Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
þ
No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act.
¨
Yes
þ
No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
þ
Yes
¨
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files.)
þ
Yes
¨
No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K, or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant
is large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act).
¨
Yes
þ
No
The aggregate market value of the voting
common equity held by non-affiliates of the registrant as of June 30, 2013 was approximately $895,349 based upon the closing price
of $0.07 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, 2014 was 39,684,495.
PART I
As used throughout this Annual Report,
the terms “USMART”, “Company”, “we”, “us”, “our” or “Registrant”
refer to USmart Mobile Device Inc. and its subsidiaries.
Overview
USmart Mobile Device
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 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. In 2013, the Company
changed the name from ACL Semiconductors Inc. to USmart Mobile Device Inc. On September 27, 2013, the Company, through its wholly
owned subsidiary ACL Holdings, sold the 30% equity interest in ATMD.
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 and IBComm. On September 27, 2013, ACL Holdings sold the 30% equity interest of
ATMD for consideration of USD 3,633,173.
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
(“Mr. 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 trader, 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, was
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 2013 and 2012 sales were around $0.9
million and $2 million; it was a distributor that accommodated special requirements for specific customers.
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. The R&D House holds, on behalf of eVision, 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 September 27, 2013, ACL International Holdings Limited entered
a Share Sale Agreement with Tomen Devices Corporation regarding the disposal of 30% share interest of ATMD, the Joint Venture with
Tomen and IBcomm, for the consideration of USD 3,633,173. The transaction was completed in November 2013.
Products
The primary products the Company’s
subsidiaries and joint venture distribute and sell for the year ended December 31, 2013 are described as follows:
Atlantic Components Limited & ATMD
(Hong Kong) Limited
Limited by the non-exclusive
distributorship agreement, in the year 2013 ATMD will only provide Samsung brand memory products to its customers, whereas Atlantic
does not have any limitation and will source any brands requested by its customers.
The primary products
for Atlantic and ATMD 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.
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 of smartphone and other mobile device 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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Even after the disposal of equity interest in
ATMD,
the Company still remain a very close business relationship with ATMD and Tomen, the majority shareholder of ATMD. The Company
believes this has a competitive advantage 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.
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Sales and Marketing
As of December 31,
2013, 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,
2013, 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 for the year ended December 31, 2013 were around USD 70,000.
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 traders,
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 distinct 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
In the year 2013,
Tomen was our supplier for Samsung memory products provided to Atlantic, and we also had various other PRC and HK suppliers for
the general memory products and the other electronic parts for the manufacturing of smartphones.
Customers
As of April 15, 2014,
the Company had approximately 30 customers in Hong Kong and Southern China, the majority of whom are memory product traders and
Consumer Electronics manufacturers. Other than the Company’s most significant two customers who accounted for 37% and 9%
of the Company’s net sales for the year ended December 31, 2013, no other customer accounted for more than 10% of the Company’s
net sales for 2013. 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.
Government Regulation
As of December 31,
2013, 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,
2013, 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. After
the ATMD establishment, Atlantic had a total of 21 full time employees in Hong Kong and PRC, including 17 employees in administration
and accounts, and 4 employees in engineering. As of September 28, 2012, the Company expanded the operations group by acquiring
Jussey had 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,
2013, the Company has total current assets of $2,809,342 and current liabilities of $20,584,666. 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 maintain our current level of working capital,
we will likely to face more difficulty in business operation.
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.
Any outcomes mentioned above occurred will deteriorate our gross margin and unfavorably change our supply
chain, even after the disposal of equity interest of ATMD, and continue to maintain a close relationship with ATMD and Tomen as
our supplier for Samsung products.
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.
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
is 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”).
Whareas, 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 face
s 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. Currently, we have 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, Chairman of the Board of Directors, holds approximately 67.1% 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,
2013, the closing price of our Common Stock fluctuated from a per share
high of $3.00 to a low of $0.01 per share. The 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 Usmart; 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, 2014, there were 39,684,495 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:
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Control of the market for the security by one or a few broker-dealers;
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“Boiler room” practices involving high-pressure sales tactics;
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Manipulation of prices through prearranged matching of purchases and sales;
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The release of misleading information;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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Dumping of securities by broker-dealers after prices have been manipulated to a desired level,
for which hurts the price of the stock and causes investors to suffer from loss.
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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.
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Item 1B.
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Unresolved Staff Comments
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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 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 two years, expiring May 10, 2015 with monthly lease payments of HKD9,800 (approximately
USD1,256).
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 September 30, 2015 with monthly lease income of HKD68,000 (approximately USD8,718).
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, Guangdong 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.
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Item 3.
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Legal Proceedings
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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.
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Item 4.
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Mine Safety Disclosure
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Not Applicable
PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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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
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AGE
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POSITION
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Chung-Lun Yang
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52
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Chairman of the Board of Directors
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Ben Wong
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50
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Director and Chief Executive Officer
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Philip Tsz Fung Lo
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47
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Chief Financial Officer (3)
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Ming Yan Leung
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45
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Chief Technology Officer
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Ho Man Yeung
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58
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Director
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Wing Sun Leung
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50
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Director
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(1)
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Kun Lin Lee resigned as Chief Financial Officer on August 18, 2013.
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(2)
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Man Sing Lai resigned as Director on August 18, 2013.
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(3)
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Philip Tsz Fung Lo was engaged as Chief Financial Officer on August 18, 2013
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(4)
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Kenneth Lap-Yip Chan resigned as Director and Chief Operating Officer on September 22, 2013
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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.
Philip Tsz Fung Lo,
Chief Financial
Officer. Mr. Lo was appointed as our Chief Financial Officer on August 18, 2013. Mr. Lo graduated from the University of Wollongong,
NSW Australia in 1992 with a Bachelor of Commerce degree in Accountancy with Merit. In 1994, Mr. Lo received his CPA Programme
of Australian Society of CPAs, and currently is a CPA member of the Certified Public Accountants of Australia and a certified public
accountant of the Hong Kong Institute of Certified Public Accountants. Mr. Lo is an independent non-executive director and chairman
of Audit Committee of Styland Holdings Limited (211), a company listed on Main Board of The Stock Exchange of Hong Kong Limited,
an independent director and chairman of Audit Committee of QKL Stores, Inc., a company listed on NASDAQ (QKLS), and an independent
director of Dragon Jade International Limited, a company listed on OTCBB in the United States. Mr. Lo is also the Managing Director
of P&L Financial Consultancy Limited and Shenzhen Xin Wei Management Consultancy Limited, which are a HK private company and
a PRC Company in the business of providing financial and management consulting services. From January 2010 to January 2012, Mr.
