The aggregate market value of the voting
common equity held by non-affiliates of the registrant as of June 30, 2012
was approximately
$1,629,699.00
based upon the closing price of $0.20 of the registrant’s common stock on the OTC Bulletin Board.
(For purposes of determining this amount, only directors, executive officers, and 10% or greater stockholders have been deemed
affiliates).
The number of shares of Registrant’s
Common Stock outstanding as of April 15, 2013 was 39,474,495.
PART I
As used throughout this Annual Report,
the terms “ACL”, “Company”, “we”, “us”, “our” or “Registrant”
refer to ACL Semiconductors Inc. and its subsidiaries.
Overview
ACL Semiconductors
Inc. was incorporated under the laws of the State of Delaware on September 17, 2002. The Company has been primarily engaged in
the business of distribution of memory products mainly under “Samsung” brand name which principally comprised Dynamic
Random Access Memory (“DRAM”), Graphic Random Access Memory (“Graphic RAM”) and Flash storage devices in
the Hong Kong Special Administrative Region (“Hong Kong”) and People’s Republic of China (the “PRC”
or “China”) markets formerly through its wholly owned subsidiary Atlantic Components Limited (“Atlantic”),
a Hong Kong incorporated company, and through ATMD (Hong Kong) Limited (“ATMD”) after April 1, 2012. The Company, through
its wholly owned subsidiary ACL International Holdings Limited (“ACL Holdings”), owns 30% equity interest in ATMD,
the joint venture with Tomen Devices Corporation (“Tomen”). ATMD offers a broad range of industry-leading Samsung semiconductor
products, and additional components from SAMCO (such as wifi and camera modules) and SMD (smartphone panels). Through the acquisition
of Jussey Investments Limited (“Jussey”) on September 28, 2012, the Company has diversified its product portfolio and
customer network, obtained design and manufacturing capabilities, and tapped into the blooming telecommunication industry with
access to the 3G baseband licenses.
Corporate Structure
Background
ACL International Holdings Limited
ACL Holdings, a holding
company incorporated in Hong Kong, is wholly owned by the Company. ACL Holdings owns 100% equity interest of Atlantic and 30% equity
interest of ATMD, the joint venture with Tomen.
Atlantic Components Limited
Atlantic, a company
incorporated in Hong Kong, is indirectly wholly owned by the Company. Atlantic was established in May 1991 by Mr. Chung-Lun Yang,
the Company’s Chairman, as a regional distributor of memory products of various manufacturers. In 1993, Samsung Electronics
Hong Kong Co., Ltd. (“Samsung”) appointed Atlantic as its authorized distributor and marketer of Samsung’s memory
products in Hong Kong and overseas markets. In 2001, Atlantic established a representative office in Shenzhen, China, and began
concentrating its distribution and marketing efforts in Southern China.
The Company’s
Samsung business was formerly conducted through Atlantic. After April 1, 2012, Atlantic integrated its business relating to procurement
of semiconductors and electronic parts directly from Samsung to the new joint venture, ATMD. The transition of the business integration
has been completed by December 31, 2012. During the transitional period, Atlantic extended its distributor agreement with Samsung
to June 30, 2012. After the distributor agreement expired, Atlantic transformed its position from Samsung memory products distributor
to a general memory products distributor, and continues its business by providing various brands of memory products to its customers.
Aristo Technologies Limited
On March 23, 2010,
the Company concluded that Aristo Technologies Limited (“Aristo”), a related company solely owned by Mr. Yang, is a
variable interest entity under FASB ASC 810-10-25 and is therefore subject to consolidation with the Company beginning fiscal year
2007 under the guidance applicable to variable interest entities. Atlantic sells Samsung memory chips to Aristo and allows long
grace periods for Aristo to repay the open accounts receivable. Being the Company’s biggest creditor, the Company does not
require Aristo to pledge assets or enter into any agreements to bind Aristo to specific repayment terms. The Company does not experience
any bad debt from Aristo. Hence, the Company does not provide any bad debt provision derived from Aristo. Although, the Company
is not involved in Aristo’s daily operation, it believes that there will not be significant additional risk derived from
the trading relationship and transactions with Aristo. Aristo is engaged in the marketing, selling and servicing of computer products
and accessories including semiconductors, LCD products, mass storage devices, consumer electronics, computer peripherals and electronic
components for different generations of computer related products. In addition to Samsung-branded products, Aristo carries various
brands of products, such as Hynix, Micron, Qimonda, Lexar, Dane-Elec, Elixir, SanDisk and Winbond. Aristo also provides value-added
services to its products and resells it to its customers. Aristo’s 2012 and 2011 sales were around $2 million and $14 million;
it was a distributor that accommodated special requirements for specific customers.
ATMD (Hong Kong) Limited
ATMD, our 30% owned
joint venture company incorporated in Hong Kong, integrated both Atlantic and Tomen’s Samsung business in Hong Kong and PRC
regions. On April 1, 2012, ATMD entered into a distribution agreement with Samsung Electronics Hong Kong Co., Ltd. and began to
sell and distribute Samsung’s products to the Greater China market, as consented to and approved by Samsung. ATMD is authorized
to distribute the same product types originally authorized to Atlantic – DRAMs, including Computing DRAMs, Consumer DRAMs
and Graphics DRAMs, NAND Flashs, and LCD panels. Apart from the original authorized distribution of products distributed by Atlantic,
ATMD is also authorized to distribute Applicable System LSI and Applicable System LCD products including, but not limited to wifi
modules, camera modules, and smartphone panels which is used in the rapidly growing segments such as smartphones, netbooks, tablets,
personal navigation devices, digital TV, Set Top Box, and wireless handheld PDAs.
The Company indirectly
owns 30% equity interest of ATMD. Mr. Chung-Lun Yang, the Company’s Chairman was appointed the Chief Executive Officer of
ATMD. Since ATMD is a newly established company, there will be a transitional period for account setup on both its suppliers and
customers’ systems. Atlantic will continue conducting its business with its customers during this transitional period. The
transitional period has been completed as of December 31, 2012. Atlantic integrated around 90% of its business relating to procurement
of semiconductors and electronic parts from Samsung to ATMD. Since the Company has moved its Samsung sales team to ATMD commencing
from April 1, 2012, the Company has compensated ATMD for the services provided to the Company relating to the sales of Samsung
memory products during the transitional period. Subsequent to the start of the operations of ATMD, the relationships between sales,
the Company’s cost of sales and operating expenses are expected to evolve in accordance with the transition of the Company’s
business as described above.
Jussey Investments Limited
Jussey, a holding
company incorporated in British Virgin Islands, which is wholly owned by the Company, owns 100% equity interest in eVision Telecom
Limited (“eVision”), a Hong Kong incorporated company, and 80% equity interest in USmart Electronic Products Limited,
a Hong Kong incorporated company, which owns 100% equity interest of Dongguan Kezheng Electronics Limited, a wholly foreign-owned
enterprise (“WFOE”) organized under the laws of the PRC (USmart Electronic Products Limited and Dongguan Kezheng Electronics
Limited are together referring as “USmart” hereafter.). Hence, Jussey indirectly owns 80% of Kezheng.
USmart Electronic Products
Limited & Dongguan Kezheng Electronics Limited
USmart was founded
in 2006 and it conducts its business through either itself or Kezheng, which has a factory located in Dongguan, PRC. USmart provides
Research and Development (“R&D”) and both ODM (Original Design Manufacturing) and OEM (Original Equipment Manufacturing)
services for the three “C” products – Computers, Communications and Consumer electronics devices, such as tablets,
portable media players, digital photo frames, and smartphones. USmart has its own R&D and production teams. With the support
from eVision, the business of which is described below, USmart is capable of providing its customers with total solutions from
design to manufacturing. USmart holds its own brands – USmart and VSmart, which can be used on a broad spectrum of products
including memory storage devices, visual and audio products such as digital flat screen television, DAB (Digital Audio Broadcasting)
radios, digital photo frames, and other home electronic products. In 2010, USmart began its business development in the telecommunication
industry, and successfully obtained the W-CDMA (Wideband Code Division Multiple Access is one of the third-generation (“3G”)
wireless standards) license from Intel Mobile Communications GmbH., which offers cellular platforms for global phone makers. W-CDMA
baseband is adapted by China Unicom, one of the three major telecommunication carriers in the PRC.
eVision Telecom Limited
Founded in 2011, eVision
is a Hong Kong based solution house that specializes in CDMA2000 (also known as Evolution-Data Optimized or “EV-DO”)
platform. CDMA2000 is one of the 3G wireless standards. This standard was adapted by China Telecom, one of the three major telecommunication
carriers in China. The principal function of eVision is to provide CDMA2000 solutions to USmart. In May 2011, eVision entered into
an exclusive R&D servicing agreement (the “Servicing Agreement”) with an independent third party in the PRC (the
“R&D House”), a solution house that works closely with South China University of Technology and has a R&D team
consisting of members with advanced academic qualifications. On behalf of eVision, the R&D House holds a CDMA2000 software
license granted by VIA Telecom Co. Ltd. According to the Servicing Agreement, the R&D House provides R&D services relating
to CDMA2000 technology exclusively to eVision, and eVision holds the sole and exclusive right, title and interest to and in the
aforementioned license and any R&D results/products obtained or developed by the R&D House during the term of the Servicing
Agreement. eVision will also hold all the intellectual property rights that are obtained or developed by the R&D House in the
course of such research.
Key Events
ATMD, Joint Venture with Tomen
On March 9, 2012,
ACL Holdings entered a Shareholders’ Agreement with Tomen regarding to the setup arrangement of the new joint venture, ATMD.
The following is a summary of the material terms of the Shareholders’ Agreement.
Capital Contribution
Pursuant
to the Shareholders’ Agreement, ACL Holdings and Tomen own 30% and 70%, respectively, of the equity interest of ATMD. The
authorized share capital of ATMD is USD10 million, divided into 10 million ordinary shares of USD1.0 per share. 3 million and 7
million shares will be issued to ACL Holdings and Tomen, respectively, upon payments of capital contributions of USD3 million and
USD7 million by ACL Holdings and Tomen, respectively.
Business of ATMD
ATMD is
engaged in the business of sales and distribution in China, Hong Kong and Macau (collectively, the “Territory”) of
certain semiconductors and electronics parts manufactured by Samsung under a certain distribution agreement with Samsung. To facilitate
its business, ATMD has formed a wholly owned subsidiary incorporated in Shenzhen, China (the “PRC Subsidiary”).
Obligations of
Both Parties In Connection With the ATMD’s Business
In addition
to cash contributions, ACL Holding agreed to cause Atlantic to integrate its entire business relating to purchasing semiconductors
and electronic parts from Samsung and selling them to customers in the Territory as a Samsung distributor and to transfer to ATMD
its entire clientele (starting from April 1, 2012 (the “Effective Date”)), and Tomen agreed to transfer some or all
of its non-Japanese clientele to ATMD starting from the Effective Date. Notwithstanding the foregoing, any outstanding customer
agreement existing as of the Effective Date to which either Tomen or Atlantic is bound will continue to be performed by such party.
Failure in fulfilling the foregoing respective agreements will give ACL Holdings or Tomen a right to terminate the Agreement in
accordance with the terms thereof. Both parties agreed not to be engaged in any business competing with ATMD’s business as
set forth in the Agreement.
Pursuant
to the Shareholders’ Agreement, Tomen is responsible for securing financing for ATMD when necessary and ACL Holdings is responsible
for promoting the sales of Samsung products and developing new customers in the Territory, on a best effort basis. No party is
entitled to any fee or compensation with respect to its performance of the foregoing obligations under the Agreement.
Corporate Governance
of ATMD
The business
of ATMD is managed by the board of directors, which may consist of up to 7 directors, among which 5 directors will be appointed
by Tomen and 2 directors will be appointed by ACL Holdings. All 7 directors have been appointed. Mr. Chung-Lun Yang, the Chairman
of the Board of Directors, and Mr. Kenneth Lap Yin Chan, the Chief Operating Officer were appointed as ATMD’s directors.
ATMD will
have two executive officers, namely, the Chief Executive Officer and Chief Financial Officer. ACL Holding is entitled to appoint
one director to be the Chief Executive Officer and Tomen is entitled to appoint one director to be the Chief Financial Officer
of ATMD.
Transfer of Shares
of ATMD
Each party
has the right of first refusal in the event the other party proposed to sell its ATMD shares pursuant to the terms of the Shareholders’
Agreement.
Termination of
the Shareholders’ Agreement
The Shareholders’
Agreement contains ordinary termination causes regarding dissolution or bankruptcy of ACL Holdings, Tomen, ATMD or the PRC Subsidiary.
Furthermore, the Shareholders’ Agreement provides that either party can terminate the Shareholders’ Agreement if (i)
the Samsung products ceased to be available to ATMD or (ii) the profitability of ATMD and its PRC Subsidiary is not satisfactory
in the opinion of either party, provided a party may not terminate the Shareholders’ Agreement based on profitability before
the third anniversary of the Shareholders’ Agreement.
Acquisition of Jussey
On September 28, 2012,
ACL Holdings entered into a Share Purchase Agreement (the “SPA”), pursuant to which ACL Holdings acquired 100% of outstanding
equity of Jussey. Under the terms of the SPA, ACL Holdings purchased 100% outstanding equity of Jussey from an individual for an
aggregate purchase consideration of approximately USD2,150,000.
Products
The primary products the Company’s
subsidiaries and joint venture distribute and sell as of December 31, 2012 are described as follows:
Atlantic Components Limited
Since ATMD is a newly
established company, there was a transitional period for account setup on both its suppliers and customers’ systems. Atlantic
had been conducting Samsung distributor related business with its customers during the transitional period. The transitional period
has been completed as of December 31, 2012.
After the distributor
agreement expired, Atlantic transformed its position from Samsung memory products distributor to a general memory products distributor,
and continues its business by providing various brands of memory products to its customers.
The primary products
for Atlantic consist of the followings:
DRAM
Dynamic
Random Access Memory (DRAM) is a type of random-access memory that stores each bit of data in a separate capacitor within an integrated
circuit. The capacitor can be either charged or discharged; these two states are taken to represent the two values of a bit, conventionally
called 0 and 1. Since capacitors leak charge, the information eventually fades unless the capacitor charge is refreshed periodically.
Since the application range for DRAM is very broad, it is classified into three main categories, namely Computing DRAM, Consumer
DRAM and Graphics DRAM.
Computing
DRAM
Computing
DRAM is widely used memory component in servers and personal computers (PC) such as desktops and notebooks.
Consumer
DRAM
Consumer
DRAM is the widely used memory components in consumer products such as Set-Top Boxes (STB), Digital TVs, High Definition TVs (HDTV),
Digital Still Cameras (DSC), Video Cameras, Digital Single-Lens Reflex (DSLR) Cameras, Navigation devices (such as Global Positioning
System (GPS), GLONASS and Galileo), and as well as the automotive industry.
Graphics
DRAM
Graphics
DRAM is a special purpose Double Data Rate (DDR) DRAM that is used in graphics-intensive products which require high-speed 3-dimensional
calculation performance and a large memory size to be used as data storage buffer, such as for DVD and computer game displays.
Currently,
the Computing and Consumer DRAM markets have been dominated by DDR3. The Synchronous Dynamic Random Access Memory (SDRAM), DDR
and DDR2 are nearly fading out in the market. The Graphics DRAM market has been dominated by GDDR3 and GDDR5. The GDDR 2 is nearly
fading out in the market.
NAND Flash
NAND Flash
memory is a specialized type of memory component used to store user data and program code; it retains this information even when
the power is off. Although NAND Flash is predominantly used in mobile phones and tablets, it is also commonly used in multimedia
digital storage applications for products such as MP3 players, DSC, Digital Voice Recorders, USB Disks, Flash memory cards, solid-state
drives (SSD), etc. Flash cards such as the micro SD cards, SD cards, and CF cards are widely used for digital cameras, mobile phones,
portable game consoles, MP3 players, etc. In addition, the Company expects that mobile phones, particularly smartphones, and tablets
to create impressive NAND Flash revenue growth in the coming year. Samsung is the major supplier in the world of Flash products.
In the third quarter of 2012, Samsung’s NAND Flash revenue was approximately USD1,821 million, representing 39.3% of NAND
Flash’s market share.
LCD Panel
LCD panel
is a major component in visual consumer electronics products such as LCD TVs, tablets, smartphones, notebooks, digital phone frames,
portable game consoles, etc.
USmart Electronic Products
Limited, Dongguan Kezheng Electronics Limited & eVision Telecom Limited
The primary products
for USmart and eVision consist of the followings:
Research &
Development
USmart
primary focus its R&D on providing smartphone solution under the Intel’s 3G baseband license, whereas eVision focus on
providing smartphone solution under the VIA’s 3G baseband license.
Manufacturing Services
OEM (Original
Equipment Manufacturing) services where USmart manufactures products or components to its customers to sell under its customers’
brand name. USmart has provided OEM services for various electronic products such as computer and peripherals, flash storage devices,
smartphones and home electronic products.
ODM (Original
Design Manufacturing) services where USmart designs and manufactures a product which is specified and eventually branded by another
firm for sale. USmart has provided ODM services for various electronic products such as computer and peripherals, flash storage
devices, smartphones and home electronic products.
Industry Background
Memory products are
integral to a wide variety of consumer and industrial applications, including: personal computer systems, workstations and servers,
and handheld devices such as notebooks, netbooks, tablets, smartphones, e-Readers, etc. A market trend of increasingly high-throughput
applications (including data processing applications, mobile applications, digital consumer electronics, graphics applications,
etc) is creating demand for high performance memory products. At present, NAND Flash, DDR2 DRAM, DDR3 DRAM and GDDR5 DRAM are the
dominant memory products used with high-throughput applications and Samsung is the world’s largest developer and manufacturer
of these memory products.
Our Strategy
For the memory products
business, the Company intends to, through operation of USmart and eVision, continue to provide its customers with a reliable source
of memory products. For the R&D and manufacturing businesses, the Company intends to focus on research and development and
manufacturing smartphone products.
