedges. Cash flows from the derivative programs were classified as
operating activities in the Consolidated Statement of Cash Flows.
There are three foreign currency exchange agreements that matured as of
March 31, 2010. These agreements are:
|
|
|
Participating forward currency option agreement
between the Company and Standard Chartered Bank for the Company to buy US$500,000
from Standard Chartered Bank at a contract rate of 7.735 at specified dates
up to January 7, 2010. According to the terms of the agreement, the Company
will buy USD in triple amounts if the spot rate is less than the contract
rate at specified dates. The gain on this forward contract during the three
months ended March 31, 2010 was $1,231.
|
|
|
|
Autocancelable target redemption forward agreement
between the Company and Standard Chartered Bank for the Company to buy US$1,000,000
from Standard Chartered Bank at a contract rate of 7.725 at specified dates
up to March 3, 2011. According to the terms of the agreement, the Company
will buy USD in triple amounts if the spot rate is less than the contract
rate at specified dates. The gain on this forward contract during the three
months ended March 31, 2010 was $14,179.
|
23
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial
Statements (Unaudited)
The before-tax effect of derivative instruments in cash flow and net
investment hedging relationships for the three months ended March 31, 2010 and
2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gain Recognized in
Income on Derivative
Location
|
|
Three months
ended March
31, 2010
|
|
Three months
ended March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow
hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contract US$500,000
|
|
Interest and other, net
|
|
$
|
1,231
|
|
$
|
3,705
|
|
Foreign exchange contract US$750,000
|
|
Interest and other, net
|
|
$
|
|
|
$
|
1,260
|
|
Foreign exchange contract US$1,000,000
|
|
Interest and other, net
|
|
$
|
|
|
$
|
15,384
|
|
Foreign exchange contract US$1,000,000
|
|
Interest and other, net
|
|
|
14,179
|
|
|
|
|
Total cash
flow hedges
|
|
|
|
$
|
15,410
|
|
$
|
20,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13.
|
Subsequent Events
|
In preparing these financial statements, the Company evaluated the
events and transactions that occurred from April 1, 2010 through May 15, 2010,
the date these financial statements were issued. The Company has made the
required additional disclosures in reporting periods in which subsequent events
occur.
The Company has recently received the fully executed renewal agreement
from Samsung.
Aristo agreed to repay the Company a monthly payment of HK$1,000,000
(approximately $128,205) over the course of 5 years beginning June 1, 2010. The
repayment plan is subject to review by the Company from time to time.
24
|
|
I
TEM 2.
|
Managements Discussion and Analysis of Financial Condition and
Results of Operations
|
The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described.
The
information contained in this Form 10-Q is intended to update the information
contained in our annual report on Form 10-K for the year ended December 31,
2009, as amended, (the Form 10-K), filed with the Securities and Exchange
Commission, and presumes that readers have access to, and will have read, the
Managements Discussion and Analysis of Financial Condition and Results of
Operation, our consolidated financial statements and the notes thereto, and
other information contained in the Form 10-K. The following discussion and
analysis also should be read together with our condensed consolidated financial
statements and the notes to the condensed consolidated financial statements and
the notes thereto included elsewhere in this Form 10-Q.
Forward-Looking Statements
Information
included in this Form 10-Q may contain forward-looking statements. Except for
the historical information contained in this discussion of the business and the
discussion and analysis of financial condition and results of operations, the
matters discussed herein are forward looking statements. These forward looking
statements include but are not limited to the Companys plans for sales growth
and expectations of gross margin, expenses, new product introduction, and the
Companys liquidity and capital needs. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, will, should, expect,
anticipate, estimate, believe, intend or project or the negative of
these words or other variations on these words or comparable terminology. In
addition to the risks and uncertainties described in Risk Factors contained
in the Form 10-K, these risks and uncertainties may include consumer trends,
business cycles, scientific developments, changes in governmental policy and
regulation, currency fluctuations, economic trends in the United States and
inflation. Forward-looking statements are based on assumptions that may be
incorrect, and there can be no assurance that any projections or other
expectations included in any forward-looking statements will come to pass. Our
actual results could differ materially from those expressed or implied by the
forward-looking statements as a result of various factors. Except as required
by applicable laws, we undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Company Overview and Background
The
Company, through its wholly-owned subsidiary Atlantic Components Limited, a
Hong Kong corporation (Atlantic), is engaged primarily in the business
of distribution of memory products under Samsung brand name which
principally comprise DRAM, Graphic RAM and Flash for the Hong Kong and Southern
China markets. Our wholly-owned subsidiary, Alpha Perform Technology Limited
(Alpha), which previously engaged in this business, ceased activities
as of January 1, 2004, and all its operations were consolidated with those of
Atlantic.