Lo served as the Chief Financial Officer of Wuhan General Group (China) Inc. which produces and manufactures blower and generator
in China. Also, from December 2007 to January 2009, Mr. Lo served as the Chief Financial Officer of Wuhan Zhongye Yangluo
Heavy Machinery Co., Ltd., which produces and manufactures steel products in China. Mr. Lo has extensive experience in the areas
of corporate management, financial accounting and auditing. He has served as the CFO of USmart Electronic Products Limited, a subsidiary
of the Company since July 2013. Mr. Lo is fluent in English, Mandarin and Cantonese.
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.
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, 2013, our Board of Directors held 8 meetings. No director who served during the fiscal year ended December
31, 2013 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:
|
(i)
|
Mr. Ho Man Yeung and Mr. Wing Sun Leung serve on the Audit Committee;
|
|
(ii)
|
Mr. Ho Man Yeung and Mr. Wing Sun Leung serve on the Nominating Committee, and;
|
|
(iii)
|
Mr. Ho Man Yeung and Mr. Wing Sun Leung serve on the Compensation Committee.
|
Board Leadership Structure and Risk
Oversight Role
Our Board of Directors
currently contains 4 Directors, and 2 of the Directors are Independent Directors. The Company is in search of an appropriate candidate
to fill in the vacant position of Independent Director for the resignation of Mr. Lai. 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 periodically reviews on the significant risks in respect
to our business. With our current governance structure based on 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,
USmart Mobile Device 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,
USmart
Mobile Device 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, 2013
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, 20
13
are: Ben Wong, our Chief Executive Officer; Philip Tsz Fung Lo, our Chief Financial Officer; and Ming Yan Leung, our Chief Technology
Officer. 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, 2013.
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, 2013 and December 31, 2012.
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
|
|
|
2013
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
-
|
|
Former Chief Executive Officer (1)
|
|
|
2012
|
|
|
$
|
369,231
|
|
|
|
-
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
369,231
|
|
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 employment
agreement with USmart and receives a monthly salary of HKD50,000 (approximately USD6,427).
On August 18, 2013,
the board of directors of the Company appointed Mr. Philip Tsz Fung Lo as the Company’s Chief Financial Officer. Mr. Lo has
an employment agreement with USmart and receives a monthly salary of HKD30,000 (approximately USD3,856).
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,
2013.
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 (2)
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Kenneth Lap-Yin Chan
(4)
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Man Sing
Lai (3)
|
|
$
|
9,615
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
9,615
|
|
Ho Man Yeung
|
|
$
|
15,385
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
15,385
|
|
Wing Sun Leung
|
|
$
|
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)
|
Ben Wong was elected as the director at the Company’s 2012 annual shareholders meeting on
November 16, 2012.
|
|
(3)
|
Man Sing Lai resigned as the Company’s Independent Director on August 22, 2013.
|
|
(4)
|
Kenneth Lap-Yin Chan resigned as the Company’s Director and Chief Operating Officer on September
22, 2013
|
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, 2013: (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, 2013. 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 (4)
No. 78, 5th Street, Hong Lok Yuen, Tai Po, New Territories, Hong Kong
|
|
|
26,622,000
|
|
|
|
67.1
|
%
|
Ben Wong (2)
11A, Tower 2, Bellagio, 33 Castle Peak Road, Sham Tseng, New Territories, Hong Kong
|
|
|
1,800
|
|
|
|
0.0
|
%
|
Philip Tsz Fung Lo (2)
30C, Block 2, Hanley Villa, 18 Yau Lai Road, Tsuen Wan, New Territories, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Kun Lin Lee (3)
7F, No 16 Huan-her East Road Sec 4, Yuan Ho City, Taipei, Taiwan
|
|
|
270,000
|
|
|
|
1.0
|
%
|
Kenneth Lap-Yin Chan (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 (5)
Flat B, 23/F., Block 31, Laguna City, Cha Kwo Ling Road, Kwun Tong, Kowloon, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Ho Man Yeung (4)
Block 4, 7/F. Unit B, The Grand Panorama, 10 Robinson Road,
Central, Hong Kong
|
|
|
0
|
|
|
|
0.0
|
%
|
Wing Sun Leung (4)
5658 Owens Drive, #202, Pleasanton, CA 94588, USA
|
|
|
0
|
|
|
|
0.0
|
%
|
Farburn Holdings Limited (6)
1601 Beverly House, 93-107 Lockhart Road, Wanchai, Hong Kong.
|
|
|
3,600,000
|
|
|
|
9.1
|
%
|
Ho Fun Cheng (6)
1601 Beverly House, 93-107 Lockhart Road, Wanchai, Hong Kong.
|
|
|
3,600,000
|
|
|
|
9.1
|
%
|
All Directors and Officers as a Group
|
|
|
26,893,800
|
|
|
|
67.8
|
%
|
|
(1)
|
Applicable percentage of ownership is based on 39,684,495 shares of Common Stock outstanding as
of December 31, 2013, together with securities exercisable or convertible into shares of Common Stock within 60 days of December
31, 2013, 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, 2013, 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)
|
Former Executive Officer
|
|
(4)
|
Director Except as otherwise set forth, information on the stock ownership of these persons was
provided to us by such persons.
|
|
(6)
|
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,
2013 and 2012, we had an outstanding receivable from Aristo / Mr. Yang, the President and Chairman of our Board of Directors, totaling
$931,652 and $3,658,359, respectively. These advances bear no interest and are payable on demand. The receivable due from Aristo
/ Mr. Yang to the Company is derived from the consolidation of the financial statements of Aristo, a variable interest entity,
with the Company. A repayment plan has been entered with Mr. Yang.
Transactions with Solution Semiconductor
(China) Limited
Mr. Yang is a director
and the sole beneficial owner of the equity interests of Solution Semiconductor (China) Ltd. (“Solution”).
