The accompanying notes are an integral part to the unaudited condensed consolidated financial statements
SKY Digital Stores, Corp. (the “Company”) was incorporated on March 23, 2006 in the state of Nevada under the name Hoopsoft Development Corp. The Company changed its name to SKY Digital Stores, Corp. (Formerly known as Yellowcake Mining Inc.) on March 17, 2011. Hong Kong First Digital Holding Ltd. (“First Digital”) was incorporated in Hong Kong on September 30, 2010. The Company’s business is mainly operated by Shenzhen Donxon and Shenzhen Dasen, engaged in the business of designing, manufacturing and selling of mobile communications and digital products and retailing stores in the PRC.
On May 5, 2011, the Company completed the acquisition of First Digital, a company that is in the business of designing, manufacturing and selling of mobile communication and digital products, by means of a share exchange. Pursuant to the terms of the Exchange Agreement, the Company acquired all of the outstanding shares (the “Shares”) of First Digital from the First Digital’s stockholders, and First Digital’s Stockholders transferred and contributed all of their Shares to the Company. In exchange, the Company issued to First Digital’s stockholders, their designees or assigns, an aggregate of 23,716,035 shares (the “Shares Component”) or 97.56% of the shares of common stock of the Company issued and outstanding after the Closing (the “Share Exchange”), at $0.20 per share. The exchange was based upon an acquisition value of First Digital of $4,743,207. As a result of the Share Exchange, First Digital became a wholly owned subsidiary of the Company, and its subsidiaries business became the Company’s main operational business. Consequently, the Share Exchange has caused the Company to cease to be a shell company.
On March 12, 2012, Xingtiankong formed Shenzhen Xingtiankong Digital Technology Company Limited (“Xingtiankong Digital”) in the city of Shenzhen under the laws of the PRC with registered capital of $158,036 (RMB 1,000,000). Xingtiankong holds 60% and two PRC individuals hold 40% ownership of Xingtiankong Digital. Xingtiankong Digital is engaged in expanding retail store business and recruiting authorized resellers.
Note 2
-
Liquidity
As reflected in the Company’s condensed consolidated financial statements, the Company has recurring net losses and negative cash flows from operating activities during the nine months ended September 30, 2012. The Company also has a working capital deficit at September 30, 2012. The Company relies upon cash from financing activities to fund its ongoing operations as it has not been able to generate sufficient cash from operating activities and there is no assurance that it will be able to do so in the future.
The Company plans to fund continuing operations through additional bank borrowings, seeking for appropriate opportunities to obtain equity financing either through private placement or public offerings, strengthening R&D innovation for more new products, opening more licensed and Company stores to expand the market coverage and cutting costs to improve profitability and replenish working capital.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements of the Company as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, included herein, have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of SEC. The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. Certain information and disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements reflect all adjustments that in the opinion of management are necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
The unaudited condensed consolidated financial statements of the Company reflect the principal activities of the following entities. All material intercompany transactions have been eliminated.
|
|
Date of
|
|
Place of
|
|
|
Ownership
|
|
Name of the entity
|
|
Formation
|
|
Incorporation
|
|
|
Percentage
|
|
SKY Digital Stores, Corp.
|
|
March 23, 2006
|
|
Nevada
|
|
|
Parent
|
|
First Digital
|
|
September 30, 2010
|
|
Hong Kong, China
|
|
|
100%
|
|
Donxon
|
|
April 9, 2003
|
|
Shenzhen, China
|
|
|
100%
|
|
Xintiankong
|
|
February 28,2011
|
|
Shenzhen, China
|
|
|
100%
|
|
Xinyang Donxon
|
|
August 1, 2011
|
|
Xinyang, China
|
|
|
100%
|
|
Vaslink
|
|
September 11, 2007
|
|
Guangzhou, China
|
|
|
100%
|
|
Shenzhen Dasen
|
|
November 26, 2007
|
|
Shenzhen, China
|
|
|
100%
|
|
Foshan Dasen
|
|
January 19, 2007
|
|
Foshan, China
|
|
|
70%
|
|
Xingtiankong Digital
|
|
March 12, 2012
|
|
Shenzhen, China
|
|
|
60%
|
|
Reclassifications
Certain amounts from the prior period have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of recorded assets and liabilities, estimated useful lives of property and equipment, lives of intangible assets, inventory obsolesce and the allowance for doubtful accounts.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The Company estimates the fair value of its financial assets and liabilities based upon the fair value hierarchy. The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels of valuation hierarchy are defined as follows:
i.
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
|
ii.
|
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
iii.
|
Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
|
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. As of September 30, 2012 and December 31, 2011, the carrying amounts of financial assets and liabilities, such as cash, accounts receivable, accounts and notes payable, short-term loans, accrued expenses and other payables, approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Company. The fair values of long-term bank loans also approximate their recorded values because long-term borrowings bear a floating rate of interest. As the stated interest rate reflects the market rate, the carrying value of the bank borrowings approximates its fair value.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in U.S. dollars (“USD”). In accordance with the Codification ASC 830, “
Foreign Currency Matters
”, an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. The functional currency for First Digital Holdings is the Hong Kong Dollar (“HKD”). The functional currency for all PRC subsidiaries is the Renminbi (“RMB”), the currency of the PRC.
All assets and liabilities were translated at the current exchange rate, at respective balance sheet dates, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the reporting periods. The resulting translation adjustments are reported as other comprehensive income and accumulated other comprehensive income in stockholders’ equity in accordance with the Codification ASC 220
Comprehensive Income
.
Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. There were no material transaction gains or losses in the periods presented. Cash flow from the Company’s operations included in the statement of cash flow is calculated based upon the functional currency using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with arithmetic changes in the corresponding balances on the consolidated balance sheet.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation. The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. These restrictions have not had a material impact on the Company since it has not engaged in any significant transactions that are subject to the restrictions.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
Period end RMB : USD exchange rate
|
|
|
6.3190
|
|
|
|
6.3523
|
|
|
|
6.3885
|
|
Average RMB : USD exchange rate
|
|
|
6.3085
|
|
|
|
6.4544
|
|
|
|
6.4884
|
|
Period end HKD : USD exchange rate
|
|
|
7.7568
|
|
|
|
7.7688
|
|
|
|
7.7929
|
|
Average HKD : USD exchange rate
|
|
|
7.7611
|
|
|
|
7.7839
|
|
|
|
7.7856
|
|
Cash and Cash Equivalents
Cash includes cash on hand and deposits in PRC and Hong Kong banks that are unrestricted as to withdrawal or use. The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Management believes that these major financial institutions are of high credit quality. Since a majority of bank accounts are located in the PRC, these bank balances are unsecured. The Company has not experienced any losses in such accounts to date.
Restricted Cash
Restricted cash consists of cash in the bank as security for loans and banker’s acceptance notes. These balances are subject to withdrawal restrictions and are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.
Accounts Receivable
Accounts receivable are recognized and carried at original invoice amounts less allowance for any uncollectible amounts. The Company periodically reviews whether the carrying values of accounts have become impaired. The assets are considered to be impaired if the collectability of the balances become doubtful. Accordingly, the management estimates an allowance for anticipated uncollectible receivable balances. If facts subsequently become available to indicate that the allowance provided requires an adjustment, a charge to earnings is made to increase the allowance for doubtful accounts. Usually, the credit term is within 180 days. An allowance for doubtful accounts may be estimated and recorded when aging exceeds 180 days. As of September 30, 2012 and December 31, 2011, no allowance for doubtful accounts was deemed necessary as a majority of the outstanding receivables were subsequently collected.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market value, using the FIFO method. The cost of inventories consists of all costs of purchases, costs of labors, direct fixed and variable production overheads and other costs incurred in bringing the inventories to their present location and condition. The Company provides inventory reserves based on excess and obsolete inventories determined principally by customer demand.
Management periodically evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine whether a valuation allowance is required. Inventory valuation allowance as of September 30, 2012 and December 31, 2011 amounted to $40,614 and $0, respectively.
Trade Deposit
The Company makes advances to certain vendors for purchase of its inventory items or raw material. Advance payments are included in “Trade Deposit”. Advances to suppliers are interest free and unsecured. These advances are recorded when payment is made by the Company and relieved against inventory when goods are received.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
|
Years
|
Machinery and equipment
|
5 years
|
Office equipment
|
3-5 years
|
Leasehold improvements
|
2 years
|
Vehicle
|
4 years
|
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of September 30, 2012 and December 31, 2011, there was no impairment of long-lived assets.
Intangibles Assets
Intangible assets with finite lives are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified as of the balance sheet dates.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
In conjunction the acquisition of Shenzhen Dasen and Vaslink, the Company capitalized $93,575 and $451,857 of identifiable intangible assets, respectively. The identifiable intangible assets consist primarily of trade name, customer relationships and technology. Trade name, customer relationships and technology are amortized over 10 years, their estimated useful life. The Company recorded amortization expenses for intangible assets of $98,482 and $4,039 for the nine months ended September 30, 2012 and 2011.
Intangible asset also includes land use right. All land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the right to use the land). The land use right of 120,590.70 square meters was acquired by the Company’s subsidiary Xinyang Donxon for $5,361,022 (RMB 33,876,301) from the relevant PRC land authority in June 2012. The Company has a 50-year long right to use the land on which the new manufacturing factory of Xinyang Donxon is situated. This land use right is amortized on a straight-line basis over the 50 year period.
Goodwill
The Company tests goodwill for impairment annually in the fourth quarter by comparing the fair value of each of the Company’s reporting units to the respective carrying value of the reporting units. Additionally, the Company may perform tests between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit below its carrying amount. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, would be recorded in operating income and could adversely affect net income and earnings per share. Shenzhen Dasen and Guangzhou Sky are the only reporting units that carry goodwill subject to impairment test. No impairment indicators occurred subsequent to the acquisitions.
Revenue Recognition
The Company has two types of revenue streams from its two lines of businesses, namely (i) design, manufacturing and sale of mobile phones and digital products (Donxon), (ii) commissions and fees from licensing of retailing stores (Shenzhen Dasen).
The Company records revenues when all of the following criteria have been met:
-
|
Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders, to determine the existence of an arrangement.
|
-
|
Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.
|
-
|
Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB destination point.
|
-
|
Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
|
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
The Company receives commissions from sale of digital products for third parties. The Company does not charge customers differently from the prices provided by third parties. The Company has no discretion on the digital product prices or the applicable commission rates as they are dictated by the third parties. Commissions from sales of digital products are recognized after phone cards are sold to retail customers. The Company presents revenues from such transactions on a net basis in the statements of income as the Company, generally, does not assume inventory risks and has no obligations for cancelled phone cards.
The Company entered into agreements with multiple independently owned retailing stores throughout Guangdong province, PRC in the third quarter of 2011. According to the revised agreements entered into by the parties, the Company is entitled to a management fee from these licensing stores. The management fee is a fixed fee each month.
In the PRC, value added tax (“VAT”) of 17% of the invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities.
Product Warranty
The Company provides product warranties to its customers that its products will meet the functionality standards agreed to in each sales arrangement. The warranty period ranges from three months up to a one-year. The Company expenses all warranty expenses at the earlier of the time their existence is known or as expenses are incurred. For the nine months ended September 30, 2012 and 2011, warranty expenses have been minimal and no warranty reserve was considered necessary.
