Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20-549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
or
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from ______________ to _____________
Commission
file number: 000-52832
CHINA
UNITECH GROUP, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of incorporation or
organization)
|
98-0500738
(I.R.S.
Employer Identification No.)
|
|
|
1-D-1010 Yuanjing
Park, Long Xiang Road,
Long
Gang District, Shenzhen,
Guangdong
Province P.R.C.
(Address
of principal executive offices)
|
518117
(Zip
Code)
|
011-86-755-2894-3820
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes o No
x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes o No
o
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date:
As of
November 12, 2010, there are 20,200,000 shares of $0.00001 par value common
stock issued and outstanding.
FORM
10-Q
CHINA
UNITECH GROUP, INC.
INDEX
|
|
|
Page
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
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|
|
Item
1. Financial Statements ( Unaudited)
|
|
3
|
|
Consolidated
Balance Sheets as of September 30, 2010 (Unaudited) and
December 31, 2009
|
|
F-1
|
|
Consolidated
Statements of Income for the Three Months and Nine Months Ended September
30, 2010 and 2009 (Unaudited)
|
|
F-2
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
2009 (Unaudited)
|
|
F-4
|
|
Notes
to Consolidated Financial Statements as of September 30, 2010
(Unaudited)
|
|
F-5
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition
or Plan of Operation
|
|
5
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
|
|
18
|
|
Item
4. Controls and Procedures
|
|
18
|
|
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|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
Item
1. Legal Proceedings.
|
|
19
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|
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Item
1A. Risk Factors.
|
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|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
|
|
|
|
|
|
|
|
Item
3. Defaults Upon Senior Securities.
|
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|
|
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|
|
Item
4. (Removed and Reserved).
|
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|
|
Item
5. Other Information.
|
|
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|
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|
|
Item
6. Exhibits
|
|
|
PART I - FINANCIAL
INFORMATION
Item 1. Financial Statements
(Unaudited)
CHINA
UNITECH GROUP, INC.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010
CHINA
UNITECH GROUP, INC.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
- at September 30, 2010 - unaudited and December 31,
2009
|
|
|
F-1 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income -
unaudited
|
|
|
F-2 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity -
unaudited
|
|
|
F-3 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows -
unaudited
|
|
|
F-4 |
|
|
|
|
|
|
Notes
to Condensed
Consolidated Financial Statements -
unaudited
|
|
|
F-5
- F-18 |
|
CHINA
UNITECH GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
6,409,048 |
|
|
$ |
3,061,856 |
|
Restricted
cash
|
|
|
1,679,581 |
|
|
|
1,645,411 |
|
Rental
deposit
|
|
|
255,163 |
|
|
|
144,504 |
|
Equipment
deposit
|
|
|
- |
|
|
|
81,217 |
|
Inventory
|
|
|
208,050 |
|
|
|
204,971 |
|
Total
current assets
|
|
|
8,551,842 |
|
|
|
5,137,959 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,802,798 |
|
|
|
3,572,696 |
|
Intangible
assets, net
|
|
|
197,589 |
|
|
|
- |
|
Total
assets
|
|
$ |
14,552,229 |
|
|
$ |
8,710,655 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short
term loan
|
|
$ |
449,296 |
|
|
$ |
146,259 |
|
Accounts
payable
|
|
|
80,859 |
|
|
|
33,979 |
|
Deferred
revenue
|
|
|
659,600 |
|
|
|
775,985 |
|
Payroll
and payroll related liabilities
|
|
|
154,888 |
|
|
|
124,390 |
|
Income
and other tax payables
|
|
|
986,316 |
|
|
|
525,470 |
|
Accrued
expenses
|
|
|
132,974 |
|
|
|
43,126 |
|
Amount
due to director
|
|
|
240,625 |
|
|
|
5,162 |
|
Acquisition
consideration payable
|
|
|
92,564 |
|
|
|
- |
|
Total
current liabilities
|
|
|
2,797,122 |
|
|
|
1,654,371 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock ($0.00001 par value, 100,000,000 shares authorized, 0 share
issued and outstanding)
|
|
|
- |
|
|
|
- |
|
Common
stock ($0.00001 par value, 100,000,000 shares authorized, 20,200,000 and
19,000,000 shares issued and outstanding as of September 30, 2010 and
December 31, 2009, respectively) (6,173,600 equivalent shares outstanding
as of December 31, 2009)
|
|
|
202 |
|
|
|
190 |
|
Additional
paid-in capital
|
|
|
1,628,417 |
|
|
|
1,373,484 |
|
Statutory
reserves
|
|
|
718,744 |
|
|
|
718,744 |
|
Retained
earnings
|
|
|
8,967,200 |
|
|
|
4,752,871 |
|
Accumulated
other comprehensive income
|
|
|
440,544 |
|
|
|
210,995 |
|
Total
stockholders’ equity
|
|
|
11,755,107 |
|
|
|
7,056,284 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
14,552,229 |
|
|
$ |
8,710,655 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements
CHINA
UNITECH GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
UNAUDITED
|
|
For
The Three Months Ended
|
|
|
For
The Nine Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenue
|
|
$ |
5,840,453 |
|
|
$ |
3,617,873 |
|
|
$ |
14,142,866 |
|
|
$ |
10,417,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
442,104 |
|
|
|
331,588
|
|
|
|
1,132,103 |
|
|
|
944,775 |
|
Salary
|
|
|
342,695 |
|
|
|
201,586 |
|
|
|
831,226 |
|
|
|
588,123 |
|
Rent
|
|
|
306,243 |
|
|
|
206,545 |
|
|
|
748,723 |
|
|
|
608,256 |
|
Utility
|
|
|
397,630 |
|
|
|
351,489 |
|
|
|
1,111,843 |
|
|
|
1,009,105 |
|
Business
tax and surcharge
|
|
|
1,381,435 |
|
|
|
855,433 |
|
|
|
3,344,906 |
|
|
|
2,463,347 |
|
Others
|
|
|
260,197 |
|
|
|
194,275
|
|
|
|
629,068 |
|
|
|
625,476 |
|
|
|
|
3,130,304 |
|
|
|
2,140,916 |
|
|
|
7,797,869 |
|
|
|
6,239,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,710,149 |
|
|
|
1,476,957 |
|
|
|
6,344,997 |
|
|
|
4,178,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
75,906 |
|
|
|
36,395 |
|
|
|
351,888 |
|
|
|
114,732 |
|
Reorganizational
expenses
|
|
|
435,086 |
|
|
|
- |
|
|
|
435,086 |
|
|
|
- |
|
Total
operating expenses
|
|
|
510,992 |
|
|
|
36,395 |
|
|
|
786,974 |
|
|
|
114,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,199,157 |
|
|
|
1,440,562 |
|
|
|
5,558,023 |
|
|
|
4,063,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,827 |
|
|
|
452 |
|
|
|
4,287 |
|
|
|
811 |
|
Interest
expenses
|
|
|
(2,402 |
) |
|
|
- |
|
|
|
(7,115 |
) |
|
|
- |
|
Other
expenses
|
|
|
(10 |
) |
|
|
(93 |
) |
|
|
(43 |
) |
|
|
(252 |
) |
Total
other income (expenses)
|
|
|
(585 |
) |
|
|
359 |
|
|
|
(2,871 |
) |
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
2,198,572 |
|
|
|
1,440,921 |
|
|
|
5,555,152 |
|
|
|
4,064,378 |
|
Income
taxes
|
|
|
572,302 |
|
|
|
291,158 |
|
|
|
1,340,823 |
|
|
|
788,198 |
|
Net
income
|
|
$ |
1,626,270 |
|
|
$ |
1,149,763 |
|
|
$ |
4,214,329 |
|
|
$ |
3,276,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
209,872 |
|
|
|
13,261 |
|
|
|
229,549 |
|
|
|
8,793 |
|
Comprehensive
income
|
|
$ |
1,836,142 |
|
|
$ |
1,163,024 |
|
|
$ |
4,443,878 |
|
|
$ |
3,284,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
|
0.08 |
|
|
|
0.06 |
|
|
|
0.22 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
and Diluted weighted average Common Stock outstanding
|
|
|
20,186,957 |
|
|
|
19,000,000 |
|
|
|
19,400,000 |
|
|
|
19,000,000 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements
CHINA
UNITECH GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
Common
Stock
|
|
|
Additional
paid
in
|
|
|
Statutory
|
|
|
Retained
|
|
|
Accumulated
other comprehensive
|
|
|
Total
stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
reserves
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2008 (1)
|
|
|
19,000,000 |
|
|
$ |
190 |
|
|
$ |
1,367,032 |
|
|
$ |
399,802 |
|
|
$ |
683,364 |
|
|
$ |
202,037 |
|
|
$ |
2,652,425 |
|
Contributed
capital by existing shareholders
|
|
|
- |
|
|
|
- |
|
|
|
6,452 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,452 |
|
Transfers
to statutory reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
318,942 |
|
|
|
(318,942 |
) |
|
|
- |
|
|
|
- |
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,388,449 |
|
|
|
- |
|
|
|
4,388,449 |
|
Foreign
currency translation difference
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,958 |
|
|
|
8,958 |
|
Balance at December
31, 2009 (1)
|
|
|
19,000,000 |
|
|
$ |
190 |
|
|
|
1,373,484 |
|
|
|
718,744 |
|
|
$ |
4,752,871 |
|
|
$ |
210,995 |
|
|
$ |
7,056,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
for reverse merger
|
|
|
6,173,600 |
|
|
|
62 |
|
|
|
3,271 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,333 |
|
Cancellation
of commons stock
|
|
|
(4,973,600 |
) |
|
|
(50 |
) |
|
|
50 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Contributed
capital by existing shareholders
|
|
|
- |
|
|
|
- |
|
|
|
251,612 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
251,612 |
|
Net
income for the period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,214,329 |
|
|
|
- |
