U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT NO. 1
TO
FORM
10-Q
(Mark
one)
x
|
Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
Quarterly Period Ended March 31, 2009
or
o
|
Transition
Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
Commission
File Number 000-50491
China
Fire & Security Group, Inc.
(Name of
small business issuer in its charter)
Florida
|
65-1193022
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
B-2508
TYG Center, C2
Dongsanhuanbeilu,
Chaoyang
District, Beijing 100027,
People’s
Republic of China
|
100027
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Issuer’s
telephone number: (86-10) 8441 7400.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
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 ¨ No
¨
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. (Check one):
Large
accelerated filer ¨
|
|
Accelerated
filer x
|
|
|
|
Non-accelerated
filer ¨
|
|
|
(Do
not check if smaller reporting company)
|
|
Smaller
reporting company ¨
|
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
As of May
11, 2009, the registrant had 27,586,593 shares of common stock
outstanding.
EXPLANATORY
NOTE
This
Amendment No. 1 to our Quarterly Report on Form 10-Q initially filed with the
Securities and Exchange Commission (the “Commission”) on May 11, 2009 is being
filed in response to the Commission’s comment letter dated November 6, 2009 in
order to amend management’s conclusion of the effectiveness of the registrant’s
disclosure controls and procedures.
China
Fire & Security Group, Inc.
Table of
Contents
|
|
|
Page
|
PART
I -
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements (unaudited):
|
|
3
|
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2009 (unaudited) and December 31,
2008
|
|
3
|
|
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income For the Three Months
Ended March 31, 2009 and 2008
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
5
|
|
|
|
|
|
Consolidated
Statements of Cash Flows For the Three Months Ended March 31, 2009 and
2008
|
|
6
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
7
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
32
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
38
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
38
|
|
|
|
|
PART II -
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
39
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
39
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
39
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
|
39
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
|
39
|
|
|
|
|
Item
5.
|
Other
Information
|
|
39
|
|
|
|
|
Item
6.
|
Exhibits
|
|
39
|
Item
1. Financial Statements
CONSOLIDATED
BALANCE SHEETS
AS OF
MARCH 31, 2009 AND DECEMBER 31, 2008
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
29,356,116
|
|
|
$
|
26,655,333
|
|
Restricted
cash
|
|
|
4,212,181
|
|
|
|
5,377,933
|
|
Notes
receivable
|
|
|
1,031,811
|
|
|
|
3,670,259
|
|
Accounts
receivable, net of allowance for doubtful accounts of $4,642,324 and
$4,370,362 as of March 31, 2009 and December 31, 2008,
respectively
|
|
|
26,588,723
|
|
|
|
25,826,343
|
|
Receivables
from related party
|
|
|
503,544
|
|
|
|
466,223
|
|
Other
receivables
|
|
|
1,663,413
|
|
|
|
1,532,259
|
|
Inventories
|
|
|
6,027,870
|
|
|
|
6,538,938
|
|
Costs
and estimated earnings in excess of billings
|
|
|
22,953,939
|
|
|
|
17,821,708
|
|
Employee
advances
|
|
|
1,236,897
|
|
|
|
743,868
|
|
Prepayments
and deferred expenses
|
|
|
2,389,344
|
|
|
|
2,816,976
|
|
Total
current assets
|
|
|
95,963,838
|
|
|
|
91,449,840
|
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
8,540,571
|
|
|
|
8,445,254
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Restricted
cash - non current
|
|
|
2,602,073
|
|
|
|
1,872,828
|
|
Accounts
receivable - retentions
|
|
|
1,363,980
|
|
|
|
1,107,450
|
|
Advances
on building and equipment purchases
|
|
|
—
|
|
|
|
249,859
|
|
Investment
in joint ventures
|
|
|
1,167,010
|
|
|
|
1,167,238
|
|
Intangible
assets, net of accumulated amortization
|
|
|
1,096,800
|
|
|
|
1,116,449
|
|
Total
other assets
|
|
|
6,229,863
|
|
|
|
5,513,824
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
110,734,272
|
|
|
$
|
105,408,918
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
6,023,062
|
|
|
$
|
6,664,090
|
|
Customer
deposits
|
|
|
5,138,306
|
|
|
|
6,102,026
|
|
Billings
in excess of costs and estimated earnings
|
|
|
2,780,379
|
|
|
|
4,237,528
|
|
Other
payables
|
|
|
399,556
|
|
|
|
837,973
|
|
Accrued
liabilities
|
|
|
7,795,775
|
|
|
|
6,785,409
|
|
Taxes
payable
|
|
|
4,195,612
|
|
|
|
2,092,745
|
|
Total
current liabilities
|
|
|
26,332,690
|
|
|
|
26,719,771
|
|
|
|
|
|
|
|
|
|
|
FAIR
VALUE OF DERIVATIVE INSTRUMENTS
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 65,000,000 shares authorized, 27,586,593 shares
issued and outstanding as of March 31, 2009 and December 31,
2008
|
|
|
27,586
|
|
|
|
27,586
|
|
Additional
paid-in-capital
|
|
|
19,602,458
|
|
|
|
19,357,409
|
|
Statutory
reserves
|
|
|
7,148,827
|
|
|
|
7,148,827
|
|
Retained
earnings
|
|
|
50,495,784
|
|
|
|
44,850,181
|
|
Accumulated
other comprehensive income
|
|
|
7,126,927
|
|
|
|
7,305,144
|
|
Total
shareholders' equity
|
|
|
84,401,582
|
|
|
|
78,689,147
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
110,734,272
|
|
|
$
|
105,408,918
|
|
The
accompanying notes are an integral part of these consolidated
statements.