Notes Payable
During the normal course of business, the Company regularly issues bank acceptance bills as a payment method to settle outstanding accounts payables with various material suppliers. The Company records such bank acceptance bills as notes payables. Such notes payable are generally short term in nature due to their short maturity period of three to six months.
Value Added Tax
The Company reports revenues net of PRC’s VAT for all the periods presented in the condensed consolidated statements of income and comprehensive income.
Income Taxes
The Company has adopted the provisions of ASC subtopic 740-10 (“ASC 740-10”).ASC 740-10 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets and liabilities based upon the likelihood of realization of tax benefits in future years. Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets 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. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company recognized a deferred tax asset which arose from net operating loss carry forward for income tax purposes. Management believe that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s limited operating history and continuing losses for U.S. income tax purposes. Therefore, as of September 30, 2012, the Company has provided a 100% deferred tax asset valuation allowance.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
The Company applies the provisions of ASC 740-10,
Accounting for Uncertainty in Income Taxes
, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in its combined financial statements. ASC 740-10 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740-10 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. There are no material uncertain tax positions as of September 30, 2012 and December 31, 2011, respectively. All tax returns since inception are subject to examination by tax authorities.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Share-based payment transactions with employees, such as share options and non-vested shares, are measured based on the grant-date fair value of the equity instrument issued, and recognized as compensation expense over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period.
Shares awards issued to non-employees (other than non-employee directors), such as consultants, are measured at fair value at the earlier of the commitment date or the date the service is completed and recognized over the period the service is provided.
Statutory Reserves
Pursuant to the applicable laws in the PRC, the Company makes appropriations to two non-distributable reserve funds, the statutory surplus reserve and the statutory public welfare reserve. The appropriations are based on after-tax net earnings as determined in accordance with the PRC generally accepted accounting principles, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve is based on an amount at least equal to 10% of after-tax net earnings until the reserve is equal to 50% of the entity’s registered capital. Appropriation to the statutory public welfare fund is based on 5% to 10% of after-tax net earnings and is not mandatory. The statutory public welfare reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable, other than in liquidation.
The Company did not make appropriations to the discretionary surplus reserve fund for the current period due to losses. As of September 30, 2012 and December 31, 2011, the Company had appropriated $356,864 of statutory surplus reserve funds.
Non-controlling Interests
Non-controlling interests represents 30% ownership interest in Foshan Dasen and 40% ownership interest in Shenzhen Xin Tian Kong Technology.
The Company follows the provisions of ASC 810 “Non controlling interests in consolidated financial statements”. A non controlling interest in a subsidiary of the Company represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable to the Company. This pronouncement requires non controlling interests to be presented as a separate component of equity in the consolidated balance sheet and modifies the presentation by requiring earnings and other comprehensive income to be attributed to controlling and non controlling interests.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the, nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Economic and Political Risks
The Company’s operations are conducted primarily in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Segment Reporting
ASC 280, “Disclosure about Segments of an Enterprise and Related Information”, requires disclosure of reportable segments used by management for making operating decisions and assessing performance. Reportable segments are categorized by products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. All of the Company’s operations are conducted in two segments (see Note 13).
Earnings per Share
The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. There are no dilutive common shares for the three and nine months ended September 30, 2012 and 2011.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 3 — Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. As of September 30, 2012 and December 31, 2011, the Company’s cash was with banks in the PRC and Hong Kong, where there is currently no rule or regulation mandated on obligatory insurance of bank accounts.
For the nine months ended September 30, 2012, one customer accounted for 60% of the Company’s total sales. For the nine months ended September 30, 2011, four customers accounted for 24%, 16%, 15% and 13% of the Company’s sales, respectively.
For the nine months ended September 30, 2012, three vendors provided 46%, 21%, and 10% of the Company’s total purchases, respectively. For the nine months ended September 30, 2011, four vendors provided 18%, 17%, 17% and 14% of the Company’s total purchases, respectively.
Note 4 — Inventories
As of September 30, 2012 and December 31, 2011, inventories consisted of the following:
|
September 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
Raw materials
|
$
|
5,422,872
|
|
$
|
511,182
|
|
Finished goods
|
|
2,865,689
|
|
|
3,119,494
|
|
Less: Allowance for inventory obsolescence
|
|
(40,614
|
)
|
|
-
|
|
|
$
|
8,247,947
|
|
$
|
3,630,676
|
|
Note 5 — Property and Equipment
Property and equipment consist of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Machinery and equipment
|
|
$
|
1,244,793
|
|
|
$
|
95,354
|
|
Office equipment
|
|
|
491,699
|
|
|
|
310,900
|
|
Leasehold improvements
|
|
|
305,306
|
|
|
|
303,705
|
|
Vehicle
|
|
|
121,962
|
|
|
|
63,474
|
|
Sub-total
|
|
|
2,163,760
|
|
|
|
773,433
|
|
Less: Accumulated depreciation
|
|
|
(528,958
|
)
|
|
|
(217,224
|
)
|
Property and equipment, net
|
|
$
|
1,634,802
|
|
|
$
|
556,209
|
|
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 5 — Property and Equipment (continued)
Total depreciation expense for the nine months ended September 30, 2012 and 2011 amounted to $311,108 and $107,013, respectively.