|
|
|
4,214,329 |
|
Foreign
currency translation difference
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
229,549 |
|
|
|
229,549 |
|
Balance
at September 30, 2010
|
|
|
20,200,000 |
|
|
$ |
202 |
|
|
$ |
1,628,417 |
|
|
$ |
718,744 |
|
|
$ |
8,967,200 |
|
|
$ |
440,544 |
|
|
$ |
11,755,107 |
|
(1) See
footnote 1 regarding the recapitalization of Classic Bond Development
Limited
The
accompanying notes are an integral part of the condensed consolidated financial
statements
CHINA
UNITECH GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
|
|
For
The Nine Months Ended
|
|
|
|
September
30
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,214,329 |
|
|
$ |
3,276,180 |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,161,497 |
|
|
|
964,444 |
|
Amortization
|
|
|
14,601 |
|
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Rental
deposit
|
|
|
(81,776 |
) |
|
|
(6,723 |
) |
Inventory
|
|
|
1,156 |
|
|
|
(134,592 |
) |
Accounts
payable
|
|
|
45,374 |
|
|
|
10,708 |
|
Amount
due to director
|
|
|
231,668 |
|
|
|
(148,493 |
) |
Payroll
and payroll related liabilities
|
|
|
27,431 |
|
|
|
(38,333 |
) |
Accrued
expenses
|
|
|
82,094 |
|
|
|
9,782 |
|
Deferred
revenue
|
|
|
(130,200 |
) |
|
|
124,994 |
|
Income
and other tax payable
|
|
|
442,125 |
|
|
|
(415,925 |
) |
Net
cash provided by operating activities
|
|
|
6,008,299 |
|
|
|
3,642,042 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
(2,696,834 |
) |
|
|
(1,215,347 |
) |
Acquisition
of cafes
|
|
|
(635,233 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(3,332,067 |
) |
|
|
(1,215,347 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Cash
acquired from reverse merger
|
|
|
1,442 |
|
|
|
- |
|
Issuance
of shares for cash
|
|
|
251,612 |
|
|
|
- |
|
Proceeds
from short term loan
|
|
|
300,000 |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
553,054 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
117,906 |
|
|
|
4,442 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
3,347,192 |
|
|
|
2,431,137 |
|
|
|
|
|
|
|
|
|
|
Cash-
beginning of period
|
|
|
3,061,856 |
|
|
|
1,112,646 |
|
|
|
|
|
|
|
|
|
|
Cash-
end of period
|
|
$ |
6,409,048 |
|
|
$ |
3,543,783 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
7,115 |
|
|
$ |
- |
|
Income
tax paid
|
|
$ |
1,051,472 |
|
|
$ |
671,288 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVIES:
|
|
|
|
|
|
|
|
|
Summary
of Assets Acquired from Acquisitions:
|
|
|
|
|
|
|
|
|
Net
Property and Equipment
|
|
$ |
499,776 |
|
|
$ |
- |
|
Other
Current Assets
|
|
|
15,678 |
|
|
|
- |
|
Intangible
Assets
|
|
|
207,964 |
|
|
|
- |
|
Net
Assets Acquired
|
|
$ |
723,418 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Transfer
of equipment deposits paid in property and equipment
|
|
$ |
83,811 |
|
|
$ |
- |
|
Acquisition
payable
|
|
$ |
90,610 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
1.
|
Organization,
Recapitalization and Nature of
Business
|
China Unitech Group, Inc.
(“China Unitech”)
China
Unitech Group, Inc. ( “the Company”, “we”, “us”, “our”) was incorporated in
the State of Nevada on March 14, 2006. The Company was a
development company from incorporation to June 30, 3010. On July 2, 2010,
the Company has successfully closed a share exchange
transaction with the shareholders of Classic Bond Development Limited, a
British Virgin Islands corporation (“ Classic Bond”). The Company will operate
through its variable interest entities in China to execute the current
business plan of those affiliates which involves the operation of a chain of
China-based internet cafes.
Recapitalization
of Classic Bond Development Limited
On July
2, 2010, the China Unitech Group, Inc. (“China Unitech”), entered into a share
exchange transaction with Classic Bond Development Limited, a British Virgin
Islands corporation (“Classic Bond”), and the shareholders of Classic Bond.
Pursuant to the Share Exchange Agreement, the China Unitech acquired 100% of the
issued and outstanding capital stock of Classic Bond in exchange for 19,000,000
newly issued shares of the Company’s common stock, which represented
approximately 94% of the 20,200,000 issued and outstanding shares of common
stock after the transaction and after the coincident cancellation of 4,973,600
shares of common stock held by the Company’s former majority stockholder. The
business, assets and liabilities did not change as a result of the reverse
acquisition.
This
share exchange transaction resulted in those shareholders obtaining a majority
voting interest in the Company. Generally accepted accounting principles require
that the company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes, resulting in a
reverse acquisition with Classic Bond as the accounting acquirer and China
Unitech as the acquired party. Accordingly, the share exchange transaction has
been accounted for as a recapitalization of Classic Bond whereby Classic Bond is deemed to be the
continuing,
surviving entity for accounting purposes, but through reorganization, has deemed
to have adopted the capital structure of China Unitech. The
equity section of the accompanying financial statements has been restated to
reflect the recapitalization of the Company due to the reverse acquisition as of
the first day of the first period presented.
Accordingly,
all references to common shares of Classic Bond’s common stock have been
restated to reflect the equivalent number of China Unitech’s common shares. In
other words, the 2,000,000 Classic Bond shares outstanding are restated as
20,200,000 common shares, as of July 2, 2010. Each share of Classic Bond is
restated to 10.10 shares of China Unitech.
The book
value of the net assets that for accounting purposes, were
deemed to have been acquired by Classic Bond from China Unitech, as of the date
of acquisition (July 2, 2010) were $3,333.
During
the recapitalization, the Company incurred restructuring expenses of $300,000,
related legal and professional fee of $ 129,033 and the interest expenses
of $6,053 related to the short term loan for paying restructuring expenses. All
of these expenses amounting to $435,086 in total which recorded as
reorganizational expenses in statement of income.
Classic Bond Development
Limited (“Classic Bond”)
Classic
Bond Development Limited was incorporated on November 2, 2009 in the
British Virgins Islands (“BVI”) with 50,000 authorized common stock
with no par value. On November 2, 2009, 50,000 common stock at $0.129 (HK$1)
each were issued for cash at $6,452 (HK$50,000) to several shareholders
including Mr. Guo Dishan who is the 65% equity interest shareholder and the sole
director of the Company.
On
June 23, 2010, the Company further issued 1,950,000 shares of common stock
to 42 individuals to raise fund of $84,093 (HK$651,721) for 651,721 shares
and 1,308,954 shares associated with the reorganization of the
Company at a value of $167,519 (HK$1,308,954) which is reflected as
contributed capital by existing shareholders of Junlong and the total amount was
$251,612. At September 30, 2010 and December 31, 2009, the issued and
outstanding of Common Stock were 2,000,000 and 50,000 shares.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
2009
1. Organization and
Nature of Business - Continued
Classic Bond Development
Limited (“Classic Bond”) -
Continued
Classic
Bond is in the business of operations of internet café, throughout the Lungang
District of Shenzhen in Province of Guangdong of People’s Republic of China
(“PRC”). The Company conducts its operations through the following
subsidiaries: (a) a wholly-owned subsidiary of the Company located in the
PRC: Shenzhen Zhonghefangda Network Technology Co., Ltd. (“Zhonghefangda”) and
(b) an entity located in the PRC: Shenzhen Junlong Culture Communication Co.,
Ltd. (“Junlong’), which is controlled by the Company through contractual
arrangements between Zhonghefangda and Junlong, as if Junlong were a
wholly-owned subsidiary of the Classic Bond.
Shenzhen Zhonghefangda
Network Technology Co., Ltd. (“Zhonghefangda”)
Zhonghefangda
, Classic Bond’s wholly-owned subsidiary, was incorporated in People’s Republic
of China (“PRC”) on June 10, 2010 with registered capital of $129,032 (HK$1
million). Zhonghefangda is engaged in provision of management and consulting
services.
On June
11, 2010, to protect the Company’s shareholders from possible future foreign
ownership restrictions, Zhonghefangda and Junlong entered into a series of
agreements. Under these agreements Zhonghefangda obtained the ability to direct
the operations of Junlong and to receive a majority of the residual returns.
Therefore, management determined that Junlong became a variable interest entity
(“VIE”) under the provisions of Financial Accounting Standards Board (“FASB”)
ASC 810-10 and Zhonghefangda was determined to be the primary beneficiary of
Junlong. Accordingly, beginning June 11, 2010, Zhonghefangda is able to
consolidate the assets, liabilities, results of operations and cash flows of
Junlong in the financial statements. Because the legal representatives and
ultimate major stockholder of Zhonghefangda and Junlong is the same person, Mr.
GouDishan, Zhonghefangda and Junlong were deemed, until June 11, 2010, to be
under the common control.