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Unaudited)
|
|
Three Months Ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
REVENUES
|
|
|
|
|
|
|
System
contracting projects
|
|
$
|
13,003,184
|
|
|
$
|
11,329,380
|
|
Products
|
|
|
3,124,322
|
|
|
|
2,881,171
|
|
Maintenance
services
|
|
|
584,705
|
|
|
|
486,075
|
|
Total
revenues
|
|
|
16,712,211
|
|
|
|
14,696,626
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
|
|
|
|
|
|
System
contracting projects
|
|
|
4,807,258
|
|
|
|
5,570,210
|
|
Products
|
|
|
1,211,653
|
|
|
|
841,882
|
|
Maintenance
services
|
|
|
396,541
|
|
|
|
240,139
|
|
Total
cost of revenues
|
|
|
6,415,452
|
|
|
|
6,652,231
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
10,296,759
|
|
|
|
8,044,395
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSE
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
1,902,318
|
|
|
|
1,162,062
|
|
General
and administrative
|
|
|
1,680,639
|
|
|
|
1,798,710
|
|
Depreciation
and amortization
|
|
|
193,394
|
|
|
|
167,262
|
|
Research
and development
|
|
|
314,030
|
|
|
|
266,649
|
|
Total
operating expense
|
|
|
4,090,381
|
|
|
|
3,394,683
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
6,206,378
|
|
|
|
4,649,712
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
111,953
|
|
|
|
111,350
|
|
Other
expense
|
|
|
(1,257
|
)
|
|
|
—
|
|
Interest
income
|
|
|
122,096
|
|
|
|
28,360
|
|
Total
other income (expense), net
|
|
|
232,792
|
|
|
|
139,710
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
6,439,170
|
|
|
|
4,789,422
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
793,567
|
|
|
|
48,642
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
5,645,603
|
|
|
|
4,740,780
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(178,217
|
)
|
|
|
2,066,916
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
5,467,386
|
|
|
$
|
6,807,696
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
27,586,593
|
|
|
|
27,556,893
|
|
Earnings
per share
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
28,210,911
|
|
|
|
28,153,181
|
|
Earnings
per share
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
The
accompanying notes are an integral part of these consolidated
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
paid-in-capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
|
27,556,893
|
|
|
$
|
27,556
|
|
|
$
|
19,317,287
|
|
|
$
|
5,067,061
|
|
|
$
|
22,228,095
|
|
|
$
|
3,568,117
|
|
|
$
|
50,208,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,740,780
|
|
|
|
|
|
|
|
4,740,780
|
|
Options
issued to employees
|
|
|
|
|
|
|
|
|
|
|
22,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,431
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,066,916
|
|
|
|
2,066,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2008 (Unaudited)
|
|
|
27,556,893
|
|
|
$
|
27,556
|
|
|
$
|
19,339,718
|
|
|
$
|
5,067,061
|
|
|
$
|
26,968,875
|
|
|
$
|
5,635,033
|
|
|
$
|
57,038,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,963,072
|
|
|
|
|
|
|
|
19,963,072
|
|
Warrants
exercised
|
|
|
29,700
|
|
|
|
30
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Options
issued to employees
|
|
|
|
|
|
|
|
|
|
|
17,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,721
|
|
Adjustment
on statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,081,766
|
|
|
|
(2,081,766
|
)
|
|
|
|
|
|
|
—
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,670,111
|
|
|
|
1,670,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008
|
|
|
27,586,593
|
|
|
$
|
27,586
|
|
|
$
|
19,357,409
|
|
|
$
|
7,148,827
|
|
|
$
|
44,850,181
|
|
|
$
|
7,305,144
|
|
|
$
|
78,689,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,645,603
|
|
|
|
|
|
|
|
5,645,603
|
|
Options
issued to employees
|
|
|
|
|
|
|
|
|
|
|
245,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,049
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(178,217
|
)
|
|
|
(178,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2009 (Unaudited)
|
|
|
27,586,593
|
|
|
$
|
27,586
|
|
|
$
|
19,602,458
|
|
|
$
|
7,148,827
|
|
|
$
|
50,495,784
|
|
|
$
|
7,126,927
|
|
|
$
|
84,401,582
|
|
The
accompanying notes are an integral part of these consolidated
statements.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Unaudited)
|
|
Three Months Ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,645,603
|
|
|
$
|
4,740,780
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
200,767
|
|
|
|
169,388
|
|
Amortization
|
|
|
18,819
|
|
|
|
18,848
|
|
Provision
for doubtful accounts
|
|
|
277,940
|
|
|
|
428,347
|
|
Gain
on disposal of equipment
|
|
|
(2,330
|
)
|
|
|
(31,252
|
)
|
Stock
compensation to employees
|
|
|
245,049
|
|
|
|
22,431
|
|
Provision
for estimated warranty claims
|
|
|
15,196
|
|
|
|
—
|
|
Change
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Notes
receivable
|
|
|
2,633,623
|
|
|
|
(405,036
|
)
|
Accounts
receivable
|
|
|
(1,333,640
|
)
|
|
|
536,779
|
|
Receivables
from related party
|
|
|
(37,960
|
)
|
|
|
—
|
|
Other
receivables
|
|
|
(133,251
|
)
|
|
|
(429,507
|
)
|
Inventories
|
|
|
502,187
|
|
|
|
(73,543
|
)
|
Costs
and estimated earnings in excess of billings
|
|
|
(5,156,880
|
)
|
|
|
(6,661,383
|
)
|
Employee
advances
|
|
|
(494,077
|
)
|
|
|
821,985
|
|
Prepayments
and deferred expenses
|
|
|
491,626
|
|
|
|
(494,952
|
)
|
Accounts
payable
|
|
|
(632,044
|
)
|
|
|
(412,039
|
)
|
Customer
deposits
|
|
|
(955,466
|
)
|
|
|
1,949,752
|
|
Billings
in excess of costs and estimated earnings
|
|
|
(1,451,470
|
)
|
|
|
(3,455,001
|
)
|
Other
payables
|
|
|
(388,150
|
)
|
|
|
368,569
|
|
Accrued
liabilities
|
|
|
1,004,384
|
|
|
|
1,125,132
|
|
Taxes
payable
|
|
|
2,038,035
|
|
|
|
(18,422
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
2,487,961
|
|
|
|
(1,799,124
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(71,018
|
)
|
|
|
(57,661
|
)
|
Proceeds
from sale of equipment
|
|
|
15,278
|
|
|
|
38,968
|
|
Net
cash used in investing activities
|
|
|
(55,740
|
)
|
|
|
(18,693
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change
in restricted cash
|
|
|
426,650
|
|
|
|
(348,582
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
426,650
|
|
|
|
(348,582
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(158,088
|
)
|
|
|
167,872
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
2,700,783
|
|
|
|
(1,998,527
|
)
|
|
|
|
|
|
|
|
|
|
CASH
and CASH EQUIVALENTS, beginning of period
|
|
|
26,655,333
|
|
|
|
17,110,449
|
|
|
|
|
|
|
|
|
|
|
CASH
and CASH EQUIVALENTS, end of period
|
|
$
|
29,356,116
|
|
|
$
|
15,111,922
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
—
|
|
|
$
|
5,510
|
|
Interest
paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Reclassification
of advances on building and equipment purchase to plant and equipment upon
receipt of purchase
|
|
$
|
249,536
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated
statements.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note
1 - Background
China Fire & Security Group
Inc. (the “Company” or “CFSG”), is a Florida corporation. The
Company, through its subsidiaries, is primarily engaged in the design,
development, manufacture and sale of fire protection products and services for
industrial customers in People’s Republic of China (“China”).
Note
2 - Summary of significant accounting policies
The reporting
entity
The
consolidated financial statements of China Fire & Security Group Inc. and
Subsidiaries reflect the activities of the parent and the following
subsidiaries:
Subsidiaries
|
|
Incorporated in
|
|
Ownership
Percentage
|
|
China
Fire Protection Group Inc. (“CFPG”)
|
|
British
Virgin Islands
|
|
|
100
|
%
|
Sureland
Industrial Fire Safety Limited (“Sureland Industrial”)
|
|
People’s
Republic of China
|
|
|
100
|
%
|
Sureland
Industrial Fire Equipment Co. Ltd. (“Sureland Equipment”)
|
|
People’s
Republic of China
|
|
|
100
|
%
|
Tianxiao
Fire Safety Equipment Co., Ltd. (“Tianxiao Equipment”)
|
|
People’s
Republic of China
|
|
|
100
|
%
|
Beijing
Hua An Times Fire Safety Technology Co., Ltd. (“Beijing Hua
An”)
|
|
People’s
Republic of China
|
|
|
100
|
%
|
Basis of
presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material intercompany transactions and balances have been eliminated in
consolidation.
Management
has included all normal recurring adjustments considered necessary to give a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2008 annual report filed on Form
10-K.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Use of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Management believes that the
estimates utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from these estimates.
The
Company’s certain accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from system contracting projects under the percentage-of-completion
method, determining the fair value of stock based compensation and the allowance
of doubtful accounts and warranty expenses. Management evaluates all of its
estimates and judgments on an on-going basis.