Note 6 — Intangible Assets, Net
As of September 30, 2012 and December 31, 2011, net intangible assets consisted of the following:
|
Gross
|
|
Weighted-average
|
|
|
|
Net
|
|
|
carrying
|
|
remaining amortization
|
|
Accumulated
|
|
carrying
|
|
|
amount
|
|
period
|
|
amortization
|
|
amount
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Customer relations
|
|
$
|
18,341
|
|
8.46 years
|
|
$
|
(2,198
|
)
|
$
|
16,143
|
|
Technology
|
|
|
444,482
|
|
9.08 years
|
|
|
(63,313
|
)
|
|
381,169
|
|
Trade name
|
|
|
75,116
|
|
9.00 years
|
|
|
(6,144
|
)
|
|
68,972
|
|
Land use right
|
|
|
5,361,022
|
|
49.67 years
|
|
|
(35,393
|
)
|
|
5,325,629
|
|
Others
|
|
|
12,659
|
|
8.50 years
|
|
|
(5,248
|
)
|
|
7,411
|
|
Total intangible assets, net
|
|
$
|
5,911,620
|
|
|
|
$
|
(112,296
|
)
|
$
|
5,799,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Weighted-average
|
|
|
|
|
Net
|
|
|
carrying
|
|
remaining amortization
|
|
Accumulated
|
|
carrying
|
|
|
amount
|
|
period
|
|
amortization
|
|
amount
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relations
|
|
$
|
18,245
|
|
9.21 years
|
|
$
|
(560
|
)
|
$
|
17,685
|
|
Technology
|
|
|
442,152
|
|
9.83 years
|
|
|
(6,460
|
)
|
|
435,692
|
|
Trade name
|
|
|
74,722
|
|
9.75 years
|
|
|
(3,658
|
)
|
|
71,064
|
|
Land use right
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Others
|
|
|
12,593
|
|
9.25 years
|
|
|
(3,225
|
)
|
|
9,368
|
|
Total intangible assets, net
|
|
$
|
547,712
|
|
|
|
$
|
(13,903
|
)
|
$
|
533,809
|
|
The Company recorded amortization expenses for intangible assets of $98,482 and $4,039 for the nine months ended September 30, 2012 and 2011, respectively. Amortization for the three months ended September 30, 2012 and 2011 were $47,996 and $2,104, respectively.
On June 12, 2012, the Company purchased a land use right of for $5,361,022 (RMB 33,876,301) from Xinyang Bureau of Land and Resources, and had already received the land use right certificate.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 6 — Intangible Assets, Net (continued)
The estimated future amortization expenses are as follows:
For the twelve months ended September 30
|
|
|
|
|
|
$
|
162,280
|
|
2014
|
|
|
162,280
|
|
2015
|
|
|
162,280
|
|
2016
|
|
|
162,280
|
|
2017
|
|
|
162,280
|
|
Thereafter
|
|
|
4,987,924
|
|
Total
|
|
$
|
5,799,324
|
|
Note 7 — Bank Loans
The following is a summary of the Company’s short-term and long-term bank loans as of September 30, 2012 and December 31, 2011:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
Short-term bank loans
|
|
|
|
|
|
|
|
Shenzhen Development Bank
|
|
|
|
|
|
|
|
Interest at 6.56%, payable June 27, 2012
|
(a)
|
|
$
|
-
|
|
|
$
|
3,935,582
|
|
Interest at 7.54%, payable November 9, 2012
|
(b)
|
|
|
2,373,793
|
|
|
|
1,416,810
|
|
China Construction Bank
|
|
|
|
|
|
|
|
|
|
Interest at 7.98%, payable June 28, 2013
|
(c)
|
|
|
1,345,150
|
|
|
|
-
|
|
Baosheng County Bank
|
|
|
|
|
|
|
|
|
|
Interest at 6%, payable July 23, 2013
|
(d)
|
|
|
2,278,842
|
|
|
|
-
|
|
Interest at 6%, payable August 21, 2013
|
(e)
|
|
|
1,582,529
|
|
|
|
-
|
|
Interest at 6%, payable August 28, 2013
|
(f)
|
|
|
751,701
|
|
|
|
-
|
|
Interest at 6%, payable August 30, 2013
|
(f)
|
|
|
751,701
|
|
|
|
-
|
|
Total short-term bank loans
|
|
|
$
|
9,083,716
|
|
|
$
|
5,352,392
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank loan
|
|
|
|
|
|
|
|
|
|
China Construction Bank
|
|
|
|
|
|
|
|
|
|
Interest at 7.87%, payable October 16, 2013
|
(g)
|
|
|
1,424,276
|
|
|
|
-
|
|
Total long-term bank loan
|
|
|
$
|
1,424,276
|
|
|
$
|
-
|
|
(a)
|
On May 26, 2011, Donxon entered into a maximum guarantee agreement with Shenzhen Development Bank. The full amount of the loan was repaid on June 29, 2012 upon maturity.
|
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7 — Bank Loans (continued)
(b)
|
On January 12, 2012, Donxon entered into a short-term bank loan agreement with Shenzhen Development Bank for $2,373,793 (RMB 15,000,000) with a floating rate of 15% over the applicable one year benchmark interest rate from the People’s Bank of China. The credit line was guaranteed by Mr. Lin Xiangfeng (CEO), a business associate and an unrelated party with the total guaranteed amount of $23,737,933 (RMB 150,000,000). Pursuant to the Loan Agreement, interest expense is payable monthly. This loan has been subsequently repaid in full amount on October 15, 2012.
|
(c)
|
On December 29, 2011, Shenzhen Dasen entered into a long-term bank loan with China Construction Bank for $1,582,529 (RMB 10,000,000) with a variable interest rate. The loan was guaranteed by Credit Orienwise Group, Inc., an unrelated party. Mr. Lin Xingfeng (CEO) also provided guarantees to Credit Orienwise Group Inc. by his personal assets and credits. Pursuant to the Loan Agreement, interest rate is adjusted every three months and Shenzhen Dasen deposited $1,582,529 (RMB 1,000,000) as security deposit in the Guarantor’s account. The purpose of such bank loan is for working capital. The Company will make monthly principal payments of RMB 500,000 starting on the seventh month after the loan is funded. The balance is due on June 28, 2013. Shenzhen Dasen paid $63,301 (RMB 400,000) to the guarantor as a guarantee fee. The guarantee fee was recorded as deferred financing costs in the consolidated balance sheets. The Company is amortizing the guarantee fee over the term of the guarantee. As of September 30, 2012, $1,345,150 (RMB 8,500,000) of the long-term bank loan had a maturity of less than one year and was accordingly reclassified as short-term bank loan.