On June
10, 2010, Classic Bond formed Shenzhen Zhonghefangda Network Technology Co.,
Ltd. (“Zhonghefangda”) and Mr. GouDishan is the legal representative of
Zhonghefangda and thereafter Zhonghefangda becomes a wholly owned subsidiary of
Classic Bond and the whole reorganization is completed.
Exclusive Management and
Consulting Agreement
On June
11, 2010, Zhonghefangda signed exclusive management and consulting services
agreement with Junlong. Pursuant to the agreement, Zhonghefangda agreed to
provide management and consulting services to Junlong, upon request, in
connection with the operation of the Business. The agreement provides that
Junlong will compensate Zhonghefangda in consideration for its right to receive
the aggregate net profit of Junlong for a period of twenty (20) years and for
succeeding periods of the same duration until terminated by both parties under
agreed conditions. Zhonghefangda will reimburse to Junlong the full
amount of any net losses incurred by Junlong during the term of this agreement.
As a result of entering into the exclusive management and consulting agreement,
Zhonghefangda should be deemed to control Junlong as a Variable Interest Entity
and should be consolidated in the accompanying
financial statements.
Shenzhen Jun Long Culture
Communication Co., Ltd. (“Junlong”),
Junlong is
a Chinese enterprise organized in the People’s Republic of China (“PRC”) on
December 26, 2003 in accordance with the Laws of the People’s Republic of China
with the registered capital of $0.136 million (equivalent to RMB 1 million).
In 2001, the Chinese
government imposed higher capital (RMB10 million for regional internet café
chain and RMB50 million for national internet café chain) and facility
requirements for the establishment of internet cafes. On August 19, 2004,
Junlong was granted approval from Shenzhen Municipal People’s Government to
increase its registered capital by $1,230,500 from $136,722 to $1,367,222
million (increased by RMB 9 million, from RMB 1 million to RMB 10
million) The capital verification process has been
completed.
In 2005,
Junlong obtained internet cafe licenses of
operating internet café chain from the Ministry of Culture,
and opened the internet first cafe in April, 2006 and our members can
access the internet at our venues. We started our internet cafes in 2006 and we
opened 10 internet cafes in 2006, 3 internet cafes opened in 2007, 10 internet
cafes opened in 2008, 5 internet cafes opened in
2009, 12 internet cafes were opened in the
first nine months of 2010. In addition, we acquired 2 cafes in April 2010, 1
cafe in July 2010 and as a result, we now own 43 internet cafes within the
Longgang District of Shenzhen.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
|
Summary of Significant Accounting
Policies
|
(a)
|
Basis
of presentation
|
The
Company’s accounting policies used in the preparation of the accompanying
financial statements conform to accounting principles generally accepted in the
United States of America (“US GAAP”) and have been consistently
applied.
(b)
|
Principle
of consolidation
|
The
condensed consolidated financial statements include the accounts of China
Unitech Group Inc., Classic Bond Development Limited, Zhonghefangda and the
VIE-Junlong. All significant intercompany balances and transactions have been
eliminated in the consolidation. The interim condensed consolidated financial
statements included herein, presented in accordance with United States generally
accepted accounting principles and stated in US dollars, have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. These statements reflect all adjustments, consisting of
normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is
suggested that these interim condensed consolidated financial statements be read
in conjunction with the financial statements of the Company for the year ended
December 31, 2009 and 2008. The Company follows the same accounting
principles in the preparation of the interim consolidated financial
statements.
Results
of operations for the interim periods are not indicative of annual
results.
In
preparing financial statements in conformity with US GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reported periods. Actual results could differ from those estimates
Significant
Estimates
These
financial statements include some amounts that are based on management’s best
estimates and judgments. The most significant estimates relate to depreciation
of property, plant and equipment, the valuation allowance for deferred taxes,
impairment testing of long-lived assets and various contingent liabilities. It
is reasonably possible that the above-mentioned estimates and others may be
adjusted as more current information becomes available, and any adjustment could
be significant in future reporting periods.
Internet
café members purchase prepaid IC cards which include stored value that will be
deducted based on time usage of computer at the internet cafe. Revenues derived
from the prepaid IC cards at the internet café are recognized when services are
provided. This is based upon the usage of computer time at the internet
cafe. Outstanding customer balances in the IC cards are included in
deferred revenue on the balance sheets. The Company does not charge any service
fees that cause a decrement to customer balances. There is no
expiration date for IC cards.
The
Company also records revenue from commission received from the sale of third
parties on-line gaming cards, snacks and drinks. Commission revenue
amounted to 20% of the value of the on-line gaming cards, snacks and drinks is
recognized at the time the gaming cards, etc. are sold to
customers. During the three months ended September 30, 2010 and 2009,
the commission income was $46,195 and $30,216, less than 1% of total
revenue. During the nine months ended September 30, 2010 and 2009,
the commission income was $113,417 and $86,287, less than 1% of total
revenue.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
2. Summary
of Significant Accounting Policies - Continued
Cost of
goods sold consists primarily of depreciation of Café computer equipment and
hardware, overhead associated with the internet cafes, including rental
payments, utilities, business tax and surcharge. Companies in China are
generally subject to business tax and related surcharges by various local tax
authorities at rates ranging from 5% to 6% on gross revenue generated from
internet cafés.
The
Company may be exposed to credit risk from its cash at bank. An
allowance has been considered for estimated irrecoverable amounts determined by
reference to past default experience and the current economic environment. No
allowance is considered necessary for the period.
(g)
|
Cash
and cash equivalents
|
Cash and
cash equivalents include cash on hand, cash accounts, interest bearing savings
accounts and time certificates of deposit with a maturity of three months or
less when purchased.
At
September 30, 2010 and December 31, 2009, restricted cash of $1,679,581 and
$1,645,411(equivalent to RMB11,250,000) represented cash held by two escrow
agents on behalf of the company for registered capital and operating cash flow
purposes of two new subsidiary companies to be established in Yiwu city, Zhejiang
province and Anshun city, Guizhou province.
Inventory
represented the IC cards we purchased from IC cards manufacturer. Inventories
are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out (FIFO) method.
(j)
|
Fair
Value of Financial Instruments
|
FASB
accounting standard requires disclosing fair value to the extent practicable for
financial instruments that are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or
settlement.
For certain
financial instruments, including cash, accounts payable, short-term loans,
accruals and other payables, it was assumed that the carrying amounts
approximate fair value because of the near term maturities of such
obligations.
The
Company prepaid the equipments deposits to the computer suppliers for purchase
of computer and equipments for the new internet cafes.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
2009
2. Summary
of Significant Accounting Policies - Continued
(l)
|
Property,
plant and equipment
|
Property,
plant and equipment, comprising computer equipment and hardware, leasehold
improvements, office furniture and vehicles and are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives listed below.
|
|
Estimated Useful Lives
|
Leasehold
improvement
|
|
Lesser
of term of the lease or the estimated useful lives of the
assets
|
Café
computer equipment and hardware
|
|
5
years
|
Café
furniture and fixtures
|
|
5
years
|
Office
furniture, fixtures and equipments
|
|
5
years
|
Motor
vehicles
|
|
5
years
|
Our
intangible assets consist of definite-lived assets subject to amortization such
as Business License and Customer Lists. The useful lives of the Business
License is 9 to 15 years and we amortized the customer lists by 5
years. We calculate amortization of the definite-lived intangible assets on a
straight-line basis over the useful lives of the related intangible
assets.
Deferred
revenue represents amounts from the IC cards that are unused balance. The
Outstanding customer balances are $659,600 and $775,985 as at September 30, 2010
and December 31, 2009 and are included in deferred revenue on the balance
sheets.
The
Company follows the FASB’s accounting standard. 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.
Income
taxes are provided on an asset and liability approach for financial accounting
and reporting of income taxes. Current tax is based on the profit or
loss from ordinary activities adjusted for items that are non-assessable or
disallowable for income tax purpose and is calculated using tax rates that have
been enacted or substantively enacted at the balance sheet
date. Deferred income tax liabilities or assets are recorded to
reflect the tax consequences in future differences between the tax basis of
assets and liabilities and the financial reporting amounts at each year
end. A valuation allowance is recognized if it is more likely than
not that some portion, or all, of a deferred tax asset will not be
realized.
(q)
|
Consolidation
of Variable Interest Entities
|
According
to the requirements of Statement of Financial
Accounting Standards No. 810-10, “Variable interest
Entities”, the company has
evaluated the economic relationships of its wholly owned subsidiary, Shenzhen Zhonghefangda
Network Technology Co., Ltd. (“Zhonghefangda”) with Junlong and
has determined that it is required to consolidate Zhonghefangda and
Junlong pursuant to the rules of FASB ASC Topic
810-10. Therefore
Junlong is considered to be a VIE, as defined by FASB ASC Topic
810-10, of which
Classic Bond is the primary beneficiary. Classic Bond, as mentioned above, will
absorb a majority of the economic risks and rewards of all of these VIEs that
are being consolidated in the accompanying financial statements.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
2. Summary
of Significant Accounting Policies - Continued
(r)
|
Foreign
currency translation
|
Assets
and liabilities of the Company with a functional currency other than US$ are
translated into US$ using period end exchange rates. Income and expense items
are translated at the average exchange rates in effect during the period.
Foreign currency translation differences are included as a component of
Accumulated Other Comprehensive Income in Stockholders’ Equity.