Aristo is
engaged in the marketing, selling and servicing of computer products and accessories
including semiconductors, LCD products, mass storage devices, consumer
electronics, computer peripherals and electronic components. In addition to
Samsung-branded products, Aristo sells Hynix, Micro, Elpida, Qimonda, Lexar,
Dane-Elec, Elixir, SanDisk and Winbond branded products.
As of March
31, 2010, ACL had more than 150 active customers in Hong Kong and Southern
China.
ACL
is in the mature stage of operations. As a result, the relationships between
sales, cost of sales, and operating expenses reflected in the financial information
included in this document to a large extent represent future expected financial
relationships. Much of the cost of sales and operating expenses reflected in
our financial statements are recurring in nature.
25
Overview
Net sales
Sales from
Samsung HK are recognized upon the transfer of legal title of the electronic
components to the customers. The quantities of memory products the Company
sells fluctuate with changes in demand from its customers. The suggested prices
set by Samsung HK that we charged our customers are subject to change
by us based on prevailing economic conditions and their impact on the
market.
Net sales
for the three months ended March 31, 2010 were 58.4% greater than net sales for the three months ended March 31, 2009.
This increase in net sales was mainly due to increase of the average selling
prices and continuous demand in memory products in the PRC market.
Our
gross profit for the first quarter of 2010 decreased by 1.1% over the gross
profit for the comparable periods of the prior fiscal year. The gross profit
margin for the first quarter of 2010 was 2.9%, compared to 4.6% for the corresponding
quarter in 2009. The decrease in gross profit and gross profit margin were
mainly due to the increase in cost of sales when compared to the cost of sales
in the corresponding quarter in 2009. During the first quarter of 2009, we
experienced increased gross profit as a consequence of higher average selling
prices and lower cost of sales as the market experienced a rebound in increased
demand together with reduced supply. As demand continued to increase through
our 2009 and into 2010 to the point of market saturation, marginal costs
increased resulting in increased cost of sales and corresponding reduction
in gross profit margin despite increasing average selling prices.
With
the increase in general and administrative expenses and interest expense,
our income before income taxes provision increased by 22.3% or $309,801
to $1,697,042 in the first quarter of 2010, compared to the corresponding
quarter in 2009.
We believe that the demand and average selling price will remain relatively
stable for the second quarter of 2010 as a result of market saturation.
Cost of sales
Cost of
sales consists of costs of goods purchased from Samsung, and purchases from
other Samsung authorized distributors. Many factors affect our gross
margin, including, but not limited to, the volume of production orders placed
on behalf of its customers, the competitiveness of the memory products industry
and the availability of cheaper Samsung memory products from overseas Samsung
distributors due to regional demand and supply situations. Nevertheless, our procurement operations are supported by Samsung pursuant to a
distributorship agreement between the Company and Samsung. Our cost of goods,
as a percentage of total revenues, amounted to approximately 97.1% for the
three months ended March 31, 2010 and approximately 95.4% for the three months
ended March 31, 2009.
Operating expenses
Our operating expenses for the three months ended March 31, 2010 and 2009
were comprised of sales and marketing and general and administrative expenses
only.
Sales and
marketing expenses consisted primarily of costs associated with advertising and
marketing activities.