The Company intends
to implement the strategies by:
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Leverage network to become a leading smartphone solution provider;
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Capitalize on rapid migration of manufacturers to China and companies seeking to expand their international
market coverage;
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Further consolidate leadership position by carrying best-in-class products from highly reputable
brands and providing superior customer service;
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Maintain optimal product mix with diversified lifecycles to maximize sales as new and groundbreaking
technology is introduced; and
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Provide “Total Memory Solutions” for computer, consumer electronic appliances and communications
devices manufacturers.
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Competitive Strengths
The Company believes
there are several key factors that will continue to differentiate us from its competitors in Hong Kong and PRC:
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There are currently five types of 3G wireless standards in the telecommunication industry. Three
of them are adapted in China by the major mobile network carriers, China Unicom, China Telecom and China Mobile. The Company, through
USmart and eVision, has access to two of the three 3G wireless standards, namely, WCDMA and CDMA2000 for its smartphones development.
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eVision has a strong R&D team specializing in the WCDA mobile network, while exclusively appointed
an R&D House specializing in CDMA2000 mobile network that works closely with South China University of Technology. This R&D
House has a R&D team consisting of members with advanced academic qualifications.
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In addition, compared
with Atlantic, ATMD, the Company’s joined venture with Tomen, has an expanded product portfolio, the Company believes it
has competitive advantages over its competitors in Greater China region. As the world’s largest memory products manufacturer,
Samsung’s memory products are competitively priced and have an established reputation for product quality and brand name
recognition in the retail and PC/Server OEM & Consumer Electronic segments. ATMD, as one of the largest distributors of Samsung’s
memory products for Hong Kong and Southern China markets, is expected to be in a highly competitive position compared to other
U.S., European, Japanese and Taiwanese memory products manufacturers and distributors.
Sales and Marketing
As of December 31,
2012, the Company employed a total of 5 full time sales and marketing personnel, each of whom has several years experience in the
memory products and manufacturing industry. 2 of these salespeople are stationed in the Company’s headquarters in Hong Kong,
and 3 of them work out of the Company’s China offices. These sales personnel co-operate with consumer electronics retailers
and manufacturers, and International Purchase Offices to ensure that clients are supplied promptly with our products.
Research and Development
The Company is currently
focusing its resources on research and development of middle to high-end smartphone solutions for WCDMA and CDMA2000 networks.
Our in-house R&D team is focusing on research and development of solutions for WCDMA network, whereas the R&D House exclusively
performs service to the Company is focusing on research and development of solutions for CDMA2000 network. The Company expects
to continue to make substantial investments in research and development and to participate in the development of new and existing
industry standards.
As of December 31,
2012, the research and development team consisted of 6 full time engineers and technical staff, and 20 engineers and technical
staff working in its appointed R&D House.
The research and development
expenses since September 27, 2012, the date of the Company acquired the manufacturing facility is $184,392.
Manufacturing
The manufacturing
facility partially owned by the Company is located in the city of Dongguan in Guangdong Province. The manufacturing facility was
awarded ISO 9001 certification for its production process and its production lines are RoHS (lead free) compliant to comply with
today’s world environmental trends and standards.
The Company has its
own quality control team to control quality and improve yields. This team consisted of 5 full time employees in China.
Competition
The memory products
industry in Hong Kong and Southern China markets is very competitive. The Company competes with other memory products distributors,
consumer electronics manufacturers, and smartphone research and development solution houses, many of which have substantially greater
financial, technical, marketing, distribution channels and other resources.
Memory products, such
as NAND flash, compete on the basis of product availability, price and customer service. We believe that we compete effectively
with respect to each of these competitive factors. Price competition is significant and is expected to continue. Since we have
been in the industry for over 20 years, we have maintained good connections with other distributors and memory products manufacturers
on sourcing the requested products for our customers. In order to differ ourselves from the other competitors, we have maintained
high quality customer service and employed a team of field application engineers to ensure the products we sourced are authentic
and reduce the risk of malfunctioning on our customer’s products. The Company’s principal competitors also include
the other non-exclusive distributors of Samsung memory products in the Hong Kong and Southern China markets.
The smartphones industry
in the China market is also highly competitive and has been characterized by price competition, manufacturing capacity constraints
and product availability constraints at various times. There are currently five types of 3G wireless standards in the telecommunication
industry. Three of them are adopted in China by the major mobile network carriers, China Unicom, China Telecom and China Mobile.
Currently, the Company has access to two of the three 3G wireless standards, namely, WCDMA and CDMA2000 from Intel and VIA respectively
for its smartphones development. Intel and VIA may at its sole discretion increase the number of licensees in China, which would
result in an increased competition for the Company. The Company’s principal competitors are other smartphone solution providers
such as Cellon, Coolpal, and SIMCOM.
Seasonality
The memory products
industry and smartphones industry are increasingly characterized by seasonality and wide fluctuations in supply and demand. Since
a significant portion of our revenue is from consumer markets, our business may be subject to seasonally lower revenues in certain
quarters of our fiscal year. The industry has also been impacted by significant shifts in consumer demand due to economic downturns
or other factors, which may result in diminished product demand and production over-capacity. In recent periods, weakness in the
general economic condition has had a more significant impact on our results than seasonality, and has made it difficult to assess
the impact of seasonal factors on our business.
Market Research
The Company invests
significant resources in market research to provide prompt and accurate market intelligence and feedback on a daily, weekly and
monthly basis in order to assist the management in production planning and product allocation functions.
Suppliers
As of December 31,
2012, the majority of the Company’s distributed products was Samsung memory products. Since 1993, our procurement operations
have been supported by Samsung. As of April 1, 2012, the Company established ATMD, a joint venture company incorporated in Hong
Kong, integrated both Atlantic and Tomen’s Samsung memory business in Hong Kong and PRC regions. On April 1, 2012, ATMD entered
into a distribution agreement with Samsung Electronics Hong Kong Co., Ltd. and began to sell and distribute Samsung’s products
to the Greater China market, as consented to and approved by Samsung. Atlanitc’s distribution agreement with Samsung has
been terminated on June 30, 2012. After the termination of Samsung distribution, Atlantic purchases the Samsung memory products
from Tomen instead. In addition to Samsung-branded products, ATMD will sell products of other brands such as SAMCO and SMD.
Customers
As of April 15, 2013,
the Company had approximately 50 customers in Hong Kong and Southern China, the majority of whom are memory product distributors
and Consumer Electronics manufacturers. Other than the Company’s most significant two customers who accounted for 45% and
29% of the Company’s net sales for the year ended December 31, 2012, no other customer accounted for more than 25% of the
Company’s net sales for 2012 and 2011. In order to control the Company’s credit risks, the Company does not offer any
credit terms to its customers other than a small number of clients who have long-established business relationships with the Company.
With the establishment of ATMD, the Company has shared and transferred the customer base related to Samsung distributorship business
to ATMD. The Company and Tomen will contribute the majority of ATMD’s customers to ATMD’s customer base.
Government Regulation
As of December 31,
2012, the Company’s business operations were not subject to the regulations of any jurisdiction other than Hong Kong SAR
and the PRC. The Company executes its sales contracts and delivers its products in Hong Kong and PRC for its Chinese customers
and there have been no restrictions imposed on the Company by the PRC authorities with respect to the Company’s pursuit of
business growth and opportunities in China.
Employees
As of December 31,
2012, the Company had a total of 81 full time employees in Hong Kong and PRC, including 5 employees in sales and marketing, 4 employees
in procurement, 32 employees in administration and accounts, 15 employees in engineering, 5 employees in quality control, 17 employees
in production, 3 employees in customer service and liaison. None of the Company employees are represented by labor unions. Pursuant
to the joint venture agreement, the Company had integrated Atlantic’s business with ATMD and transferred most of Atlantic’s
employees in the sales, marketing and engineering departments to ATMD. After the ATMD was established, Atlantic had a total of
21 full time employees in Hong Kong and PRC, including 17 employees in administration and accounting, and 4 employees in engineering.
As of September 28, 2012, the Company expanded the operations group by acquiring Jussey and increased the number of full time employees
by 60. The Company has never experienced any work stoppage and believes that our employee relations are favorable.
The Company’s
primary hiring sources for its employees include referrals from existing employees, print and internet advertising and direct recruiting.
All of the Company’s employees are highly skilled and educated and subject to rigorous recruiting standards appropriate for
a company involved in the distribution of brand name memory products. The Company attracts talent from numerous sources, including
higher learning institutions, colleges and industry. Competition for these employees is intense. The Company believes its relationship
with its employees to be good. However, the Company’s ability to achieve its financial and operational objectives depends
in large part upon its continuing ability to attract, integrate, retain and motivate highly qualified personnel, and upon the continued
service of its senior management and key personnel, especially Mr. Yang.
We are subject
to a number of risks. Some of these risks are endemic to the high-technology and semiconductor industry and are the same or similar
to those disclosed in our previous SEC filings. This section should be read in conjunction with the consolidated financial statements
and the accompanying notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in this Annual Report. The risks and uncertainties set out below are not the only risks and uncertainties
we face. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of
these risks and investors may lose all or part of their investment. The information included in this Annual Report is provided
as of the filing date with the SEC and future events or circumstances could differ significantly from the forward-looking statements
included herein.
Risks Related to Our Business
Our independent auditor has issued a
going concern opinion after auditing our financial statements; our ability to continue is dependent on our ability to raise additional
capital and our operations could be curtailed if we are unable to obtain required additional funding when needed.
As of December 31, 2012, the Company has
total current assets of $8,098,594 and current liabilities of $36,779,064. This raises substantial doubt about the Company’s
ability to continue as a going concern. The Company is attempting to address its lack of liquidity by raising additional funds,
either in the form of debt or equity or some combination thereof. Any additional equity financing may involve substantial dilution
to our then existing shareholders. We currently have no agreements or arrangements with respect to any such financing and there
can be no assurance that any needed funds will be available to us on acceptable terms or at all. Our failure to raise additional
funds in the future will adversely affect our business operations, and may require us to suspend our operations. After auditing
our financial statements, our independent auditor issued a going concern opinion and our ability to continue is dependent on our
ability to raise additional capital. If we are unable to obtain necessary financing or working capital in the future, we will likely
be required to curtail our development plans.
We hold a minority interest in the newly
established ATMD, and entering into the Joint Venture Agreement has exposed the Company to various risks.
On March 9, 2012,
ACL Holdings entered into an agreement with Tomen Devices Corporation (“Tomen”) to create a joint venture (the “Joint
Venture Agreement”), ATMD, which became effective on April 1 2012. ACL Holdings and Tomen own 30% and 70%, respectively,
of the equity interest of ATMD.
ATMD had entered into
a distribution agreement with Samsung and started to sell and distribute Samsung’s products to the Greater China market,
as consented to and approved by Samsung. Atlantic has discontinued its contractual relationship with Samsung under its distribution
agreement. Since the Joint Venture Agreement contains non-compete provisions that prohibit ACL Holdings from working with ATMD’s
suppliers, which provisions will limit our Company’s continuing business engagement as a distributor of semiconductor products.
In addition, pursuant to the Joint Venture Agreement, Atlantic has transferred to ATMD its existing customer base and employees
in the sales and engineering departments, which for an indefinite period of time will materially affect Atlantic’s ability
to generate significant revenues. The Company may consider engaging suppliers that do not have a business relationship with ATMD,
as well as exploring other business opportunities such as acquiring suitable target companies to broaden its business portfolio.
However, there is no assurance that the Company may succeed in doing so or achieving and maintaining its profitability.
As Tomen owns a majority
interest in ATMD and exercises voting control over most matters put to a vote of stockholders, the votes cast by Tomen may not
be in the best interests for ACL holding as a minority stockholder. Tomen also has the right to appoint 5 directors out of a total
number of 7 board members of ATMD and thereby control ATMD. Even though Mr. Yang, the Company’s Chairman of the Board of
Directors will be the Chief Executive Officer of ATMD, there is no assurance that the board of the ATMD will be able to lead ATMD
to business success. In the event we discontinue our involvement in the management of ATMD for any reason, we cannot provide assurance
that new management will possess the skills, qualifications or abilities necessary to profitably operate such business.
The joint venture
with Tomen is a new business model that we adopted and there is no assurance such model will be successful in the future. The joint
venture may be terminated without other party’s prior consent, as either party can terminate the Joint Venture Agreement
if (i) the Samsung products ceased to be available to ATMD or (ii) the profitability of ATMD and its PRC Subsidiary is not satisfactory
in the opinion of either party, provided a party may not terminate the Agreement based on profitability before the third anniversary
of the Agreement. In the event the joint venture is terminated for any reason, there is no assurance that we may obtain full recovery
of our contribution and investment, nor is there any assurance that the Company may continue to work with Samsung and resume as
its authorized distributor. In the event the joint venture is terminated and we cannot reconnect with Samsung, the Company’s
financial conditions and operations will be materially affected.
The Joint Venture
Agreement provides that each party to the agreement will bear the excess liabilities in proportion to their percentage interests
in the event the joint venture does not have sufficient assets to repay its debts upon liquidation. Since Tomen controls the board
and has broad powers to incur debts, if ATMD does not have sufficient assets to cover such debts upon liquidation, the Company
will be responsible for part of the debts even though it did not vote for such debts at the board level. The assumption of such
liabilities may also have negative impact on the Company’s financial conditions.
Lastly, pursuant to
the Joint Venture Agreement, the Board of ATMD has the power to prohibit any transfer of the shares. As the Board is controlled
by Tomen, Tomen may, in its sole discretion, deny any proposed sale of shares held by ACL Holdings.
We are expected to experience significant
decrease in sales revenues because we hold a minority interest in ATMD and cannot consolidate with its financial results.
As of December 31, 2012,
all of Atlantic’s Samsung distributor business has been transferred to ATMD. We expect to experience significant decrease
in sales revenues after such transfer, because we only hold a minority interest in ATMD and cannot consolidate our financial results
with ATMD’s, including its sales revenues.
If ATMD’s relationship with Samsung
is terminated or deteriorated, our financial conditions will be materially adversely affected.
ATMD relies ultimately
on Samsung to provide it with products for distribution to its clients.
Although Samsung has
renewed distribution agreement with Atlantic in the past, no assurances can be given that Samsung will definitely renew the distribution
Agreement with ATMD. In addition, even if such agreement is renewed, no assurance can be given that the terms will be satisfactory
to us.
Samsung has the right
to increase the number of distributors of its memory products in Hong Kong and the Southern China markets without consulting us.
If Samsung significantly increases the number of authorized distributors of its memory products, competition among Samsung distributors
would increase and ATMD may not be able to operate profitably.
If Samsung is unable to respond to customer
demand for diversified products or is unable to do so in a cost-effective manner, ATMD may lose market share and our financial
conditions may be adversely affected.
In recent periods,
the market has become relatively segmented, with diverse products need being driven by the different requirements of applications
such as desktop and notebook PCs, netbooks, servers, workstations, handheld devices, and communications and industrial applications
that demand specific solutions.
Samsung needs to dedicate
significant resources to product design and development to respond to customer demand for the continued diversification of memory
products. If Samsung is unable or unwilling to invest sufficient resources to meet the diverse memory needs of customers, we, as
a major Samsung memory products distributor may lose market share. In addition, as ATMD diversifies its product lines, it may encounter
difficulties penetrating certain markets, particularly markets where it does not have existing customers. If ATMD is unable to
respond to customer demand for market diversification in a cost-effective manner, the results of its operations and accordingly
our financial conditions may be adversely affected.
If Samsung’s
global allocation process results in Samsung not having sufficient supplies of memory products to meet all of our customer orders,
this would have a negative impact on our sales and could result in our loss of customers. However, such shortages are infrequent.
On the other hand, no assurance can be given that such shortages will not occur in the future.
If Samsung’s manufacturing process
is disrupted, the results of ATMD operations, cash flows and financial condition could be adversely affected.
Samsung manufactures
products using highly complex processes that require technologically advanced equipment and continuous modification to improve
yields and performance. Difficulties in the manufacturing process can reduce yields or disrupt production. ATMD may be unable to
meet its customers’ requirements and they may purchase products from other suppliers. This could result in loss of revenues
or affect its customer relationships. Additionally, any future health-related disruptions at Samsung’s manufacturers or other
key suppliers could affect its ability to supply ATMD with products in a timely manner, which would harm its results of operations.
It
may lose orders from its customers and/or may incur compensation to those customers due to delay
in delivery, and may have a negative impact on its financial results and positions.
ATMD is heavily dependent on major supplier,
Samsung, and factors affecting Samsung could have a great impact on its business operations.
Samsung is the major
supplier of ATMD’s products and therefore any factors that impact Samsung could have a great impact on ATMD’s business
operations. For example, Samsung relies heavily on silicon wafer producers to produce the raw material, silicon wafers, for its
products that we distribute, therefore, earthquakes, typhoons or other natural disasters in areas where silicon wafer are produced
would affect Samsung’s supply of silicon wafers, which in turn, would negatively impact our business, financial condition,
and operational results. For example, the 2011 earthquake and tsunami in Japan have adversely impacted Samsung’s suppliers
located in Japan and its ability to source parts from companies located in Japan.
USmart and eVision are also dependent
on Samsung to provide them with application processors.
The majority of solutions
provided by USmart and eVision are Android based and the major components include application processors provided by Samsung. Should
there be any disruption in the supply of such processors from Samsung during the fulfillment of orders, USmart and eVision may
lose its orders from customers and/or may incur compensation to those customers due to delay in delivery, and may have a negative
impact on its financial results and positions.
If the growth rate of either memory
products or other components sold or the amount of memory or components used in each application decreases, sales of our products
could decrease.
The Company and its
joint venture, ATMD, are dependent on the computer and consumer electronics market as many of the products that we distribute are
used in PCs, smartphones, or other consumer electronics. DRAMs are the most widely used semiconductor components in PCs. Flash
products are mostly used in the consumer electronics products. Wifi and Camera modules are highly used in smartphones. LCD panels
are used in many visual products, such as smartphones, tablets, and netbooks. If there is a continued reduction in the growth rate
of the related consumer electronics markets, sales of our products built for those markets would decrease, and, as a result, our
operations, cash flows and financial condition could be adversely affected.
The
demand from the end-products that uses our solutions depends on many factors.
The
demand from the end-products that use our solutions depend on many factors such as economic climate, change in technology, competiveness
of competitors, etc. If such demand decreases as a result of negative impact from these factors, it will affect revenue, cash flows
and financial conditions of the Company, and may adversely affect the Company’s share price.