During the years ended
December 31, 2013 and 2012, we received service charges of $15,384 and $5,769 respectively from Solution. The service fee was charged
for back office support for Solution.
During the years ended
December 31, 2013 and 2012, we sold products for $3,530,784 and $1,000 respectively, to Solution. As of December 31, 2013 and 2012,
there were no outstanding accounts receivables from Solution
Two facilities located
in Hong Kong owned by Solution were used by the Company as collateral for loans from DBS Bank (Hong Kong) Limited (“DBS Bank”)
(formerly Overseas Trust Bank Limited) and The Bank of East Asia, Limited (“BEA Bank”) respectively.
Transactions with Systematic Information
Limited
Mr. Yang, the Company’s
Chief Executive Officer, majority shareholder and a director, is a director and shareholder of Systematic Information Ltd. (“Systematic
Information”) with a total of 100% interest.
During the years ended
December 31, 2013 and 2012, we received service charges of $3,077 and $7,769 respectively from Systematic Information. The service
fee was charged for back office support for Systematic Information.
During the years ended
December 31, 2013 and 2012, we sold products for $2,000,782and $17,457 respectively, to Systematic Information. As of December
31, 2013 and 2012, there were no outstanding accounts receivables from Systematic Information.
A workshop located
in Hong Kong owned by Systematic Information was used by the Company as collateral for loans from BEA Bank.
Transactions with 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, 2013 and 2012, we received service charges of $1,026 and $0 respectively from Global. The service fee was charged
for back office support for Global.
During the years ended
December 31, 2013 and 2012, we sold products for $1,564,213 and $0 respectively, to Global. As of December 31, 2013 and 2012, there
were no outstanding accounts receivables from Global.
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, 2013 and 2012, we sold products for $25,536 and $21,784 respectively,
to Atlantic Storage. As of December 31, 2013 and 2012, there were no outstanding accounts receivables from Atlantic Storage.
Transactions with City Royal Limited
Mr. Yang, the Company’s
Chief Executive Officer, 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, 2013 and 2012, 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.
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, 2013 and 2012, we
received a service fee of $0 and $9,615 respectively from Ocean. The service fee was charged for back office support for Ocean.
During the years ended December 31, 2013
and 2012, we sold products for $13,924 and $0 respectively, to Ocean. As of December 31, 2013 and 2012, there were no outstanding
accounts receivables from Ocean.
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 CPA during the years ended December 31, 2013 and 2012. Albert Wong & Co. LLP CPA audited our annual financial statements
for the year ended December 31, 2013 and 2012.
|
|
Fiscal 2013
|
|
|
Fiscal 2012
|
|
Audit Fees (1)
|
|
$
|
107,000
|
|
|
$
|
116,000
|
|
Audit Related Fees (2)
|
|
$
|
—
|
|
|
$
|
—
|
|
Tax Fees (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
All Other Fees (4)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,000
|
|
|
$
|
116,000
|
|
|
(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 2013 annual financial
statements. Audit Fees billed by Albert Wong & Co. CPA firm includes audited fees for auditing our 2012 annual financial statements
and interim reviews for 2012 to 2013.
|
|
(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 2013 or 2012.
|
|
(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 2013 or 2012.
|
|
(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 2013 or 2012.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 1.
|
Organization and
principal activitY
|
Organization and Basis of Presentation
USmart Mobile Device
Inc. (“USmart”) and its subsidiaries are referred to herein collectively and on a consolidated basis as the “Company”
or “we”, “us” or “our” or similar terminology.
The Company was incorporated
under the laws of the State of Delaware on September 17, 2002 and 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 Virgins Island (“Jussey”) (please refer
to Note 17 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 and Chief Executive Officer (“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)
|
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.
|
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE
1.
|
Organization and
principal activitY (CONTINUED)
|
On March 23, 2010,
USmart concluded that Aristo, a related company solely owned by Mr. Yang is a variable interest entity under FASB ASC 810-10-25
and is therefore subject to consolidation with USmart beginning fiscal year 2007 under the guidance applicable to variable interest
entities.
Business Activity
USmart Mobile Device
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 and SMD (smartphone panels). On September 27, 2013, the Company sold the entire 30% equity interest of
ATMD. 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.
USMART MOBILE DEVICE 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, 2013. 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
|
|
|
$
|
680,499
|
|
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
USmart and accordingly,
USmart is considered to be the de facto principal of Aristo, Aristo is considered to be the de facto subsidiary of the Company,
and Mr. Yang is considered to be 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.
USMART MOBILE DEVICE 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 2013 and 2012 sales were around 7 million and 2 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 2013 were $3,337,735 with account
receivable of $4,850,769 as of December 31, 2013. 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.
USMART MOBILE DEVICE 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.
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.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
Summary of significant
accounting policies
(Continued)
|
|
(h)
|
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.
|
(i)
|
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 decreased by $662,093 from $2,625,375 as of December 31,
2012 to $1,963,282 as of December 31, 2013. Inventory obsolescence reserves totaled $2,625,375 including acquired from subsidiaries
$339,078 as of December 31, 2012.
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.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
Summary of significant
accounting policies
(Continued)
|
|
(l)
|
Income taxes (Continued)
|
The Company
did not have any interest or penalty recognized in the income statements for the period ended December 31, 2013 and December 31,
2012 or the balance sheet, as of December 31, 2013 and December 31, 2012. The Company did not have uncertainty tax positions or
events leading to uncertainty tax position within the next 12 months. The Company’s 2011, 2012 and 2013 U.S. federal income
tax returns are subject to U.S. Internal Revenue Service examination and the Company’s 2007/8, 2008/9, 2009/2010, 2010/11,
2011/12, 2012/13, 2013/14 Hong Kong Company Income Tax filing are subject to Hong Kong Inland Revenue Department examination. The
Company’s 2009, 2010, 2011, 2012 and 2013 PRC income tax returns are subject to PRC State Administration of Taxation examination.
|
(m)
|
Foreign currency translation
|
The accompanying
consolidated financial statements are presented in United States dollars (USD). The functional currencies of the Company’s
operating business based in Hong Kong and PRC are the Hong Kong Dollar (HKD) and Renminbi (RMB) respectively. The consolidated
financial statements are translated into United States dollars from HKD with a ratio of USD1.00=HKD7.80, a fixed exchange rate
maintained between Hong Kong and United States derived from the Hong Kong Monetary Authority pegging HKD and USD monetary policy.