Revenue
recognition
Revenue
is recognized when it is probable that the economic benefits will flow to the
Company as follows:
|
1.
|
Revenue from system contracting
projects are recognized using the percentage-of-completion method of
accounting and, therefore, take into account the costs, estimated earnings
and revenue to date on contracts not yet completed. Revenue recognized is
that percentage of the total contract price that cost expended to date
bears to anticipated final total cost, based on current estimates of costs
to complete. Contract costs include all direct material and labor costs
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and depreciation costs. Selling, general,
and administrative costs are charged to expense as incurred. At the time a
loss on a contract becomes known, the entire amount of the estimated
ultimate loss is recognized in the consolidated financial statements.
Claims for additional contract costs are recognized upon a signed change
order from the customer or in accordance with paragraphs 62 and 65 of the
AICPA’S Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction - Type and Certain Production - Type Contracts" ("SOP
81-1").
|
|
2.
|
Revenue from product sales is
recognized when the goods are delivered and title has passed. Product
sales revenue is presented net of a value-added tax (VAT). All of the
Company’s products that are sold in the People’s Republic of China (“PRC”)
are subject to a Chinese value-added tax at a rate of 17% of the gross
sales price. This VAT may be offset by VAT paid by the Company on raw
materials and other materials included in the cost of producing their
finished product.
|
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
|
3.
|
Revenue from the rendering of
Maintenance Services is recognized over the service period on a
straight-line basis.
|
In
accordance with SFAS 48, “Revenue Recognition when Right of Return Exists,”
revenue is recorded net of an estimate of markdowns, price concessions and
warranty costs. Such reserve is based on management’s evaluation of historical
experience, current industry trends and estimated costs.
Enterprise Wide
Disclosure
Almost
all the Company’s products (fire detecting products, fire alarm control device,
and water mist/sprinkler systems) are sold via system contracting projects or as
part of the integrated products sales. The composition of these three types of
products varies significantly from project to project, both in quantity and in
dollar amounts. Although the Company could provide a breakdown of sales
contribution for the Company’s own products for each project, it is almost
impossible to provide revenues for each of the products when the revenue from
each project is recognized based on percentage of completion. More
importantly, the revenues from the Company’s own products do not accurately
reflect the Company’s overall financial performance. The Company is a system
contracting projects provider rather than product vendors who sell their own
products directly or through channels. Therefore, it is not practical
to separately disclose the revenues from external customers for each of the
products.
The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by business lines for
purposes of allocating resources and evaluating financial performance. There are
no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. Based on
qualitative and quantitative criteria established by SFAS 131, “Disclosures
about Segments of an Enterprise and Related Information”, the Company considers
itself to be operating within one reportable segment.
Shipping and
handling
Costs
related to shipping and handling are included in cost of revenue pursuant to
EITF 00-10 “Accounting for Shipping and Handling Fees and
Costs.”
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Foreign currency
translation
The
reporting currency of the Company is the US dollar. The Company uses their local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the unified exchange rate as quoted by
the People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the consolidated statements of shareholders’ equity.
Asset and
liability accounts at March 31, 2009 were translated at 6.83 RMB to $1.00 as
compared to 6.82 RMB at December 31, 2008. Equity accounts were
stated at their historical rate. The average translation rates
applied to income statements accounts for the three months ended March 31, 2009
and 2008 were 6.83 RMB and 7.15 RMB, respectively. Cash flows are also
translated at average translation rates for the period, therefore, amounts
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Historically, the Company has not
entered any currency trading or hedging transactions, although there is no
assurance that the Company will not enter into such transactions in the
future.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets with 5% residual value. Depreciation expense amount to
$200,767 and $169,388 for the three months ended March 31, 2009 and 2008,
respectively.
Estimated
useful lives of the assets are as follows:
|
|
Useful
Life
|
Buildings
and improvements
|
|
40
years
|
Transportation
equipment
|
|
5
years
|
Machinery
|
|
10
years
|
Office
equipment
|
|
5
years
|
Furniture
|
|
5
years
|
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Construction
in progress represents the costs incurred in connection with the construction of
buildings or additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service. Interest incurred during construction is
capitalized into construction in progress. All other interest is expensed as
incurred.
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the
consolidated statements of income. Maintenance, repairs and minor renewals are
charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized.
Long-term
assets of the Company are reviewed at least annually, more often if
circumstances dictate, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
evaluates the periods of depreciation and amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of March 31, 2009, the Company expects these assets to be fully
recoverable.
Plant and
equipment consists of the following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Buildings
and improvements
|
|
$
|
6,430,237
|
|
|
$
|
6,417,304
|
|
Transportation
equipment
|
|
|
2,728,422
|
|
|
|
2,747,038
|
|
Machinery
|
|
|
1,250,364
|
|
|
|
1,249,470
|
|
Office
equipment
|
|
|
1,274,097
|
|
|
|
1,262,426
|
|
Furniture
|
|
|
105,342
|
|
|
|
90,882
|
|
Total
depreciable assets
|
|
|
11,788,462
|
|
|
|
11,767,120
|
|
Less
accumulated depreciation
|
|
|
(3,501,878)
|
|
|
|
(3,321,866)
|
)
|
Construction
in progress
|
|
|
253,987
|
|
|
|
—
|
|
Plant
and equipment, net
|
|
$
|
8,540,571
|
|
|
$
|
8,445,254
|
|
Concentration of
risk
Cash
includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People’s Republic of China and Hong Kong. The Company
maintains balances at financial institutions which, from time to time, may
exceed Hong Kong Deposit Protection Board insured limits for the banks located
in Hong Kong. Balances at financial institutions or state owned banks within the
PRC are not covered by insurance. As of March 31 2009 and December
31, 2008, the Company had deposits (including restricted cash balances) totaling
to $33,258,824 and $30,765,488, respectively, that are not covered by insurance.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any risks on its cash in bank accounts.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in the North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environments
and foreign currency exchange. The Company's results may be adversely affected
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The
Company has no major customer who represents over 10% of the Company’s sales for
the three months ended March 31, 2009. The Company has one major customer who
represents approximately 15% of the Company’s sales for the three months ended
March 31, 2008. Accounts receivable from this customer was $0 as of March 31,
2008.
Cash and cash
equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash and cash equivalents also
include unrestricted time deposits.
Restricted
cash
Restricted
cash represents cash required to be deposited in a separate bank account subject
to withdrawal restrictions by its system contracting projects and product sales
customers to guarantee its contracts will be performed. The deposit cannot be
drawn or transferred by the Company until the restriction period has
expired.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Restricted
cash consists of the following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Restricted
cash
|
|
|
|
|
|
|
Products
sales
|
|
$
|
2,341,856
|
|
|
$
|
1,608,056
|
|
System
contracting projects
|
|
|
4,472,398
|
|
|
|
5,642,705
|
|
Total
restricted cash
|
|
|
6,814,254
|
|
|
|
7,250,761
|
|
Restricted
cash - non current
|
|
|
(2,602,073
|
)
|
|
|
(1,872,828
|
)
|
Restricted
cash - current
|
|
$
|
4,212,181
|
|
|
$
|
5,377,
933
|
|
Inventories
Inventories
are stated at the lower of cost or market, using weighted average
method.