26
General and
administrative expenses include all corporate and administrative functions that
serve to support our current and future operations and provide an
infrastructure to support future growth. Major items in this category include
management and staff salaries, rent/leases, professional services, and travel
and entertainment. We expect these expenses to increase as a result of
increased legal and accounting fees anticipated in connection with our compliance with ongoing reporting and accounting requirements of the
Securities and Exchange Commission and as a result of anticipated expansion by
the Company of its business operations. Sales and marketing expenses are
expected to fluctuate as a percentage of sales due to the addition of sales
personnel and various marketing activities planned throughout the year.
Interest
expense, including finance charges, relates primarily to the Companys
short-term and long-term bank borrowings.
Results of Operations
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2010
|
|
March 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
99,011,062
|
|
$
|
62,500,139
|
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
|
96,184,458
|
|
|
59,642,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,826,604
|
|
|
2,857,959
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling
|
|
|
24,802
|
|
|
22,177
|
|
General and administrative
|
|
|
1,057,869
|
|
|
1,355,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
1,743,933
|
|
|
1,480,329
|
|
|
|
|
|
|
|
|
|
Other income
(expenses)
|
|
|
(46,891
|
)
|
|
(93,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes provision
|
|
|
1,697,042
|
|
|
1,387,241
|
|
|
|
|
|
|
|
|
|
Income taxes
provision
|
|
|
(256,066
|
)
|
|
(217,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,440,976
|
|
$
|
1,169,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share - basic and diluted
|
|
$
|
0.05
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
27
Net Sales
The
following table presents our net sales for the three months ended March 31,
2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,011,062
|
|
$
|
62,500,139
|
|
|
58.4
|
%
|
Net sales
increased by $36,510,923 or 58.4%, from $62,500,139 for the three months ended
March 31, 2009 to $99,011,062 in the three months ended March 31, 2010. The
increase was mainly due to increase of the average selling prices and
continuous demand in memory products in the PRC market.
Cost of sales
The
following table presents our cost of sales for the three months ended March 31,
2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,184,458
|
|
$
|
59,642,180
|
|
|
61.3
|
%
|
Cost
of sales increased by $36,542,278, or 61.3%, from $59,642,180 for the three
months ended March 31, 2009 to $96,184,458 for the three months ended March
31, 2010. The increase was principally attributable to the extra-ordinary
low cost of sales during the three months ended March 31, 2009 when compared
with the same period in 2010.
Gross Profit
The following table presents our gross profit for the three months
ended March 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,826,604
|
|
$
|
2,857,959
|
|
|
-1.1
|
%
|
Gross
profit decreased by $31,355, or 1.1%, from $2,857,959 for the three months
ended March 31, 2009 to $2,826,604 for the three months ended March 31, 2010.
Although we experienced a significant increase in net sales during the first
quarter of 2010 when compared to the same period in 2009, this did not result
in a corresponding increase in gross profit. During the first quarter of
2009, we experienced increased gross profit as a consequence of higher average
selling prices and lower cost of sales as the market experienced a rebound
in increased demand together with reduced supply. As demand continued to
increase throughout 2009 and into 2010 to the point of market saturation,
marginal costs increased resulting in increased cost of sales and a corresponding reduction in gross profit margin despite increasing
average selling prices.
Sales and Marketing
The
following table presents the sales and marketing expenses for the three months
ended March 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,802
|
|
$
|
22,177
|
|
|
11.8
|
%
|
For the three months ended March 31, 2010, sales and marketing expenses
increased $2,625, or 11.8%, as compared to the three months ended March 31,
2009. Such increase was directly attributable to and reflective of increased
sales and marketing effort by the Company.
28
General and Administrative
The
following table presents the general and administrative expenses for the three
months ended March 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,057,869
|
|
$
|
1,355,453
|
|
|
-22.0
|
%
|
For
the three months ended March 31, 2010, general and administrative expenses
decreased $297,584, or 22%, as compared to the three months ended March 31,
2009. This decrease was principally attributable to a decrease in directors
remuneration, staff salaries and bank charges.