The
exchange rates used to translate amounts in RMB into USD for the purposes of
preparing the financial statements were as follows:
|
|
9/30/2010
|
|
|
9/30/2009
|
|
Year
end RMB : USD exchange rate
|
|
|
6.6981
|
|
|
|
6.8376
|
|
Nine
months average RMB : USD exchange rate
|
|
|
6.8164
|
|
|
|
6.8425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2009
|
|
|
|
12/31/2008
|
|
Year
end RMB : USD exchange rate
|
|
|
6.8372
|
|
|
|
6.8542
|
|
Average
yearly RMB : USD exchange rate
|
|
|
6.8409
|
|
|
|
6.9623
|
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into USD at the rates used in translation.
(s)
|
Post-retirement
and post-employment benefits
|
The
Company contributes to a state pension plan in respect of its PRC employees.
Other than the above, neither the Company nor its subsidiary provides any other
post-retirement or post-employment benefits.
(t)
|
Earnings
per Share (EPS)
|
Earnings
per share is calculated in accordance with ASC 260-10 which requires the Company
to calculate net income (loss) per share based on basic and diluted net income
(loss) per share, as defined. Basic EPS excludes dilution and is computed by
dividing net income (loss) by the weighted average number of shares outstanding
for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
There is
no dilution factor occurred during the period, the basic EPS equals diluted
EPS.
(u)
|
Retained
earnings-appropriated
|
In
accordance with the relevant PRC regulations and the Company’s PRC articles of
association, Junlong is required to allocate their respective net income to
statutory surplus reserve.
(v)
|
Statutory
surplus reserve
|
In
accordance with the relevant laws and regulations of the PRC and the articles of
associations of the Company, Junlong is required to allocate 10% of their net
income reported in the PRC statutory accounts, after offsetting any prior years’
losses, to the statutory surplus reserve, on an annual basis. When the balance
of such reserve reaches 50% of the respective registered capital of the
subsidiaries, any further allocation is optional.
The
statutory surplus reserves can be used to offset prior years’ losses, if any,
and may be converted into registered capital, provided that the remaining
balances of the reserve after such conversion is not less than 25% of registered
capital. The statutory surplus reserve is non-distributable.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
2009
2. Summary
of Significant Accounting Policies - Continued
(w)
|
Recent
Accounting Pronouncements
|
The
Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company’s results of
operations, financial position or cash flow.
Acquisition
of Langman internet café on April 6, 2010 and Chaosu internet café on April 16,
2010.
The
Company acquired property, plant and equipment, other current assets and
intangible assets of Langman internet café on April 6, 2010 and Chaosu internet
café on April 16, 2010 for total gross consideration amount of $497,457
(RMB3,400,000) and the company settled all of the amount in July 28, 2010. The
intangible assets are comprised of business licenses. In accordance with
the purchase method of accounting, the estimated fair market value of these
assets has been included in the consolidated financial statements from the date
of acquisitions.
All
intangible and tangible assets acquired, based on their appraised fair values,
were as follows:
Property,
plant, and equipment
|
|
$ |
346,003 |
|
Other
current assets
|
|
|
10,973 |
|
Intangible
assets
|
|
|
140,481 |
|
|
|
|
|
|
Net
assets acquired
|
|
$ |
497,457 |
|
Acquisition of Gai Nian Shi Kong internet café on July 1, 2010.
The
Company acquired property, plant and equipment, other current assets and
intangible assets of Langman internet café on July 1, 2010 for total gross
consideration amount of $231,409 (RMB1,550,000). The intangible assets are
comprised of business licenses. In accordance with the purchase method of
accounting, the appraised fair market value of these assets has been included in
the consolidated financial statements from the date of
acquisitions.
For the
three months ended September 30, 2010, the Company paid $138,845 (RMB930,000) of
the purchase consideration of $231,409 (RMB1,550,000) and the balance of $92,564
(RMB620,000) recorded under current liabilities of acquisition consideration
payable. This amount was settled on October 29, 2010.
All
intangible and tangible assets acquired, based on their appraised fair values,
were as follows:
Property,
plant, and equipment
|
|
$ |
157,489 |
|
Other
current assets
|
|
|
4,819 |
|
Intangible
assets
|
|
|
69,101 |
|
|
|
|
|
|
Net
assets acquired
|
|
$ |
231,409 |
|
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
4. Cash
Cash is
summarized as follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
at bank
|
|
$ |
6,261,594 |
|
|
$ |
2,975,991 |
|
Cash
in hand
|
|
|
147,454 |
|
|
|
85,865 |
|
|
|
$ |
6,409,048 |
|
|
$ |
3,061,856 |
|
Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents (Note 2). As of
September 30, 2010 and December 31, 2009, substantially all of the Company’s
cash and cash equivalents were held by major banks located in the PRC, which
management believes are of high credit quality.
5. Restricted
Cash
|
|
September
30,
|
|
|
December
31,
|
|
Bank
deposits held by:
|
|
2010
|
|
|
2009
|
|
Mr.
Fangrong, Zheng – Anshun city of Guizhou
province
|
|
$ |
933,101 |
|
|
$ |
914,117 |
|
Mr. Jinping Zeng -
Yiwu city of Zhejiang province
|
|
|
746,480 |
|
|
|
731,294 |
|
|
|
$ |
1,679,581 |
|
|
$ |
1,645,411 |
|
At
September 30, 2010 and December 31, 2009, the restricted cash represented bank
deposits of $ 1,679,581 (equivalent to RMB11,250,000) held by two escrow agents
on behalf of the company for registered capital and operating cash flow purposes
of two new subsidiary companies to be established in Anshun city, Guizhou
province and Yiwu city, Zhejiang province.
6.
Equipment Deposit
Equipment
deposit consists of:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Equipment
deposit for purchase computers
|
|
$ |
- |
|
|
$ |
81,217 |
|
7.
Inventory
Inventory
consists of:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Purchased
IC cards
|
|
$ |
208,050 |
|
|
$ |
204,971 |
|
There was
no allowance made for obsolete or slow moving inventory as of September 30, 2010
and December 31, 2009.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
8. Property,
Plant and Equipment
Property,
plant and equipment consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Leasehold
improvement
|
|
$ |
3,026,707 |
|
|
$ |
2,388,938 |
|
Café
computers equipments and hardware
|
|
|
5,463,354 |
|
|
|
3,333,037 |
|
Café
furniture and fixtures
|
|
|
1,387,803 |
|
|
|
858,846 |
|
Office
furniture, fixtures and equipments
|
|
|
47,801 |
|
|
|
21,117 |
|
Motor
vehicle
|
|
|
249,708 |
|
|
|
94,072 |
|
|
|
$ |
10,175,373 |
|
|
$ |
6,696,010 |
|
Less:
Accumulated depreciation
|
|
|
(4,417,215 |
) |
|
|
(3,169,385 |
) |
Property
and equipment in service, net
|
|
|
5,758,158 |
|
|
|
3,526,625 |
|
Construction
in progress
|
|
|
44,640 |
|
|
|
46,071 |
|
Property
and equipment, net
|
|
$ |
5,802,798 |
|
|
$ |
3,572,696 |
|
During
the three months ended September 30, 2010, depreciation expenses amounted to
$457,120, of which $442,104 and $ 15,016were recorded as cost of sales and
general and administrative expense, respectively.
During the three months
ended September 30, 2009, depreciation expenses amounted
to $338,679, of which $331,588 and $7,091 were recorded as cost of sales and general
and administrative expense, respectively.
During the nine months ended September 30, 2010, depreciation expenses amounted to
$1,161,497, of which $1,132,103 and $ 29,394 were recorded as cost of sales and general and
administrative expense, respectively.
During
the nine months ended September 30, 2009, depreciation expenses
amounted to $964,444, of which $944,775 and $ 19,669 were recorded as cost
of sales and general and administrative expense,
respectively.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
2009
9. Intangible
Assets
Intangible
assets are summarized as follows:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Business
License
|
|
$ |
93,889 |
|
|
$ |
- |
|
Customer
Lists
|
|
|
118,559 |
|
|
|
- |
|
|
|
|
212,448 |
|
|
|
- |
|
Less:
Accumulated Amortization
|
|
|
14,859 |
|
|
|
- |
|
Total
|
|
$ |
197,589 |
|
|
$ |
- |
|
During
the three months ended September 30, 2010, amortization expenses amounted
to $8,802 and $ 0 respectively.
During
the nine months ended September 30, 2010, amortization expenses amounted to
$14,601 and $ 0 respectively.
Estimated
amortization for the next five years and thereafter is as follows:
Year
ending December 31,
|
|
|
|
Remainder
of 2010
|
|
$ |
8,964 |
|
2012
|
|
|
35,857 |
|
2013
|
|
|
35,857 |
|
2014
|
|
|
35,857 |
|
2015
|
|
|
35,857 |
|
Thereafter
|
|
|
45,197 |
|
|
|
$ |
197,589 |
|
10. Short
Term Loan
The short
term loan due within one year as of September 30, 2010 and December 31, 2009
consist of the following:
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Bank
|
|
Loan
Period
|
|
Interest
rate
|
|
|
|
|
|
|
|
China
Construction Bank
|
|
October
27, 2009 to October
25, 2010
|
|
|
6.372 |
% |
|
$ |
149,296 |
|
|
$ |
146,259 |
|
Shenzhen
Yuzhilu Aviation Service Co., Ltd.
|
|
July
1, 2010 to October 1, 2010
|
|
|
8.000 |
% |
|
|
300,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
$ |
449,296 |
|
|
$ |
146,259 |
|
On
October 27, 2009, the Company entered into a loan agreement with China
Construction Bank for $149,296 (RMB1,000,000) which was secured by
director’s guarantee. The annual interest rate is 6.372% and is due on
October 25, 2010.