Inventories
consist of the following as of:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Raw
materials
|
|
$ |
860,486 |
|
|
$ |
896,797 |
|
Finished
goods
|
|
|
4,334,897 |
|
|
|
4,597,407 |
|
Work
in progress
|
|
|
832,487 |
|
|
|
1,044,734 |
|
Total
|
|
$ |
6,027,870 |
|
|
$ |
6,538,938 |
|
Raw
materials consist primarily of materials used in production. Finished goods
consist primarily of equipment used in product sales and system contracting
projects. The costs of finished goods include direct costs of raw materials as
well as direct labor used in production. Indirect production costs such as
utilities and indirect labor related to production such as assembling, shipping
and handling costs are also included in the cost of inventory. The
Company reviews its inventories periodically to determine if any reserves are
necessary for potential obsolescence. As of March 31, 2009 and December 31,
2008, the Company determined no reserves are necessary.
Accounts
receivable
Accounts
receivable represents amounts due from customers for products sales, maintenance
services and system contracting projects. Overdue balances are reviewed
regularly by senior management. Reserves are recorded when collection of amounts
due are in doubt. Delinquent account balances are written-off after
management has determined that the likelihood of collection is not probable,
known bad debts are written off against allowance for doubtful accounts when
identified.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Accounts
receivable consists of the following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Accounts
receivable:
|
|
|
|
|
|
|
System
contracting projects
|
|
$
|
18,215,174
|
|
|
$
|
19,167,096
|
|
Maintenance
services
|
|
|
2,704,938
|
|
|
|
3,193,166
|
|
Products
sales
|
|
|
11,674,915
|
|
|
|
8,943,893
|
|
Total
accounts receivable
|
|
|
32,595,027
|
|
|
|
31,304,155
|
|
Allowance
for bad debts
|
|
|
(4,642,324)
|
|
|
|
(4,370,362
|
)
|
Accounts
receivable, net
|
|
|
27,952,703
|
|
|
|
26,933,793
|
|
Accounts
receivable - non-current retentions
|
|
|
(1,363,980)
|
|
|
|
(1,107,450
|
)
|
Accounts
receivable - current
|
|
$
|
26,588,723
|
|
|
$
|
25,826,343
|
|
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the three months ended March 31, 2009 and for the year ended December 31,
2008 is as follows:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
4,370,362
|
|
|
$
|
2,483,359
|
|
Additional
charged to bad debt expense
|
|
|
277,940
|
|
|
|
1,683,336
|
|
Write-off
charged against the allowance
|
|
|
—
|
|
|
|
—
|
|
Foreign
currency translation adjustment
|
|
|
(5,978)
|
|
|
|
203,667
|
|
Ending
allowance for doubtful accounts
|
|
$
|
4,642,324
|
|
|
$
|
4,370,362
|
|
Retentions
held by customers of system contracting projects included in the Company’s
accounts receivable as follows:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Retentions
|
|
|
|
|
|
|
Current
|
|
$
|
3,534,296
|
|
|
$
|
3,685,136
|
|
Non-current
|
|
|
1,363,980
|
|
|
|
1,107,450
|
|
Total
retentions
|
|
$
|
4,898,276
|
|
|
$
|
4,792,586
|
|
These
balances represent portions of billings made by the Company but held for payment
by the customer pending satisfactory completion of the project. Retention
payments are generally collected within one year of the completion of the
project.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Costs and estimated earnings
in excess of billings
The
current asset, “Costs and estimated earnings in excess of billings” on
contracts, represents revenues recognized in excess of amounts
billed.
Costs and
estimated earnings in excess of billings consists of the following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Contract
costs incurred plus recognized profits less recognized losses to
date
|
|
$
|
87,067,288
|
|
|
$
|
68,149,817
|
|
Less:
progress billings
|
|
|
64,113,349
|
|
|
|
50,328,109
|
|
Costs
and estimated earnings in excess of billings
|
|
$
|
22,953,939
|
|
|
$
|
17,821,708
|
|
Billings in excess of costs
and estimated earnings
The
current liability, “Billings in excess of costs and estimated earnings” on
contracts, represents billings in excess of revenues recognized.
Billings
in excess of costs and estimated earnings consists of the
following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Progress
billings
|
|
$
|
20,221,969
|
|
|
$
|
31,456,807
|
|
Less:
contracts costs incurred plus recognized profits less recognized losses to
date
|
|
|
17,441,590
|
|
|
|
27,219,279
|
|
Billings
in excess of costs and estimated earnings
|
|
$
|
2,780,379
|
|
|
$
|
4,237,528
|
|
Research and
development
Research
and development expenses include salaries, consultant fees, supplies and
materials, as well as costs related to other overhead such as depreciation,
facilities, utilities and other departmental expenses. The costs the Company
incur with respect to internally developed technology and engineering services
are included in research and development expenses as incurred as they do not
directly relate to any particular licensee, license agreement or licenses
fee.
Warranty
Generally,
the Company’s products are not covered by specific warranty terms. However, it
is the Company’s policy to replace parts if they become defective within one
year after deployment at no additional charge. The Company maintains
a provision for potential warranty costs on these products for one
year. This provision represents management’s assessment of the
Company’s history of warranty costs while incorporating estimates by the quality
review staff of the potential product failure rates. The Company
records a warranty obligation in selling expense at the time revenue are
recognized. For the three months ended March 31, 2009 and 2008, the
Company recorded $15,196 and $0, respectively, as a provision for estimated
warranty claims.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Fair value of financial
instruments
SFAS 107,
Disclosures About Fair Value of Financial Instruments, defines financial
instruments and requires fair value disclosures for those
instruments. SFAS 157, Fair Value Measurements, adopted January 1,
2008, defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosures
requirements for fair value measures. The carrying amounts reported in the
balance sheets for receivables and payables qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels are defined as
follow:
|
·
|
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
·
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
The
investment in joint ventures is also a financial instrument. The
Company invested $167,010 (RMB 1,140,000) to Hubei Shou An Changjiang Fire
Protection Co., Ltd for 19% ownership and invested $1,000,000 to King Galaxy
Investments Limited for 5% ownership. Total investment as of March 31, 2009
amounted to $1,167,010. Since there is no quoted or observable market price for
the fair value of similar long term investments in joint ventures, the Company
then used the level 3 inputs for its valuation methodology. The determination of
the fair value was based on the cost of the capital contribution to the joint
ventures.
The
Company did not identify any assets and liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Intangible
assets
Land use
rights - All land in the People’s Republic of China is owned by the government.
However, the government grants the user “land use rights”. The Company acquired
land use rights in 2001 and the land use rights expire in 2051. The costs of
these rights are being amortized over fifty years using the straight-line
method.
Technology
rights - In May 2007, the Company acquired two technology rights to manufacture
fire protection products and the costs of these rights are being amortized over
ten years using the straight-line method.
Intangible
assets consist of the following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
Land
use rights
|
|
$
|
770,789
|
|
|
$
|
770,789
|
|
Technology
rights
|
|
|
608,745
|
|
|
|
608,745
|
|
Accumulated
amortization
|
|
|
(282,734
|
)
|
|
|
(263,085
|
)
|
Balance
|
|
$
|
1,096,800
|
|
|
$
|
1,116,449
|
|
Amortization
expense amounted to $18,819, and $18,848 for the three months ended March 31,
2009 and 2008, respectively.
Intangible
assets of the Company are reviewed annually, more often when circumstances
require, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of March 31, 2009, the Company
expects these assets to be fully recoverable.
Income
taxes
The
Company reports income taxes pursuant to SFAS 109, “Accounting for Income
Taxes.” SFAS 109 requires the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consist of taxes currently due plus deferred taxes.