Income from Operations
The
following table presents the income from operations for the three months ended
March 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,743,933
|
|
$
|
1,480,329
|
|
|
17.8
|
%
|
Income
from operations for the three months ended March 31, 2010 increased by $263,604,
or 17.8%, from $1,480,329 for the three months ended March 31, 2009 to $1,743,933
in the three months ended March 31, 2010. Such increase was mainly due to an increase
in cost of sales offset by a decrease of general and administrative expenses.
Interest Income
The
following table presents the interest income for the three months ended March
31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93
|
|
$
|
33,631
|
|
|
-99.7
|
%
|
For
the three months ended March 31, 2010, interest income decreased $33,538,
or 99.7%, as compared to the three months ended March 31, 2009. This decrease
was due to bank interest refunded by customers during the period in 2009.
Interest Expense
The following
table presents the interest expense for the three months ended March 31, 2010
and 2009, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,164
|
|
$
|
166,892
|
|
|
-43.0
|
%
|
For the
three months ended March 31, 2009, interest expense decreased by $71,728 or
43%, from $166,892 in the three months ended March 31, 2009 to $95,164 in the
three months ended March 31, 2010. These decreases were mainly due to a
decrease in the use by the Company of letters of credit to obtain goods from
suppliers.
29
Net Income on Cash Flow Hedge
The
following table presents the net income on cash flow hedge for the three months
ended March 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,410
|
|
$
|
20,439
|
|
|
-24.6
|
%
|
For the
three months ended March 31, 2009, income on cash flow hedge decreased by
$5,029, or 24.6%, as compared to the three months ended March 31, 2009. t The
decreases were due to the expiration or termination of several currency hedging
contracts in the period 2010.
Income Tax Provision
The
following table presents the income tax provision for the three months ended
March 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256,066
|
|
$
|
217,949
|
|
|
17.5
|
%
|
Income tax
provision increased by $38,117 or 17.5% from $217,949 for the three months
ended March 31, 2009 to $256,066 for the three months ended March 31, 2010. The
increases were due to an increase in the estimated Hong Kong taxes payable by
Atlantic.
Liquidity and Capital Resources
Our principal
sources of liquidity have been cash from operations, bank lines of credit
and credit terms from suppliers. Our principal uses
of cash have been for operations and working capital. We anticipate
these uses will continue to be our principal uses of cash in the future.
As of March 31, 2010, we had revolving
lines of credit and loan facilities in the aggregate amount of $20,368,838, of which $6,177,134 was available
(representing an approximately 20.5% increase in our borrowing lines of credit from December 31, 2009),
which was attributable to the increase of factoring loan. In connection therewith, $996,613 of
restricted bank deposits were released to the Company. Other detailed disclosures on credit facilities
are made in Note 8 and Note 9 of the Condensed Consolidated Financial Statements for the quarter ended
March 31, 2010, including the amounts of facilities, outstanding balances, maturity date, and pledges of assets.
Our
ability to draw down under our various credit and loan facilities is, in
each case, subject to the prior consent of the relevant lending institution
to make advances at the time of the requested advance and each facility (other
than with respect to certain long term mortgage loans) is payable within
90 days of drawdown. As a result of the general tightening of credit markets
in Hong Kong and Asia, many lenders have revised the terms of their revolving
credit lines to levels we did not deem commercially reasonable. Accordingly,
on a case by case basis, we have elected to terminate or not renew
several of our credit facilities resulting in a significant reduction in
our available short term borrowings.
To
address the reduction in available credit facilities, we are relying on our
own cash reserves and cash flows from operations to fund our ongoing operations
and have tightened the credit terms we extend to our customers. As a result,
the Company does not expect that the reduction in available credit facilities
is going to have a materially adverse impact upon our operations for the
foreseeable future.
We
will continue to seek additional sources of available financing on acceptable
terms; however, there can be no assurance that we will be able to
obtain the necessary additional capital on a timely basis or on acceptable
terms, if at all. In addition, if the results are negatively impacted and
delayed as a result of political and economic factors beyond managements
control, our capital requirements may increase.