For our subsidiaries whose functional currency are the RMB, statement of income, balance sheets and cash flows are translated with
a ratio of RMB1.00=HKD1.26 an average exchange rate during the period.
Exchange
gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
All of our revenue transactions are transacted in the functional currencies. We have not entered into any material transactions
that are either originated, or to be settled, in currencies other than the HKD, RMB and USD. Accordingly, transaction gains or
losses have not had, and are not expected to have a material effect on our results of operations.
The RMB
is not freely convertible into any other currencies. In addition, all foreign exchange transactions in the PRC must be conducted
through authorized institutions. Accordingly, management cannot provide any assurance that the RMB underlying the consolidated
financial statement amounts could have been, or could be, converted into HKD or USD at the exchange rates used to translate the
functional currency into the reporting currency.
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 $1,121 and
$1,250 for the years ended December 31, 2013 and 2012, 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.
|
(q)
|
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.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
Summary of significant
accounting policies
(Continued)
|
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.
|
(s)
|
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.
|
(u)
|
Recently issued Accounting Guidance
|
In January
2013, FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures
about Offsetting Assets and Liabilities. This ASU clarifies that ordinary trade receivables and receivables are not in the scope
of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies
only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions
that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification™ (Codification)
or subject to a master netting arrangement or similar agreement.The FASB undertook this clarification project in response to concerns
expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized,
companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly
increasing the cost of compliance at minimal value to financial statement users.An entity is required to apply the amendments in
ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity
should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as
the effective date of ASU 2011-11.
In February
2013, FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting these reclassifications. Other comprehensive
income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are
later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the
current requirements for reporting net income or other comprehensive income in financial statements. All of the information that
this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.
The new
amendments will require an organization to:
|
l
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Present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but
only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period.
|
|
l
|
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification
items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially
transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
|
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 2.
|
Summary of
Significant Accounting Policies (Continued)
|
|
(u)
|
Recently issued Accounting Guidance (Continued)
|
The amendments
apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply
with these amendments for all reporting periods (interim and annual). A private company is required to meet the reporting requirements
of the amended paragraphs about the roll forward of accumulated other comprehensive income for both interim and annual reporting
periods. However, private companies are only required to provide the information about the effect of reclassifications on line
items of net income for annual reporting periods, not for interim reporting periods.The amendments are effective for reporting
periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December
15, 2013, for private companies. Early adoption is permitted.
In February
2013, FASB issued Accounting Standards Update (ASU) No. 2013-03, Financial Instruments (Topic 825). This ASU clarifies the scope
and applicability of a disclosure exemption that resulted from the issuance of Accounting Standards Update No. 2011-04,Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
The amendment clarifies that the requirement to disclose" the level of the fair value hierarchy within which the fair value
measurements are categorized in their entirety (Level 1, 2, or 3)" does not apply to nonpublic entities for items that are
not measured at fair value in the statement of financial position, but for which fair value is disclosed. This ASU is the final
version of Proposed Accounting Standards Update 2013-200—Financial Instruments (Topic 825) which has been deleted. The amendments
are effective upon issuance.
In February
2013, FASB has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint
and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This ASU provides
guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements
for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations
addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the
amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting
entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and
amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal
years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective
for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The amendments in this ASU
should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability
arrangements within the ASU’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may
elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this
ASU) and should disclose that fact. Early adoption is permitted.
In March
2013, FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830). This ASU resolve the
diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation
of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells
a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group
of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas
mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment
of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This
ASU is the final version of Proposed Accounting Standards Update EITF11Ar—Foreign Currency Matters (Topic 830), which has
been deleted. The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within
those years) beginning after December 15, 2013. For nonpublic entities the amendments in this Update are effective prospectively
for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. The amendments should
be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early
adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s
fiscal year of adoption.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 2.
|
Summary of significant
accounting policies
(Continued)
|
|
(u)
|
Recently issued Accounting Guidance (Continued)
|
In April
2013, FASB Accounting Standards Update 2013-07,Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.
This ASU clarifies when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles
for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation
basis of accounting. Liquidation is the process by which a company converts its assets to cash or other assets and settles its
obligations with creditors in anticipation of ceasing all of its activities. An organization in liquidation must prepare its financial
statements using a basis of accounting that communicates information to users of those financial statements to enable those users
to develop expectations about how much the organization will have available for distribution to investors after disposing of its
assets and settling its obligations. The ASU requires organization to prepare its financial statements using the liquidation basis
of accounting when liquidation is “imminent.” Liquidation is considered imminent when the likelihood is remote that
the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with
the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other
parties; or (b) a plan for liquidation is being imposed by other forces (e.g., involuntary bankruptcy). In cases where a plan for
liquidation was specified in the organization’s governing documents at inception (e.g., limited-life entities), the organization
should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation
that was specified in the organization’s governing documents. The ASU requires financial statements prepared using the liquidation
basis to present relevant information about a company’s resources and obligations in liquidation, including the following:
|
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The organization’s assets measured at the amount of the expected cash proceeds from liquidation,
including any items it had not previously recognized under U.S. GAAP that it expects to either sell in liquidation or use in settling
liabilities (e.g., trademarks).
|
|
l
|
The organization’s liabilities as recognized and measured in accordance with existing guidance
that applies to those liabilities.
|
|
l
|
Accrual of the costs it expects to incur and the income it expects to earn during liquidation,
including any anticipated disposal costs.
|
This ASU
is effective for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted.
In July
2013, FASB has published Accounting Standards Update 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date
of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. This ASU defers indefinitely certain disclosures
about investments held by nonpublic employee benefit plans in their plan sponsors’ own nonpublic equity securities. The ASU
was approved by the FASB on June 12, 2013. ASU No. 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date
of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, applies to disclosures of certain quantitative
information about the significant unobservable inputs used in Level 3 fair value measurement for investments held by certain employee
benefit plans.