Deferred tax assets amounted to $67,824 and $0 as of March 31, 2009 and December
31, 2008, respectively.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures, and transition.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
The
Company does not anticipate any events which could cause change to these
uncertainties.
The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit.
In
principal, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized. Deferred tax is calculated using tax
rates that are expected to apply to the period when the asset is realized or the
liability is settled. Deferred tax is charged or credited in the income
statement, except when it is related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity. Deferred
tax assets and liabilities are offset when they relate to income taxes levied by
the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Value Added
Tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the contract and production of the Company’s
finished products can be used to offset the VAT due on sales of the finished
product.
VAT on
sales and VAT on purchases amounted to $980,467 and $793,772 for the three
months ended March 31, 2009. VAT on sales and VAT on purchases amounted to
$964,361 and $742,064 for the three months ended March 31, 2008, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company
acts as an agent for the government. VAT taxes are not impacted by the income
tax holiday.
Stock-based
compensation
The
Company adopted SFAS 123R “Accounting for Stock-Based Compensation” at the
beginning of 2006, which defines a fair-value-based method of accounting for
stock-based employee compensation and transactions in which an entity issues its
equity instruments to acquire goods and services from non-employees. Stock
compensation granted to non-employees has been determined in accordance with
SFAS 123R and the EITF 96-18, "Accounting for Equity Instruments that are issued
to Other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services", as the fair value of the consideration received or the fair value of
equity instruments issued, whichever is more reliably measured.
Recently issued accounting
pronouncements
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities - An Amendment of SFAS No. 133.” SFAS 161
seeks to improve financial reporting for derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial
position, financial performance, and cash flows. To achieve this increased
transparency, SFAS 161 requires (1) the disclosure of the fair value of
derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and
(3) cross-referencing within the footnotes. SFAS 161 became effective on
January 1, 2009 and the adoption of SFAS 161 did not impact the Company’s
consolidated financial statements.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles.” SFAS 162 is intended to improve financial reporting by identifying
a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with
U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles." The Company is in the process of evaluating the
impact of adoption of this statement on the results of operations, financial
position or cash flows.
In June
2008, the FASB issued EITF 07-5 “Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity’s Own Stock”. This Issue is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF 07-5 provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuer’s
own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
exception. This standard triggered liability accounting on all warrants
exercisable at strike prices denominated in any currency other than the
functional currency of the operating entity in China (Renminbi). The
adoption of EITF 07-5 did not have a material impact on the Company’s financial
position or results.
In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. The adoption of EITF 08-4 did not have a material impact on
the Company’s financial position or results.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s financial position or results.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets”.
FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1
achieves this by amending the impairment model in EITF 99-20 to remove its
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1
did not have a material impact on the Company’s consolidated financial
statements because all of the investments in debt securities are classified as
trading securities.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally,
if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB
28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this
FSP. Management is currently evaluating this new FSP but do not believe that it
will have a significant impact on the determination or reporting of the
Company’s financial results.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. Management is
currently evaluating this new FSP but do not believe that it will have a
significant impact on the determination or reporting of our financial
results.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption.
Management is currently evaluating the disclosure requirements of this new
FSP.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note
3 - Earnings per share
The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings per Share.” SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common
stock.
The
following is a reconciliation of the basic and diluted earnings per share
computation for the three months ended March 31:
|
|
2009
(Unaudited)
|
|
|
2008
(Unaudited)
|
|
Net
income for earnings per share
|
|
$
|
5,645,603
|
|
|
$
|
4,740,780
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
27,586,593
|
|
|
|
27,556,893
|
|
Diluted
effect of stock options and warrants
|
|
|
624,318
|
|
|
|
596,288
|
|
Weighted
average shares used in diluted computation
|
|
|
28,210,911
|
|
|
|
28,153,181
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
As of
March 31, 2009 and 2008, all outstanding stock options and warrants were
included in the calculation of diluted earnings per share.
Note
4 - Related party transactions
The
Company has accounts receivable from Hubei Shou An Changjiang Fire Protection
Co., Ltd. (“Hubei Shou An”), in which the Company has 19% ownership interest.
The receivable due from Hubei Shou An was $153,068 and $114,388 as of March 31,
2009 and December 31, 2008, respectively, resulted from product sales. This
amount was expected to be repaid by December 31, 2009 in cash.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
The
Company has other receivable from Hubei Shou An. The receivable due from Hubei
Shou An was $350,476 and $351,835 as of March 31, 2009 and December 31, 2008,
respectively. This balance was for the operating capital in Hubei Shou An and
expected to be repaid by June 30, 2009 in cash.
Note
5 - Notes receivable
Notes
receivable represents trade accounts receivable due from various customers where
the customers’ bank has guaranteed the payment of the receivable. This amount is
non-interest bearing and is normally paid within three to six months. The
Company has the ability to submit their request for payment to the customer’s
bank earlier than the scheduled payment date. However, the Company will incur an
interest charge and a processing fee when they submit the payment request early.
The Company‘s notes receivable totaled $1,031,811 and $3,670,259 as of March 31,
2009 and December 31, 2008, respectively.
Note
6 - Prepayments and deferred expenses
Prepayments
and deferred expenses are monies deposited with or advanced to subcontractors to
perform services on System Contracting Projects. Some subcontractors require a
certain amount of money to be deposited as a guarantee payment in order for them
start performing the services. Prepayments and deferred expenses also
include monies deposited or advanced to vendors on future inventory purchases to
ensure timely delivery. The total outstanding amount was $2,389,344 and
$2,816,976 as of March 31, 2009 and December 31, 2008,
respectively.
Note
7 - Investment in joint ventures
During
the second quarter of 2007, the Company invested $167,010 (RMB 1,140,000) for a
19% interest in Hubei Shou An Changjiang Fire Protection Co., Ltd., located in
China Hubei, PRC. The investment is recorded under the cost
accounting method.
During
the third quarter of 2007, the Company invested $1,000,000 for a 5% interest in
King Galaxy Investments Limited. “King Galaxy” through its wholly owned
subsidiary, China Alliance Security Holdings Company Limited owns 100% of Wan
Sent (China) Technology Co., Ltd. (“Wan Sent”), an emerging Chinese fire
emergency remote-monitoring system provider based in Beijing, PRC. The
investment has been recorded under the cost accounting method.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note
8 - Customer deposits
Customer
deposits represent amounts advanced by customers on products orders and
maintenance services deposits and system contracting projects deposits. The
product or service normally is shipped or performed within six months after
receipt of the advance payment and the related sale is recognized in accordance
with the Company’s revenue recognition policy. Customer deposits also
represent amounts advanced by customers on system contracting projects deposits.
The advance payment will apply to the invoices when the Company billed our
customer based on the progression of the projects. As of March 31, 2009 and
December 31, 2008 customer deposits amounted to $5,138,306, and $6,102,026,
respectively.
Note
9 - Accrued liabilities
Accrued
liabilities represent subcontractors’ expenses incurred as of balance sheet date
for system contracting projects. Accrued liabilities also represent accrued
estimation of warranty expenses. As of March 31, 2009 and December
31, 2008, accrued liabilities amounted to $7,795,775 and $6,785,409,
respectively.
Note
10 - Income taxes
Prior to
January 1, 2008, under the Income Tax Laws of PRC, the Company’s subsidiaries
are generally subject to an income tax at an effective rate of 25% on income
reported in the statutory financial statements after appropriate tax
adjustments, unless the enterprise is located in a specially designated region
where it allows enterprises a three-year income tax exemption and a 50% income
tax reduction for the following three years or the enterprise is a manufacturing
related joint venture with a foreign enterprise or a wholly owned subsidiary of
a foreign enterprise, where it allows enterprises a two-year income tax
exemption and a 50% income tax reduction for the following three
years.