On July
1, 2010, the Company entered into a loan agreement with Shenzhen Yuzhilu
Aviation Service Co., Ltd. for $300,000. The annual interest rate is
8.000% and is due on October 1, 2010. The Company settled such loan
on October 8, 2010.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND
2009
11. Due To A
Director
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Mr.
Guo Di Shan, a director of the Company
|
|
$ |
240,625 |
|
|
$ |
5,162 |
|
The
amount due to Mr. Guo Di Shan is unsecured with no stated interest or repayment
terms.
12. Income
and Other Tax Payables
Income
and other tax payables consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Business
tax payable
|
|
$ |
399,924 |
|
|
$ |
240,015 |
|
Income
tax
|
|
|
580,304 |
|
|
|
280,027 |
|
Withhold
individual income tax payable
|
|
|
1,887 |
|
|
|
2,907 |
|
Other
tax payables
|
|
|
4,201 |
|
|
|
2,521 |
|
Total
|
|
$ |
986,316 |
|
|
$ |
525,470 |
|
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
13. Income
Tax
The
Company incorporated in PRC is subject to PRC enterprises income tax at the
applicable tax rates on the taxable income as reported in their Chinese
statutory accounts in accordance with the relevant enterprises income tax
laws. Junlong was charged a tax rate of 20% of its taxable income in
2009 and 22% in 2010.
The
Company uses the liability method, where deferred tax assets and liabilities are
determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities
for financial and income tax reporting purposes. There are
no material timing differences and therefore no deferred tax asset or liability
at September 30, 2010. As approved by the relevant tax authority in the PRC,
Junlong’s income tax rates will be 24% for 2011 and thereafter.
The
income tax provision consists of the following:
|
|
September
30,
2010
|
|
|
September
30,
2009
|
|
Current
|
|
$ |
1,340,823 |
|
|
$ |
788,198 |
|
Deferred
|
|
|
- |
|
|
|
- |
|
|
|
$ |
1,340,823 |
|
|
$ |
788,198 |
|
The
Company applied the provisions of ASC 740.10.50, ”Accounting For
Uncertainty In Income Taxes”, which provides clarification related to the
process associated with accounting for uncertain tax positions recognized in our
financial statements. ASC 740.10.50 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 740.10.50 also provides guidance
related to, among other things, classification, accounting for interest and
penalties associated with tax positions, and disclosure
requirements. The Company recognizes accrued interest and penalties
related to unrecognized tax benefits in the provision for income taxes in
the statements of operation. The Company’s policy for recording interest
and penalties associated with audits is to record such items as a component of
income tax expense.
As of
September 30, 2010, the Company is subject to potential audit by the PRC tax
bureau for three years afterwards. As of September 30, 2010 and 2009, the
Company did not accrue any interest and penalties in connection with ASC
740.10.50.
14. Employee
Benefits
The
Company contributes to a state pension scheme organized by municipal and
provincial governments in respect of its employees in PRC. The
compensation expense related to this plan, which is calculated at a range of 8%
of the average monthly salary. The compensation expense was $2,538
and $1,668 for the three months ended September 30, 2010 and 2009,
respectively. The compensation expense was$5,469 and $4,636 for the nine
months ended September 30, 2010 and 2009, respectively.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
15. Commitments
and Contingencies
Operating
Leases
In the
normal course of business, the Company leases office space and internet
cafes under operating leases agreements, which expire through 2014. The
Company rents internet cafes venues and office space, primarily for regional
sales administration offices that are conducive to administrative operations.
The operating leases agreements generally contain renewal options that may be
exercised in the Company’s discretion after the completion of the base rental
terms. In addition, many of the leases provide for regular increases to the base
rental rate at specified intervals, which usually occur on an annual
basis.
As
of September 30, 2010, the Company was obligated under operating leases
requiring minimum rentals as follows:
Fiscal
year
|
|
|
|
|
Remainder
of 2010
|
|
$
|
335,533
|
|
2011
|
|
|
1,185,466
|
|
2012
|
|
|
949,734
|
|
2013
|
|
|
664,605
|
|
2014
|
|
|
563,764
|
|
2015
|
|
|
160,285
|
|
|
|
$
|
3,859,387
|
|
During
the three months ended September 30, 2010, rent expenses amounted to
$ 308,482, of which $306,243 and $2,239 was recorded as cost of
sales and general and administrative expense, respectively.
During
the three months ended September 30, 2009, rent expenses amounted to $208,738,
of which $206,545 and $2,193 was recorded as cost of sales and general
and administrative expense, respectively.
During
the nine months ended September 30, 2010, rent expenses amounted to
$765,392, of which $748,723 and $16,669 was recorded as cost of sales
and general and administrative expense, respectively.
During
the nine months ended September 30, 2009, rent expenses amounted to
$614,833, of which $608,256 and $6,577 was recorded as cost of sales
and general and administrative expense, respectively.
Incorporation
of Two New Subsidiary Companies
The
Company is committed to establish two new subsidiary companies, which are
located in Yiwu
city, Zhejiang province and Anshun city, Guizhou province with the
investment of approximately $2.195 million (equivalent to RMB15 million) each,
with total of $4.39 million as registered capital and operating cash flow
purposes. The registered capital of each subsidiary company will be $0.439
million (RMB3,000,000). As of September 30, 2010 and December 31,
2009, the Company paid approximately $1.6 million (RMB11.25 million) in total to
two escrow agents and the amounts were recorded under restricted
cash.
Upon the
establishment of the two subsidiary companies, the two escrow agents will be
appointed as the General Manager of the two subsidiary companies. The Company is
committed to pay a monthly salary of approximately $1,100 (RMB7,500) plus 3% of
the net income of the respective subsidiary companies as bonus.
CHINA
UNITECH GROUP, INC.
NOTES
TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
16.
Concentrations, Risks, and Uncertainties
The
Company did not have any customer constituting greater than 10% of net sales for
the three months and nine months ended September 30, 2010 and 2009.
At
September 30, 2010 and December 31, 2009, there was one supplier of consignment
snacks and drinks with amount of $75,0378 and $33,979 respectively which
accounted for 58% and 100% of the Company’s account payable.
17. Operating
Risk
Interest
rate risk
The
interest rates and terms of repayment of bank and other borrowings are disclosed
in Note 10. Other financial assets and liabilities do not have
material interest rate risk.
Foreign
currency risk
Most of
the transactions of the Company were settled in Renminbi. In the
opinion of the directors, the Company does not have significant foreign currency
risk exposure.
Company’s
operations are substantially in foreign countries
Substantially
all of the Company’s services are provided in China. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in China. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations.
The
Chinese government began tightening its regulation of internet cafes since 2001.
In particular, a large number of unlicensed internet cafes have been closed. In
addition, the Chinese government has imposed higher capital (RMB10,000,000 for
regional internet café chain is required and RMB50,000,000 for national internet
café chain) and facility requirements for the establishment of internet cafes.
Furthermore, the Chinese government’s policy, which encourages the development
of a limited number of national and regional internet cafe chains and discourages the establishment of independent
internet cafes, may slow down the growth of internet cafes. Recently, the
Ministry of Culture, together with other government authorities, issued a joint
notice suspending the issuance of new internet cafe chain licenses. Any intensified government regulation of
internet cafes could restrict our ability to maintain and expand our internet
cafes.
Currently,
the Company uses only one internet service provider. However, there
are other internet service providers available to the Company. The
management of the Company believes that the risk of loss of internet services is
not that high because of other service providers available to the
Company.
18.
Segment Information
19. Subsequent
Event
The
Company evaluated subsequent events through the time of issuance of the
financial statements. Pursuant to the requirements of FASB ASC Topic 855, there
were no events or transactions occurring during this subsequent event reporting
period that require recognition or disclosure in the financial
statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
We
operate a chain of 43 Internet Cafés in Shenzhen, Guangdong, China. We provide
top quality internet café facilities and are the largest internet café chain in
Shenzhen.
We
provide internet access at reasonable prices to students and migrant workers.
Although we sell snacks, drinks, and game access cards, over 95% of our revenue
comes from selling access time to our computers.
For the
fiscal year ended December 31, 2009, our revenue was $14,038,931 and our net
profit was $4,388,449, representing an increase of 38.89% and 45.62%,
respectively, from the previous fiscal year. For the three months ended
September 30, 2010, our revenue was $5,840,453 and our net profit was
$1,626,270, an increase of 61.43% and 41.44%, respectively, from the
corresponding period of 2009. As of September 30, 2010, we have 510
employees.
Because
our recent operations have been limited to the operations of Junlong, the
discussion below of our performance is based upon the unaudited financial
statements of Junlong for the three-month periods ended September 30, 2010 and
2009 and the audited financial statements of Junlong for the years ended
December 31, 2009 and 2008, which are included in this report.