|
(d)
|
On July 24, 2012, Shenzhen Donxon entered into a one-year short-term bank loan agreements with Baosheng County Bank for $2,373,793 (RMB 15,000,000) with a fixed rate of 6%. The purpose of such bank loans are for working capital. The company will make monthly principal payments of RMB 300,000 starting on the first month after the loan is funded. The remaining amount of the principal will be repaid upon maturity. As of September 30, 2012, the balance of this loan amounted to $2,278,842. Pursuant to the Loan Agreement, interest expense is payable monthly. The loan is guaranteed by the Company’s subsidiary Shenzhen Xin Tian Kong Digital Company Limited (“Xintiankong”), who is contingently liable as guarantor with respect to the maximum exposure of $3,956,322 (RMB 25,000,000) bank loan that Shenzhen Donxon, borrows during the period of July 17, 2012 and July 16, 2013. In addition, the Company’s subsidiary Henan Xinyang Donxon pledged the Land Use Rights of 120,590.7 square meters as collateral for this loan.
|
(e)
|
On August 22, 2012, Shenzhen Donxon entered into a one-year loan agreement with Baosheng County Bank to borrow $1,582,529 (RMB 10,000,000) as working capital. The loan bears a fixed interest rate of 6%. The Company will repay the principal RMB 300,000 each month and with the remaining balance to be paid upon maturity. In addition, the Company’s subsidiary Henan Xinyang Donxon pledged the Land Use Rights of 120,590.7 square meters as collateral for this loan.
|
(f)
|
On August 29, 2012 and August 30, 2012 respectively, Shenzhen Dasen entered into a one-year short-term bank loan agreement with Baosheng County Bank for total of $1,503,402 (RMB 9,500,000) with a fixed rate of 6%. The purpose of such bank loans are for working capital. The company will make monthly principal payments of RMB300,000 starting on the first month after the loan is funded. The remaining principal will be repaid at maturity. Pursuant to the Loan Agreement, interest expense is payable monthly. In connection with this bank loan, on August 29, 2012, the Company’s subsidiary Shenzhen Donxon entered into a loan guarantee agreement with the bank and is contingently liable as pledgor to guarantee the full amount of loan that Shenzhen Dasen borrowed from the bank. Shenzhen Donxon pledged the restricted cash of $1,582,529 (RMB 10,000,000) as collateral for this loan. The term of this pledge is for one year, expiring on August 28, 2013.
|
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7 — Bank Loans (continued)
(g)
|
On October 17, 2011, the Company, Shenzhen AIV Technology Co., Ltd. (“AIV Technology”), Shenzhen Huafoli Co., Ltd. (“Huafoli”) and Shenzhen SPA Moment Investment Development Co., Ltd. (“SPA Moment”) entered into short-term bank loan agreements with China Construction Bank. The total amount of these loans was $4,747,587 (RMB 30,000,000) and secured on cross-guarantee basis. The Company is contingently liable as the guarantor with respect to the maximum exposure of $3,323,311(RMB 21,000,000) to these three companies, who are unrelated third parties. These three companies are also contingently liable as the guarantor for the Company with respect to the short-term bank loan with China Construction Bank Shenzhen Branch for $1,424,276 (RMB 9,000,000) with 20% more than the benchmark interest rate of the loan (7.87% as of December 31, 2011). Mr. Lin Xiangfeng (CEO) provided guarantees to these loans with the maximum amount of $4,747,587 (RMB 30,000,000) secured by his personal assets. The obligations and guarantees were extended to October 2013. At any time from the date of guarantees, should AIV Technology, Huafoli and SPA Moment fail to make their due debt payments, the Company will be obligated to perform under the guarantees by primarily making the required payments, including late fees and penalties. According to Chinese laws, the Company as the guarantor has recourse to principal debtors, after making the bank loan repayments on behalf of them.
|
Pursuant to the Loan Agreement, interest rate will be adjusted every three months and the Company deposited $427,283 (RMB 2,700,000) as restricted cash for the loan. The loan has subsequently matured on October 16, 2012 and the Company did not repay the loan upon maturity, but entered into a supplemental agreement with the bank to extend the loan for one year. The full amount of the loan is expected to be repaid on October 16, 2013.
Note 8 – Loans To/From Third Parties
Loans to/from unrelated parties consist of the following at:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
Loan to third parties
|
|
|
|
|
|
|
|
Nanchang Xinduo Trading Co., Ltd.
|
(a)
|
|
$
|
188,321
|
|
|
$
|
187,334
|
|
Total loan to unrelated parties
|
|
|
$
|
188,321
|
|
|
$
|
187,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from third parties
|
|
|
|
|
|
|
|
|
|
Shenzhen Qifeng Supply Chain Service Co., Ltd.
|
(b)
|
|
$
|
1,171,071
|
|
|
$
|
1,164,932
|
|
Yangguang Xingye Trading Co., Ltd.
|
(c)
|
|
|
210,160
|
|
|
|
209,058
|
|
Deke Mobile Technology Co., Ltd.
|
(d)
|
|
|
349,336
|
|
|
|
112,951
|
|
Yiyatong Supply Chain Co., Ltd.
|
(e)
|
|
|
-
|
|
|
|
472,270
|
|
Junhuiyuan Investment Inc.