The
short-term borrowings from banks to finance the cash flow required to finance
the purchase of Samsung memory products from Samsung HK must be made a day in
advance of the release of goods from Samsung HKs warehouse before receiving
payments from customers upon physical delivery of such goods in Hong Kong
which, in most instances, take approximately two days from the date of such
delivery.
The
following factors, among others, could have negative impacts on our
results of operations and financial position: the termination or change in
terms of the Distributorship Agreement; pricing pressures in
30
the industry; a continued downturn in the economy in general or in the
memory products sector; an unexpected decrease in demand for Samsungs memory
products; our ability to attract new customers; an increase in
competition in the memory products market; and the ability of some of our customers to obtain financing.
Although
we believe our expectations of future growth are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. We are under no duty to update our expectations to
conform them to actual results or to reflect changes in expectations.
Net Cash Used for Operating Activities
In the
three months ended March 31, 2010, net cash used for operating activities was
$436,143 while in the three months ended March 31, 2009, net cash provided by
operating activities was $4,901,645, an increase of $5,337,788. This increase
was primarily due to an increase of accounts receivable and decrease of
inventories and accounts payable as of March 31, 2010.
Net Cash Provided by Investing Activities
For the
three months ended March 31, 2010, net cash provided by investing activities
was $757,263 while in the three months ended March 31, 2009, net cash used for
investing activities was $1,090,180, an increase in cash used of $1,847,443.
This increase was primarily due to the decrease of amounts due from Aristo /
Mr. Yang as of March 31, 2010.
Net Cash Provided by Financing Activities
In the
three months ended March 31, 2010, net cash provided by financing activities
was $1,007,350 while in the three months ended March 31, 2009, net cash used
for financing activities was $4,189,889, an increase of $5,197,239. This
increase was due to an increase in the balance of bank lines of credit and
notes payable as of March 31, 2010.
Principles of Consolidation
The
consolidated financial statements of ACL Semiconductors Inc. include the
accounts of Atlantic Components Ltd., a Hong Kong subsidiary and Alpha Perform
Technology Limited, a BVI subsidiary, and Aristo Technologies Ltd., a Hong Kong
company, a variable interest entity deemed to be a subsidiary. All significant
inter-company transactions and balances are eliminated in consolidation.
Critical Accounting Polices
The
U.S. Securities and Exchange Commission (SEC) recently issued Financial
Reporting Release No. 60,
Cautionary Advice
Regarding Disclosure About Critical Accounting Policies
(FRR 60),
suggesting companies provide additional disclosure and commentary on their most
critical accounting policies. In FRR 60, the SEC defined the most critical
accounting policies as the ones that are most important to the portrayal of a
companys financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based on this
definition, our most critical accounting policies include: inventory
valuation, which affects cost of sales and gross margin; policies for revenue
recognition, allowance for doubtful accounts, and stock-based compensation. The
methods, estimates and judgments we use in applying these most critical
accounting policies have a significant impact on the results we report in our
consolidated financial statements.
31
Inventory Valuation.
Our
policy is to value inventories at the lower of cost or market on a part-by-part
basis. This policy requires ACL to make estimates regarding the market value
of its inventories, including an assessment of excess or obsolete inventories.
We determine excess and obsolete inventories based on an estimate of the
future demand for its products within a specified time horizon, generally
12 months. The estimates we use for demand are also used for near-term
capacity planning and inventory purchasing and are consistent with its revenue
forecasts. If ACLs demand forecast is greater than our actual demand
we may be required to take additional excess inventory charges, which will
decrease gross margin and net operating results in the future.
Allowance for Doubtful Accounts.
We
maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Our
allowance for doubtful accounts is based on our assessment of the
collectability of specific customer accounts, the aging of accounts receivable,
our history of bad debts, and the general condition of the industry. If
a major customers credit worthiness deteriorates, or our customers actual
defaults exceed our historical experience, ACLs estimates could
change and impact our reported results.