The
solutions provided by us rely on the licenses from Intel Mobile Communications GmbH. and VIA Telecom Co., Ltd, which we could lose.
The
majority of solutions provided by USmart are under licenses from Intel Mobile Communications GmbH (“Intel”). Where
as, the majority of solutions provided by eVision are under licenses from VIA Telecom Co. (“VIA”) Ltd. If such licenses
are revoked or expire without renewal, USmart and eVision will not be able to provide those solutions to its customers and may
result in loss of revenue and profits which will have a negative impact to its financial results and positions.
Competitive
level is uncontrollable.
Business
in telecommunication industry highly relies on the baseband license acquired from Intel. The current CDMA license providers are
Intel, VIA and T3G Technology Co., Ltd. in China. USmart cannot control how many licensees the license providers authorized. If
the number of licensees increases, it may increases the competition and result in loss of revenue and profits which may have a
negative impact to its financial results and positions.
Our research and development may be
costly and/or untimely, and there are no assurances that our research and development will either be successful or completed within
the anticipated timeframe, if at all.
Our recent acquired
business relies on research and development activities. The research and development of new products play an important role for
our company. Development of new products requires significant research and development. If we are unable to perform research and
development successfully, our business and results of operations could be negatively impacted.
The research and
development of new products is costly and time consuming, and there are no assurances that our research and development of new
products will either be successful or completed within the anticipated time frame, if at all. There are also no assurances that
if the product is developed, that it will lead to actual commercialization and sales.
We are heavily dependent upon the electronics
industry, and excess capacity or decreased demand for products produced by this industry could result in increased price competition
as well as a decrease in our gross margins and unit volume sales.
Our business is heavily
dependent on the electronics industry. The majority of our revenue is generated from the networking, high-end computing and computer
peripherals segments of the electronics industry, which are characterized by intense competition, relatively short product life-cycles
and significant fluctuations in product demand. Furthermore, these segments are subject to economic cycles, which have occurred
in the past and are likely to occur in the future. A recession or any other event leading to excess capacity or a downturn in these
segments of the electronics industry could result in intensified price competition, a decrease in our gross margins and unit volume
sales and materially affect our business, prospects, financial condition and results of operations.
The memory product industry is highly
competitive.
The Company and its
joint venture, ATMD, face intense competition from a number of companies, some of which are large corporations or conglomerates,
that may have greater resources to withstand downturns in the semiconductor memory market, invest in technology and capitalize
on growth opportunities. To the extent Samsung memory products become less competitive, our ability to effectively compete against
distributors of other memory products will diminish.
We
face competition from other telecommunication and computer manufacturers.
We
face competition from other telecom and computer manufacturers in China, particularly in the telecommunication sector. There are
three major telecommunication companies in China and they can also provide R&D, manufacturing and marketing services to smartphone
and other accessories that we feature. This competition may affect our ability to attract and retain customers and buyers and may
reduce the prices we are able to charge. An inability to compete effectively could adversely affect our business, financial condition
and results of operations.
We
are operating in an industry with very short life cycle.
The
mobile devices industry in which the newly acquired business is operating has a very short product life cycle. Inability to respond
to an end of a product life cycle may result in the loss of revenue and profits which may have a negative impact to its financial
results and positions.
We
are operating in an industry with high demand in product features upgrade and fast generation change.
The
telecommunication industry in which our recently acquired business is operating has high demand in product features upgrade and
fast generation change. Inability to respond to the features upgrade and generation change may result in the loss of revenue and
profits which may have a negative impact to its financial results and positions.
If
our current product strategy and operating system strategy are not successful, our telecommunication business could be negatively
impacted.
Our
current strategy is to concentrate our mobile solution on smartphones and to use third-party and/or open-source operating systems
and associated application ecosystems, predominantly the Google Android operating system (a royalty-free open-source platform).
As a result, we are dependent on third-parties’ continued development of operating systems, software application ecosystem
infrastructures and such third-parties’ approval of our implementations of their operating system and associated applications.
If we had to change our strategy, our financial results could be negatively impacted because a resulting shift away from using
Android and the associated applications ecosystem could be costly and difficult. A strategy shift could increase the burden of
development to the Company and potentially create a gap in our portfolio for a period of time, which could competitively disadvantage
the Company.
We
are at risk if Android-based smartphones do not remain competitive in the marketplace. Even if Android-based smartphones remain
competitive, the Android operating system is an open-source platform and many other companies sell competing Android-based smartphones
solutions. If the Android-based smartphones solutions of our competitors are more successful than ours, our financial results
could be negatively impacted. It is also critical to the success of the Android operating system that third-party developers continue
to develop and offer applications for this operating system that are competitive with applications developed for other operating
systems. From an overall risk perspective, the industry is currently engaged in an extremely competitive phase with respect to
operating system platforms, applications and software generally. If Android does not continue to gain operator and/or developer
adoption, or any updated versions or new releases of Google’s Android operating system or applications are not made available
to us in a timely fashion, the Company could be competitively disadvantaged and our financial results could be negatively impacted.
We
may not be able to adequately protect our brand name and intellectual property rights that we developed.
Our
brand names and intellectual property rights are important to our business and we rely on them to conduct our business operations.
Unauthorized use of our brand names and intellectual property rights by third parties may materially adversely affect our business
and reputation. We rely on trademark and copyright laws to protect our intellectual property rights. Despite our precautions, it
may be possible for third parties to obtain and use our brand names or intellectual property rights without authorization.
We
cannot be assured that third parties will not infringe or misappropriate our brand names or intellectual property rights. We may,
at times, have to incur significant legal costs and spend time in defending our trademarks and copyrights. Any defense efforts,
whether successful or not, would divert both time and resources from the operation and growth of our business.
Current economic and political conditions
may harm our business.
Global economic conditions
and the effects of military or terrorist actions may cause significant disruptions to worldwide commerce. If these disruptions
result in delays or cancellations of customer orders, a decrease in corporate spending on information technology or our inability
to effectively market, manufacture or ship our products, our results of operations, cash flows and financial condition could be
adversely affected. There is a risk that the events in Japan could negatively affected semiconductor markets, and may continue
to have severe and unpredictable effects on the price of certain raw materials in the future. In addition, our ability to raise
capital for working capital purposes and ongoing operations is dependent upon ready access to capital markets. During times of
adverse global economic and political conditions, accessibility to capital markets could decrease. If we are unable to access the
capital markets over an extended period of time, we may be unable to fund operations, which could materially adversely affect our
results of operations, cash flows and financial condition.
We believe that we will require additional
equity financing to reduce our long-term debts and implement our business plan.
We anticipate
that we will require additional equity financing in order to reduce our long-term debts and implement our business plan of increasing
sales in the Southern China markets. There can be no assurance that we will be able to obtain the necessary additional capital
on a timely basis or on terms acceptable to us. If we obtain such financing, the holders of our Common Stock may experience substantial
dilution.
To
finance our new business, debt or equity financing may be required and may adversely impact our share price.
In
order to expand the business of USmart and eVision as well as the Company, the Company may need to raise fund in form of equity
and/or debt to incur substantial additional indebtedness to finance such expansion. If we or our subsidiaries incur additional
debt, the risks that we face as a result of an increased indebtedness could have important consequences to you. For example, it
could:
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limit our ability to satisfy our obligations under our borrowings;
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increase our vulnerability to adverse general economic and industry conditions;
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require us to dedicate a substantial portion of our cash flow from operations to servicing and
repaying our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and
other general corporate purposes;
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limit our flexibility in planning for or reacting to changes in our businesses and the industry
in which we operate;
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place us at a competitive disadvantage compared to our competitors that have less debt;
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limit, along with the restrictive covenants of our indebtedness, among other things, our ability
to borrow additional funds or make guarantees; and
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increase the cost of additional financing.
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Our
ability to generate sufficient cash to satisfy our outstanding and future debt obligations will depend upon our future operating
performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which
are beyond our control. We anticipate that our operating cash flow will be sufficient to meet our anticipated operating expenses
and to service our debt obligations as they become due. However, we may not always be able to generate sufficient cash flow for
these purposes. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include
actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking
equity capital. These strategies may not be instituted on satisfactory terms, if at all. As a result, the share price may be adversely
affected due to increase in gearing or shareholder base.
Risks
Relating to the Recent Acquisition
The
acquisition may not result in the increase of revenue and profits of the Company.
While
the management expects that the acquisition of Jussey will enable the Company to tap into and expand its operations in mobile devices
and telecommunication business segments through USmart and eVision, USmart and eVision may not be able to contribute an increase
in revenue and profit to the results of the Company as other factors such as changes in future economic climate, intensity of competition
from competitors, ability to adapt due to change in technology, number of orders to be received may not be correctly anticipated,
which will have a significant impact on the results of USmart and eVision that could generate.
Successful
operation of the acquired business is not assured.
Despite
that USmart and eVision have orders / projects on hand and pipeline of orders are anticipated, the Company may not be able to expand
the business of USmart or eVision beyond these orders / projects and may suffer losses after these orders have been fulfilled as
USmart and eVision have operated at a loss making in the past, which may have a significant negative impact to the Company financial
position.
Successful
integration of the USmart and eVision businesses with our other businesses is not assured.
While
management expects that they will be able to integrate the business of USmart and eVision into the Company’s existing trading
business within the expected timeframe which would enables the Company to operate more effectively and efficiently and to create
synergy hence lower costs of operations, such integration may fail or fail to achieve the desired level of synergy and may increase
the overall administrative expenses at a ratio higher than the proportionate revenue and profit contribution from USmart and eVision,
and may have significant negative impact to the Company.
USmart
and eVision may not be able to distribute dividends to the Company.
USmart
and eVision are Hong Kong incorporated company and may distribute retained profits to its shareholders. Since USmart and eVision
have been operating at a loss in the past and does not have retained profits available for distribution to the Company, it may
not be able to generate enough profits to recover losses from prior years and therefore may not be able to distribute dividends
to the Company for further distributions to its shareholders.
A
lack of expertise over USmart and eVision financial reporting in U.S. GAAP could result in an inability to accurately report our
financial results, which may lead to loss of investor confidence in our financial statements and may adversely affect the Company’s
share price.
While
the management will pursue to ensure that the financial results of USmart and eVision will be reported accurately under U.S. GAAP,
the financial results of USmart and eVision may be inaccurately reported under U.S. GAAP due to lack of U.S. GAAP expertise from
USmart and eVision and may adversely affect the Company’s share price, loss of investor confidence and regulatory penalty.
Our
ability to execute on our business strategy and growth will depend in part on the success of the telecommunication industry.
The
acquisition is part of the Company’s business strategy to grow and expand through access to the telecommunication industry.
As a result, the success of USmart and eVision businesses will have a material impact on the overall success of the Company.
Risks Associated With Doing Business
in China
There are substantial
risks associated with doing business in China, some of which are addressed in the following risk factors.
Economic, political and social conditions,
as well as government policies in China could have a material adverse effect on our business, results of operations and financial
condition.
Part of our business
is conducted in, and part of our revenues is derived from, the PRC.
The economy of the
PRC differs from the economies of most developed countries in many respects, including, but not limited to structure, governmental
involvement, level of development, growth rate, capital re-investment, allocation of resources, control of foreign currency and
rate of inflation. The economy of the PRC has been transitioning from a planned economy to a market-oriented economy. Although
in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, a
substantial portion of productive assets in the PRC is still owned by the PRC government. In addition, the PRC government continues
to play a significant role in regulating industries by imposing industrial policies. It also exercises significant control over
the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies.
Policies and other
measures taken by the PRC government to regulate the economy could have a significant negative impact on economic conditions in
the PRC, with a resulting negative impact on our business. For example, our business, results of operations and financial condition
may be materially and adversely affected by:
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new laws and regulations and the interpretations of those laws and regulations;
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the introduction of measures to control inflation or stimulate growth;
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changes in the rate or method of taxation; or
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the imposition of additional restrictions on currency conversions and remittances abroad.
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Macroeconomic measures taken by the
PRC government to manage economic growth could have adverse economic consequences.
In response to concerns
about the PRC’s high growth rate in industrial production, bank credit, fixed investment and money supply, the PRC government
has periodically taken measures to slow economic growth to a more manageable level. Among the measures that the PRC government
has taken are restrictions on bank loans in certain sectors. These measures have contributed to a modest slowdown in economic growth
in the PRC and a reduction in demand for consumer goods and real property. These measures and any additional measures, including
an increase in interest rates, could contribute to a further slowdown in the PRC economy, which could result in a decline in demand
for industrial materials and lower revenues for us.
In particular, the
State Council has recently announced further macroeconomic measures to control perceived overinvestment in the real property market.
The detailed regulations issued by central government agencies to implement these measures include, without limitation, restrictions
on foreign investment and strict enforcement of tax collection. We can give you no assurance that these measures and regulations
will not adversely affect our business.
The PRC legal system has inherent uncertainties
that could negatively impact our business.
Our business is operated
through, and our revenues are generated by, our operating subsidiaries in the PRC. Substantially all of our assets are located
in the PRC. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited
precedential value. Since 1979, the PRC government has promulgated laws and regulations dealing with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are
relatively new, and because of the limited volume of published cases and their nonbinding nature, interpretation and enforcement
of these laws and regulations involve uncertainties. In addition, as the legal system in China develops, changes in such laws and
regulations, their interpretation or their enforcement may have a negative effect on our business, financial condition and results
of operations.
It may be difficult to affect service
of process upon us or our directors or to enforce any judgments obtained from non-PRC courts.
Our operations are
conducted and a substantial part of our assets are located within China. Our key management reside in Hong Kong and China, where
substantially all of their assets are located. Investors may experience difficulties in effecting service of process upon us, our
directors or our senior management as it may not be possible to affect such service of process outside China. In addition, our
PRC counsel has advised us that China does not have treaties with the United States and many other countries providing for reciprocal
recognition and enforcement of court judgments. Therefore, recognition and enforcement in China of judgments of a court in the
United States or certain other jurisdictions may be difficult or impossible.
Restrictions on foreign currency exchange
may limit our ability to obtain and remit foreign currency or to utilize our revenues effectively.
We receive substantially
part of our revenues in Renminbi through our ownership and operation of USmart. As a result, any restriction on currency exchange
may limit our ability to use revenues generated in Renminbi to service and repay our indebtedness. Our ability to satisfy our debt
obligations depends upon the ability of our subsidiaries incorporated in the PRC to obtain and remit sufficient foreign currency.
Our subsidiaries incorporated in the PRC must present certain documents to the designated foreign exchange bank before they can
obtain and remit foreign currency out of the PRC (including, in the case of dividends, evidence that the relevant PRC taxes have
been paid and, in the case of shareholder loans, evidence of the registration of the loan with the State Administration for Foreign
Exchange). There can be no assurance that our subsidiaries incorporated in the PRC will not encounter difficulty in the future
when undertaking these activities. If our subsidiaries in the PRC are unable to remit dividends to us, we could be unable to make
payment of interest on and principal of our indebtedness.
Currency fluctuations and restrictions
on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign
currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in US Dollar terms.
Our reporting currency
is the US Dollar and our operations in China use their local currency as their functional currencies. Part of our revenue
and expenses in China are in the Chinese currency, the Renminbi. We are subject to the effects of exchange rate fluctuations
with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government
policies and China’s domestic and international economic and political developments, as well as supply and demand in the
local market. Since 1994, the official exchange rate for the conversion of the Renminbi to the US Dollar had generally been
stable and the Renminbi had appreciated slightly against the US Dollar. In July 2005, the Chinese government changed
its policy of pegging the value of the Renminbi to the US Dollar. Under this policy, which was halted in 2008 due to
the worldwide financial crisis, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain
foreign currencies. In June 2010, the Chinese government announced its intention to again allow the Renminbi to fluctuate
within the 2005 parameters. It is possible that the Chinese government could adopt an even more flexible currency policy,
which could result in more significant fluctuation of Renminbi against the US Dollar, or it could adopt a more restrictive policy. We
can offer no assurance that the Renminbi will be stable against the US Dollar or any other foreign currency.
Our financial statements are translated into US Dollars at the average exchange rates in each applicable period. To
the extent the US Dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions
results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent
the US Dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in
increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign
exchange rate fluctuations as we convert the financial statements of our foreign consolidated subsidiaries into US Dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the foreign consolidated subsidiaries’ financial
statements into US Dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In
addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional
currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead
to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited
and we may not be able to hedge our exchange rate risks.
The cyclical nature of the telecommunication
and computer industry could adversely affect our results of operation.
Our results of operations
are and will continue to be affected by the cyclical nature of the telecommunication and computer industry in the PRC. Our products
pricing, inventory and accounts receivable are affected by, among other factors, supply and demand of comparable products, interest
rates, inflation, the rate of economic growth, tax laws and political and economic developments in the PRC. We cannot assure you
that the products can be sold. In addition, additional supply of new products are scheduled for completion over the next few months
and years in the PRC. This additional supply could also adversely affect trade products sales as well as the inventory and credit
policies.
Risks Related to Our Common Stock
Failure to maintain effective internal
control over financial reporting in accordance with Section 404 of the Sarbanes Oxley Act of 2002 may result in actions filed against
us by regulatory agencies or in a reduction in the price of our common stock.
We are required to
maintain effective internal control over financial reporting under the Sarbanes Oxley Act of 2002 and related regulations. Any
material weakness in our internal control over financial reporting that needs to be addressed, or disclosure of a material weakness
in management’s assessment of internal control over financial reporting, may reduce the price of our common shares because
investors may lose confidence in our financial reporting. Our failure to maintain effective internal control over financial reporting
could also lead to actions being filed against us by regulatory agencies. We identified material weaknesses in internal control
over financial reporting as more fully discussed in Controls and Procedures at Item 9A of our Annual Report as of December 31,
2011. As of December 31, 2012, we had plans for certain remediation actions, but they will take time to implement because of their
cost. There can be no assurance when remediation will be completed, if at all. Therefore, future reports may have statements indicating
that our controls and procedures are not effective. We cannot assure you that even if we remediate our internal control over financial
reporting relating to the identified material weaknesses that it will establish the effectiveness of our internal control over
financial reporting or that we will not be subject to material weaknesses in the future.
Our major stockholder controls our business,
and could delay, deter or prevent a change of control or other business combination.
One shareholder, Mr.