Beginning
from January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
existing income tax laws for Domestic Enterprises (“DES”) and Foreign Invested
Enterprises (“FIEs”).
The key
changes are:
|
a.
|
The new standard EIT rate of 25%
will replace the 33% rate currently applicable to both DES and FIEs,
except for High Tech companies who pays a reduced rate of
15%;
|
|
b.
|
Companies established before
March 16, 2007 will continue to enjoy tax holiday treatment approved by
local government for a grace period of the next 5 years or until the tax
holiday term is completed, whichever is
sooner.
|
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
The
Company’s subsidiaries were paying the following tax rate for the period ended
March 31, 2008 (Unaudited).
Subsidiaries
|
|
Income tax
exemption
|
|
|
Effective
income tax
rate
|
|
Sureland
Industrial
|
|
|
25.0
|
%
|
|
|
—
|
%
|
Sureland
Equipment
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
Beijing
Hua An
|
|
|
25.0
|
%
|
|
|
—
|
%
|
Tianxiao
Equipment
|
|
|
—
|
%
|
|
|
25.0
|
%
|
The
Company’s subsidiaries are paying the following tax rate for the period ended
March 31, 2009 (Unaudited).
Subsidiaries
|
|
Income tax
exemption
|
|
|
Effective
income tax
rate
|
|
Sureland
Industrial
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
Sureland
Equipment
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
Beijing
Hua An
|
|
|
15.0
|
%
|
|
|
10.0
|
%
|
Tianxiao
Equipment
|
|
|
—
|
%
|
|
|
25.0
|
%
|
The
provision for income taxes amounted to $793,567, and $48,642 for the three
months ended March 31, 2009 and 2008, respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended March 31:
|
|
2009
(Unaudited)
|
|
|
2008
(Unaudited)
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign
income not recognized in USA
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
China
income taxes
|
|
|
25.0
|
|
|
|
25.0
|
|
China
income tax exemption
|
|
|
(13.7
|
)
|
|
|
(24.1
|
)
|
Other
item (1)
|
|
|
1.0
|
|
|
|
0.1
|
|
Total
provision for income taxes
|
|
|
12.3
|
%
|
|
|
1.0
|
%
|
(1) The
1% represents the $580,723 expenses incurred by CFSG and CFPG that are not
deductible in PRC for the three months ended March 31, 2009. The 0.1% represents
$420,063 expenses incurred by CFSG and CFPG that are not deductible in PRC for
the three months ended March 31, 2008.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
The
estimated tax savings for the three months ended March 31, 2009 and 2008
amounted to $785,479 and $1,241,570, respectively. The net effect on basic
earnings per share if the income tax had been applied would decrease basic and
diluted earnings per share for the three months ended March 31, 2009, and 2008
by $0.03 and $0.05, respectively.
China
Fire & Security Group, Inc. was incorporated in the United States and has
incurred net operating losses of $0 for income tax purposes for the three months
ended March 31 2009, respectively. The estimated net operating loss
carry forwards for United States income taxes amounted to $1,004,414 which may
be available to reduce future years’ taxable income. These carry
forwards will expire, if not utilize, from 2025 through
2027. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax
purposes. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to
zero. The net change in the valuation allowance for the period ended
March 31, 2009 was $0 and the accumulated valuation allowance as of March 31,
2009 amounted to $341,501. Management reviews this valuation
allowance periodically and makes adjustments as warranted.
Taxes
payable
Taxes
payable consisted of the following:
|
|
March 31, 2009
(Unaudited)
|
|
|
December 31,
2008
|
|
VAT
taxes payable
|
|
$
|
2,241,078
|
|
|
$
|
1,094,089
|
|
Income
taxes payable
|
|
|
850,198
|
|
|
|
38,406
|
|
Sales
taxes
|
|
|
1,039,762
|
|
|
|
936,164
|
|
Other
taxes payable
|
|
|
64,574
|
|
|
|
24,086
|
|
Total
|
|
$
|
4,195,612
|
|
|
$
|
2,092,745
|
|
Note
11 - Retirement plan
The
Company and its subsidiaries are required to participate in a central pension
scheme operated by the local municipal government. The Company is required to
contribute 20% of its payroll costs to the central pension scheme in 2009 and
2008. The contributions are charged to the consolidated income statement of the
Company as they become payable in accordance with the rules of the scheme. The
aggregate contributions of the Company to retirement benefit schemes amounted to
$46,512 and $50,780 for the three months ended March 31, 2009 and 2008,
respectively.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note
12 - Statutory reserves
The laws
and regulations of the People’s Republic of China require that before an
enterprise distributes profits to its partners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserve. The statutory reserves include surplus reserve fund and the
enterprise fund. These statutory reserves represent restricted retained
earnings.
Surplus reserve
fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividend to
shareholders. For the three months ended March 31, 2008, the Company did not
make any contribution to this fund. Due to the balance of Surplus reserve fund
already reaches 50% of the Company’s registered capital, the Company did not
reserve any surplus reserve fund for the three months ended March 31,
2009. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
Enterprise
fund
The
enterprise fund may be used to acquire plant and equipment or to increase the
working capital to expend on production and operation of the business. No
minimum contribution is required and the Company did not make any contribution
to this fund for the three months ended March 31, 2009 and
2008.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note 13 -
Warrants
In 2008,
a total of 45,000 warrants were converted into 29,700 shares of common stock by
the warrants holders using the cashless exercise options.
The
Company’s warrant activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life (years)
|
|
Outstanding,
December 31, 2007
|
|
|
55,000
|
|
|
$
|
4.24
|
|
|
|
4.08
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(45,000
|
)
|
|
|
4.24
|
|
|
|
|
|
Outstanding,
December 31, 2008
|
|
|
10,000
|
|
|
$
|
4.24
|
|
|
|
2.09
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009 (Unaudited)
|
|
|
10,000
|
|
|
$
|
4.24
|
|
|
|
1.84
|
|
Note
14 - Options issued to employees
On
January 30, 2008, the Company’s 2008 Omnibus Long-term Incentive Plan was
adopted and approved by shareholders. Pursuant to the 2008 Omnibus Long-term
Incentive Plan, the Company reserved 2,000,000 shares of our common stock for
issuance.
On
December 31, 2008, pursuant to the Company's 2008 Omnibus Long-term Incentive
Plan, the Company's Board of Directors authorized the issuance of 1,000,000
shares of options for its employee with total 800,000 shares options issued to
executive officers. The options will vest evenly each quarter over the following
four years, starting from the first quarter of 2009. The Company used the Black
Scholes Model to value the options at the time they were issued, based on the
exercise price of $6.81, which was the close price of the Company’s stock on
December 31, 2008 and using the risk-free rate of 0.875%, 1.125%, 1.313% and
1.5% and the volatility of 86% that was estimated by analyzing the trading
history of the Company’s stock. Because the Company do not have historical
history exercise period from its previous issued option, the Company used the
simplified method to calculate the term, which is the midpoint between the start
vesting date and expiration date of the options, as a variable of the model. The
1,000,000 employee options had a fair value of $3,863,606. The related
compensation expense is recognized on a straight-line basis over the four year
vesting period.