New Accounting Pronouncements
ASC
105, Generally Accepted Accounting Principles (ASC 105) (formerly
Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162) reorganized by topic existing accounting
and reporting guidance issued by the Financial Accounting Standards Board
(FASB) into a single source of authoritative generally accepted accounting
principles (GAAP) to be applied by nongovernmental entities. All
guidance contained in the Accounting Standards Codification (ASC)
carries an equal level of authority. Rules and interpretive releases of the Securities
and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. Accordingly,
all other accounting literature will be deemed non-authoritative.
ASC 105 is effective on a prospective basis for financial statements issued for
interim and annual periods ending after September 15, 2009. We have implemented
the guidance included in ASC 105 as of July 1, 2009. The implementation of this
guidance changed our references to GAAP authoritative guidance
but did not impact our financial position or results of operations.
ASC
805, Business Combinations (ASC 805) (formerly included under Statement
of Financial Accounting Standards No. 141 (revised 2007), Business Combinations)
contains guidance that was issued by the FASB in December 2007. It requires the
acquiring entity in a business combination to recognize all assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
certain exceptions. Additionally, the guidance requires changes to the
accounting treatment of acquisition related items, including, among other
items, transaction costs, contingent consideration, restructuring costs,
indemnification assets and tax benefits. ASC 805 also provides for a
substantial number of new disclosure requirements. ASC 805 also contains
guidance that was formerly issued as FSP FAS 141(R)-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies which was intended to provide additional guidance clarifying
application issues regarding initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. ASC 805 was effective for
business combinations initiated on or after the first annual reporting period
beginning after December 15, 2008. We implemented this guidance
effective January 1, 2009. Implementing this guidance did not have an effect
on our financial position or results of operations; however it
will likely have an impact on our accounting for future business
combinations, but the effect is dependent upon acquisitions, if any, that are
made in the future.
32
ASC
810, Consolidation (ASC 810) includes new guidance issued by the
FASB in December 2007 governing the accounting for and reporting of noncontrolling
interests (previously referred to as minority interests). This guidance
established reporting requirements which include, among other things, that
noncontrolling interests be reflected as a separate component of equity, not
as a liability. It also requires that the interests of the parent and the
noncontrolling interest be clearly identifiable. Additionally, increases and
decreases in a parents ownership interest that leave control intact shall
be reflected as equity transactions, rather than step acquisitions or dilution
gains or losses. This guidance also requires changes to the presentation of
information in the financial statements and provides for additional disclosure
requirements. ASC 810 was effective for fiscal years beginning on or after
December 15, 2008. We implemented this guidance as of January 1, 2009.
We are in the process of evaluating ASC 810 and will make necessary
changes accordingly.
|
|
I
TEM 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item
|
|
I
TEM 4T.
|
Controls and Procedures
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission (SEC) rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as
appropriate, to allow timely decisions regarding required disclosure.
In
connection with the preparation of this Form 10-Q, we carried out an evaluation
under the supervision and with the participation of our management, including
the CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act. This evaluation was retrospective and
conducted as of March 31, 2010, the last day of the fiscal quarter covered by
this Form 10-Q. Based upon that evaluation, our CEO and CFO have concluded that
our disclosure controls and procedures were not effective as of March 31, 2010
because we have not completed the remediation discussed elsewhere in this Item
4T of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
Our
management has concluded that there are material weaknesses in our internal
controls over financial reporting. These weaknesses include:
Company-level
controls.
We did not maintain effective company-level
controls as defined in the Internal ControlIntegrated Framework published by
COSO. These deficiencies related to each of the five components of internal
control as defined by COSO (control environment, risk assessment, control
activities, information and communication, and monitoring). These deficiencies
resulted in more than a remote likelihood that a material misstatement of our
annual or interim financial statements would not be prevented or detected.