|
(e)
|
|
|
-
|
|
|
|
902,035
|
|
Total loan from unrelated parties
|
|
|
$
|
1,730,567
|
|
|
$
|
2,861,246
|
|
(a)
|
In April 2011, the Company entered into a two-year loan agreement with this unrelated third-party. The amount is unsecured, non-interest bearing and due on demand.
|
(b)
|
This loan from unrelated party Shenzhen Qifeng Supply Chain Service Co., Ltd. originally had a nine month term from December 9, 2011 to June 12, 2012, bearing no interest. The Company did not repay the loan when the loan term expired on June 12, 2012, but entered into an amended agreement with the third-party to extend the loan for another nine months (from June 12, 2012 to December 11, 2012).The loan bears an annual interest rate of 7.8782%.
|
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8 – Loans To/From Third Parties (continued)
(c)
|
Loans from unrelated party Yangguang Xingye Trading Co., Ltd. was originally nine months term from December 22, 2011 to June 21, 2012. The Company did not repay the loan when it expired on June 21, 2012 and entered into an amended agreement with the third-party to extend the loan for another nine months (from June 21, 2012 to December 20, 2012). This loan is unsecured and bears no interest.
|
(d)
|
Loan from unrelated party Deke Mobile Technology Co. Ltd. is unsecured, payable on demand and bears no interest. The full balance will be repaid before September 2013.
|
(e)
|
Loans from these unrelated parties were repaid in March 2012.
|
Note 9 — Related Party Transactions
During the normal course of business, the Company, from time to time, temporarily borrows money from its principal shareholders or officers to finance its working capital as needed.
Amount due from related party as of September 30, 2012 and December 31, 2011 are as below:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Due from related party
|
|
|
|
|
|
|
Shenzhen Libaohua Technology Co., Ltd. (“Libaohua”)
|
|
$
|
2,373,793
|
|
|
$
|
-
|
|
Total amount due from related party
|
|
$
|
2,373,793
|
|
|
$
|
-
|
|
On January 12, 2012, the Company entered into a short-term loan agreement with related party Libaohua for $2,373,793 (RMB 15,000,000) with an interest rate of 7.878%. The amount has been subsequently repaid by Libaohua on October 15, 2012.
Amount due to related parties as of September 30, 2012 and December 31, 2011 are as below:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Due to related parties
|
|
|
|
|
|
|
Shenzhen Top Finance Guaranty Investment Inc. (“Top Finance”)
|
|
$
|
2,451,863
|
|
|
$
|
2,234,136
|
|
Individual shareholders
|
|
|
294,350
|
|
|
2,805,357
|
|
Total amount due to related parties
|
|
$
|
2,746,213
|
|
|
$
|
5,039,493
|
|
On July 7, 2011, the Company entered into a one-year loan agreement with Top Finance, a shareholder with 8.68% of the total outstanding shares of common stock of the Company. Pursuant to the term of the loan agreement, Top Finance made a loan in the aggregate amount of $3,006,805 (RMB 19,000,000) to the Company for general corporate purposes, with no interest. The Company did not repay the loan back to Top Finance when the loan matured on July 6, 2012 but entered into a loan extension agreement with Top Finance to extend the loan repayment date to January 6, 2013.
Shareholders advanced funds to the Company for working capital purposes. The loans from stockholders are unsecured and bear no interest. The full amounts of the loans will be due in September 2013.
See Note 7 for other related party information
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 10— Commitments and Contingencies
The Company leases offices, factory buildings and retail store spaces from third parties under operating leases. These operating leases expire before August 20, 2017. For the three months ended September 30, 2012 and 2011, the Company has rental expenses in the amount of $119,433 and $86,335, respectively. For the nine months ended September 30, 2012 and 2011, the Company has rental expenses in the amount of $357,281 and $208,702, respectively.
The estimated future rental expenses as of September 30, 2012 are as follows:
Twelve months ended September 30,
|
|
|
|
2013
|
|
$
|
400,372
|
|
2014
|
|
|
268,529
|
|
2015
|
|
|
133,121
|
|
2016
|
|
|
47,382
|
|
2017
|
|
|
45,416
|
|
Total
|
|
$
|
894,820
|
|
The Company opened a new manufacturing factory in April 2012 in Henan Xinyang High-tech Park, with 10 mobile phone assembly lines, with production capacity of 5 million mobile phones annually. Xinyang Donxon has obtained a land use right of 180 mu (120,590.7 square meters) from local government in June 2012 and is expected to pay additional RMB 25 million to obtain an additional land use right of 120 mu (80,393.8 square meters) in the near future. In addition, currently, the factory buildings consisted of 5 buildings, totaling 30,000 square meters, are leased from local government, and the Company is liable to pay approximately RMB 50 million to purchase these buildings from local government in the near future.
Contingencies
Guarantee of Third-Party Indebtedness—No Liability Is Recorded
As China only began its economic reform and development of a market economy in the 1980s, its credit evaluation system has had only a very short history and is far less sophisticated than that in the developed countries. Therefore, when an enterprise applies for a loan from a commercial bank, it is difficult for the bank to evaluate the credit risk of the applicant. As an alternative tool, it is a common practice in China for commercial banks to require the applicant find an unrelated third-party in its local economy to provide a loan guarantee for the applicant, which very much serves as a credit check for the bank. In return, and also to avoid risk of having to make payments under the guarantee, such guarantors often require the counterparty to provide similar guarantees on their own debt. Therefore, this type of guarantee is usually
a cross-guarantee.
For mutual benefit, the Company reached agreements with two unrelated third parties to provide such
a cross-guarantee on bank loans as of September 30, 2012 and December 31, 2011.