In July
2013, FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).U.S.
GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating
loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU state that an unrecognized
tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent
a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under
the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax
position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use,
the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability
and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when
a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments
in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic
entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.
Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the
effective date. Retrospective application is permitted.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Finished goods
|
|
$
|
3,044,793
|
|
|
$
|
7,241,523
|
|
Less allowance for excess and obsolete inventory
|
|
|
(1,963,282
|
)
|
|
|
(2,625,375
|
)
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
1,081,511
|
|
|
$
|
4,616,148
|
|
The following is a summary of the change in the Company's inventory
valuation allowance:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Inventory valuation allowance, beginning of the year
|
|
$
|
2,625,375
|
|
|
$
|
709,374
|
|
Obsolete inventory sold
|
|
|
(662,093
|
)
|
|
|
-
|
|
Additional inventory provision
|
|
|
-
|
|
|
|
1,916,001
|
|
|
|
|
|
|
|
|
|
|
Inventory valuation allowance, end of year
|
|
$
|
1,963,282
|
|
|
$
|
2,625,375
|
|
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 4.
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment, net comprise
the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
At cost
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
8,574,682
|
|
|
$
|
9,375,558
|
|
Automobiles
|
|
|
642,241
|
|
|
|
658,772
|
|
Office equipment
|
|
|
268,863
|
|
|
|
268,863
|
|
Leasehold improvements
|
|
|
543,550
|
|
|
|
543,550
|
|
Furniture and fixtures
|
|
|
57,302
|
|
|
|
57,302
|
|
Machinery
|
|
|
668,185
|
|
|
|
668,185
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,754,823
|
|
|
$
|
11,572,230
|
|
Less: accumulated depreciation
|
|
|
(2,541,974
|
)
|
|
|
(1,986,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,212,849
|
|
|
$
|
9,586,055
|
|
Depreciation and amortization
expense included in the general and administrative expenses for the years ended December 31, 2013 and 2012 were $756,596 and $564,117
respectively.
Automobiles include the following amounts
under capital leases:
|
|
December 31, 2013
|
|
|
December 31, 202
|
|
Cost
|
|
$
|
399,473
|
|
|
$
|
469,754
|
|
Less accumulated depreciation
|
|
|
(341,876
|
)
|
|
|
(302,106
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,597
|
|
|
$
|
167,648
|
|
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 5.
|
CAPITAL LEASE OBLIGATIONS
|
The Company leases automobiles
under three capital
leases that will expire between April 2014 and December 2015. Aggregate future obligations under the capital leases in effect
as of December 31, 2013 and 2012 are as follows:
The Company has several
non-cancellable capital leases relating to automobiles:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Current portion
|
|
$
|
75,917
|
|
|
$
|
96,506
|
|
Non-current portion
|
|
|
57,511
|
|
|
|
133,428
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,428
|
|
|
$
|
229,934
|
|
At December 31, 2013 and 2012, the value
of automobiles under capital leases as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Cost
|
|
$
|
399,473
|
|
|
$
|
469,754
|
|
Less: accumulated depreciation
|
|
|
(341,876
|
)
|
|
|
(302,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,597
|
|
|
$
|
167,648
|
|
At December 31, 2013 and 2012, the Company
had obligations under capital leases repayable as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Total minimum lease payments
|
|
|
|
|
|
|
|
|
-Within one year
|
|
$
|
81,906
|
|
|
$
|
103,890
|
|
- After one year but within 5 years
|
|
|
60,351
|
|
|
|
143,430
|
|
|
|
$
|
142,257
|
|
|
$
|
247,320
|
|
Interest expenses relating to future periods
|
|
|
(8,829
|
)
|
|
|
(17,386
|
)
|
Present value of the minimum lease payments
|
|
$
|
133,428
|
|
|
$
|
229,934
|
|
USMART MOBILE DEVICE 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,
2013 and 2012, we had an outstanding receivable from Aristo / Mr. Yang, the President and Chairman of our Board of Directors, totaling
$931,652 and $3,658,359, respectively. These advances bear no interest and are payable on demand. The receivable due from Aristo
/ Mr. Yang to the Company is derived from the consolidation of the financial statements of Aristo, a variable interest entity,
with the Company. A repayment plan has been entered with Mr. Yang.
Transactions with Solution Semiconductor
(China) Limited
Mr. Yang is a director
and the sole beneficial owner of the equity interests of Solution Semiconductor (China) Ltd. (“Solution”).
During the years ended
December 31, 2013 and 2012, we received service charges of $15,384 and $5,769 respectively from Solution. The service fee was charged
for back office support for Solution.
During the years ended
December 31, 2013 and 2012, we sold products for $3,530,784 and $1,000 respectively, to Solution. As of December 31, 2013 and 2012,
there were no outstanding accounts receivables from Solution
Two facilities located in Hong Kong owned by Solution were used by the Company as collateral for loans
from DBS Bank (Hong Kong) Limited (“DBS Bank”) and The Bank of East Asia, Limited (“BEA Bank”) respectively.
Transactions with Systematic Information
Limited
Mr. Yang, the Company’s
Chief Executive Officer, majority shareholder and a director, is a director and shareholder of Systematic Information Ltd. (“Systematic
Information”) with a total of 100% interest.
During the years ended
December 31, 2013 and 2012, we received service charges of $3,077 and $7,769 respectively from Systematic Information. The service
fee was charged for back office support for Systematic Information.
During the years ended
December 31, 2013 and 2012, we sold products for $2,000,782and $17,457 respectively, to Systematic Information. As of December
31, 2013 and 2012, there were no outstanding accounts receivables from Systematic Information.
A workshop located
in Hong Kong owned by Systematic Information was used by the Company as collateral for loans from BEA Bank.
Transactions with 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, 2013 and 2012, we received service charges of $1,026 and $0 respectively from Global. The service fee was charged
for back office support for Global.
During the years ended
December 31, 2013 and 2012, we sold products for $1,564,213 and $0 respectively, to Global. As of December 31, 2013 and 2012, there
were no outstanding accounts receivables from Global.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2013 and 2012, we sold products for $25,536 and $21,784 respectively,
to Atlantic Storage. As of December 31, 2013 and 2012, there were no outstanding accounts receivables from Atlantic Storage.