Yang, our Chairman of the Board of Directors, holds approximately 76.4% of our outstanding Common Stock. By virtue of his stock
ownership, Mr. Yang will control all matters submitted to our board and our stockholders, including the election of directors,
and will be able to exercise control over our business, policies and affairs. Since he has substantial voting power, he could cause
us to take actions that we would not otherwise consider, or could delay, deter or prevent a change of control or other business
combination that might otherwise be beneficial to our stockholders.
Our stock price has been volatile and
may fluctuate in the future.
There has been significant
volatility in the market prices of publicly traded shares in computer related companies, including ours. From September 30, 2003,
the effective date of the reverse-acquisition of Atlantic, to December 31, 2012, the closing price of our Common Stock fluctuated
from a per share high of $3.00 to a low of $0.05 per share. The per share price of our Common Stock may not remain at or exceed
current levels. The market price for our Common Stock, and for the stock of electronic companies generally, has been highly volatile.
The market price of our Common Stock may be affected by: (1) incidental level of demand and supply of the stock; (2) daily trading
volume of the stock; (3) number of public stockholders in our stock; (4) fundamental results announced by ACL; and (5) any other
unpredictable and uncontrollable factors.
If additional authorized shares of our
Common Stock available for issuance or shares eligible for future sale were introduced into the market, it could hurt our stock
price.
We are authorized
to issue 50,000,000 shares of Common Stock. As of April 15, 2013, there were 39,474,495 shares of our Common Stock issued and outstanding.
Currently, outstanding
shares of Common Stock are eligible for resale. We are unable to estimate the amount, timing or nature of future sales of outstanding
Common Stock. Sales of substantial amounts of the Common Stock in the public market by these holders or perceptions that such sales
may take place may lower the Common Stock’s market price.
If penny stock regulations impose restrictions
on the marketability of our Common Stock, the ability of our stockholders to sell shares of our stock could be impaired.
The SEC has adopted
regulations that generally define a “penny stock” to be an equity security that has a market price of less than $5.00
per share or an exercise price of less than $5.00 per share subject to certain exceptions. Exceptions include equity securities
issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for
more than three years, or (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for
less than three years, or (iii) average revenue of at least $6,000,000 for the preceding three years. Unless an exception is available,
the regulations require that prior to any transaction involving a penny stock, a risk of disclosure schedule must be delivered
to the buyer explaining the penny stock market and its risks. Our Common Stock is currently trading at under $5.00 per share. Although
we currently fall under one of the exceptions, if at a later time we fail to meet one of the exceptions, our Common Stock will
be considered a penny stock. As such the market liquidity for the Common Stock will be limited to the ability of broker-dealers
to sell it in compliance with the above-mentioned disclosure requirements.
You should be aware
that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns
include:
|
•
|
Control of the market for the security by one or a few broker-dealers;
|
|
•
|
“Boiler room” practices involving high-pressure sales tactics;
|
|
•
|
Manipulation of prices through prearranged matching of purchases and sales;
|
|
•
|
The release of misleading information;
|
|
•
|
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
|
|
•
|
Dumping of securities by broker-dealers after prices have been manipulated to a desired level,
which hurts the price of the stock and causes investors to suffer loss.
|
We are aware of the
abuses that have occurred in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, we will strive within the confines of practical limitations to prevent
such abuses with respect to our Common Stock.
Section 203 of the Delaware General
Corporation Law may deter a third party from acquiring us.
Section 203 of the
Delaware General Corporation Law prohibits a merger with a 15% shareholder within three years of the date such shareholder acquired
15%, unless the merger meets one of several exceptions. The exceptions include, for example, approval by two-thirds of the shareholders
(not counting the 15% shareholder), or approval by the Board prior to the 15% shareholder acquiring its 15% ownership. This provision
makes it difficult for a potential acquirer to force a merger with or takeover of the Company, and could thus limit the price that
certain investors might be willing to pay in the future for shares of our Common Stock.
|
Item
1B.
|
Unresolved Staff
Comments
|
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.
Our principal office
occupies approximately 7,643 square feet and is located at Room 1703, 17/F., Tower 1, Enterprise Square, 9 Sheung Yuet Road, Kowloon
Bay, Kowloon, Hong Kong. The lease is for five years, expiring November 30, 2014 with monthly lease payments of HKD90,000 (approximately
USD11,538).
We lease an office
occupies approximately 7,643 square feet and is located at Room 1701, 17/F., Tower 1, Enterprise Square, 9 Sheung Yuet Road, Kowloon
Bay, Kowloon, Hong Kong. The lease is for five years, expiring November 30, 2014 with monthly lease payments of HKD90,000 (approximately
USD11,538). This office is sublet to ATMD
We own an office unit
of approximately 4,989 square feet, which is located at B24-B27, 1/F., Block B, Proficient Industrial Centre, 6 Wang Kwun Road,
Kowloon Bay, Kowloon, Hong Kong, and which was acquired from Classic Electronic Limited, a non-related party, on July 21, 2006.
We lease a warehouse
unit of approximately 1,070 square feet, which is located at B11, 1/F., Block B, Proficient Industrial Centre, 6 Wang Kwun Road,
Kowloon Bay, Kowloon, Hong Kong. The lease is for two years expiring on June 30, 2013, with monthly rentals of HKD11,500 (approximately
USD1,474).
We lease a warehouse
unit of approximately 873 square feet, which is located at B13, 1/F., Block B, Proficient Industrial Centre, 6 Wang Kwun Road,
Kowloon Bay, Kowloon, Hong Kong. The lease is for three years, expiring May 10, 2013 with monthly lease payments of HKD8,000 (approximately
USD1,026).
We lease an office
unit of approximately 2,682.9 square feet, which is located at Room 2208, 22/F., Building A, United Plaza, No.5022 Binhe Road,
Futian Centre, Shenzhen, China. The lease is for three years expiring on February 23, 2013 with monthly lease payments of RMB20,122
(approximately USD3,186).
We own an investment
property of approximately 3,000 square feet, which is located at No. 76, 5th Street, Hong Lok Yuen, Tai Po, New Territories, Hong
Kong. The current lease is for two years expiring on December 31, 2012 with monthly lease income of HKD64,000 (approximately USD8,205).
We own a property
of approximately 3,000 square feet that is used for Mr. Yang’s personal residence and is located at No. 78, 5th Street, Hong
Lok Yuen, Tai Po, New Territories, Hong Kong.
We lease a premise
including factory, dormitory, and office space of approximately 6,500 square meters, which is located at No.12, Lu Yi 2 Road, Ke
Yuan Cheng, Tang Xia Town, Dongguan City, Guanggong Province, China. The current lease is for eight years expiring on December
31, 2018 with monthly lease payments of RMB81,900 (approximately USD12,967). Pursuant to the lease agreement, the lease payments
will increase 5% every three years.
Aristo owns an investment
property of approximately 2,670 square feet, which is located at House 19, Casas Domingo, 8 Kam Ka Street, Sheung Shui, New Territories,
Hong Kong with 2 parking lots namely No. 39 and No. 40 of the estate. The current lease is for three years expiring on March 14,
2014 with monthly lease income of HKD23,500 (approximately USD3,013).
Aristo owns an investment
property of approximately 2,521 square feet, which is located at House 56, Casa Marina II, 1 Lo Ping Road, Tai Po, New Territories,
Hong Kong. The current lease is for two years expiring on July 13, 2014 with monthly lease income of HKD27,000 (approximately USD3,462)
In the event that
the above facilities become unavailable, we believe that alternative facilities could be obtained on a competitive basis.
|
Item 3.
|
Legal Proceedings
|
We are not a party
to any current or pending legal proceedings that, if decided adversely to us, would have a material adverse effect upon our business,
results of operations, or financial condition, and we are not aware of any threatened or contemplated proceeding by any governmental
authority against us. To our knowledge, we are not a party to any material legal proceedings as of the date of this report.
|
Item 4.
|
Mine Safety Disclosure
|
Not Applicable
PART III
|
Item
10.
|
Directors, Executive Officers and Corporate
Governance
|
Directors and Executive Officers
The following table
sets forth the name, age, and position of our directors and our executive officers as of December 31, 2012. Each director holds
office (subject to our By-Laws) until the next annual meeting of shareholders and until such director’s successor has been
elected and qualified. All of our executive officers are serving until the next annual meeting of directors and until their successors
have been duly elected and qualified. Each executive officer holds his office until he resigns, is removed by the board of directors,
or his successor is elected and qualified, subject to applicable employment agreements.
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
Chung-Lun Yang
|
|
51
|
|
Chairman of the Board of Directors (1)
|
Ben Wong
|
|
49
|
|
Director and Chief Executive Officer (1)(3)
|
Kenneth Lap-Yin Chan
|
|
50
|
|
Director and Chief Operating Officer
|
Kun Lin Lee
|
|
47
|
|
Chief Financial Officer (2)
|
Ming Yan Leung
|
|
44
|
|
Chief Technology Officer
|
Man Sing Lai
|
|
44
|
|
Director
|
Ho Man Yeung
|
|
57
|
|
Director
|
Wing Sun Leung
|
|
49
|
|
Director
|
|
(1)
|
Chung-Lun Yang resigned as the Company’s Chief Executive Officer on February 1, 2013. The
board of directors of the Company appointed Ben Wong as the new Chief Executive Officer on February 1, 2013.
|
|
(2)
|
Kun Lin Lee and Hung Ming Joseph Chu did not stand for re-election at the Company’s 2012
annual shareholders meeting on November 16, 2012.
|
|
(3)
|
Ben Wong was elected as the director at the Company’s 2012 annual shareholders meeting on
November 16, 2012.
|
Chung-Lun Yang,
Chairman of the Board. Mr. Yang became a Director on September 30, 2003. Mr. Yang is the founder of Atlantic and has been a director
of Atlantic since 1991. Mr. Yang graduated from The Hong Kong Polytechnic University in 1982 with a degree in electronic engineering.
From October 1982 until April 1985, he was the sales engineer of Karin Electronics Supplies Ltd. From June 1986 until September
1991, he was Director of Sales (Samsung Components Distribution) of Evertech Holdings Limited, a Hong Kong based company. Mr. Yang
has over 15 years of extensive experience in the electronics distribution business. The breadth of Mr. Yang’s sales
and operational experience led the Board of Directors to believe this individual is qualified to serve as a director of the Company. Mr.
Yang is also a member of The Institution of Electrical Engineers, United Kingdom. Mr. Yang resigned as the Company’s Chief
Executive Officer on February 1, 2013.
Ben Wong
, Director
and Chief Executive Officer. Mr. Wong was elected as the Director at the Company’s 2012 annual shareholders meeting
on November 16, 2012, and appointed as the Chief Executive Officer of the Company on February 1, 2013. Mr. Wong has been the Chief
Executive Officer and Director of USmart Electronic Products Limited since 2006. Mr. Wong graduated from the Chinese Culture University
of Taiwan in 1986 with a Bachelor’s Degree of Science in Mechanical Engineering. From 1989 to 1990, he worked for Philips
H.K. Ltd. as the Industrial Engineer. He gained manufacturing concept from design to mass production processing, and flow of products
development from working in Philips. He is also experienced in object-oriented design/analysis, application development, requirements
planning & testing, project development, IT management, prototyping, conceptual design and interface implementation.
Kenneth Lap-Yin
Chan
, Director and Chief Operating Officer. Mr. Chan became a Director and Chief Operating Officer on June 11, 2010. Mr. Chan
was previously serving the Company as the Chief Financial Officer since September 30, 2003. Mr. Chan has been with Atlantic since
2001 serving as Financial Controller. From 1988 to 2001, Mr. Chan worked for a number of banks in Hong Kong, including Standard
Chartered Bank, Dao Heng Bank and Asia Commercial Bank. He has more than 12 years of experience in corporate and commercial finance,
based on which he was chosen to be a member of the board. Mr. Chan graduated from the University of Toronto in 1986 with a Bachelor’s
Degree in Commerce.
Kun Lin Lee
,
Chief Financial Officer. Mr. Lee was appointed as a Director and Chief Financial Officer on June 11, 2010. He was a director
of the Company from June 2010 until November 2012. Prior to appointment as the Company’s Chief Financial Officer, Mr. Lee
held various executive positions, including VP Finance/Business Development at the Company from November, 2009 to May 2010 and
Director of Internal Audits, at Sigma Designs Inc and Catalyst Semiconductor from May, 2006 to May, 2007 and April, 2005 to October
2006, respectively where he oversaw its finance, strategy, business development, regulatory compliance and risk management. Mr.
Lee started his public accounting career with Arthur Andersen in December, 1997 and later joined BDO Siedman in December, 2004.
He later joined an investment banking firm VIA, Inc. servicing semiconductor clients in merger & acquisition, business valuation,
and fundraising. Mr. Lee received his B.B.A. degree in Finance from University of Hawaii at Manoa, and his MS from Golden Gate
University. In addition, Mr. Lee is a Certified Public Accountant, Certified Information Technology Professional, Certified Financial
Forensic Accountant and a graduate of CalCPA Leadership Institute. Mr. Lee was chosen to be a member of the board based on his
wealth of experience in business management and corporate governance. Mr. Lee did not stand for re-election as the director at
the Company’s 2012 annual shareholders meeting on November 16, 2012.
Ming Yan Leung
,
Chief Technology Officer. Mr. Leung was appointed as our Chief Technology Officer on June 11, 2010. Prior to joining the Company,
Mr. Leung was Chief Architect Officer of RV Technology Ltd., where he oversaw various mobile solutions and services for enterprises
and end users. In 1997, Mr. Leung ran the banking solution team at the Tech-Trans Group where he led the implementation of SWIFT-related
solution for various banking institutes and a mobile workforce system for an electricity supply company. Mr. Leung holds a Masters
in Engineering Management from the University of Technology, Sydney, and a Postgraduate degree in Investment Decision Making from
Wuhan University of Technology
.
Mr. Leung was chosen to be a member of the board based on his experience in managing development
and implementation of electronic devices and solutions for more than 10 years.
Man Sing Lai
,
Director. Mr. Lai became an Independent Director on December 1, 2010. As a member of the Board of Directors to the Company, the
Company approved a monthly compensation of $1,282 (HKD10,000). Mr. Lai has been Chief Financial Officer of Mainland Headwear Holdings
Limited since 2008, a headwear manufacturer whose shares are publicly traded on the main board of the Hong Kong Stock Exchange.
From 2007 to 2008 Mr. Lai was Financial Controller of J.I.C. Technology Company Limited, a LCD manufacturer whose shares are publicly
traded on the main board of the Hong Kong Stock Exchange. From 2001 to 2007, Mr. Lai was the Director of Finance at GVG Digital
Technology Holdings (HK) Ltd a DVD player manufacturer in China. Mr. Lai graduated with a BSc in Management Science from the London
School of Economics in 1990, a Bachelors of Business in 1994 from the University of Southern Queensland in Australia and a Masters
in Business Administration in 2007 from the University of Western Sydney in Australia. Mr. Lai is a member of the HKICPA and CPA
Australia. It is base on his extensive experience in business management and corporate governance that Mr. Lai was chosen to be
a member of the board.
Ho Man Yeung
,
Director. Mr. Yeung became an Independent Director on December 1, 2010. As a member of the Board of Directors to the Company, the
Company approved a monthly compensation of $1,282 (HKD10,000). Mr. Yeung has been a Director of Avnet Sunrise Ltd. since 2002.
Avnet Sunrise Ltd. is a subsidiary of Avnet, Inc. [NYSE: AVT] a global distributor of electronic components and devices. Mr. Yeung
has over twenty-five years of experience in the electronic distribution industry. It is these experiences and qualifications upon
which Mr. Yeung was chosen to be a member of our board. Mr. Yeung graduated from University of Salford with a BSc in Electronics
and earned a Certified Diploma of Accounting at Manchester Polytechnic University.
Wing Sun Leung
,
Director. Mr. Leung became an Independent Director on December 1, 2010. As a member of the Board of Directors to the Company, the
Company approved a monthly compensation of $1,282 (HKD10,000). Mr. Leung has been Project Director since April 2010 at German Alternative
Investment (Shenzhen) Company Co. Ltd. an investment and advisory services firm. From 2007 to 2009, Mr. Leung was Vice President
and Senior Consultant at Shenzhen Everich Industrial Co. Ltd., an importer and exporter of electronics. Prior to that, Mr. Leung
was Sales Director at Sigmatel Asia Inc., a distributor of electronic components in China and Hong Kong. Mr. Leung has over twenty
years of experience in the electronics distribution industry in the United States, China and Hong Kong. Mr. Leung graduated from
the Chinese University of Hong Kong with a BSc in Social Science. Based on such professional experience, Mr. Leung was chosen to
be a member of the board. This experience will inure to the Company’s benefit as it seeks to expand its business and maintain
its profitability.
There are no family
relationships between any of our directors and executive officers. There have been no events under any bankruptcy act, no criminal
proceedings and no judgments, orders or decrees material to the evaluation of the ability and integrity of any director or executive
officer of the Company during the past five years.
Board Meetings
During the fiscal
year ended December 31, 2012, our Board of Directors held 9 meetings. No director who served during the fiscal year ended December
31, 2012 attended fewer than 80% of the meetings of the Board of Directors during that year.
Committees of the Board
On January 20, 2011,
the Board of Directors establishes an Audit Committee, Nominating Committee and Compensation Committee of the Board of Directors,
and elected:
|
(i)
|
Mr. Man Sing Lai, Mr. Ho Man Yeung and Mr. Wing Sun Leung serve on the Audit Committee, and Mr.
Man Sing Lai acts as the Chairman of the Audit Committee;
|
|
(ii)
|
Mr. Man Sing Lai, Mr. Ho Man Yeung and Mr. Wing Sun Leung serve on the Nominating Committee, and
Mr. Man Sing Lai acts as the Chairman of the Nominating Committee; and
|
|
(iii)
|
Mr. Man Sing Lai, Mr. Ho Man Yeung and Mr. Wing Sun Leung serve on the Compensation Committee,
and Mr. Man Sing Lai acts as the Chairman of the Compensation Committee.
|
Board Leadership Structure and Risk
Oversight Role
Our Board of Directors
contains 6 Directors, and 3 of the Directors are Independent Directors. We believe that such a leadership structure is suitable
for the Company at its present stage of development.