Principal
Factors Affecting our Financial Performance
We
believe that the following factors will continue to affect our financial
performance:
|
·
|
Improved
Disposable Income. As Shenzhen Government is increasing the minimum
wage, migrant workers who are our major customers will have more
disposable income. We are expecting the inflow of migrant workers to
contribute to our revenue growth.
|
|
·
|
Continued
Internet Café Use. Our business may be adversely affected with
increased home computer and home console ownership. However, the home
computer and console penetration rate is relatively low in China as
compared to that of America and Europe. In addition, young people in China
prefer internet cafes to home computers. We expect the preference will
continue and provide us sustainable
business.
|
Recent
Developments
On July
2, 2010, we completed a reverse acquisition transaction through a share exchange
with Classic Bond and its shareholders, whereby we acquired 100% of the issued
and outstanding capital stock of Classic Bond, in exchange for 19,000,000 shares
of our common stock, which shares constituted 94% of our issued and outstanding
shares on a fully-diluted basis, as of and immediately after the consummation of
the reverse acquisition. As a result of the reverse acquisition, Classic Bond
became our wholly-owned subsidiary and the former shareholders of Classic Bond,
became our controlling stockholder. See “Corporate Structure and History – Our
Corporate History and Background – Acquisition of Classic Bond” above for more
information regarding Classic Bond, its subsidiary and controlled
VIE.
For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition, with Classic Bond as the acquirer and China Unitech as the acquired
party.
In April,
2010, we acquired two new cafes in Longgang district. Lanman internet cafe
opened On 6th April,
which has 231 computers with 10 employees; Chaosu internet cafe opened on
16th
April , which has 240 computers with 14 employees, in July, 2010, we acquired
one new cafes in Baoan district, Gainianshikong internet cafe opened on 11th July,
which has 214 computers with 10 employees. In the first nine months of 2010, we
opened 12 internet cafes, as a result, we have 43 internet cafes located in
Shenzhen City.
Taxation
United
States
China
Unitech is subject to United States tax at a tax rate of 34%. No provision for
income taxes in the United States has been made as we had no taxable income for
2009 and 2008.
British Virgin
Islands
Classic
Bond was incorporated in the BVI and under the current laws of the BVI, is not
subject to income taxes.
China
Zhonghefangda
is subject to payment of a 5% business tax on its revenue.
Junlong
was subject to an 18% Enterprise Income Tax, or EIT in 2008, 20% in 2009, and
22% in 2010.
China
passed a new Enterprise Income Tax Law, or the EIT Law, and its implementing
rules, both of which became effective on January 1, 2008. The EIT Law and its
implementing rules generally provide that a 10% withholding tax applies to
China-sourced income derived by non-resident enterprises for PRC enterprise
income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. In addition, under the EIT Law, we may be
deemed to be a “resident enterprise,” as discussed in “Risk Factors – Under the
EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.”
We incurred income taxes of $572,302 for the period ended September
30, 2010, which is $281,144 or 96.56% more than the taxes we incurred in the
same period in 2009. It was due to revenue increase because business expansion.
The increase was also caused by the increase of income tax rate from 20% in 2009
to 22% in 2010. We incurred income taxes of $1,068,262 for the year ended
December 31, 2009, an increase of $461,210 or 63.83% from the taxes we incurred
in the same 2008 period, which were $652,052. This increase in taxes was due to
new internet cafes opened and income tax rate rise from 18% in 2008 to 20% in
2009.
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.
CHINA
UNITECH GROUP, INC.
|
|
|
UNAUDITED
|
|
|
For
The Three
Months
Ended
|
|
|
|
|
|
|
|
|
For
The Nine
Months
Ended
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
|
|
|
|
|
September
30
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Comparison
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Comparison
|
|
|
|
|
Revenue
|
|
$ |
5,840,453 |
|
|
$ |
3,617,873 |
|
|
|
2,222,580 |
|
|
|
61.43 |
% |
|
$ |
14,142,866 |
|
|
$ |
10,417,633 |
|
|
|
3,725,233 |
|
|
|
35.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
442,104 |
|
|
|
331,588 |
|
|
|
2,116 |
|
|
|
0.48 |
% |
|
|
1,132,103 |
|
|
|
944,775 |
|
|
|
187,328 |
|
|
|
19.83 |
% |
Salary
|
|
|
342,695 |
|
|
|
201,586 |
|
|
|
141,109 |
|
|
|
70.00 |
% |
|
|
831,226 |
|
|
|
588,123 |
|
|
|
243,103 |
|
|
|
41.34 |
% |
Rent
|
|
|
306,243 |
|
|
|
206,545 |
|
|
|
99,698 |
|
|
|
48.27 |
% |
|
|
748,723 |
|
|
|
608,256 |
|
|
|
140,467 |
|
|
|
23.09 |
% |
Utility
|
|
|
397,630 |
|
|
|
351,489 |
|
|
|
46,141 |
|
|
|
13.13 |
% |
|
|
1,111,843 |
|
|
|
1,009,105 |
|
|
|
102,738 |
|
|
|
10.18 |
% |
Business
tax and surcharge
|
|
|
1,381,435 |
|
|
|
855,433 |
|
|
|
526,002 |
|
|
|
61.49 |
% |
|
|
3,344,906 |
|
|
|
2,463,347 |
|
|
|
881,559 |
|
|
|
35.79 |
% |
Others
|
|
|
260,197 |
|
|
|
194,275 |
|
|
|
174,322 |
|
|
|
203.00 |
% |
|
|
629,068 |
|
|
|
625,476 |
|
|
|
3,592 |
|
|
|
0.57 |
% |
|
|
|
3,130,304 |
|
|
|
2,140,916 |
|
|
|
989,388 |
|
|
|
46.21 |
% |
|
|
7,797,869 |
|
|
|
6,239,082 |
|
|
|
1,558,787 |
|
|
|
24.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,710,149 |
|
|
|
1,476,957 |
|
|
|
1,233,192 |
|
|
|
83.50 |
% |
|
|
6,344,997 |
|
|
|
4,178,551 |
|
|
|
2,166,446 |
|
|
|
51.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
75,906 |
|
|
|
36,395 |
|
|
|
39,511 |
|
|
|
108.56 |
% |
|
|
351,888 |
|
|
|
114,732 |
|
|
|
237,156 |
|
|
|
206.70 |
% |
Reorganizational
expenses
|
|
|
435,086 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
435,086 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
510,992 |
|
|
|
36,395 |
|
|
|
474,597 |
|
|
|
1304.02 |
% |
|
|
786,974 |
|
|
|
114,732 |
|
|
|
672,242 |
|
|
|
585.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,199,157 |
|
|
|
1,440,562 |
|
|
|
758,595 |
|
|
|
52.66 |
% |
|
|
5,558,023 |
|
|
|
4,063,819 |
|
|
|
1,494,204 |
|
|
|
36.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,827 |
|
|
|
452 |
|
|
|
1,375 |
|
|
|
304.20 |
% |
|
|
4,287 |
|
|
|
811 |
|
|
|
3,476 |
|
|
|
428.61 |
% |
Interest
expenses
|
|
|
-2,402 |
|
|
|
- |
|
|
|
-2,402 |
|
|
|
|
|
|
|
-7,115 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
-10 |
|
|
|
-93 |
|
|
|
83 |
|
|
|
-89.25 |
% |
|
|
-43 |
|
|
|
-252 |
|
|
|
209 |
|
|
|
-82.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
-585 |
|
|
|
359 |
|
|
|
-944 |
|
|
|
-262.95 |
% |
|
|
-2,871 |
|
|
|
559 |
|
|
|
-3,430 |
|
|
|
-613.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
2,198,572 |
|
|
|
1,440,921 |
|
|
|
757,651 |
|
|
|
52.58 |
% |
|
|
5,555,152 |
|
|
|
4,064,378 |
|
|
|
1,490,774 |
|
|
|
36.68 |
% |
Income
taxes
|
|
|
572,302 |
|
|
|
291,158 |
|
|
|
281,144 |
|
|
|
96.56 |
% |
|
|
1,340,823 |
|
|
|
788,198 |
|
|
|
552,625 |
|
|
|
70.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,626,270 |
|
|
$ |
1,149,763 |
|
|
|
476,507 |
|
|
|
41.44 |
% |
|
$ |
4,214,329 |
|
|
$ |
3,276,180 |
|
|
|
938,149 |
|
|
|
28.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
209,872 |
|
|
|
13,261 |
|
|
|
196,611 |
|
|
|
1482.63 |
% |
|
|
229,549 |
|
|
|
8,793 |
|
|
|
220,756 |
|
|
|
2510.59 |
% |
Comprehensive
income
|
|
$ |
1,836,142 |
|
|
$ |
1,163,024 |
|
|
|
673,118 |
|
|
|
57.88 |
% |
|
$ |
4,443,878 |
|
|
$ |
3,284,973 |
|
|
|
1,158,905 |
|
|
|
35.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
|
0.08 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
0.22 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
and Diluted weighted average Common Stock outstanding
|
|
|
20,186,957 |
|
|
|
19,000,000 |
|
|
|
1,186,957 |
|
|
|
6.25 |
% |
|
|
19,400,000 |
|
|
|
19,000,000 |
|
|
|
400,000 |
|
|
|
2.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a Percentage of Sales Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
100.00 |
% |
|
|
73.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
7.57
|
% |
|
|
9.17
|
% |
|
|
|
|
|
|
|
|
|
|
8.00 |
% |
|
|
9.07 |
% |
|
|
|
|
|
|
|
|
Salary
|
|
|
5.87 |
% |
|
|
5.57 |
% |
|
|
|
|
|
|
|
|
|
|
5.88 |
% |
|
|
5.65 |
% |
|
|
|
|
|
|
|
|
Rent
|
|
|
5.24 |
% |
|
|
5.71 |
% |
|
|
|
|
|
|
|
|
|
|
5.29 |
% |
|
|
5.84 |
% |
|
|
|
|
|
|
|
|
Utility
|
|
|
6.81 |
% |
|
|
9.72 |
% |
|
|
|
|
|
|
|
|
|
|
7.86 |
% |
|
|
9.69 |
% |
|
|
|
|
|
|
|
|
Business
tax and surcharge
|
|
|
23.65 |
% |
|
|
23.64 |
% |
|
|
|
|
|
|
|
|
|
|
23.65 |
% |
|
|
23.65 |
% |
|
|
|
|
|
|
|
|
Others
|
|
|
4.46
|
% |
|
|
5.37
|
% |
|
|
|
|
|
|
|
|
|
|
4.45 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
46.40 |
% |
|
|
40.82 |
% |
|
|
|
|
|
|
|
|
|
|
44.86 |
% |
|
|
40.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
8.75 |
% |
|
|
1.01 |
% |
|
|
|
|
|
|
|
|
|
|
5.56 |
% |
|
|
1.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
37.65 |
% |
|
|
39.82 |
% |
|
|
|
|
|
|
|
|
|
|
39.30 |
% |
|
|
39.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
0.03 |
% |
|
|
0.01 |
% |
|
|
|
|
|
|
|
|
|
|
0.03 |
% |
|
|
0.01 |
% |
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
-0.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
-0.01 |
% |
|
|
0.01 |
% |
|
|
|
|
|
|
|
|
|
|
-0.02 |
% |
|
|
0.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
37.64 |
% |
|
|
39.83 |
% |
|
|
|
|
|
|
|
|
|
|
39.28 |
% |
|
|
39.01 |
% |
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
9.80 |
% |
|
|
8.05 |
% |
|
|
|
|
|
|
|
|
|
|
9.48 |
% |
|
|
7.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
27.84 |
% |
|
|
31.78 |
% |
|
|
|
|
|
|
|
|
|
|
29.80 |
% |
|
|
31.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
3.59 |
% |
|
|
0.37 |
% |
|
|
|
|
|
|
|
|
|
|
1.62 |
% |
|
|
0.08 |
% |
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
31.44 |
% |
|
|
32.15 |
% |
|
|
|
|
|
|
|
|
|
|
31.42 |
% |
|
|
31.53 |
% |
|
|
|
|
|
|
|
|
Revenue. Our revenue
is generated from sales of prepaid IC cards. Sales revenue increased $2,222,580,
or 61.43%, to $5,840,453 for the three months ended September 30, 2010 from
$3,617,873 for the same period in 2009. The increase was mainly because of the
revenue generated by the new cafes opened in 2010.