As of September 30, 2012, the Company, through its subsidiary is contingently liable as guarantor with respect to the maximum exposure of $3,323,311 (RMB 21,000,000) to unrelated third parties, AIV Technology, Huafoli and SPA Moment on a cross-guarantee basis. The term of these guarantees and related cross-guarantees expire in October 2013.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 10— Commitments and Contingencies (continued)
Guarantee of Subsidiaries Indebtedness—No Liability Is Recorded (continued)
As of July 17, 2012, Sky Digital is contingently liable as guarantor with respect to the maximum exposure of $3,956,322 (RMB 25,000,000) to Shenzhen Donxon, who is one of the subsidiaries of the Company. The term of this guarantee is for one year, expiring on July 16, 2013.
As of August 29, 2012, Shenzhen Donxon is contingently liable as pledgor with respect to the maximum exposure of $1,503,402 (RMB 9,500,000) to Shenzhen Dasen, who is one of the subsidiaries of the Company. The term of this pledge is for one year, expiring on August 28, 2013.
The Company assessed its obligation under these guarantees pursuant to the provision of ASC 460 “Guarantee”. Management has evaluated the guarantee and concluded that the likelihood of having to make payments under the guarantee is remote. As of September 30, 2012, the Company has not recorded any liabilities under these guarantees.
Note 11 — Income Tax
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
SKY Digital Stores, Corp. is incorporated in the U.S. and has incurred a net operating loss for income purposes for 2011. As of September 30, 2012, the estimated net operating loss carry forward for U.S income tax purposes amounted to approximately $123,000, which may be available to reduce future taxable income. These carry forward will expire if not utilized by 2031. Management believe that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s limited operating history and continuing losses for U.S. income tax purposes. Accordingly, the Company has provided a 100% deferred tax asset valuation allowance at September 30.The net change in valuation allowance for the nine months ended September 30, 2012 was an increase of approximately $42,000. Management reviews this valuation allowance periodically and makes adjustments as necessary.
First Digital is a company incorporated in Hong Kong and has operations in the PRC, the tax jurisdiction. First Digital did not earn any income that was derived in Hong Kong for the nine months ended September 30, 2012 and 2011 and therefore was not subject Hong Kong Profit tax. All of the Company’s income is generated in the PRC. Accordingly, its income tax provision is calculated based on the applicable tax rates and existing legislation, interpretations and practices in respect thereof.
The income tax rate for Shenzhen Dasen is 25%.Vaslink is located in a Guangzhou High-tech Park and is entitled to the preferential income tax rate of 10% granted by local tax authority.
The Company’s subsidiary Xinyang Donxon is located in Xinyang High-tech Park in the PRC and has been granted a favorable tax treatment by local taxing authority which stipulated a 100% income tax exemption for the first two years and 50% income tax exemption for the following consecutive three years (“tax holiday”).
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 11 — Income Tax (continued)
The following table reconciles the statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2012 and 2011:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
U.S. Statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34
|
)
|
|
|
(34
|
)
|
China Statutory income tax rate
|
|
|
25
|
|
|
|
24
|
|
Net operating loss in the PRC
|
|
|
(21
|
)
|
|
|
-
|
|
Nondeductible expenses - permanent differences
|
|
|
-
|
|
|
|
26
|
|
Effective tax rate
|
|
|
4
|
%
|
|
|
50
|
%
|
The Company’s PRC subsidiaries had tax loss carry forwards of approximately $992,000 and $160,000 for the periods ended September 30, 2012 and 2011, respectively which expire 5 years after the Company incurs the loss unless utilized. The Company has made a full valuation allowance against its net deferred tax assets. Future reversal of the valuation allowance will be recognized either when the benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future earnings.
Uncertain tax position
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in its consolidated statements of income. There were no unrecognized tax benefits for the nine months ended September 30, 2012 and 2011. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions. As of September 30, 2012 and December 31, 2011, the Company did not accrue any interest and penalties.
Note 12 — Stock-Based Compensation
In July and August 2011, the Company appointed two independent directors. Pursuant to the terms of their appointments, one director shall receive 100,000 shares of the common stock of the Company per annum for his service. The other director shall receive such number of shares of the common stock of the Company, whose value equal to $60,000 per annum for his service. The value of the shares will be an average of closing price for the five trading days prior to the issuance of the shares. These common stocks were valued at $211,000 based on the trading value of the Company’s common stock on the grant date of $1.51 per share. Since these two directors no longer served as the independent directors before their service periods end, none of these common shares were issued as of September 30, 2012. As a result, no stock-based compensation expenses were accrued for the three and nine months ended September 30, 2012.
On March 8, 2012, the Company’s Board of Directors approved Stock Award Agreement, pursuant to the Board Resolution and Stock Award Agreement, the Company agreed to issue 200,000 restricted shares of its common stock to an independent director as compensation and 100,000 restricted shares of its common stock to consultant for consulting services rendered. The terms of the service agreement was continued on March 8, 2014, and 300,000 shares of restricted common stock were subsequently issued on April 30, 2012. The trading value of the Company’s common stock on March 8, 2012 was $0.85 per share. Accordingly, $31,788 and $71,610 were charged to general and administrative expense for three and nine months ended September 30, 2012, respectively.
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 12 — Stock-Based Compensation (continued)
On the same date of March 8, 2012, the Company agreed to grant total of 694,000 shares of common stock to a group of 60 employees as stock awards. These shares will vest on March 8, 2014, provided that the employees are still employed by the Company on such date. The trading value of the Company’s common stock on the grant date March 8, 2012 was $0.85 per share. Accordingly, $54,781 and $124,204 were charged to general and administrative expense and selling expense for three and nine months ended September 30, 2012, respectively.