As a matter of regular
practice, and as part of its oversight function, our Board of Directors undertakes a review of the significant risks in respect
to our business. Such review is supplemented as necessary by outside professionals with expertise in substantive areas germane
to our business. With our current governance structure, our Board of Directors and senior executives, there is not a significant
division of oversight and operational responsibilities in managing the material risks facing the Company.
Code of Business Conduct and Ethics
We have adopted a
written code of business conduct and ethics, known as our Code of Business Conduct and Ethics which applies to all of our directors,
officers, and employees, including our principal executive officer and our principal financial and accounting officer. A copy of
the Code of Business Conduct and Ethics is attached as Exhibit 14 to the Annual Report on Form 10-K for the period ended December
31, 2003. To receive a copy of our Code of Business Conduct and Ethics, at no cost, requests should be directed to the Secretary,
ACL Semiconductor, Inc., Room 1703, 17/F., Tower 1, Enterprise Square, 9 Sheung Yuet Road, Kowloon Bay, Kowloon, Hong Kong. We
intend to disclose any amendment to, or waiver of, a provision of the Code of Business Conduct and Ethics in a report filed under
the Securities Exchange Act of 1934, as amended, within four business days of the amendment or waiver.
Stockholder Communications
Stockholders and other
interested parties may contact the Board of Directors or the non-management directors as a group at the following address: Board
of Directors or Outside Directors, ACL Semiconductor, Inc., Room 1703, 17/F., Tower 1, Enterprise Square, 9 Sheung Yuet Road, Kowloon
Bay, Kowloon, Hong Kong. All communications received at the above address will be relayed to the Board of Directors or the non-management
directors, respectively. Communications regarding accounting, internal accounting controls or auditing matters may also be reported
to the Board of Directors using the above address.
Typically, we do not
forward to our directors communications from our stockholders or other communications which are of a personal nature or not related
to the duties and responsibilities of the Board, including:
|
·
|
Junk mail and mass mailings
|
|
·
|
New product suggestions
|
|
·
|
Resumes and other forms of job inquiries
|
|
·
|
Opinion surveys and polls
|
|
·
|
Business solicitations or advertisements
|
Compliance with Section 16(A) of The Securities Exchange
Act of 1934
Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than ten percent
of a registered class of our equity securities (collectively, “Reporting Person”) to file with the SEC initial reports
of ownership and reports of changes in ownership of our Common Stock and other equity securities of the Company. Reporting Persons
are required by the SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. To our knowledge,
based solely on a review of the copies of such reports furnished to us, we believe that during fiscal year ended December 31, 2012
all Reporting Persons complied with all applicable filing requirements.
|
Item 11.
|
Executive Compensation
|
COMPENSATION DISCUSSION AND ANALYSIS
Summary
Our approach to executive
compensation is influenced by our belief in rewarding people for consistently strong execution and performance. We believe that
the ability to attract and retain qualified executive officers and other key employees is essential to our long term success.
Our plan to obtain
and retain highly skilled employees is to provide market competitive salaries and also incentive awards. Our approach is to link
individual employee objectives with overall company strategies and results, and to reward executive officers and significant employees
for their individual contributions to those strategies and results. We use compensation and performance data from comparable companies
in the electronics distribution industry to establish market competitive compensation and performance standards for our employees.
Furthermore, we believe that equity awards serve to align the interests of our executives with those of our stockholders. As such,
we intend for equity to become a key component of our compensation program.
Named Executive Officers
The named executive
officers for the fiscal year ended December 31, 2012 are: Chung-Lun Yang, our Chief Executive Officer; Kun Lin Lee, our Chief Financial
Officer; Kenneth Lap-Yin Chan, our Chief Operating Officer; and Ming Yan Leung, our Chief Technology Officer. Mr. Yang resigned
as the Company’s Chief Executive Officer on February 1, 2013. Ben Wong was appointed as the new Chief Executive Officer on
February 1, 2013. These individuals are referred to collectively in this Annual Report on Form 10-K as the “Named Executive
Officers.”
OUR EXECUTIVE COMPENSATION PROGRAM
Overview
The primary elements
of our executive compensation program are base salary, incentive cash and stock bonus opportunities and equity incentives typically
in the form of stock option grants. Although we provide other types of compensation, these three elements are the principal means
by which we provide the Named Executive Officers with compensation opportunities.
The emphasis on the
annual bonus opportunity and equity compensation components of the executive compensation program reflect our belief that a large
portion of an executive’s compensation should be performance-based. This compensation is performance-based because payment
is tied to the achievement of corporate performance goals. To the extent that performance goals are not achieved, executives will
receive a lesser amount of total compensation. We have entered into employment agreements with four of our Named Executive Officers.
Such employment agreements set forth base salaries, bonuses and stock option grants. Such stock option grants are predicated on
our achievement of corporate performance goals as set forth in such agreements.
ELEMENTS OF OUR EXECUTIVE COMPENSATION
PROGRAM
Base Salary
We pay a base salary
to certain of the Named Executive Officers. In general, base salaries for the Named Executive Officers are determined by evaluating
the responsibilities of the executive’s position, the executive’s experience and the competitiveness of the marketplace.
Base salary adjustments are considered and take into account changes in the executive’s responsibilities, the executive’s
performance and changes in the competitiveness of the marketplace. We believe that the base salaries of the Named Executive Officers
are appropriate within the context of the compensation elements provided to the executives and because they are at a level which
remains competitive in the marketplace.
Bonuses
The Board of Directors
may authorize us to give discretionary bonuses, payable in cash or shares of Common Stock, to the Named Executive Officers and
other key employees. Such bonuses are designed to motivate the Named Executive Officers and other employees to achieve specified
corporate, business unit and/or individual, strategic, operational and other performance objectives.
Stock Options
Stock options constitute
performance-based compensation because they have value to the recipient only if the price of our Common Stock increases. We have
not granted any stock options to any of our Named Executive Officers and the grant of stock options to Named Executive Officers
is not a material factor in making compensation determinations with respect to our Named Executive Officers. However, we have in
the past used stock options as incentives for our other employees. Stock options generally vest over time, with obtainment of a
corporate goal, or a combination of the two. The grant of stock options is designed to motivate our employees to achieve our short
term and long term corporate goals.
Retirement and Deferred Compensation Benefits
We do not have any
arrangements with the Named Executive Officers to provide them with retirement and/or deferred compensation benefits.
Perquisites
There were no perquisites
provided to the Named Executive Officers.
Post-Termination/Change of Control Compensation
We do not have any
arrangements with the Named Executive Officers to provide them with compensation following termination of employment.
Tax Implications of Executive Compensation
Our aggregate deductions
for each Named Executive Officer compensation are potentially limited by Section 162(m) of the Internal Revenue Code to the extent
the aggregate amount paid to an executive officer exceeds $1 million, unless it is paid under a predetermined objective performance
plan meeting certain requirements, or satisfies one of various other exceptions specified in the Internal Revenue Code. At our
2012 Named Executive Officer compensation levels, we did not believe that Section 162(m) of the Internal Revenue Code would be
applicable, and accordingly, we did not consider its impact in determining compensation levels for our Named Executive Officers
in 2012.
Hedging Policy
We do not permit the
Named Executive Officers to “hedge” ownership by engaging in short sales or trading in any options contracts involving
our securities.
Option Exercises and Stock Vested
No options have been
exercised by our Named Executive Officers during the fiscal year ended December 31, 2012.
Pension Benefits
Under the Mandatory
Provident Fund (“MPF”) Scheme Ordinance in Hong Kong, the Company is required to set up or participate in an MPF scheme
to which both the Company and employees must make continuous contributions throughout their employment based on 5% of the employees’
earnings, subject to maximum and minimum level of income. For those earning less than the minimum level of income, they are not
required to contribute but may elect to do so. However, regardless of the employees’ election, their employers must contribute
5% of the employees’ income. Contributions in excess of the maximum level of income are voluntary. All contributions to the
MPF scheme are fully and immediately vested with the employees’ accounts. The contributions must be invested and accumulated
until the employees’ retirement.
Nonqualified Deferred Compensation
We do not have any
defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Employment Agreements
We have entered into
employment agreements with our Executive Officers, which set the base salary as set forth in our summary compensation table.
Executive Officer Compensation
The following table
sets forth the annual and long-term compensation of our Named Executive Officers for services in all capacities to the Company
whose total compensation exceeds $100,000 for the last two fiscal years ended December 31, 2012 and December 31, 2011.
Summary Compensation Table
Name and
Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Change in
Pension Value
and
Non-qualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chung-Lun Yang
|
|
|
2012
|
|
|
$
|
369,231
|
|
|
|
0
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
369,231
|
|
Former Chief Executive Officer (1)
|
|
|
2011
|
|
|
$
|
492,308
|
|
|
|
1,000,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
1,492,308
|
|
On
February 1, 2013
, the board of directors of the Company appointed Mr. Ben Wong as the Company’s
Chief Executive Officer.
Mr. Wong has an informal employment agreement with USmart and receives a monthly salary of HKD50,000
(approximately USD6,493).
Outstanding equity awards at fiscal year-end
None.
Compensation of Directors
The following table
sets forth the Director compensation for service on the Board of Directors of the Company for the fiscal year ended December 31,
2012.
Name
|
|
Fees Earned or Paid in Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Non-qualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
|
|
|
Total
|
|
Chung-Lun Yang
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Ben Wong (3)
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Kenneth Lap-Yin Chan
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Kun Lin Lee (2)
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Man Sing Lai
|
|
$
|
15,385
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
15,385
|
|
Ho Man Yeung
|
|
$
|
15,385
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
15,385
|
|
Wing Sun Leung
|
|
$
|
15,385
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
15,385
|
|
Hung Ming Joseph Chu (2)
|
|
$
|
15,385
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
15,385
|
|
|
(1)
|
Chung-Lun Yang resigned as the Company’s Chief Executive Officer on February 1, 2013. The
board of directors of the Company appointed Ben Wong as the new Chief Executive Officer on February 1, 2013.
|
|
(2)
|
Kun Lin Lee and Hung Ming Joseph Chu did not stand for re-election at the Company’s 2012
annual shareholders meeting on November 16, 2012.
|
|
(3)
|
Ben Wong was elected as the director at the Company’s 2012 annual shareholders meeting on
November 16, 2012.
|
We compensate our
independent directors an amount of HKD10,000 (USD1,282) per month for serving on our board of directors, in addition to reimbursement
for out of pocket expenses incurred in attending director meetings. We do not compensate our executive directors for serving on
the board of directors.
|
Item
12.
|
Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The following table
sets forth certain information regarding beneficial ownership of our Common Stock as of December 31, 2012: (i) by each person who
is known by us to own beneficially more than 5% of the Common Stock, (ii) by each of our directors, (iii) by each of our executive
officers and (iv) by all our directors and executive officers as a group. On such date, we had 39,474,495 shares of Common Stock
outstanding.
As used in the table
below, the term beneficial ownership with respect to a security consists of sole or shared voting power, including the power to
vote or direct the vote, and/or sole or shared investment power, including the power to dispose or direct the disposition, with
respect to the security through any contract, arrangement, understanding, relationship, or otherwise, including a right to acquire
such power(s) during the 60 days immediately following December 31, 2012. Except as otherwise indicated, the stockholders listed
in the table have sole voting and investment powers with respect to the shares indicated.
Name and Address of Beneficial Owner
|
|
Shares of Common Stock Beneficially Owned
|
|
|
Percentage of Class Beneficially Owned(1)
|
|
Chung-Lun Yang (2) (3)
No. 78, 5th Street, Hong Lok Yuen, Tai Po, New Territories, Hong Kong
|
|
|
26,622,000
|
|
|
|
67.4
|
%
|
Ben Wong (2) (3)
11A, Tower 2, Bellagio, 33 Castle Peak Road, Sham Tseng, New Territories, Hong Kong
|
|
|
1,800
|
|
|
|
0.0
|
%
|
Kun Lin Lee (2)
7F, No 16 Huan-her East Road Sec 4, Yuan Ho City, Taipei, Taiwan
|
|
|
60,000
|
|
|
|
0.2
|
%
|
Kenneth Lap-Yin Chan (2) (3)
Flat B, 8/F., Block 19, South Horizons, Aplei Chau, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Ming Yan Leung (2)
G/F., 11 Ka Fuk Lane, Tuen Mun, New Territories, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Man Sing Lai (3)
Flat B, 23/F., Block 31, Laguna City, Cha Kwo Ling Road, Kwun Tong, Kowloon, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Ho Man Yeung (3)
Block 4, 7/F. Unit B, The Grand Panorama, 10 Robinson Road,
Central, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Wing Sun Leung (3)
5658 Owens Drive, #202, Pleasanton, CA 94588, USA
|
|
|
0
|
|
|
|
0.0
|
%
|
Farburn Holdings Limited (4)
1601 Beverly House, 93-107 Lockhart Road, Wanchai, Hong Kong.
|
|
|
3,600,000
|
|
|
|
9.1
|
%
|
Ho Fun Cheng (4)
1601 Beverly House, 93-107 Lockhart Road, Wanchai, Hong Kong.
|
|
|
3,600,000
|
|
|
|
9.1
|
%
|
All Directors and Officers as a Group
|
|
|
26,683,800
|
|
|
|
67.6
|
%
|
|
(1)
|
Applicable percentage of ownership is based on 39,474,495 shares of Common Stock outstanding as
of December 31, 2012, together with securities exercisable or convertible into shares of Common Stock within 60 days of December
31, 2012, for each stockholder. Beneficial ownership is determined in accordance with the rules of the United States Securities
and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject
to securities exercisable or convertible into shares of Common Stock that are currently exercisable or exercisable within 60 days
of December 31, 2012, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership
of any other person. The Common Stock is the only outstanding class of equity securities of the Company.
|
|
(3)
|
Director Except as otherwise set forth, information on the stock ownership of these persons was
provided to us by such persons.
|
|
(4)
|
The shares are owned directly by Farburn Holdings Limited (“Farburn”) and indirectly
by Ho Fun Cheng (“Mr. Cheng”) through his equity ownership in Farburn. In addition, Mr. Cheng is the sole director
of Farburn, and may be deemed as beneficial owner of these shares. Farburn acquired these shares from the Company pursuant to certain
Amended and Restated Finder and Consulting Agreement dated October 15, 2012.
|
|
Item 13.
|
Certain Relationships and Related Transactions,
and Director Independence
|
All related person
transactions are reviewed and, as appropriate, may be approved or ratified by the Board of Directors. Related person transactions
are approved by the Board of Directors only if, based on all of the facts and circumstances, they are in, or not inconsistent with,
our best interests and our stockholders, as the Board of Directors determines in good faith. The Board of Directors takes into
account, among other factors it deems appropriate, whether the transaction is on terms generally available to an unaffiliated third-party
under the same or similar circumstances and the extent of the related person’s interest in the transaction. The Board of
Directors may also impose such conditions as it deems necessary and appropriate on us or the related person in connection with
the transaction.
In the case of a transaction
presented to the Board of Directors for ratification, the Board of Directors may ratify the transaction or determine whether rescission
of the transaction is appropriate.
CERTAIN RELATED PERSON TRANSACTIONS
Related party receivables
are payable on demand upon the same terms as receivables from unrelated parties.
Transactions with Aristo Technologies
Limited / Mr. Yang
This represented Aristo
transactions with various related parties of Mr. Yang.
As of December 31,
2012 and 2011, we had an outstanding receivable from Aristo / Mr. Yang, the President and Chairman of our Board of Directors, totaling
$3,658,359 and $5,780,400, respectively. These advances bear no interest and are payable on demand. The receivable due from Aristo
/ Mr. Yang to the Company is derived from the consolidation of the financial statements of Aristo, a variable interest entity,
with the Company. A repayment plan has been entered with Mr. Yang.
For the years ended
December 31, 2012 and 2011, we recorded compensation to Mr. Yang of $369,231 and $1,492,308 respectively, and paid $369,231 and
$1,492,308 respectively to Mr. Yang as compensation for his services.
Transactions with Solution Semiconductor
(China) Limited
Mr. Yang is a director
and the sole beneficial owner of the equity interests of Solution Semiconductor (China) Ltd. (“Solution”). On April
1, 2009, we entered into a lease agreement with Solution pursuant to which we lease one facility. The lease agreement for this
facility expired on April 30, 2011. The monthly lease payment for this lease is $1,090. We incurred and paid an aggregate rent
expense of $0 and $4,359 to Solution during the year ended December 31, 2012 and 2011.
During the years ended
December 31, 2012 and 2011, we received service charges of $5,769 and $0 respectively from Solution. The service fee was charged
for back office support for Solution.
During the years ended
December 31, 2012 and 2011, we sold products for $1,000 and $0 respectively, to Solution. As of December 31, 2012 and 2011, there
were no outstanding accounts receivables from Solution.
During the years ended
December 31, 2012 and 2011, we purchased inventories of $0 and $49,421 respectively from Solution. As of December 31, 2012 and
2011, there were no outstanding accounts payable to Solution.
Two facilities located
in Hong Kong owned by Solution were used by the Company as collateral for loans from DBS Bank (Hong Kong) Limited (“DBS Bank”)
(formerly Overseas Trust Bank Limited) and The Bank of East Asia, Limited (“BEA Bank”) respectively.
Transactions with Systematic Information
Limited
Mr. Yang, the Company’s
Chairman of the Board of Directors, 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, 2010, we entered into a lease agreement
with Systematic Information pursuant to which we lease one facility. The lease agreement for this facility expired on April 30,
2011. The monthly lease payment for this lease totals $641. We incurred and paid an aggregate rent expense of $0 and $2,564to Systematic
Information during the years ended December 31, 2012 and 2011.
During the years ended
December 31, 2012 and 2011, we received service charges of $7,769 and $8,154 respectively from Systematic Information. The service
fee was charged for back office support for Systematic Information.
During the years ended
December 31, 2012 and 2011, we sold products for $17,457and $1,347,148 respectively, to Systematic Information. As of December
31, 2012 and 2011, there were no outstanding accounts receivables from Systematic Information.
A workshop located
in Hong Kong owned by Systematic Information was used by the Company as collateral for loans from BEA Bank.