Transactions with City Royal Limited
Mr. Yang, the Company’s
Chief Executive Officer, 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, 2013 and 2012, 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.
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, 2013 and 2012, we
received a service fee of $0 and $9,615 respectively from Ocean. The service fee was charged for back office support for Ocean.
During the years ended December 31, 2013
and 2012, we sold products for $13,924 and $0 respectively, to Ocean. As of December 31, 2013 and 2012, there were no outstanding
accounts receivables from Ocean.
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.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 7.
|
REVOLVING LINES OF CREDIT AND LOAN FACILITIES
|
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
$897,290 at December 31, 2013 and $897,000 at December 31, 2012. 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, 2013. The weighted
average interest rate approximated 5.25% for 2013 and 2012.
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
$761,089 at December 31, 2013 and $764,761 at December 31, 2012. 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, 2013. The
weighted average interest rate approximated 5.5% for 2013 and 2012.
The Company has available
to it a $2,435,897 revolving line of credit with The Fubon Bank (Hong Kong) Limited (Fubon”) with an outstanding balance
of 1,520,201 at December 31, 2013 and $0 at December 31, 2012. The line of credit bears interest at the higher of HIBOR plus 3.5%
for HKD facilities and LIBOR plus 3.5% for other currency facilities as of December 31, 2013. The weighted average interest rate
approximated 6.5% for 2013.
The summary of banking facilities at December
31, 2013 is as follows:
|
|
Granted facilities
|
|
|
Utilized facilities
|
|
|
Not Utilized
Facilities
|
|
Lines of credit and loan facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Import/Export Loan
|
|
|
4,102,564
|
|
|
|
3,178,580
|
|
|
|
923,984
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Loans
|
|
|
3,222,113
|
(a)
|
|
|
3,222,113
|
|
|
|
-
|
|
Revolving Short Term Loan
|
|
|
1,538,462
|
(a)
|
|
|
1,538,168
|
|
|
|
294
|
|
Overdraft
|
|
|
64,103
|
(b)
|
|
|
61,758
|
|
|
|
2,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,927,242
|
|
|
$
|
8,000,619
|
|
|
$
|
926,623
|
|
(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 USD1,538,168. 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
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank loans were comprised of the following
as of December 31, 2013 and 2012
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Installment loan provided by BEA Bank having a maturity date in July 28, 2014 and carrying an interest rate of Hong Kong dollar Prime Rate at 5.25% as of December 31, 2013 and 2012 +0.25%, payable in monthly installments of $13,291 including interest through December 2013 without any balloon payment requirements
|
|
$
|
89,744
|
|
|
$
|
243,590
|
|
|
|
|
|
|
|
|
|
|
Installment loan provided by BEA Bank having a maturity date in April 18, 2015 and carrying an interest rate of Hong Kong dollar Prime Rate at 5.25% as of December 31, 2013 and 2012 +0.25%, payable in monthly installments of $46,065 including interest through December 2013 without any balloon payment requirements
|
|
|
683,761
|
|
|
|
1,196,581
|
|
|
|
|
|
|
|
|
|
|
Installment loan provided by DBS Bank having a maturity date in April 25, 2015 and carrying an interest rate of Hong Kong Prime dollar Rate at 5.25% as of December 31, 2013 and 2012 +0.5%, payable in monthly installments of $55,939 including interest through December 2013 without any balloon payment requirements
|
|
|
859,612
|
|
|
|
1,574,812
|
|
|
|
|
|
|
|
|
|
|
Installment loan provided by DBS Bank having a maturity date in June 2, 2023 and carrying an interest rate of one month HIBOR at 0.28% as of December 31+2%, it was fully repaid on 23 September, 2013
|
|
|
-
|
|
|
|
456,123
|
|
|
|
|
|
|
|
|
|
|
Installment loan provided by DBS Bank having a maturity date in September 15, 2023 and carrying an interest rate of Hong Kong dollar Prime Rate at December 31, 2012 -2.5%, it was fully repaid on 23 September, 2013
|
|
|
-
|
|
|
|
584,573
|
|
|
|
|
|
|
|
|
|
|
Installment loan provided by DBS Bank having a maturity date in June 2, 2026 and carrying an interest rate of one month HIBOR at December 31, 2012 +2%, it was fully repaid on 23 September, 2013
|
|
|
-
|
|
|
|
703,598
|
|
|
|
|
|
|
|
|
|
|
Installment loan provided by DBS Bank having a maturity date in July 21, 2026 and carrying an interest rate of Hong Kong dollar Prime Rate at 5.25% as of December 31, 2012 -2.4%, it was fully repaid on 23 September, 2013
|
|
|
-
|
|
|
|
1,340,032
|
|
|
|
|
|
|
|
|
|
|
Installment loan having a maturity date in 23 September, 2028 and carrying an interest rate of 2% per annum over one month HIBOR (0.2143% at December 31, 2013) from Fubon Bank payable in monthly installments of $6,283 including interest through December 2013 without any balloon payment requirements
|
|
|
947,971
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Term loan having a maturity due in 23 January, 2014 and carrying an interest rate of 3.88429 per annum from Fubon Bank without any balloon payment requirements
|
|
|
641,025
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,222,113
|
|
|
$
|
6,099,309
|
|
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 8.
|
BANK LOANS (CONTINUED)
|
An analysis on the repayment of bank loan
as of December 31, 2013 and December 31, 2012 are as follow:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Carrying amount that are repayable on demand or within twelve months from
|
|
|
|
|
|
|
|
|
December 31, 2013 containing a repayable on demand clause:
|
|
|
|
|
|
|
|
|
Within twelve months
|
|
$
|
1,937,063
|
|
|
$
|
1,529,282
|
|
|
|
|
|
|
|
|
|
|
Carrying amount that are not repayable within twelve months from September 30, 2013 containing a repayable on demand clause but shown in current liabilities:
|
|
|
|
|
|
|
|
|
After 1 year, but within 2 years
|
|
$
|
505,656
|
|
|
$
|
2,142,751
|
|
After 2 years, but within 5 years
|
|
|
118,775
|
|
|
|
467,232
|
|
After 5 years
|
|
|
660,619
|
|
|
|
1,960,044
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,285,050
|
|
|
$
|
4,570,027
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,222,113
|
|
|
$
|
6,099,309
|
|
With respect to all of the debt and credit
arrangements referred to in this Note 8 and Note 9, the Company pledged its assets to a bank group in Hong Kong comprised of DBS
Bank, BEA Bank and Fubon Bank, as collateral for all current and future borrowings from the bank group by the Company. In addition
to the above pledged collateral, the debt is also secured by:
|
1.