Note 13 — Segment Information
Pursuant to ASC 280 we disclose segments on a single entity basis, which in our case is the legal entity. The Company operates as two reportable segments. Substantially all of the Company’s sales and long-lived assets are in the PRC.
Our mobile phone manufacturing segment relates to the segment reporting of Donxon and retail store segment relates to Shenzhen Dasen. Management monitors these two segments regularly to make decisions about resources to be allocated to the segments and assess their performance.
The following table presents summarized information by segment:
|
|
Three months ended September 30, 2012
|
|
|
Three months ended September 30, 2011
|
|
|
|
Mobile phone manufacturing
|
|
|
Retail stores
|
|
|
Total
|
|
|
Mobile phone manufacturing
|
|
|
Retail stores
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,074,060
|
|
|
$
|
11,630,614
|
|
|
$
|
23,704,674
|
|
|
$
|
11,938,568
|
|
|
$
|
3,906,076
|
|
|
$
|
15,844,644
|
|
Cost of goods
|
|
|
11,438,485
|
|
|
|
11,680,959
|
|
|
|
23,119,444
|
|
|
|
11,263,824
|
|
|
|
3,559,359
|
|
|
|
14,823,183
|
|
Gross profit
|
|
|
635,575
|
|
|
|
(50,345
|
)
|
|
|
585,230
|
|
|
|
674,744
|
|
|
|
346,717
|
|
|
|
1,021,461
|
|
Commission and franchise income
|
|
|
-
|
|
|
|
117,940
|
|
|
|
117,940
|
|
|
|
-
|
|
|
|
55,084
|
|
|
|
55,084
|
|
Income (loss) from operations
|
|
|
(207,680
|
)
|
|
|
(328,724
|
)
|
|
|
(536,404
|
)
|
|
|
472,806
|
|
|
|
(400,512
|
)
|
|
|
72,294
|
|
Income tax expenses
|
|
|
60
|
|
|
|
8,996
|
|
|
|
9,056
|
|
|
|
58,601
|
|
|
|
10,612
|
|
|
|
69,213
|
|
Depreciation and amortization
|
|
|
101,210
|
|
|
|
12,449
|
|
|
|
113,659
|
|
|
|
86,085
|
|
|
|
9,252
|
|
|
|
95,337
|
|
Asset expenditures
|
|
|
292,663
|
|
|
|
6,941
|
|
|
|
299,604
|
|
|
|
127,095
|
|
|
|
-
|
|
|
|
127,095
|
|
Total Assets
|
|
$
|
25,630,097
|
|
|
$
|
6,585,297
|
|
|
$
|
32,215,394
|
|
|
$
|
5,965,502
|
|
|
$
|
14,257,021
|
|
|
$
|
20,222,523
|
|
|
|
Nine months ended September 30, 2012
|
|
|
Nine months ended September 30, 2011
|
|
|
|
Mobile phone manufacturing
|
|
|
Retail stores
|
|
|
Total
|
|
|
Mobile phone manufacturing
|
|
|
Retail stores
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
40,225,958
|
|
|
$
|
32,550,447
|
|
|
$
|
72,776,405
|
|
|
$
|
33,037,198
|
|
|
$
|
5,029,509
|
|
|
$
|
38,066,707
|
|
Cost of goods
|
|
|
38,395,198
|
|
|
|
32,303,884
|
|
|
|
70,699,082
|
|
|
|
30,695,597
|
|
|
|
4,673,085
|
|
|
|
35,368,682
|
|
Gross profit
|
|
|
1,830,760
|
|
|
|
246,563
|
|
|
|
2,077,323
|
|
|
|
2,341,601
|
|
|
|
356,424
|
|
|
|
2,698,025
|
|
Commission and franchise income
|
|
|
-
|
|
|
|
406,479
|
|
|
|
406,479
|
|
|
|
-
|
|
|
|
90,541
|
|
|
|
90,541
|
|
Income (loss) from operations
|
|
|
(583,618
|
)
|
|
|
(550,753
|
)
|
|
|
(1,134,371
|
)
|
|
|
1,132,482
|
|
|
|
(552,023
|
)
|
|
|
580,459
|
|
Income tax expenses
|
|
|
42,059
|
|
|
|
28,190
|
|
|
|
70,249
|
|
|
|
259,559
|
|
|
|
10,612
|
|
|
|
270,171
|
|
Depreciation and amortization
|
|
|
388,027
|
|
|
|
21,563
|
|
|
|
409,590
|
|
|
|
99,000
|
|
|
|
11,935
|
|
|
|
110,935
|
|
Asset expenditures
|
|
|
6,725,175
|
|
|
|
33,328
|
|
|
|
6,758,503
|
|
|
|
449,655
|
|
|
|
-
|
|
|
|
449,655
|
|
Total Assets
|
|
$
|
25,630,097
|
|
|
$
|
6,585,297
|
|
|
$
|
32,215,394
|
|
|
$
|
5,965,502
|
|
|
$
|
14,257,021
|
|
|
$
|
20,222,523
|
|
(a)
|
Retail store segment was commenced on April 8, 2011. For the three and nine months ended September 30, 2012 and 2011, operating results for retail stores included Xingtiankong, Dasen, Foshan Dasen and retail stores.
|
SKY Digital Stores, Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 13 — Segment Information (continued)
(b)
|
Mobile phone manufacturing numbers include the operating results of Donxon, Vaslink and Xinyang Donxon for the nine months ended September 30, 2012 and included the operating results of only Donxon for the nine months ended September 30, 2011.
|
Note 14— Subsequent Events
On October 29, 2012, the Company’s subsidiary Shenzhen Dasen entered into a short-term loan agreement with Shenzhen Baosheng County Bank to borrow RMB 9 million as working capital for one year (from October 29, 2012 to October 28, 2013). The loan bears interest rate of 7.2%.
F-23