Transactions with Global Mega Development
Limited
Mr. Yang is the sole
beneficial owner of the equity interests of Global Mega Development Ltd. (“Global”). During the years ended December
31, 2012 and 2011, we sold products for $0 and $3,325 respectively, to Global. As of December 31, 2012 and 2011, 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 years
ended December 31, 2012 and 2011, we received a management fee of $7,692 and $7,692 respectively from Systematic. The management
fee was charged for back office support for Systematic.
During the years ended
December 31, 2012 and 2011, we sold products for $248,373and $0 respectively, to Systematic. As of December 31, 2012 and 2011,
there were no outstanding accounts receivables from Systematic.
Transactions with Atlantic Storage Devices
Limited
Mr. Yang is a director
and 40% shareholder of Atlantic Storage Devices Ltd. (“Atlantic Storage”). The remaining 60% of Atlantic Storage is
owned by a non-related party. During the years ended December 31, 2012 and 2011, we sold products for $21,784 and $361,698 respectively,
to Atlantic Storage. As of December 31, 2012 and 2011, there were no outstanding accounts receivables from Atlantic Storage.
During the years ended
December 31, 2012 and 2011, we purchased inventories of $0 and $101,790 respectively, from Atlantic Storage. As of December 31,
2012 and 2011, there were no outstanding accounts payable to Atlantic Storage.
Transactions with City Royal Limited
Mr. Yang, the Company’s
Chairman of the Board of Directors, majority shareholder and a director, 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.
Transactions with Aristo Components
Limited
Mr. Ben Wong appointed
as new Chief Executive Officer on February 1, 2013. He is a 90% shareholder of Aristo Components Ltd. (“Aristo Comp”).
The remaining 10% of Aristo Comp is owned by a non-related party. During the years ended December 31, 2012 and 2011, we received
a management fee of $12,308 and $12,308 respectively from Aristo Comp. The management fee was charged for back office support for
Aristo Comp.
During the years ended
December 31, 2012 and 2011, we sold products for $0 and $1,403,064 respectively, to Aristo Comp. As of December 31, 2012 and 2011,
there were no outstanding accounts receivables from Aristo Comp.
During the years ended
December 31, 2012 and 2011, we purchased inventories of $0 and $39,107 respectively from Aristo Comp. As of December 31, 2012 and
2011, there were no outstanding accounts payable to Aristo Comp.
Transactions with Smart Global Industrial
Limited
Mr. Yang is a director
and 50% shareholder of Smart Global Industrial Limited (“Smart”). During the years ended December 31, 2012 and 2011,
we sold products for $0 and $26,886 respectively to Smart. As of December 31, 2012 and 2011, there were no outstanding accounts
receivables from Smart.
Transactions with Atlantic Ocean (HK)
Limited
Mr. Yang is a director
and 60% shareholder of Atlantic Ocean (HK) Limited (“Ocean”). During the years ended December 31, 2012 and 2011, we
received a service fee of 9,615 and $0 respectively from Ocean. The service fee was charged for back office support for Ocean.
As of December 31, 2012 and 2011, there were no outstanding accounts receivables from Ocean.
Transactions with ATMD (Hong
Kong) Limited
Effective
April 1, 2012, ATMD became a jointly-controlled entity of the Company. The Company holds a 30% interest of ATMD, the remaining
70% interest is owned by Tomen. During the years ended December 30, 2012 and 2011, we received service charges of $84,346 and $0
from ATMD. The service fee was charged for back office support for ATMD.
During
the years ended December 31, 2012 and 2011, we sold products for $30,525 and $0 respectively, to ATMD. As of December 31, 2012
and 2011, there was no outstanding accounts receivable from ATMD.
During
the years ended December 31, 2012 and 2011, we purchased inventories of $121,711 and $0 from ATMD.
During
the years ended December 31, 2012 and 2011, we paid $196,288 and $0 to ATMD as compensation for the services provided by ATMD to
the Company regarding the sales of Samsung products during the transition period. As of December 31, 2012 and 2011, there were
no outstanding accounts payable to ATMD.
Transactions with Tomen
Devices Corporation
On April
1, 2012, the Company has established ATMD, a joint venture with Tomen. The Company holds a 30% interest of ATMD, the remaining
70% interest is owned by Tomen. During the years ended December 31, 2012 and 2011, we sold products for $32,195 and $297,654 to
Tomen. As of December 31, 2012 and 2011, there was no outstanding accounts receivable from Tomen.
During
the years ended December 31, 2012 and 2011, we purchased inventories of $107,472,458 and $193,041,193 from Tomen. As of December
31, 2012 and 2011, there was $9,209,313 and $3,980,741 accounts payable to Tomen.
Debt Assignment
On December 27, 2012,
Aristo entered into an assignment agreement (the “Assignment Agreement”) with Atlantic and USmart.
Pursuant to the Assignment
Agreement, Aristo agreed to assign to Atlantic, for no consideration, all of its rights and interests in certain debts (collectively,
the “Debt”) in an amount of US$11,794,871.79 owed to Aristo by USmart (the “Assignment”).
The Company acquired
80% of USmart’s equity interest (the “Interest”) on September 28, 2012. The Debt owed by USmart to Aristo was
taken into consideration by the parities in determining the purchase price for the Interest and was expected to be eliminated subsequent
to the closing of the Acquisition.
|
Item 14.
|
Principal
Accounting Fees and Services
|
The following table
presents fees, including reimbursements for expenses, professional audit services and other services rendered by Albert Wong &
Co. LLP and Albert Wong & Co. CPA firms during the years ended December 31, 2012 and 2011. Albert Wong & Co. LLP audited
our annual financial statements for the year ended December 31, 2012 and Albert Wong & Co. audited our annual financial statements
for the year ended December 31, 2011.
|
|
Fiscal 2012
|
|
|
Fiscal 2011
|
|
Audit Fees (1)
|
|
$
|
116,000
|
|
|
$
|
70,000
|
|
Audit Related Fees (2)
|
|
$
|
--
|
|
|
$
|
--
|
|
Tax Fees (3)
|
|
$
|
--
|
|
|
$
|
--
|
|
All Other Fees (4)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116,000
|
|
|
$
|
70,000
|
|
|
(1)
|
Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s
consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports
and services that are normally provided by Albert Wong & Co. CPA firms in connection with statutory and regulatory filings
or engagements. Audit Fees billed by Albert Wong & Co. LLP CPA firm includes audited fees for auditing our 2012 annual financial
statements. Audit Fees billed by Albert Wong & Co. CPA firm includes audited fees for auditing our 2011 annual financial statements
and interim reviews for 2011 to 2012.
|
|
(2)
|
Audit-Related Fees consist of fees billed for assurance and related services that are reasonably
related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported
under “Audit Fees.” There were no such fees in fiscal year 2012 or 2011.
|
|
(3)
|
Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice
and tax planning. There were no such fees in fiscal year 2012 or 2011.
|
|
(4)
|
All Other Fees consist of fees for products and services other than the services reported above.
There were no such fees in fiscal year 2012 or 2011.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITY
|
Organization and Basis of Presentation
ACL Semiconductors
Inc. (“ACL”) and its subsidiaries are referred to herein collectively and on a consolidated basis as the “Company”
or “we”, “us” or “our” or similar terminology.
The Company
was incorporated under the laws of the State of Delaware on September 17, 2002 and acquired Atlantic Components Limited, a Hong
Kong incorporated company (“Atlantic”) through a reverse-acquisition that was effective September 30, 2003. On September
28, 2012, the Company acquired Jussey Investments Limited, a company incorporated in British Virgin Islands (“Jussey”)
(please refer to Note 18 for more information on the acquisition).
The Company
is currently engaged in the production, manufacturing and distribution of smartphones, electronic products and components in Hong
Kong and PRC through its operating subsidiaries:
|
(i)
|
Atlantic Components Limited, a Hong Kong incorporated company and the Company’s
original principle operating subsidiary which is controlled by the Company through its subsidiary, ACL International Holdings Limited
(“ACL Holdings”); and
|
|
(ii)
|
Aristo Technologies Limited, a Hong Kong incorporated company (“Aristo”),
solely owned by Mr. Chung-Lun Yang, the Company’s Chairman of the Board of Directors (“Mr. Yang”); and
|
|
(iii)
|
eVision Telecom Limited (“eVision”), a Hong Kong incorporated
company which was acquired through an acquisition of its holding company, Jussey; and
|
|
(iv)
|
USmart Electronic Products Limited (“USmart”), a Hong Kong incorporated
company which was acquired through an acquisition of its holding company, Jussey; and
|
|
(v)
|
Dongguan Kezheng Electronics Limited (“Kezheng”), a wholly foreign-owned
enterprise (“WFOE”) organized under the laws of the PRC which is acquired through an acquisition of its ultimate holding
company, Jussey.
|
The Company owns 100% equity
interest of ACL International Holdings Limited, a Hong Kong incorporated company, which owns:
|
(i)
|
100% equity interest of Atlantic (restructured on December 17, 2010); and
|
|
(ii)
|
30% equity interest of ATMD, a joint venture with Tomen Devices Corporation
(“Tomen”); and
|
|
(iii)
|
100% equity interest of Jussey Investments Limited, a company incorporated
in British Virgin Islands (acquired by ACL Holdings on September 28, 2012) which owns:
|
|
a.
|
100% equity interest in eVision; and
|
|
b.
|
80% equity interest in USmart, which owns 100% equity interest in Kezheng.
|
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITY (CONTINUED)
|
On March
23, 2010, ACL concluded that Aristo, a related company solely owned by Mr. Yang is a variable interest entity under FASB ASC 810-10-25
and is therefore subject to consolidation with ACL beginning fiscal year 2007 under the guidance applicable to variable interest
entities.
Business Activity
ACL Semiconductors
Inc. was incorporated under the laws of the State of Delaware on September 17, 2002. The Company has been primarily engaged in
the business of distribution of memory products mainly under “Samsung” brand name which principally comprised Dynamic
Random Access Memory (“DRAM”), Graphic Random Access Memory (“Graphic RAM”), and Flash for the Hong Kong
Special Administrative Region (“Hong Kong”) and People’s Republic of China (the “PRC” or “China”)
markets formerly through its indirectly wholly owned subsidiary Atlantic Components Limited (“Atlantic”), a Hong Kong
incorporated company, and ATMD (Hong Kong) Limited (“ATMD”) after April 1, 2012. The Company, through its wholly owned
subsidiary ACL International Holdings Limited (“ACL Holdings”), owns 30% equity interest in ATMD, the joint venture
with Tomen Devices Corporation (“Tomen”). ATMD offers a broad range of industry-leading Samsung semiconductor products,
and additional components from SAMCO (such as wifi and camera modules) and SMD (smartphone panels). The transitional period has
been completed as of December 31, 2012. Atlantic integrated around 90% of its business relating to procurement of semiconductors
and electronic parts from Samsung to ATMD. Subsequent to the start of the operations of ATMD, the relationships between sales,
the Company’s cost of sales and operating expenses are expected to evolve in accordance with the transition of the Company’s
business as described above. Through the acquisition of Jussey Investments Limited (“Jussey”) on September 28, 2012,
the Company has diversified its product portfolio and customer network, obtained design and manufacturing capabilities, and tapped
into the blooming telecommunication industry with access to the 3G baseband licenses.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The Company
maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The consolidated
financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally
accepted accounting principles in the United States of America and have been consistently applied in the presentation of consolidated
financial statements.
|
(b)
|
Principles of consolidation
|
The consolidated
financial statements are presented in US Dollars and include the accounts of the Company and its subsidiary. All significant inter-company
balances and transactions are eliminated in consolidation.
The Company
owned its subsidiary soon after its inception and continued to own the equity’s interests through December 31, 2012. The
following table depicts the identity of the subsidiary:
Name of Subsidiary
|
|
Place of
Incorporation
|
|
Attributable Equity
Interest %
|
|
|
Registered Capital
|
|
ACL International Holdings Limited
|
|
Hong Kong
|
|
|
100
|
|
|
$
|
0.13
|
|
Alpha Perform Technology Limited
|
|
BVI
|
|
|
100
|
|
|
$
|
1,000
|
|
Atlantic Components Limited (1)
|
|
Hong Kong
|
|
|
100
|
|
|
$
|
384,615
|
|
Aristo Technologies Limited (2)
|
|
Hong Kong
|
|
|
100
|
|
|
$
|
1,282
|
|
Dongguan Kezheng Electronics Limited (3)
|
|
PRC
|
|
|
80
|
|
|
$
|
580,499
|
|
eVision Telecom Limited (4)
|
|
Hong Kong
|
|
|
100
|
|
|
$
|
25,641
|
|
Jussey Investments Limited (1)
|
|
BVI
|
|
|
100
|
|
|
$
|
1
|
|
USmart Electronic Products Limited (4)
|
|
Hong Kong
|
|
|
80
|
|
|
$
|
1.28
|
|
Note:
|
(1) Wholly owned subsidiary of ACL International Holdings Limited
|
|
(2) Deemed variable interest entity
|
|
(3) Wholly owned subsidiary of USmart Electronic Products Limited
|
|
(4) Wholly or partially owned by Jussey Investments Limited
|
Variable Interests
Entities
According to
ASC 810-10-25 which codified FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities —
an interpretation of ARB No. 51 (FIN 46R), an entity that has one or more of the three characteristics set forth therein is considered
a variable interest entity. One of such characteristics is that the equity investment at risk in the relevant entity is not sufficient
to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including
the equity holders.
ASC 810-05-08A
specifies the two characteristics of a controlling financial interest in a variable interest entity (“VIE”): (1) the
power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and (2) the obligation
to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that
could potentially be significant to the VIE. The Company is the primary beneficiary of Aristo because the Company can direct the
activities of Aristo through the common director and major shareholder. Also, the Company extended substantial accounts receivable
to Aristo and created an obligation to absorb loss if Aristo failed. Moreover, ASC 810-25-42 & 43 provides guidance on related
parties treatment of VIE and specifies the relationship of de-facto agent and principal. This guidance will help to determine whether
the Company will consolidate Aristo.
Owing
to the extent of outstanding large amounts of accounts receivable since 2007 together with the nominal amount of paid-up capital
contributed by Mr. Yang when Aristo was formed, it has been determined that Aristo cannot finance its operations without subordinated
financial support from ACL and accordingly, ACL is considered to be the de facto principal of Aristo, Aristo is considered to be
the de facto subsidiary of the Company, and Mr. Yang is considered to be a related party of both the Company and Aristo.
By virtue
of the above analysis, it has been determined that the Company is the primary beneficiary of Aristo.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
|
|
(b)
|
Principles of consolidation (Continued)
|
Aristo Technologies
Limited
The
Company sells Samsung memory chips to Aristo and allows long grace periods for Aristo to repay the open accounts receivable. Being
the biggest creditor, the Company does not require Aristo to pledge assets or enter into any agreements to bind Aristo to specific
repayment terms. The Company does not experience any bad debt from Aristo. Hence, the Company does not provide any bad debt provision
derived from Aristo. Although, the Company is not involved in Aristo’s daily operation, it believes that there will not be
significant additional risk derived from the trading relationship and transactions with Aristo.
Aristo
is engaged in the marketing, selling and servicing of computer products and accessories including semiconductors, LCD products,
mass storage devices, consumer electronics, computer peripherals and electronic components for different generations of computer
related products. Aristo carries various brands of products such as Samsung, Hynix, Micron, Elpida, Qimonda, Lexar, Dane-Elec,
Elixir, SanDisk and Winbond. Aristo 2012 and 2011 sales were around 2 million and 14 million; it was only a small distributor
that accommodated special requirements for specific customers.
Aristo
supplies different generations of computer related products. Old generation products will move slowly owing to lower market demand.
According to the management experience and estimation on the actual market situation, old products carrying on hand for ten years
will have no resell value. Therefore, inventories on hand over ten years will be written-off by Aristo immediately.
The
Company sells to Aristo in order to fulfill Aristo’s periodic need for Samsung memory products based on prevailing market
prices, which Aristo, in turn, sells to its customers. The sales to Aristo for fiscal year 2012 were $106,031 with account
receivable of $5,323,933 as of December 31, 2012. For fiscal year 2011 were $7,086,379 with accounts receivable of $16,871,739
as of December 31, 2011. For fiscal year 2010 were $7,123,769 with accounts receivable of $14,073,937 as of December 31, 2010.
The
Company purchases from Aristo, from time to time, LCD panels, Samsung memory chips, DRAM, Flash memory, central processing units,
external hard disks, DVD readers and writers that the Company cannot obtain from Samsung directly due to supply limitations.
Acquisition
The
Company uses the acquisition method of accounting for business combinations which requires that the assets acquired and liabilities
assumed be recorded at the date of the acquisition at their respective fair values. Assets acquired and liabilities assumed in
a business combination that arise from contingencies are recognized at fair value if fair value can reasonably be estimated. If
the fair value of an asset acquired or liability assumed that arises from a contingency cannot be determined at the date of acquisition,
the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability
is recognized. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Any excess of the purchase price (consideration transferred) over the estimated fair values
of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as
incurred. The operating results of acquired business are reflected in the acquirer’s consolidated financial statements and
results of operations after the date of the acquisition.
|
(c)
|
Jointly-controlled entity
|
A
jointly-controlled entity is a corporate joint venture that is subject to joint control, resulting in none of the participating
parties having unilateral control over the economic activity of the jointly-controlled entity.
The
Group’s investment in a jointly-controlled entity is stated in equity method for the consolidated statement of financial
position the Group’s shares of the equity of a jointly-controlled entity and the consolidated income statement and consolidated
reserves, respectively.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
|
The preparation
of consolidated financial statements that conform with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting periods. Management makes these estimates using the best information available at the time, however,
actual results could differ materially from those estimates.
|
(e)
|
Economic and political risks
|
The Company’s
operations are conducted in Hong Kong and China. A large number of customers are located in Southern China. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the political, economic and legal environment in Hong
Kong and China, and by the general state of the economy in Hong Kong and China.
The Company’s
operations and customers in Hong Kong and Southern China are subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These include risks associated with, among others, the political,
economic and legal environments, and foreign currency exchange. The Company’s results may be adversely affected by changes
in the political and social conditions in Hong Kong and China, and by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other
things.
|
(f)
|
Property, plant and equipment
|
Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using
the straight-line method.