|
Collateral for loans from DBS Bank:
|
|
(a)
|
a security interest on a residential property located in Hong Kong owned by City, a related party;
|
|
(b)
|
a workshop located in Hong Kong owned by Solution, a related party; and
|
|
(c)
|
an unlimited personal guarantee by Mr. Yang
|
|
2.
|
Collateral for loans from BEA Bank:
|
|
(a)
|
a workshop located in Hong Kong owned by Systematic Information, a related party;
|
|
(b)
|
a workshop located in Hong Kong owned by Solution, a related party; and
|
|
(c)
|
an unlimited personal guarantee by Mr. Yang
|
|
3.
|
Collateral for loans from Fubon Bank
|
|
(a)
|
a security interest on two residential properties located in Hong Kong owned by Aristo, a company
wholly owned by Mr. Yang; and
|
|
(b)
|
an unlimited personal guarantee by Mr. Yang
|
|
NOTE 9.
|
other current
liabilities
|
The other current liabilities consisted
the following as of December 31, 2013 and December 31, 2012:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Revolving short term loan
|
|
$
|
1,538,168
|
|
|
$
|
1,531,637
|
|
Trade deposit from customers
|
|
|
7,725,475
|
|
|
|
9,896,635
|
|
Temporary receipts
|
|
|
2,242,999
|
|
|
|
-
|
|
Others
|
|
|
937,358
|
|
|
|
957,730
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,444,000
|
|
|
$
|
12,386,002
|
|
The trade deposit from customers consists
of letter of credits received from our customers which were financed by the bank.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 10.
|
LOAN FROM A THIRD PARTY
|
On September 26, 2013, Atlantic Components Limited entered into
a Loan Agreement with Excel Precise International Limited, an unrelated third party, for a loan facility to the aggregate extent
of HKD55 Million (USD7,051,282). The amount HKD55 Million has been drawn down on September 27, 2013. The rate of interest is 1.1%
per month and payable on the 26
th
day of each calendar month.
The Loan is collateral with mortgage over two Properties owned
by Atlantic Components Limited and Personal Guaranteed by Wong, Fung Ming and Yang, Chung Lun.
The repayment time schedule contained in the Loan Agreement
is as follows:
Date of Repayment
|
|
Amount
|
|
|
|
|
|
The Last date of the 12-month period from September 27, 2013
|
|
|
641,026
|
|
The Last date of the 24-month period from September 27, 2013
|
|
|
1,282,051
|
|
The Last date of the 36-month period from September 27, 2013
|
|
|
5,128,205
|
|
|
|
|
|
|
|
|
|
7,051,282
|
|
|
|
|
|
|
Current portion
|
|
|
641,026
|
|
Non-current portion
|
|
|
6,410,256
|
|
|
|
|
|
|
|
|
|
7,051,282
|
|
The Loan facility is to provide purpose
temporary relief for the Company’s liquidity during the negotiation with new banker for a better term on a new banking facility.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax (reversal) expense amounted
to $21,887 for 2013 and $32,950 for 2012 (an effective rate of -0.16% for 2013 and -0.02% for 2012). 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, 2013
|
|
|
December 31, 2012
|
|
Computed tax at federal statutory rate
|
|
$
|
-
|
|
|
$
|
-
|
|
Tax rate differential on foreign earnings of Atlantic and Aristo,
|
|
|
|
|
|
|
|
|
Hong Kong based companies
|
|
|
(83,680
|
)
|
|
|
(353,440
|
)
|
Federal tax penalty provision
|
|
|
80,000
|
|
|
|
-
|
|
Tax (over) under provision for Atlantic
|
|
|
(68,720
|
)
|
|
|
32,950
|
|
Tax paid by Kezheng
|
|
|
10,607
|
|
|
|
-
|
|
Net operating loss carry forward
|
|
|
83,680
|
|
|
|
353,440
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,887
|
|
|
$
|
32,950
|
|
The income tax provision consists of the following components:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Federal
|
|
$
|
80,000
|
|
|
$
|
-
|
|
Foreign
|
|
|
(58,113
|
)
|
|
|
32,950
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,887
|
|
|
$
|
32,950
|
|
The Components of the deferred tax assets and liabilities are
as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Net operating losses
|
|
$
|
4,681,570
|
|
|
$
|
1,837,120
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
4,687,570
|
|
|
$
|
1,837,120
|
|
Less: valuation allowance
|
|
|
(4,687,570
|
)
|
|
|
(1,837,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company did not have any interest and penalty
not
to recognize- in the income statements for the year ended December 31, 2013 and 2012 or balance sheet as of December 31, 2013 and
2012. The Company did not have uncertainty tax positions or events leading to uncertainty tax position within the next 12 months.
The Company’s 2011, 2012, and 2013 U.S. Corporation Income Tax Return are subject to U.S. Internal Revenue Service examination
and the Company’s 2007/8, 2008/9, 2009/2010, 2010/11, 2011/12 2012/13, and 2013/14 Hong Kong Corporations Profits Tax Return
filing are subject to Hong Kong Inland Revenue Department examination. The Company’s 2009, 2010, 2011, 2012 and 2013 PRC
income tax returns are subject to PRC State Administration of Taxation examination.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 12.
|
CASH FLOW INFORMATION
|
|
(a)
|
Cash paid during the years ended December 31, 2013 and 2012 is as follows:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Interest paid
|
|
$
|
1,041,095
|
|
|
$
|
1,011,080
|
|
Income taxes (reversal) paid
|
|
$
|
-
|
|
|
$
|
(2,870
|
)
|
|
(b)
|
Net cash inflow on acquisition of subsidiaries as of December 31, 2013 and December 31, 2012 are as follow:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Cash consideration paid up to December 31, 2013 and 2012
|
|
$
|
-
|
|
|
$
|
2,150,000
|
|
Cash and cash equivalents acquired
|
|
|
-
|
|
|
|
(157,259
|
)
|
Net cash inflow in respect of acquisition of subsidiaries
|
|
$
|
-
|
|
|
$
|
1,992,741
|
|
|
NOTE 13.
|
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, 2013 and 2012 since
there were no outstanding options at December 31, 2013 and 2012.
|
NOTE 14.
|
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. On September 27, 2013, the Company sold the entire 30% equity interest of ATMD.