Specifically,
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Our
control environment did not sufficiently promote effective internal control
over financial reporting throughout our organizational structure, and this
material weakness was a contributing factor to the other material weaknesses
described in this Item 4T;
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33
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Our
board of directors has not established adequate financial reporting
monitoring activities to mitigate the risk of management override,
specifically:
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none
of our board of directors is independent;
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no
financial expert on our board of directors has been designated;
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no
formally documented financial analysis is presented to our board of
directors, specifically fluctuation, variance, trend analysis or business
performance reviews;
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an
effective whistleblower program has not been established;
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there
is insufficient oversight of external audit specifically related to fees,
scope of activities, executive sessions, and monitoring of results;
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there
is insufficient oversight of accounting principle implementation;
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there
is insufficient review of related party transactions; and
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there
is insufficient review of recording of stock transactions.
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We
have not maintained sufficient competent evidence to support the effective
operation of our internal controls over financial reporting, specifically
related to our board of directors oversight of quarterly and annual SEC
filings; and managements review of SEC filings, journal entries, account
analyses and reconciliations, and critical spreadsheet controls;
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We
had inadequate risk assessment controls, including inadequate mechanisms for
anticipating and identifying financial reporting risks; and for reacting to
changes in the operating environment that could have a material effect on
financial reporting;
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There
was inadequate communication from management to employees regarding the
general importance of controls and employees duties and control
responsibilities;
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We
had inadequate monitoring controls, including inadequate staffing and
procedures to ensure periodic evaluations of internal controls to ensure that
appropriate personnel regularly obtain evidence that controls are functioning
effectively and that identified control deficiencies are remediated timely;
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We
had an inadequate number of trained finance and accounting personnel with
appropriate expertise in U.S. generally accepted accounting principles.
Accordingly, in certain circumstances, an effective secondary review of
technical accounting matters was not performed;
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We
had inadequate controls over our management information systems related to
program changes, segregation of duties, and access controls;
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We
had inadequate access and change controls over end-user computing spreadsheets.
Specifically, our controls over the completeness, accuracy, validity and
restricted access and review of certain spreadsheets used in the period-end
financial statement preparation and reporting process were not designed
appropriately or did not operate as designed; and
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We
were unable to assess effectiveness of our internal control over financial
reporting in a timely matter.
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Financial statement preparation and review
procedures.
We had
inadequate policies, procedures and personnel to ensure that accurate, reliable
interim and annual consolidated financial statements were prepared and reviewed
on a timely basis. Specifically, we had insufficient: a) levels of supporting
documentation; b) review and supervision within the accounting and finance
departments; c) preparation and review of footnote disclosures accompanying our
financial statements; and d) technical accounting resources. These deficiencies
resulted in errors in the financial statements and more than a remote
likelihood that a material misstatement of our annual or interim financial
statements would not be prevented or detected. In addition, as discussed in
Note 2 in Notes to the Consolidated Financial Statements of this Form 10-K, we
recently determined that Aristo Technologies Limited (Aristo), a
related party, is a variable interest entity under FASB ASC 810-10-25. Consequently,
we consolidated the financial statements of Aristo with those of the Company
for the period effective and restated our previously filed annual and interim
financial statements in amended Form 10-Ks for years ended 2007 and 2008 to
reflect the disclosure in accordance with ASC 810-10-25.
34
Inadequate
reviews of account reconciliations, analyses and journal entries.
We had inadequate review procedures over account reconciliations,
account and transaction analyses, and journal entries. Specifically,
deficiencies were noted in the following areas: a) management review of
supporting documentation, calculations and assumptions used to prepare the
financial statements, including spreadsheets and account analyses; and b)
management review of journal entries recorded during the financial statement
preparation process. These deficiencies resulted in a more than a remote
likelihood that a material misstatement of our annual or interim financial
statements would not be prevented or detected.
Inadequate
controls over purchases and disbursements.
We had inadequate controls over the segregation of duties and
authorization of purchases, and the disbursement of funds. These weaknesses
increase the likelihood that misappropriation of assets and/or unauthorized
purchases and disbursements could occur and not be detected in a timely manner.