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
The total
stock option compensation expense recognized for the three months ended March
31, 2009 and 2008 was $245,049 and $22,431, respectively. As of March
31, 2009, approximately $3.6 million of estimated expense with respect to
un-vested stock-based awards has yet to be recognized and will be recognized in
expense over the employee’s remaining service period of approximately 4.75
years.
The
Company has stock options as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Value
|
|
Outstanding,
December 31, 2007
|
|
|
779,500
|
|
|
$
|
1.43
|
|
|
$
|
8,925,615
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2008
|
|
|
779,500
|
|
|
$
|
1.43
|
|
|
$
|
4,194,190
|
|
Granted
|
|
|
1,000,000
|
|
|
|
6.81
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009 (Unaudited)
|
|
|
1,779,500
|
|
|
$
|
4.45
|
|
|
$
|
6,062,185
|
|
Following
is a summary of the status of options outstanding at March 31,
2009:
Outstanding Options
|
|
Exercisable Options
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Remaining
|
|
Number of
|
|
Exercise
|
|
|
Contractual
|
|
Number of
|
|
|
Exercise
|
|
Contractual
|
|
Options
|
|
Price
|
|
|
Life
|
|
Options
|
|
|
Price
|
|
Life
|
|
750,000
|
|
$
|
1.25
|
|
|
|
7.25
|
|
|
|
750,000
|
|
|
$
|
1.25
|
|
|
|
7.25
|
|
9,500
|
|
$
|
4.51
|
|
|
|
3.08
|
|
|
|
9,500
|
|
|
$
|
4.51
|
|
|
|
3.08
|
|
20,000
|
|
$
|
6.70
|
|
|
|
3.25
|
|
|
|
8,750
|
|
|
$
|
6.70
|
|
|
|
3.25
|
|
1,000,000
|
|
$
|
6.81
|
|
|
|
4.75
|
|
|
|
62,500
|
|
|
$
|
6.81
|
|
|
|
4.75
|
|
CHINA
FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note
15 - Commitments and Contingencies
Operating Lease
Commitments
Currently
the Company is engaged in an operating lease with Tianjin Fire Protection
Equipment Company Ltd for the use of approximately 17,230 square meters land in
Tianjin, consisting of manufacturing facilities, warehouses and office
buildings. The term of the operating lease is three years,
starting from May 2007. The monthly payment for the lease is 66,000RMB or
$9,670. At March 31, 2009, total future minimum lease payments under the
operating lease were as follows:
Year Ending December 31
|
|
Amount
|
|
2009
|
|
$
|
87,030
|
|
Thereafter
|
|
|
38,680
|
|
Contingencies
In 2008,
the Company filed five lawsuits against four different companies for the
infringement of the Company’s intellectual properties. These five cases are
still pending. Management expects these five cases will be settled in the
Company’s favor.
In 2008,
the Company was sued by three different companies for the invalidation of our
intellectual properties. Two of these three cases were eventually settled in the
Company’s favor. The other case is still pending and management expects this
case will be settled in the Company’s favor as well.
Management
expects the outcome from the above pending lawsuits will have no material impact
of the Company’s consolidated financial statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
CAUTIONARY
STATEMENT
The
information in this report contains forward-looking statements. All statements
other than statements of historical fact made in this report are forward
looking. In particular, the statements herein regarding industry prospects and
future results of operations or financial position are forward-looking
statements. These forward-looking statements can be identified by the use of
words such as "believes," "estimates," "could," "possibly," "probably,"
anticipates," "projects," "expects," "may," "will," or "should" or other
variations or similar words. No assurances can be given that the future results
anticipated by the forward-looking statements will be achieved. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. Our actual results may differ significantly from management's
expectations.
General
The
following discussion and analysis provides information which the management of
China Fire & Security Group, Inc., (the “Company” or “CFSG”) believes to be
relevant to an assessment and understanding of the Company's results of
operations and financial condition. This discussion should be read together with
the Company's financial statements and the notes to financial statements, which
are included in this report.
Overview
We are
engaged in the design, development, manufacturing and sale of fire protection
products and services for large industrial consumers in China. We have developed
a proprietary product line that addresses all aspects of industrial fire safety
from fire detection to fire system control and extinguishing. The Company is the
first in China to leverage advanced technology for fire protection and safety to
clients such as iron and steel companies, power plants, petrochemical plants, as
well as special purpose construction in China.
Reorganization
We were
organized as a Florida corporation on June 17, 2003.
CFSG
owns, through its wholly owned subsidiary China Fire Protection Group, Inc.,
Sureland Industrial and Sureland Equipment (jointly “Sureland”). Sureland is
engaged primarily in the design, development, manufacture and sale in China of a
variety of fire safety products for the industrial fire safety market and of
design and installation of industrial fire safety systems in which it uses its
own fire safety products. To a minor extent, it provides maintenance services
for customers of its industrial fire safety systems. Its business is primarily
in China, but it has recently begun contract manufacturing products for the
export market and it has begun to provide a fire safety system for a Chinese
company operating abroad.
Sureland
markets its industrial fire safety products and systems primarily to major
companies in the iron and steel, power and petrochemical industries in China. It
has also completed projects for highway and railway tunnels, wine distilleries,
tobacco warehouses and a nuclear reactor. It is developing its business in the
transportation, wine and tobacco, vessels, nuclear energy, and public space
markets. Its products can be readily adapted for use on vessels and in
exhibition halls and theatres. It plans to expand its marketing efforts to
secure business in these industries.
Sureland
has internal research and development facilities engaged primarily in furthering
fire safety technologies. It believes that its technologies allow it to offer
cost-effective and high-quality fire safety products and systems. It has
developed products for industrial fire detecting and extinguishing. It believes
that it is the only manufacturer in China which has successfully developed a
comprehensive line of linear heat detectors.
As of
March 31, 2009, Sureland operates more than 20 sales and liaison offices in
China.
Sureland
has twice been ranked as the leading Chinese industrial fire safety company
by the China Association for Fire Prevention based on six major factors
including total revenue, growth rate, net profit, return on assets, investment
in research and development and intellectual property. Its key products include
linear heat detectors and water mist extinguishers, whose sales volumes are the
largest in China. Its products have been used by its customers in more than 20
provinces throughout China.
Critical
Accounting Policies and Estimates
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements appearing at the end of this quarterly report,
we believe that the following accounting policies are the most critical to aid
you in fully understanding and evaluating our reported financial
results.
Revenue
recognition
Revenue
is recognized when it is probable that the economic benefits will flow to the
Company as follows:
1.
|
Revenue from system contracting
projects are recognized using the percentage-of-completion method of
accounting and, therefore, take into account the costs, estimated earnings
and revenue to date on contracts not yet completed. Revenue recognized
is that percentage of the total contract price that cost expended to
date bears to anticipated final total cost, based on current estimates of
costs to complete the contract. Contract costs include all direct material
and labor costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs, and depreciation costs.
Selling, general, and administrative costs are charged to expense as
incurred. At the time a loss on a contract becomes known, the entire
amount of the estimated ultimate loss is recognized in the consolidated
financial statements. Claims for additional contract costs are recognized
upon a signed change order from the customer or in accordance with
paragraphs 62 and 65 of AICPA Statement of Position 81-1, "Accounting for
Performance of Construction - Type and Certain Production - Type
Contracts" ("SOP 81-1")
|
2.
|
Revenue from product sales is
recognized when the goods are delivered and title has passed. Product
sales revenue represents the invoiced value of goods, net of a value-added
tax (VAT). All of the Company’s products that are sold in the PRC are
subject to a Chinese value-added tax at a rate of 17 percent of the gross
sales price. This VAT may be offset by VAT paid by the Company on raw
materials and other materials included in the cost of producing their
finished product.
|
3.
|
Revenue from the rendering of
Maintenance Services is recognized when such services are
provided.
|
4.
|
Provision is made for foreseeable
losses as soon as they are anticipated by
management.
|
5.
|
Where contract costs incurred to
date plus recognized profits less recognized losses exceed progress
billings, the surplus is treated as an amount due from contract consumers.