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 $32,872 for 2013 and $29,552 for 2012.
USMART MOBILE DEVICE 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, 2013:
|
|
Related parties
|
|
|
Others
|
|
|
Total
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
$
|
-
|
|
|
$
|
376,760
|
|
|
$
|
376,760
|
|
2015
|
|
|
-
|
|
|
|
177,033
|
|
|
|
177,033
|
|
Thereafter
|
|
|
-
|
|
|
|
525,100
|
|
|
|
525,100
|
|
Total
|
|
$
|
-
|
|
|
$
|
1,078,893
|
|
|
$
|
1,078,893
|
|
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 2013. Rent expense for the years ended December 31, 2013 and 2012 totaled $475,571 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. There are no dividends
being paid for the year 2013.
|
NOTE 18.
|
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, USmart’s contribution comprised
cash of $3 million.
Particulars of the jointly-controlled entity are as follows:
|
|
|
|
Percentage of
|
|
|
Name
|
|
Place of registration
|
|
Ownership interest
|
|
Voting power
|
|
Profit sharing
|
|
Principal activity
|
ATMD (Hong Kong) Limited
|
|
Hong Kong
|
|
30
|
|
30
|
|
30
|
|
Trading
|
All shareholding in the above entity are in ordinary shares
or the equivalent and are stated to the nearest percentage point.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 18.
|
INVESTMENTS IN A JOINTLY-CONTROLLED ENTITY (CONTINUED)
|
The following table illustrates the summarized financial information
of the Company’s jointly-controlled entity:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Share of jointly-controlled entity's assets and liabilities:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
23,490,550
|
|
Non-current assets
|
|
|
-
|
|
|
|
69,921
|
|
Current liabilities
|
|
|
-
|
|
|
|
(20,742,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
2,818,307
|
|
|
|
|
|
|
|
|
|
|
Share of jointly-controlled entity's results:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
48,674,460
|
|
Gross profit
|
|
|
-
|
|
|
|
698,848
|
|
Net loss
|
|
|
-
|
|
|
|
(181,693
|
)
|
On September 27, 2013 the Company sold the entire
30% equity interest of ATMD.
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
(“UEP”), 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 UEP.
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.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 19.
|
ACQUISITION (CONTINUED)
|
The purchase price was allocated as follows:
Purchase Consideration:
|
|
|
|
|
Acquisition obligation payable to sellers
|
|
$
|
2,150,000
|
|
Direct costs relating to acquiree
|
|
|
20,000
|
|
Less: cash acquired
|
|
|
(157,259
|
)
|
|
|
|
|
|
Net purchase consideration
|
|
$
|
2,012,741
|
|
|
|
|
|
|
Assets Acquired
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired:
|
|
|
|
|
Fixed assets
|
|
$
|
355,481
|
|
Inventories
|
|
|
654,757
|
|
Trade receivables, deposits, prepayment and other receivables
|
|
|
717,369
|
|
Restricted cash
|
|
|
132,706
|
|
Trade payables, other creditors and accruals
|
|
|
(13,328,971
|
)
|
Non-controlled interest
|
|
|
2,140,276
|
|
|
|
|
|
|
Net tangible assets acquired
|
|
$
|
(9,328,382
|
)
|
|
|
|
|
|
Purchase consideration in excess of net tangible assets
|
|
$
|
11,341,123
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Trademark
|
|
$
|
53,955
|
|
License contracts
|
|
|
11,287,168
|
|
|
|
|
|
|
|
|
$
|
11,341,123
|
|
The purchase price allocation was computed
based on fair value report from the independent valuator.
Jussey’s results of operations are
consolidated with the Company effective October 1, 2012.
The intangible assets were fully amortized
as of December 31, 2013, see Note 20 for details.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 20.
|
INTANGIBLE ASSETS
|
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.
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:
|
|
Remaining useful life
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
12 months
|
|
$
|
53,955
|
|
|
$
|
53,955
|
|
License contracts
|
|
12 months
|
|
|
11,287,168
|
|
|
|
11,287,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,341,123
|
|
|
|
11,341,123
|
|
Less : Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
|
$
|
53,955
|
|
|
$
|
-
|
|
License contracts
|
|
|
|
|
11,287,168
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,341,123
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
$
|
-
|
|
|
$
|
11,341,123
|
|
The aggregate amortization
expense for those intangible assets that continue to be amortized is reflected in amortization of intangible assets in the Condensed
Consolidated Statements of Income (Unaudited) and was $11,341,123 and $0 for the year ended December 31, 2013 and 2012 respectively.
The written down of the carrying amount
of the intangible assets are based on evaluation of the future revenue generated from the concerned intangible assets. Due to the
slowing down of the projected order and the narrowing down of gross margin of the projects, the Company decided to fully write
down $11,341,123 of the entire carrying value of the intangible assets.
|
NOTE 21.
|
SUBSEQUENT EVENTS
|
In preparing these
financial statements, the Company evaluated the events and transactions that occurred from January 1, 2014 through April 15, 2014,
the date these financial statements are issued. The Company has determined that there were no material subsequent events.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 22.
|
UNCERTAINTY OF ABILITY TO CONTINUE AS A GOING CONCERN
|
The Company's financial
statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of business. The continuation of the Company as a going
concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment
of profitable operations. The management will seek to raise funds from shareholders.
For the year ended
December 31, 2013, the Company has generated revenue of $72,175,289 and has incurred an accumulated deficit $16,879,337. These
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors
noted above raise substantial doubts regarding the Company's ability to continue as a going concern.
USMART MOBILE DEVICE INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
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.
SCHEDULE III
QUARTERLY INFORMATION (UNAUDITED)
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.