Estimated useful lives of the
plant and equipment are as follows:
Automobiles
|
|
3 1/3 years
|
Computers
|
|
5 years
|
Leasehold improvement
|
|
5 years
|
Land and buildings
|
|
By estimated useful life
|
Office equipment
|
|
5 years
|
Machinery
|
|
10 years
|
The cost and related accumulated
depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement
of income.
Intangible
assets include license contracts and trademarks, initial measures at fair market value and are subsequently carry at fair value
less amortization and impairment, if any.
The license
agreements and trademarks are measured based on the future economic benefits arising from the mobile business acquired from Jussey.
The license agreements and trademark are individually identified and separately recognized by using income approach. They represent
the economic benefits derived from the mobile phone production contracts obtained at the time of the acquisition.
The Company
will capture the finite life of these intangible assets. Amortization will be provided to license contracts based on the percentage
of the completion of these contracts (measured by production and shipment schedules) and their respective economic benefits. The
Company will provide 24 equally monthly amortizations to trademark commence from July 2013 till to June 2015.
Estimates
of the useful lives and residual values of intangible assets are reviewed periodically and adjusted if appropriate.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
|
(g) Intangible assets (Continued)
Basically, the estimated useful
lives of the intangible assets are as follows:
License agreements
|
|
24 months
|
Trademarks
|
|
24 months
|
The Company will evaluate the procedure on the measurement
of these intangible assets from time to time to assess their fair value. Periodically, the Company will re-measure the values of
these intangible assets. If their re-calculated fair values are below the carrying value in the ledger, the Company will provide
additional impairment to reflect the reduction of future economic benefits and their related fair values.
Accounts
receivable is carried at the net invoiced value charged to customer. The Company records an allowance for doubtful accounts to
cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its
evaluation of the collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing
historical data and estimates of future performance.
|
(i)
|
Accounting for the impairment of long-lived assets
|
The Company
periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization,
when events and circumstances warrant such a review, pursuant to the guidelines established in ASC No. 360 (formerly Statement
of Financial Accounting Standards No. 144). The carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value
is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
During
the reporting years, there was no impairment loss.
|
(j)
|
Cash and cash equivalents
|
The Company
considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The
Company maintains bank accounts in Hong Kong. The Company does not maintain any bank accounts in the United States of America.
Inventories
are stated at the lower of cost or market and are comprised of purchased computer technology resale products. Cost is determined
using the first-in, first-out method. The reserve for obsolescence was increased by $1,576,923 from $709,374 as of December 31,
2011 to $2,286,297 as of December 31, 2012. Inventory obsolescence reserves totaled $2,286,297 including acquired from subsidiaries
$339,078 as of December 31, 2012.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
|
Leases
that substantially transfer all the benefits and risks of ownership of assets to the company are accounted for as capital leases.
At the inception of a capital lease, the asset is recorded together with its long term obligation (excluding interest element)
to reflect the purchase and the financing.
Leases
which do not transfer substantially all the risks and rewards of ownership to the company are classified as operating leases. Payments
made under operating leases are charged to income statement in equal installments over the accounting periods covered by the lease
term. Lease incentives received are recognized in income statement as an integral part of the aggregate net lease payments made.
Contingent rentals are charged to income statement in the accounting period which they are incurred.
We are
governed by the Internal Revenue Code of the United States, the Hong Kong Inland Revenue Department and the PRC’s Income
Tax Laws. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets,
including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income of the period that includes the enactment date. Deferred income
tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of
the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
The Company
did not have any interest or penalty recognized in the income statements for the period ended December 31, 2012 and December 31,
2011 or the balance sheet, as of December 31, 2012 and December 31, 2011. The Company did not have uncertainty tax positions or
events leading to uncertainty tax position within the next 12 months. The Company’s 2010, 2011 and 2012 U.S. federal income
tax returns are subject to U.S. Internal Revenue Service examination and the Company’s 2006/7, 2007/8, 2008/9, 2009/2010,
2010/11, 2011/12, 2012/13, Hong Kong Company Income Tax filing are subject to Hong Kong Inland Revenue Department examination.
The Company’s 2008, 2009, 2010, 2011, and 2012 PRC income tax returns are subject to PRC State Administration of Taxation
examination.
|
(n)
|
Foreign currency translation
|
The accompanying
consolidated financial statements are presented in United States dollars (USD). The functional currencies of the Company’s
operating business based in Hong Kong and PRC are the Hong Kong Dollar (HKD) and Renminbi (RMB) respectively. The consolidated
financial statements are translated into United States dollars from HKD with a ratio of USD1.00=HKD7.80, a fixed exchange rate
maintained between Hong Kong and United States derived from the Hong Kong Monetary Authority pegging HKD and USD monetary policy.
For our subsidiaries whose functional currency are the RMB, statement of income, balance sheets and cash flows are translated with
a ratio of RMB1.00=HKD1.235 an average exchange rate during the period.
Exchange
gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
All of our revenue transactions are transacted in the functional currencies. We have not entered into any material transactions
that are either originated, or to be settled, in currencies other than the HKD, RMB and USD. Accordingly, transaction gains or
losses have not had, and are not expected to have a material effect on our results of operations.
The RMB
is not freely convertible into any other currencies. In addition, all foreign exchange transactions in the PRC must be conducted
through authorized institutions. Accordingly, management cannot provide any assurance that the RMB underlying the consolidated
financial statement amounts could have been, or could be, converted into HKD or USD at the exchange rates used to translate the
functional currency into the reporting currency.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
|
The Company
derives revenues from resale of computer memory products, providing both ODM (Original Design Manufacturing) and OEM (Original
Equipment Manufacturing) services for various electronic products, such as computer and peripherals, flash storage devices and
home electronic products. The Company recognizes revenue in accordance with the ASC 605 “Revenue Recognition”. Under
ASC 605, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered,
the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment.
Sales are recorded net of discounts, rebates, and returns, which historically were not material.
The Group
expensed all advertising costs as incurred. Advertising expenses included in general and administrative expenses were $1,250 and
$2,803for the years ended December 31, 2012 and 2011, respectively.
The Company’s
sales are generated from Hong Kong and the rest of China and substantially all of its assets are located in Hong Kong.
|
(r)
|
Fair value of financial instruments
|
The carrying
amount of the Company’s cash and cash equivalents, accounts receivable, lines of credit, convertible debt, accounts payable,
accrued expenses, and long-term debt approximates their estimated fair values due to the short-term maturities of those financial
instruments.
Comprehensive
income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial
statements. The Company has no items that represent other comprehensive income and, therefore, has not included a schedule of comprehensive
income in the consolidated financial statements.
|
(t)
|
Basic and diluted earnings (loss) per share
|
In accordance
with ASC No. 260 (formerly SFAS No. 128), “Earnings Per Share,” the basic earnings (loss) per common share is computed
by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted
earnings (loss) per common share is computed similarly to basic earnings (loss) per common share, except that the denominator is
increased to include the number of additional common shares that would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive.
Certain
amounts in the prior period have been reclassified to conform to the current consolidated financial statement presentation.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(CONTINUED)
|
|
(v)
|
Recently implemented standards
|
In July
2012, the FASB has issued Accounting Standards Update (ASU) No. 2012-02,
Intangibles--Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment
. This ASU states that an entity has the option first to assess qualitative
factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived
intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not
more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.
However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset
and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification
Subtopic 350-30, Intangibles--Goodwill and Other, General Intangibles Other than Goodwill.
Under the
guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset
in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing
the qualitative assessment in any subsequent period.
The amendments
in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if
a public 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 August
2012, the FASB has issued Accounting Standards Update (ASU) No. 2012-03,
Technical Amendments and Corrections to SEC Sections.
This ASU amends various SEC paragraphs pursuant to SAB 114, SEC Release No. 33-9250, and ASU 2010-22, which amend or rescind portions
of certain SAB Topics.
In October
2012, the FASB has issued Accounting Standards Update (ASU) No. 2012-04,
Technical Corrections and Improvement
s. This ASU
make technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The amendments
in this ASU that will not have transition guidance will be effective upon issuance for both public entities and nonpublic entities.
For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning
after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for
fiscal periods beginning after December 15, 2013.
In October
2012, the FASB has issued Accounting Standards Update (ASU) No. 2012-06,
Business Combinations (Topic 805): Subsequent Accounting
for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial
Institution.
This ASU addresses the diversity in practice about how to interpret the terms on the same basis and contractual
limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance
Corporation or National Credit Union Administration) acquisition of a financial institution that includes a loss-sharing agreement
(indemnification agreement). For public and nonpublic entities, the amendments in this ASU are effective for fiscal years, and
interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should
be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing
as of the date of adoption arising from a government-assisted acquisition of a financial institution.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories consisted of the following:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
6,902,445
|
|
|
$
|
3,803,641
|
|
Less allowance for excess and obsolete inventory
|
|
|
(2,286,297
|
)
|
|
|
(709,374
|
)
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
4,616,148
|
|
|
$
|
3,094,267
|
|
The following is a summary of the change in the Company's inventory
valuation allowance:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory valuation allowance, beginning of the year
|
|
$
|
709,374
|
|
|
$
|
513,120
|
|
Obsolete inventory sold
|
|
|
0
|
|
|
|
(78,396
|
)
|
Additional inventory provision
|
|
|
1,576,923
|
|
|
|
274,650
|
|
|
|
|
|
|
|
|
|
|
Inventory valuation allowance, end of year
|
|
$
|
2,286,297
|
|
|
$
|
709,374
|
|
|
NOTE 4
|
PROPERTY, PLANT AND
EQUIPMENT, NET
|
Property, plant and equipment, net comprise
the following:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At cost
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
9,375,558
|
|
|
$
|
9,375,558
|
|
Automobiles
|
|
|
658,772
|
|
|
|
741,651
|
|
Office equipment
|
|
|
268,863
|
|
|
|
197,919
|
|
Leasehold improvements
|
|
|
543,550
|
|
|
|
458,121
|
|
Furniture and fixtures
|
|
|
57,302
|
|
|
|
41,591
|
|
Machinery
|
|
|
668,185
|
|
|
|
499,614
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,572,230
|
|
|
$
|
11,314,454
|
|
Less: accumulated depreciation
|
|
|
(1,986,175
|
)
|
|
|
(1,519,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,586,055
|
|
|
$
|
9,794,517
|
|
Depreciation and amortization
expense included in the general and administrative expenses for the years ended December 31, 2012 and 2011 were $564,117 and $479,002
respectively.
Automobiles include the following amounts
under capital leases:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
469,754
|
|
|
$
|
527,390
|
|
Less accumulated depreciation
|
|
|
(302,106
|
)
|
|
|
(125,810
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
167,648
|
|
|
$
|
401,580
|
|
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
5.
|
CAPITAL LEASE
OBLIGATIONS
|
The Company leases automobiles
under four capital leases that expire between July 2013 and December 2015. Aggregate future obligations under the capital
leases in effect as of December 31, 2012 and 2011 are as follows:
The Company has several
non-cancellable capital leases relating to automobiles:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
96,506
|
|
|
$
|
109,872
|
|
Non-current portion
|
|
|
133,428
|
|
|
|
229,934
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229,934
|
|
|
$
|
339,806
|
|
At December 31, 2012 and 2011, the value
of automobiles under capital leases as follows:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
469,754
|
|
|
$
|
527,390
|
|
Less: accumulated depreciation
|
|
|
(302,106
|
)
|
|
|
(125,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,648
|
|
|
$
|
401,580
|
|
At December 31, 2012 and 2011, the Company
had obligations under capital leases repayable as follows:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
|
|
|
|
|
|
-Within one year
|
|
$
|
103,890
|
|
|
$
|
122,930
|
|
- After one year but within 5 years
|
|
|
143,430
|
|
|
|
247,320
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
247,320
|
|
|
$
|
370,250
|
|
Interest expenses relating to future periods
|
|
|
(17,386
|
)
|
|
|
(30,444
|
)
|
|
|
|
|
|
|
|
|
|
Present value of the minimum lease payments
|
|
$
|
229,934
|
|
|
$
|
339,806
|
|
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
6.
|
RELATED PARTY
TRANSACTIONS
|
Related party receivables are payable on
demand upon the same terms as receivables from unrelated parties.
Transactions with Aristo Technologies
Limited / Mr. Yang
This represented Aristo
transactions with various related parties of Mr. Yang.
As of December 31,
2012 and 2011, we had an outstanding receivable from Aristo / Mr. Yang, the President and Chairman of our Board of Directors, totaling
$3,658,359 and $5,780,400, respectively. These advances bear no interest and are payable on demand. The receivable due from Aristo
/ Mr. Yang to the Company is derived from the consolidation of the financial statements of Aristo, a variable interest entity,
with the Company. A repayment plan has been entered with Mr. Yang.
For the years ended
December 31, 2012 and 2011, we recorded compensation to Mr. Yang of $369,231 and $1,492,308 respectively, and paid $369,231 and
$1,492,308 respectively to Mr. Yang as compensation for his services.
Transactions with Solution Semiconductor
(China) Limited
Mr. Yang is a director
and the sole beneficial owner of the equity interests of Solution Semiconductor (China) Ltd. (“Solution”). On April
1, 2009, we entered into a lease agreement with Solution pursuant to which we lease one facility. The lease agreement for this
facility expired on April 30, 2011. The monthly lease payment for this lease is $1,090. We incurred and paid an aggregate rent
expense of $0 and $4,359 to Solution during the year ended December 31, 2012 and 2011.
During the years ended
December 31, 2012 and 2011, we received service charges of $5,769 and $0 respectively from Solution. The service fee was charged
for back office support for Solution.
During the years ended
December 31, 2012 and 2011, we sold products for $1,000 and $0 respectively, to Solution. As of December 31, 2012 and 2011, there
were no outstanding accounts receivables from Solution
During the years ended
December 31, 2012 and 2011, we purchased inventories of $0 and $49,421 respectively from Solution. As of December 31, 2012 and
2011, there were no outstanding accounts payable to Solution.
Two facilities located
in Hong Kong owned by Solution were used by the Company as collateral for loans from DBS Bank (Hong Kong) Limited (“DBS Bank”)
(formerly Overseas Trust Bank Limited) and The Bank of East Asia, Limited (“BEA Bank”) respectively.
Transactions with Systematic Information
Limited
Mr. Yang, the Company’s
Chairman of the Board of Directors, 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, 2010, we entered into a lease agreement
with Systematic Information pursuant to which we lease one facility. The lease agreement for this facility expired on April 30,
2011. The monthly lease payment for this lease totals $641. We incurred and paid an aggregate rent expense of $0 and $2,564to Systematic
Information during the years ended December 31, 2012 and 2011.
During the years ended
December 31, 2012 and 2011, we received service charges of $7,769 and $8,154 respectively from Systematic Information. The service
fee was charged for back office support for Systematic Information.
During the years ended
December 31, 2012 and 2011, we sold products for $17,457and $1,347,148 respectively, to Systematic Information. As of December
31, 2012 and 2011, there were no outstanding accounts receivables from Systematic Information.
A workshop located in Hong Kong owned by
Systematic Information was used by the Company as collateral for loans from BEA Bank.
Transactions with Global Mega Development
Limited
Mr. Yang is the sole
beneficial owner of the equity interests of Global Mega Development Ltd. (“Global”). During the years ended December
31, 2012 and 2011, we sold products for $0 and $3,325 respectively, to Global. As of December 31, 2012 and 2011, there were no
outstanding accounts receivables from Global.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
6.
|
RELATED PARTY
TRANSACTIONS
|
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 years
ended December 31, 2012 and 2011, we received a management fee of $7,692 and $7,692 respectively from Systematic. The management
fee was charged for back office support for Systematic.
During the years ended
December 31, 2012 and 2011, we sold products for $248,373and $0 respectively, to Systematic. As of December 31, 2012 and 2011,
there were no outstanding accounts receivables from Systematic.
Transactions with Atlantic Storage
Devices Limited
Mr. Yang is a director
and 40% shareholder of Atlantic Storage Devices Ltd. (“Atlantic Storage”). The remaining 60% of Atlantic Storage is
owned by a non-related party. During the years ended December 31, 2012 and 2011, we sold products for $21,784 and $361,698 respectively,
to Atlantic Storage. As of December 31, 2012 and 2011, there were no outstanding accounts receivables from Atlantic Storage.
During the years ended
December 31, 2012 and 2011, we purchased inventories of $0 and $101,790 respectively, from Atlantic Storage. As of December 31,
2012 and 2011, there were no outstanding accounts payable to Atlantic Storage.
Transactions with City Royal Limited
Mr. Yang, the Company’s
Chairman of the Board of Directors, majority shareholder and a director, 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.
Transactions with Aristo Components
Limited
Mr. Ben Wong appointed
as new Chief Executive Officer on February 1, 2013. He is a 90% shareholder of Aristo Components Ltd. (“Aristo Comp”).
The remaining 10% of Aristo Comp is owned by a non-related party. During the years ended December 31, 2012 and 2011, we received
a management fee of $12,308 and $12,308 respectively from Aristo Comp. The management fee was charged for back office support for
Aristo Comp.
During the years ended
December 31, 2012 and 2011, we sold products for $0 and $1,403,064 respectively, to Aristo Comp. As of December 31, 2012 and 2011,
there were no outstanding accounts receivables from Aristo Comp.
During the years ended
December 31, 2012 and 2011, we purchased inventories of $0 and $39,107 respectively from Aristo Comp. As of December 31, 2012 and
2011, there were no outstanding accounts payable to Aristo Comp.
Transactions with Smart Global Industrial
Limited
Mr. Yang is a director
and 50% shareholder of Smart Global Industrial Limited (“Smart”). During the years ended December 31, 2012 and 2011,
we sold products for $0 and $26,886 respectively to Smart. As of December 31, 2012 and 2011, there were no outstanding accounts
receivables from Smart.
Transactions with Atlantic Ocean
(HK) Limited
Mr. Yang is a director
and 60% shareholder of Atlantic Ocean (HK) Limited (“Ocean”). During the years ended December 31, 2012 and 2011, we
received a service fee of 9,615 and $0 respectively from Ocean. The service fee was charged for back office support for Ocean.