Cost of Revenue. Our
cost of sales is primarily comprised of the costs of our facilities, computers,
accessories, utilities, labor and overhead. Our cost of sales increased
$989,388, or 46.21%, to $3,130,304 for the three months ended September 30, 2010
from $2,140,916 during the same period in 2009. The increase was mainly
attributable to increase of labor cost and utility expenses in the first three
months of 2010 as compared to the same period in 2009.
Gross Profit. Our
gross profit is equal to the difference between our sales revenue and our cost
of sales. Our gross profit increased $1,233,192, or 83.50%, to $2,710,149 for
the three months ended September 30, 2010 from $1,476,957 for the same period in
2009. Gross profit as a percentage of sales revenue was 46.40% for the three
months ended September 30, 2010, as compared to 40.82% during the same period in
2009. The improvement of our gross profit margin was mainly attributable to
computer usage increase in the first three months of 2010 as compared to the
same period in 2009.
Operating Expenses.
Our administrative expenses consist of the costs associated with staff and
support personnel who manage our business activities. Our administrative
expenses increased $39,511, or 108.56%, to $75,906 for the three months ended
September 30, 2010 from $36,395 for the same period in 2009. The increase was
mainly attributable to expenses of listing company.
Our
reorganizational expenses increased $435,086 from $0 for the three months ended
September 30, 2010 for the same period in 2009, the increase was mainly
attributable to the amount occurred in the set up of VIE structure and the
purchase of shell company.
Non-operating
Expenses. Our Non-operating expenses increased $944, to $585 for the
three months ended September 30, 2010 from $359 operating income for the same
period in 2009. In the 2010 period, we incurred interest expenses of $2,402 on
the RMB 1 million (approximately $147,058) loan from China Construction Bank
Shenzhen Branch, while in the 2009 period we received interest income of $452
from bank balances.
Income before Income
Taxes. Income before income taxes increased $757,651, or 52.58%, to
$2,198,572for the three months ended September 30, 2010 from $1,440,921 for the
same period in 2009. The increase of income before income tax was mainly
attributable to business expansion. Income before income taxes as a percentage
of sales revenue dropped to 37.64% for the three months ended September 30,
2010, as compared to 39.83% for the same period in 2009 due to the occurrence of
reorganizational expenses described above.
Income Taxes. Our
income taxes increased to $572,302 during the three months ended September 30,
2010 from $291,158 during the same period in 2009.
Net Income. Our net
income increased $476,507, or 41.44%, to $1,626,270 during the three months
ended September 30, 2010 from $1,149,763 during the same period in 2009, as a
result of the factors described above.
Comparison
of Nine Months Ended September 30, 2010 and 2009
Revenue. Sales
revenue increased $3,725,233, or 35.76%, to $14,142,866 for the nine months
ended September 30, 2010 from $10,417,633 for the same period in 2009. The
increase was mainly because of the revenue generated by the new cafes opened in
2010.
Cost of Revenue. Our
cost of sales increased $1,558,787, or24.98%, to $7,797,869 for the nine months
ended September 30, 2010 from $6,239,082 during the same period in 2009. The
increase was mainly attributable to increase of labor cost and business tax and
surcharge in the first nine months of 2010 as compared to the same period in
2009.
Gross Profit. Our
gross profit increased $2,166,446, or 51.85%, to $6,344,997 for the nine months
ended September 30, 2010 from $4,178,551 for the same period in 2009. Gross
profit as a percentage of sales revenue was 44.86% for the nine months ended
September 30, 2010, as compared to40.11% during the same period in 2009. The
improvement of our gross profit margin was mainly attributable to computer usage
increase in the first nine months of 2010 as compared to the same period in
2009.
Operating Expenses.
Our administrative expenses consist of the costs associated with staff and
support personnel who manage our business activities. Our administrative
expenses increased $237,156, or 206.70%, to $351,888 for the nine months ended
September 30, 2010 from $114,732 for the same period in 2009. The increase was
mainly attributable to expenses of listing company.
Non-operating
Expenses. Our Non-operating expenses increased $3430, to $2871 for the
nine months ended September 30, 2010 from $559 operating income for the same
period in 2009. In the 2010 period, we incurred interest expenses of $7,115 on
the RMB 1 million (approximately $147,058) loan from China Construction Bank
Shenzhen Branch, while in the 2009 period we received interest income of $811
from bank balances.
Income before Income
Taxes. Income before income taxes increased $1,490,774, or 36.68%, to
$5,555,152 for the nine months ended September 30, 2010 from $4,064,378 for the
same period in 2009. The increase of income before income tax was mainly
attributable to business expansion. Income before income taxes as a percentage
of sales revenue increased to 39.28% for the three months ended September 30,
2010, as compared to 39.01% for the same period in 2009 due to the factors
described above.
Income Taxes. Our
income taxes increased to $1,340,823 during the nine months ended September 30,
2010 from $788,198 during the same period in 2009.
Net Income. Our net
income increased $938,149, or 28.64%, to $4,214,329 during the nine months ended
September 30, 2010 from $3,279,180 during the same period in 2009, as a result
of the factors described above.
Liquidity and Capital
Resources
As of
September 30, 2010, we had cash and cash equivalents of $6,409,048 and
restricted cash of $1,679,581. The following table provides detailed information
about our net cash flow for all financial statements periods presented in this
report.
Cash
Flow
|
|
Nine Months
Ended
|
|
|
Fiscal Year
Ended
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
6,008,299 |
|
|
$ |
3,642,042 |
|
|
$ |
4,781,464 |
|
|
$ |
4,945,741 |
|
Net
cash used in investing activities
|
|
|
(3,332,067
|
) |
|
|
(1,215,347
|
) |
|
|
(2,988,697
|
) |
|
|
(1,518,823
|
) |
Net
cash provided by (used in) financing activities
|
|
|
553,054 |
|
|
|
0 |
|
|
|
146,180 |
|
|
|
(2,872,635
|
) |
Effect
of Foreign currency translation on cash and cash
equivalents
|
|
|
117,906 |
|
|
|
4,442 |
|
|
|
3,811 |
|
|
|
42,865 |
|
Net
cash flows
|
|
|
3,347,192 |
|
|
|
2,431,137 |
|
|
|
1,942,758 |
|
|
|
606,148 |
|
Operating
Activities
Net cash
provided by operating activities was $6,008,299 for the three months ended
September 30, 2010, as compared to $3,642,042 net cash provided by operating
activities for the same period in 2009. The change was mainly attributable to
increase in income tax payable and amount due to a director for advances made by
the director
Investing
Activities
Net cash
used in investing activities was $3,332,067 for the three months ended September
30, 2010, as compared to $1,215,347 net cash used in investing activities for
the same period in 2009. The change was mainly attributable to acquisition of
cafes and leasehold improvement.
Financing
Activities
Net cash
provided by financing activities was $553,054 in 3 months ended September 30,
2010, as compared to $0 net cash used in financing activities in the same period
in 2009. The change was mainly due to shareholder’s capital contribution and
proceeds from short term loan.
On July
1, 2010, the company entered into a loan agreement with Shenzhen Yuzhilu
Aviation Service Co., Ltd for $300,000 for purchasing the shell company. This
loan will mature on October 1, 2010.