These deficiencies resulted in errors in the financial statements and in more
than a remote likelihood that a material misstatement of our annual or interim
financial statements would not be prevented or detected. Specifically,
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We had inadequate procedures and controls
to ensure proper segregation of duties within our purchasing and
disbursements processes and accounting systems;
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We had inadequate procedures and controls
to ensure proper authorization of purchase orders; and
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We had inadequate approvals for payment of
invoices and wire transfers.
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As
of March 31, 2010, we had not completed the remediation of any of these
material weaknesses.
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We
are addressing the outstanding material weaknesses described above, as well
as our control environment. We also expect to undertake the following
remediation efforts:
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We plan to evaluate the composition of our
board of directors and to determine whether to add independent directors or
to replace an inside director with an independent director, in both cases, in
order to have a majority of our board of directors become independent;
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We plan on drafting quarterly financial
statement variance analysis of actual versus budget with relevant
explanations of variances for distribution to our board of directors;
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We are in the process of developing,
documenting, and communicating a formal whistleblower program to employees.
We expect to post the policy on the web site in the governance section and in
the common areas in the office. We plan on providing a toll free number for
reporting complaints and will hire a specific third party whistleblower
company to monitor the hotline and provide monthly reports of activity to our
board of directors;
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Management intends to continue to provide
SEC and US GAAP training for employees and retain external consultants with
appropriate SEC and US GAAP expertise to assist in financial statement
review, account analysis review, review and filing of SEC reports, policy and
procedure compilation assistance, and other related advisory services;
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We intend on developing an internal control
over financial reporting evidence policy and procedures which contemplates,
among other items, a listing of all identified key internal controls over
financial reporting, assignment of responsibility to process owners within
the Company, communication of such listing to all applicable personnel, and
specific policies and procedures around the nature and retention of evidence
of the operation of controls;
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We intend on undertaking a restricted
access review to analyze all financial modules and the list of persons
authorized to have edit access to each. We will remove or add authorized
personnel as appropriate to mitigate the risks of management or other
override; and
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We plan to re-assign roles and
responsibilities in order to improve segregation of duties.
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These
specific actions are part of an overall program that we are currently
developing in an effort to remediate the material weaknesses described above.
35
Attached
as exhibits to this report are certifications of our CEO and CFO, which are
required in accordance with Rule 13a-14 of Securities Exchange Act of 1934, as
amended. The discussion above in this Item 4T includes information concerning
the controls and controls evaluation referred to in the certifications and
those certifications should be read in conjunction with this Item 4T for a more
complete understanding of the topics presented.
We
are committed to improving our internal control processes and will continue to
diligently review our internal control over financial reporting and our
disclosure controls and procedures. The failure to implement adequate controls
may result in deficient and inaccurate reports under the Exchange Act.
Changes in Internal Control over Financial
Reporting
Except
as described above, there have been no changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended March 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
36
P
ART II OTHER
INFORMATION
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I
TEM 1.
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Legal Proceedings
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None
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I
TEM 1A.
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Risk Factors
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There
are no material changes from the risk factors set forth in Part I, Item 1A,
in our Annual Report on Form 10K for the year ended December 31, 2009.
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I
TEM 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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None
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I
TEM 3.
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Defaults Upon Senior Securities
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None
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I
TEM 4.
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Submission of Matters to a Vote of Security Holders
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No
matters were submitted to a vote of security holders during the three months
ended March 31, 2010.
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I
TEM 5.
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Other Information
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None
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37
Exhibits:
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31.1
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
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31.2
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
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32.1
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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32.2
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Certification
by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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38
S
IGNATURES
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.
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ACL
SEMICONDUCTORS INC.
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Date: May
17, 2010
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By:
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/s/ Chung-Lun
Yang
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Chung-Lun
Yang
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Chief
Executive Officer
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Date: May 17, 2010
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By:
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/s/
Kenneth Lap-Yin Chan
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Kenneth
Lap-Yin Chan
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Chief
Financial Officer
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39