As of December 31, 2012 and 2011, there were no outstanding accounts receivables from Ocean.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
6.
|
RELATED PARTY
TRANSACTIONS
|
Transactions with ATMD
(Hong Kong) Limited
Effective
April 1, 2012, ATMD became a jointly-controlled entity of the Company. The Company holds a 30% interest of ATMD, the remaining
70% interest is owned by Tomen. During the years ended December 30, 2012 and 2011, we received service charges of $84,346 and $0
from ATMD. The service fee was charged for back office support for ATMD.
During
the years ended December 31, 2012 and 2011, we sold products for $30,525 and $0 respectively, to ATMD. As of December 31, 2012
and 2011, there was no outstanding accounts receivable from ATMD.
During
the years ended December 31, 2012 and 2011, we purchased inventories of $121,711 and $0 from ATMD.
During
the years ended December 31, 2012 and 2011, we paid $196,288 and $0 to ATMD as compensation for the services provided by ATMD to
the Company regarding the sales of Samsung products during the transition period. As of December 31, 2012 and 2011, there were
no outstanding accounts payable to ATMD.
Transactions with Tomen
Devices Corporation
On April
1, 2012, the Company has established ATMD, a joint venture with Tomen. The Company holds a 30% interest of ATMD, the remaining
70% interest is owned by Tomen. During the years ended December 31, 2012 and 2011, we sold products for $32,195 and $297,654 to
Tomen. As of December 31, 2012 and 2011, there was no outstanding accounts receivable from Tomen.
During
the years ended December 31, 2012 and 2011, we purchased inventories of $107,472,458 and $193,041,193 from Tomen. As of December
31, 2012 and 2011, there was $9,209,313 and $3,980,741 accounts payable to Tomen.
Debt Assignment
On December 27, 2012,
Aristo entered into an assignment agreement (the “Assignment Agreement”) with Atlantic and USmart.
Pursuant to the Assignment
Agreement, Aristo agreed to assign to Atlantic, for no consideration, all of its rights and interests in certain debts (collectively,
the “Debt”) in an amount of US$11,794,871.79 owed to Aristo by USmart (the “Assignment”).
The Company acquired
80% of USmart’s equity interest (the “Interest”) on September 28, 2012. The Debt owed by USmart to Aristo was
taken into consideration by the parities in determining the purchase price for the Interest and was expected to be eliminated subsequent
to the closing of the Acquisition.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
7.
|
REVOLVING LINES OF CREDIT AND LOAN FACILITIES
|
The Company has available
to it a $6,987,180 revolving line of credit with DBS Bank with an outstanding balance of $6,657,560 at December 31, 2012 and $6,657,242
at December 31, 2011. The line of credit bears interest at the bank’s standard bills rate less 0.75 % to 1% for HKD borrowings
and at the bank’s standard bills rate less 0.25% to 0.50% for other currency borrowings as of December 31, 2012. The weighted
average interest rate approximated 4.25% for 2012 and 2011.
The Company has available
to it a $897,436 revolving line of credit with The Bank of East Asia, Limited (“BEA”) with an outstanding balance of
$897,000 at December 31, 2012 and $3,265,000 at December 31, 2011. The line of credit bears interest at the higher of Hong Kong
prime rate or HIBOR plus 2% for HKD facilities and LIBOR plus 1.75% for other currency facilities as of December 31, 2012. The
weighted average interest rate approximated 5.25% for 2012 and 2011.
The Company has available
to it a $769,231 revolving line of credit with The Bank of East Asia, Limited (“BEA”) with an outstanding balance of
$764,761 at December 31, 2012 and $765,971 at December 31, 2011. The line of credit bears interest at the higher of Hong Kong prime
rate plus 0.25% or HIBOR plus 2% for HKD facilities and LIBOR plus 2% for other currency facilities as of December 31, 2012. The
weighted average interest rate approximated 5.5% for 2012 and 2011.
The summary of banking facilities at December
31, 2012 is as follows:
|
|
Granted facilities
|
|
|
Utilized facilities
|
|
|
Not Utilized Facilities
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit and loan facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Import/Export Loan
|
|
$
|
8,653,847
|
|
|
$
|
8,319,321
|
|
|
$
|
334,526
|
|
Bank Loans
|
|
|
6,099,309
|
(a)
|
|
|
6,099,309
|
|
|
|
0
|
|
Revolving Short Term Loan
|
|
|
1,538,462
|
(a)
|
|
|
1,531,637
|
|
|
|
6,825
|
|
Overdraft
|
|
|
474,359
|
(b)
|
|
|
357,562
|
|
|
|
116,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,765,977
|
|
|
$
|
16,307,829
|
|
|
$
|
458,148
|
|
(a) The bank loans are combined from the summary of Note 8, total bank loans amount to USD7,630,946 with a revolving short term loan of USD1,531,637. The revolving short term loan is placed under Other Current Liabilities on the balance sheet. It has a facility limit of USD1,538,462, bearing an interest rate of 0.5% below Hong Kong prime rate per annum.
(b) Including in cash and cash equivalents
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank loans were comprised of the following
as of December 31, 2012 and 2011:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in July 28, 2014 and carrying an interest rate of 0.25% plus the Hong Kong dollar Prime Rate (5.25% at December 31, 2012 and December 31, 2011) to BEA Bank payable in monthly Installments of $13,996 including interest through December 2012 without any balloon payment requirements
|
|
$
|
243,590
|
|
|
$
|
397,436
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in April 18, 2015 and carrying an Interest rate of 0.25% plus the Hong Kong Prime dollar Rate (5.25% at December 31, 2012 and December 31, 2011) to BEA Bank payable in monthly Installments of $48,415 including interest through December 2012 without any balloon payment requirements
|
|
|
1,196,581
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in April 25, 2015 and carrying an Interest rate of 0.5% plus the Hong Kong Prime dollar Rate (5.25% at December 31, 2012 and December 31, 2011) to DBS Bank payable in monthly Installments of $60,233 including interest through December 2012 without any balloon payment requirements
|
|
|
1,574,812
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in June 2, 2023 and carrying an Interest rate of 2% per annum over one month HIBOR (0.28% at December 31, 2012 and 0.24% at December 31, 2011) to DBS Bank payable in monthly Installments of $4,074 including interest through December 2012 without any balloon Payment requirements
|
|
|
456,123
|
|
|
|
494,065
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in September 15, 2023 and carrying an interest rate of 2.5% below the Hong Kong dollar Prime Rate (5.25% at December 31, 2012 and December 31, 2011) to DBS Bank payable in monthly Installments of $5,240 including interest through December 2012 without any balloon payment requirements
|
|
|
584,573
|
|
|
|
630,640
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in June 2, 2026 and carrying an Interest rate of 2% per annum over one month HIBOR (0.28% at December 31, 2012 and 0.24% at December 31, 2011) to DBS Bank payable in monthly Installments of $5,050 including interest through December 2012 without any balloon Payment requirements
|
|
|
703,598
|
|
|
|
747,497
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in July 21, 2026 and carrying an interest rate of 2.4% below the Hong Kong dollar Prime Rate (5.25% at December 31, 2012 and December 31, 2011) to DBS Bank payable in monthly installments of $9,925 including interest through December 2012 without any balloon payment requirements
|
|
|
1,340,032
|
|
|
|
1,419,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,099,309
|
|
|
$
|
3,689,240
|
|
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis on the repayment of bank loan
as of December 31, 2012 and December 31, 2011 are as follow:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Carrying amount that are repayable on demand or within twelve months from December 31, 2012 containing a repayable on demand clause:
|
|
|
|
|
|
|
|
|
Within twelve months
|
|
$
|
1,529,282
|
|
|
$
|
361,734
|
|
|
|
|
|
|
|
|
|
|
Carrying amount that are not repayable within twelve months from December 31, 2012 containing a repayable on demand clause but shown in current liabilities:
|
|
|
|
|
|
|
|
|
After 1 year, but within 2 years
|
|
$
|
2,142,751
|
|
|
$
|
676,286
|
|
After 2 years, but within 5 years
|
|
|
467,232
|
|
|
|
455,607
|
|
After 5 years
|
|
|
1,960,044
|
|
|
|
2,195,613
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,570,027
|
|
|
$
|
3,327,506
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,099,309
|
|
|
$
|
3,689,240
|
|
With respect to all
of the above referenced debt and credit arrangements in Note 7 and Note 8, the Company pledged its assets to a bank group in Hong
Kong comprised of DBS Bank and BEA Bank, as collateral for all current and future borrowings from the bank group by the Company.
In addition to the above pledged collateral, the debt is also secured by:
|
1.
|
Collateral for loans from DBS Bank:
|
|
(a)
|
a fixed cash deposit of
$840,897 (HKD6,559,000);
|
|
(b)
|
a security interest on two residential properties located in Hong Kong owned
by Atlantic, an indirect wholly owned subsidiary of ACL;
|
|
(c)
|
a workshop located in Hong Kong owned by Atlantic, an indirect wholly owned
subsidiary of ACL;
|
|
(d)
|
a security interest on a residential property located in Hong Kong owned
by City, a related party;
|
|
(e)
|
a workshop located in Hong Kong owned by Solution, a related party;
|
|
(f)
|
a security interest on two residential properties located in Hong Kong owned
by Aristo, a company wholly owned by Mr. Yang; and
|
(g)
an unlimited personal guarantee by Mr. Yang
|
2.
|
Collateral for loans from BEA Bank:
|
|
(a)
|
a workshop located in Hong Kong owned by Systematic Information, a related
party;
|
|
(b)
|
a workshop located in Hong Kong owned by Solution, a related party; and
|
|
(c)
|
an unlimited personal guarantee by Mr. Yang
|
|
NOTE 9.
|
OTHER
CURRENT LIABILITES
|
The other current liabilities as of December
31, 2012 were $12,386,002. It consisted $1,531,637 of revolving short term loan and $10,854,365 of trade deposit from customers.
The trade deposit from customers is letter of credits received from our customers which were financed by the bank. The trades
have been fully settled on or before February 13, 2013.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense amounted to $32,950
for 2012 and $197,422 for 2011 (an effective rate of -0.02% for 2012 and -15.4% for 2011). A reconciliation of the provision for
income taxes with amounts determined by applying the statutory federal income tax rate of 34% to income before income taxes is
as follows:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Computed tax at federal statutory rate
|
|
$
|
0
|
|
|
$
|
0
|
|
Tax rate differential on foreign earnings of Atlantic and
Aristo, Hong Kong based companies
|
|
|
(353,440
|
)
|
|
|
34,682
|
|
Unrecognized timing difference
|
|
|
0
|
|
|
|
0
|
|
Tax under provision for Atlantic
|
|
|
32,950
|
|
|
|
43,576
|
|
Net operating loss carry forward
|
|
|
353,440
|
|
|
|
119,164
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,950
|
|
|
$
|
197,422
|
|
The income tax provision consists of the following components:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
|
$
|
0
|
|
Foreign
|
|
|
32,950
|
|
|
|
197,442
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,950
|
|
|
$
|
197,442
|
|
The Components of the deferred tax assets and liabilities are
as follows:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,837,120
|
|
|
$
|
1,483,680
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
1,837,120
|
|
|
$
|
1,483,680
|
|
Less: valuation allowance
|
|
|
(1,837,120
|
)
|
|
|
(1,483,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The Company
did not have any interest and penalty recognized in the income statements for the year ended December 31, 2012 and 2011 or balance
sheet as of December 31, 2012 and 2011. The Company did not have uncertainty tax positions or events leading to uncertainty tax
position within the next 12 months. The Company’s 2010, 2011, and 2012 U.S. Corporation Income Tax Return are subject to
U.S. Internal Revenue Service examination and the Company’s 2006/7, 2007/8, 2008/9, 2009/2010, 2010/11, 2011/12, and 2012/13
Hong Kong Corporations Profits Tax Return filing are subject to Hong Kong Inland Revenue Department examination. The Company’s
2008, 2009, 2010, 2011, and 2012 PRC income tax returns are subject to PRC State Administration of Taxation examination.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 11.
|
CASH FLOW INFORMATION
|
|
(a)
|
Cash paid during the years ended December 31, 2012 and 2011 is as follows:
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,011,080
|
|
|
$
|
555,306
|
|
|
|
|
|
|
|
|
|
|
Income taxes (reversal) paid
|
|
$
|
(2,870
|
)
|
|
$
|
451,906
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Activities:
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred when capital leases were entered for new automobiles
|
|
$
|
0
|
|
|
$
|
399,345
|
|
(b)
Net cash inflow on acquisition of subsidiaries
as of December 31, 2012 and December 31, 2011
are as follow
:
|
|
December 31, 2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Cash consideration paid up to December 31, 2012
|
|
$
|
2,150,000
|
|
|
$
|
0
|
|
Cash and cash equivalents acquired
|
|
|
(157,259
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net cash inflow in respect of acquisition of subsidiaries
|
|
$
|
1,992,741
|
|
|
$
|
0
|
|
|
NOTE
12.
|
WEIGHTED AVERAGE
NUMBER OF SHARES
|
The Company has a
2006 Incentive Equity Stock Plan, under which the Company may grant options to its employees for up to 5 million shares of common
stock. There was no dilutive effect to the weighted average number of shares for the years ended December 31, 2012 and 2011 since
there were no outstanding options at December 31, 2012 and 2011.
|
NOTE 13.
|
CONCENTRATIONS OF CREDIT
RISK AND MAJOR CUSTOMERS
|
The Company had a
non-exclusive Distributorship Agreement with Samsung Electronics Hong Kong Co., Ltd. (“Samsung”), which was initially
entered into in May 1993 and has been renewed annually. The Company’s Samsung business was formerly handle through its indirect
wholly owned subsidiary, Atlantic. After April 1, 2012, Atlantic integrates its business relating to purchasing semiconductors
and electronic parts from Samsung to the new joint venture, ATMD. ATMD has signed a new non-exclusive Distributorship Agreement
with Samsung. The non-exclusive Distributorship Agreement between Atlantic and Samsung was expired in June 30, 2012.
In addition, the Company’s
operations and business viability are to a large extent dependent on the provision of management services and financial support
by Mr. Yang. See Note 8 of the Notes to Consolidated Financial Statements for Mr. Yang’s support on the Company’s banking
facilities.
Under the Mandatory
Provident Fund (“MPF”) Scheme Ordinance in Hong Kong, the Company is required to set up or participate in an MPF scheme
to which both the Company and employees must make continuous contributions throughout their employment based on 5% of the employees’
earnings, subject to maximum and minimum level of income. For those earning less than the minimum level of income, they are not
required to contribute but may elect to do so. However, regardless of the employees’ election, their employers must contribute
5% of the employees’ income. Contributions in excess of the maximum level of income are voluntary. All contributions to the
MPF scheme are fully and immediately vested with the employees’ accounts. The contributions must be invested and accumulated
until the employees’ retirement. The Company contributed and expensed $29,552 for 2012 and $34,906 for 2011.
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases
its facilities. The following is a schedule by years of future minimum rental payments required under operating leases that have
non-cancellable lease terms in excess of one year as of December 31, 2012:
|
|
Related parties
|
|
|
Others
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
0
|
|
|
$
|
346,949
|
|
|
$
|
346,949
|
|
2014
|
|
|
0
|
|
|
|
282,533
|
|
|
|
282,533
|
|
Thereafter
|
|
|
0
|
|
|
|
490,171
|
|
|
|
490,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0
|
|
|
$
|
1,119,653
|
|
|
$
|
1,119,653
|
|
See Note 6 of the
Notes to Consolidated Financial Statements for related party leases. All leases expire prior to December 31, 2018. Real estate
taxes, insurance, and maintenance expenses are obligations of the Company. It is expected that in the normal course of business,
leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease
commitments will likely be more than the amounts shown for 2012. Rent expense for the years ended December 31, 2012 and 2011 totaled
$299,807 and $241,699, respectively.
On May 28, 2012, the
Company paid a special dividend of the common stock to its shareholders. 5,805,059 shares of common stock were issued and an additional
$7.47 was paid to shareholders for fractional shares.
|
NOTE
17.
|
INVESTMENTS IN
A JOINTLY-CONTROLLED ENTITY
|
In March 2012, the
Company and Tomen Devices Corporation established ATMD (Hong Kong) Limited, a joint venture operating in Hong Kong. Under the terms
of the agreement, ACL’s contribution comprised cash of $3 million.
Particulars of the jointly-controlled entity are
as follows:
All shareholding in the above
entity are in ordinary shares or the equivalent and are stated to the nearest percentage point.
On September
28, 2012, the Company completed its acquisition of 100% equity interest of Jussey Investments Limited (“Jussey”), a
company incorporated in British Virgin Islands, for aggregate purchase consideration of approximately US$2,150,000, payable by
way of cash or equivalent in favor to the seller within 5 business days after the completion of the acquisition. Jussey owns 100%
equity interest in eVision Telecom Limited (“eVision”), a Hong Kong incorporated company, and 80% equity interest in
USmart Electronic Products Limited (“USmart”), a Hong Kong incorporated company. Jussey indirectly owns 80% of Dongguan
Kezheng Electronics Limited (“Kezheng”), a wholly foreign-owned enterprise (“WFOE”) organized under the
laws of the PRC by USmart.
Through the acquisition, the
Company has diversified its product portfolio, enhanced its distributor role to a Research and Develop (“R&D”)
manufacturer with its own products and brands, entered the telecommunication industry, gained access to the 3G baseband licenses,
and design and manufacturing matrix and facility.
The Company accounted for this
acquisition of Jussey and its subsidiaries by acquisition method of accounting. The balance sheet items were stated at fair value.
The fair value was accounted upon the issuance of fair value report from an independent valuator engaged for this acquisition.
The purchase price
allocation was computed based on the fair value report from the independent valuator.
Jussey’s results
of operations are consolidated with the Company effective October 1, 2012.
The intangible
assets are summarized in the following table which provides the gross carrying value and accumulated amortization for each major
class of intangible assets other than goodwill:
The aggregate
amortization expense for those intangible assets that continue to be amortized is reflected in amortization of intangible assets
in the Consolidated Statements of Income and comprehensive Income and was $0 and $0 for the years ended December 31, 2012 and 2011,
respectively.
Amortization expense for trademark in the
coming 24 months period, commence on July 2013 and thereafter is as follows:
Amortization expenses
for license contracts will be provided according to the production and shipment schedules; commence on July 2013, fully provided
on June 2015.