As of
September 30, 2010, we had a one-year loan, extended by China Construction Bank
Shenzhen Branch, in the principal amount of $149,296 outstanding. This loan will
mature on October 25, 2010.
We
believe that we maintain good relationships with the various banks we deal with
and our current available working capital, after receiving the aggregate
proceeds from our planned capital raising activities and bank loans referenced
above, should be adequate to sustain our operations at our current levels
through at least the next twelve months.
Obligations under Material
Contracts
We are
party to a Loan Agreement with China Construction Bank Shenzhen Branch entered
into in October 2009 for a loan of RMB 1 million (approximately
$149,296).
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements.
Revenue
recognition
Internet
café members purchase prepaid IC cards which include stored value that will be
deducted based on time usage of computer at the internet cafe. Revenues derived
from the prepaid IC cards at the internet café are recognized when services are
provided. This is based upon usage of computer time at the internet cafe.
Outstanding customer balances in the IC cards are included in deferred revenue
on the balance sheets. The Company does not charge any service fees that cause a
decrement to customer balances. There is no expiration date for IC
cards.
The
Company also records revenue from commission received from the sale of third
parties on-line gaming cards, snacks and drinks. Commission revenue amounting to
20% of the value of the on-line gaming cards, snacks and drinks is recognized at
the time the gaming cards, etc. are sold to customers.
Cost
of goods sold
Cost of
goods sold consists primarily of depreciation of Café computer equipment and
hardware, overhead associated with the internet cafes, including rental
payments, utilities, business tax and surcharge. Companies in China are
generally subject to business tax and related surcharges by various local tax
authorities at rates ranging from 5% to 6% on gross revenue generated from
internet cafés.
Credit risk
The
Company may be exposed to credit risk from its cash at bank. An allowance has
been considered for estimated irrecoverable amounts determined by reference to
past default experience and the current economic environment. No allowance is
considered necessary for the period.
Cash
and cash equivalents
Cash and
cash equivalents include cash on hand, cash accounts, interest bearing savings
accounts and time certificates of deposit with a maturity of three months or
less when purchased.
At
September 30, 2010, restricted cash of $1,679,581 represented cash held by two
escrow agents on behalf of the company for registered capital and operating cash
flow purposes of two new subsidiary companies to be established in Yiwu city,
Zhejiang province and Anshun city, Guizhou province.
Inventory
Inventory
represented the IC cards we purchased from IC cards manufacturer. Inventories
are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out (FIFO) method.
Fair Value of Financial
Instruments
FASB
accounting standard requires disclosing fair value to the extent practicable for
financial instruments that are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or
settlement.
For
certain financial instruments, including cash, accounts payable, short-term
loans, accruals and other payables, it was assumed that the carrying amounts
approximate fair value because of the near term maturities of such
obligations.
Property,
plant and equipment
Fixed
assets, comprising computer equipment and hardware, leasehold improvements,
office furniture and vehicles and are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives listed below.
|
|
Estimated Useful Lives
|
Leasehold
improvement
|
|
Lesser
of term of the lease or the estimated useful lives of the
assets
|
Café
computer equipment and hardware
|
|
5
years
|
Café
furniture and fixtures
|
|
5
years
|
Office
furniture, fixtures and equipments
|
|
5
years
|
Motor
vehicles
|
|
5
years
|
Deferred Revenue
Deferred
revenue represents amounts from the IC cards that are unused balance. The
Outstanding customer balances are $659,600 and $775,985 as at September 30, 2010
and in the same period in 2009 and are included in deferred revenue on the
balance sheets.
The
Company follows the FASB’s accounting standard. Comprehensive income is defined
as the change in equity of a company during a period from transactions and other
events and circumstances excluding transactions resulting from investments from
owners and distributions to owners. For the Company, comprehensive income for
the periods presented includes net income and foreign currency translation
adjustments.
Income
taxes
Income
taxes are provided on an asset and liability approach for financial accounting
and reporting of income taxes. Current tax is based on the profit or loss from
ordinary activities adjusted for items that are non-assessable or disallowable
for income tax purpose and is calculated using tax rates that have been enacted
or substantively enacted at the balance sheet date. Deferred income tax
liabilities or assets are recorded to reflect the tax consequences in future
differences between the tax basis of assets and liabilities and the financial
reporting amounts at each year end. A valuation allowance is recognized if it is
more likely than not that some portion, or all, of a deferred tax asset will not
be realized.
Foreign
currency translation
Assets
and liabilities of the Company with a functional currency other than US$ are
translated into US$ using period end exchange rates. Income and expense items
are translated at the average exchange rates in effect during the period.
Foreign currency translation differences are included as a component of
Accumulated Other Comprehensive Income in Stockholders’ Equity.
The
exchange rates used to translate amounts in RMB into USD for the purposes of
preparing the consolidated financial statements were as follows:
|
|
3 months
ended
September 30,
2010
|
|
|
2009
|
|
Year
end RMB : USD exchange rate
|
|
|
6.6981 |
|
|
|
6.8372 |
|
Average
yearly RMB : USD exchange rate
|
|
|
6.8164 |
|
|
|
6.8409 |
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into USD at
the rates used in translation.
Post-retirement and post-employment
benefits
The
Company contributes to a state pension plan in respect of its PRC employees.
Other than the above, neither the Company nor its subsidiary provides any other
post-retirement or post-employment benefits.
Earnings
of $0.08 per share has been calculated based on the weighted average number of
20,186,957 shares outstanding during the period compared to $0.06 earnings per
share calculated based on the weighted average number of 19,000,000
shares.
Retained
earnings-appropriated
In
accordance with the relevant PRC regulations and the Company’s PRC articles of
association, Junlong is required to allocate their respective net income to
statutory surplus reserve.
Statutory
surplus reserve
In
accordance with the relevant laws and regulations of the PRC and the articles of
associations of the Company, Junlong is required to allocate 10% of their net
income reported in the PRC statutory accounts, after offsetting any prior years’
losses, to the statutory surplus reserve, on an annual basis. When the balance
of such reserve reaches 50% of the respective registered capital of the
subsidiaries, any further allocation is optional.
The
statutory surplus reserves can be used to offset prior years’ losses, if any,
and may be converted into registered capital, provided that the remaining
balances of the reserve after such conversion is not less than 25% of registered
capital. The statutory surplus reserve is non-distributable.
Recently
issued accounting pronouncements
Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) issued a standard that
established the FASB Accounting Standards Codification (the “ASC”), which
effectively amended the hierarchy of U.S. generally accepted accounting
principles (“GAAP”) and established only two levels of GAAP, authoritative and
non-authoritative. All previously existing accounting standard documents were
superseded, and the ASC became the single source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the
Securities and Exchange Commission (“SEC”), which are sources of authoritative
GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting
literature not included in the ASC became non-authoritative. The ASC was
intended to provide access to the authoritative guidance related to a particular
topic in one place. New guidance issued subsequent to June 30, 2009 will be
communicated by the FASB through Accounting Standards Updates. The ASC was
effective for financial statements for interim or annual reporting periods
ending after September 15, 2009. We adopted and applied the provisions of the
ASC for the Company’s fiscal year ended December 31, 2009, and have eliminated
references to pre-ASC accounting standards throughout the financial statements.
The adoption of the ASC did not have a material impact on the Company’s
financial statements.
Our
operating results and operating cash flows historically have not been subject to
seasonal variations. There are moderate impacts on our business during major
national holidays such as the Spring Festival and National Day. This pattern may
change, however, as a result of new market opportunities or new product
introductions.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
We
currently do not hold or use any derivative or other financial instruments that
expose us to substantial market risk and we have no foreign exchange
contracts.
We are
exposed to foreign exchange risk arising from fluctuations in the exchange rate
between U.S. Dollars and Renminbi. Our operations are located in the People’s
Republic of China and substantially all of our revenues and assets are
denominated in Renminbi. However our reporting currency is the U.S.Dollar and
some of our expenses are denominated in U.S. Dollars. As a result, our financial
results are potentially subject to the impact of changes in value between U.S.
Dollars and Renminbi. If the Renminbi depreciates relative to the U.S. Dollar,
the value of our revenues, earnings and assets as reported in our financial
statements will decline.
Item
4. Controls and Procedures.
Evaluation
of our Disclosure Controls
As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.
Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance level.
Changes
in internal control over financial reporting
There
have been no changes in our internal controls over financial reporting during
our third fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item 1. Legal
Proceedings.
Item
1A. Risk Factors
There
have not been any material changes to the Company’s risk factors from our Annual
Report on Form 10-K/A on October 27, 2010.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. (Removed and Reserved).
Item
5. Other Information
Not
applicable.
Item
6. Exhibits
Copies of
the following documents are included as exhibits to this report pursuant to Item
601 of Regulation S-K.
Exhibit No.
|
|
SEC Ref. No.
|
|
Title of Document
|
1
|
|
31.1
|
|
Certification
of the Principal Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 *
|
|
|
|
|
|
2
|
|
32.1
|
|
Certification
of the Principal Executive Officer and Principal Financial Officer
pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of
2002*
|
* The Exhibits attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
SIGNATURES
In
accordance with the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
CHINA
UNITECH GROUP, INC.
|
|
|
|
|
Date:
November 15, 2010
|
/s/
Dishan Guo
|
|
Dishan
Guo
|
|
Chief
Executive Officer, President
(Principal
Executive Officer) and
Chief
Financial Officer
(Principal
Financial and
Accounting Officer)
|