Where progress billings exceed contract costs incurred to date plus
recognized profits less recognized losses, the surplus is treated as an
amount due to contract
customers.
|
Foreign currency
translation
The
reporting currency of the Company is the US dollar. The Company uses their local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the unified exchange rate as quoted by
the People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred. Historically, the Company has not entered any currency
trading or hedging, although there is no assurance that the Company will not
enter into such activities in the future.
Use of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Management believes that the
estimates utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from these estimates.
Certain
of the Company’s accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from system contracting projects under the percentage of completion
method and the allowance of doubtful accounts. Management evaluates all of its
estimates and judgments on an on-going basis.
Inventories
Inventories
are stated at the lower of cost or market, using the weighted average method.
Inventories consist of raw materials, work in progress, finished goods and
consumables. Raw materials consist primarily of materials used in production.
Finished goods consist primarily of equipment used in project contracts. The
cost of finished goods included direct costs of raw materials as well as direct
labor used in production. Indirect production costs such as utilities and
indirect labor related to production such as assembling, shipping and handling
costs are also included in the cost of inventory. The Company reviews its
inventory annually for possible obsolete goods or to determine if any reserves
are necessary for potential obsolescence.
Accounts
receivable
Accounts
receivable represents the products sales, maintenance services and system
contracting projects with its customers that were on credit. Overdue balances
are reviewed regularly by senior management. Reserves are recorded when the
collection of amounts due are in doubt. Delinquent account balances
are written-off after management has determined that the likelihood of
collection is not probable, known bad debts are written off against allowance
for doubtful accounts when identified.
Results
of Operations
Comparison
of the Three Months Ended March 31, 2009 and 2008:
|
|
For the Three Months Ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Y/Y Change
|
|
|
|
Amount ($)
|
|
|
% of
Total
Revenue
|
|
|
Amount ($)
|
|
|
% of
Total
Revenue
|
|
|
Amount ($)
|
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System
contracting projects
|
|
|
13,003,184
|
|
|
|
77.8
|
%
|
|
|
11,329,380
|
|
|
|
77.1
|
%
|
|
|
1,673,804
|
|
|
|
15.0
|
%
|
Products
|
|
|
3,124,322
|
|
|
|
18.7
|
%
|
|
|
2,881,171
|
|
|
|
20.0
|
%
|
|
|
243,151
|
|
|
|
8.0
|
%
|
Maintenance
services
|
|
|
584,705
|
|
|
|
3.5
|
%
|
|
|
486,075
|
|
|
|
2.9
|
%
|
|
|
98,630
|
|
|
|
20.0
|
%
|
Total
Revenue
|
|
|
16,712,211
|
|
|
|
100.0
|
%
|
|
|
14,696,626
|
|
|
|
100.0
|
%
|
|
|
2,015,585
|
|
|
|
14.0
|
%
|
Total
revenues were approximately $16.7 million for the three months ended March 31,
2009 as compared to approximately $14.7 million for the three months ended March
31, 2008, an increase of approximately $2.0 million or 14 percent. This increase
was primarily due to the increase in our revenues from system contracting
projects during the three months ended March 31, 2009. The Company recognized
revenues from 212 total solution, product sales and maintenance contracts for
the three months ended March 31, 2009 as compared to 146 contracts for the three
months ended March 31, 2008.
Revenues
from system contracting projects increased by 15 percent to $13.0 million
derived from 121 contracts for the three months ended March 31, 2009, compared
to $11.3 million derived from 81 contracts for the three months ended March 31,
2008. This increase in revenues from system contracting projects was mainly
attributable to the increase in the number of system contracting projects we
executed and the successful execution of large-scale projects from Xinyu Iron
and Steel Group and Capital Iron and Steel Group during the period. Revenues
from our product sales were $3.1 million derived from 39 executed contracts for
the three months ended March 31, 2009, compared to $2.9 million derived from 33
executed contracts for the three months ended March 31, 2008. The increase in
revenues from product sales was mainly due to the increase in the number of
product sales contracts we executed during the period. Revenues from maintenance
services increased by 20 percent to $0.6 million derived from 52 contracts for
the three months ended March 31, 2009, compared to $0.5 million derived from 32
contracts for the three months ended March 31, 2008. The increase in revenues
from maintenance services was mainly attributable to the increase in the number
of maintenance service contracts that we executed as the result of the expansion
in our customer base during the period.
In
particular, our three largest customers were Xinyu Iron and Steel Group, Capital
Iron and Steel Group, and Anshan Iron and Steel Group, which collectively
contributed approximately $4.6 million in revenues, representing 27.5 percent of
total revenues for the three months ended March 31, 2009.
|
|
For the Three Months Ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Y/Y Change
|
|
|
|
Amount ($)
|
|
|
% of
Revenue
|
|
|
Amount ($)
|
|
|
% of
Revenue
|
|
|
Amount ($)
|
|
|
%
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System
contracting projects
|
|
|
4,807,258
|
|
|
|
37.0
|
%
|
|
|
5,570,210
|
|
|
|
49.2
|
%
|
|
|
-762,952
|
|
|
|
-13.7
|
%
|
Products
|
|
|
1,211,653
|
|
|
|
38.8
|
%
|
|
|
841,882
|
|
|
|
29.2
|
%
|
|
|
369,771
|
|
|
|
43.9
|
%
|
Maintenance
services
|
|
|
396,541
|
|
|
|
67.8
|
%
|
|
|
240,139
|
|
|
|
49.4
|
%
|
|
|
156,402
|
|
|
|
65.1
|
%
|
Total
Cost of Revenues
|
|
|
6,415,452
|
|
|
|
38.4
|
%
|
|
|
6,652,231
|
|
|
|
45.3
|
%
|
|
|
-236,779
|
|
|
|
-3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System
contracting projects
|
|
|
8,195,926
|
|
|
|
63.0
|
%
|
|
|
5,759,170
|
|
|
|
50.8
|
%
|
|
|
2,436,756
|
|
|
|
42.3
|
%
|
Products
|
|
|
1,912,669
|
|
|
|
61.2
|
%
|
|
|
2,039,289
|
|
|
|
70.8
|
%
|
|
|
-126,620
|
|
|
|
-6.2
|
%
|
Maintenance
services
|
|
|
188,164
|
|
|
|
32.2
|
%
|
|
|
245,936
|
|
|
|
50.6
|
%
|
|
|
-57,772
|
|
|
|
-23.5
|
%
|
Total
Gross Profit
|
|
|
10,296,759
|
|
|
|
61.6
|
%
|
|
|
8,044,395
|
|
|
|
54.7
|
%
|
|
|
2,252,364
|
|
|
|
28.0
|
%
|
Cost of
revenues for the three months ended March 31, 2009 was approximately $6.4
million, as compared to $6.7 million for the three months ended March 31, 2008,
a decrease of approximately $0.2 million or 3.6%. Gross profit for the three
months ended March 31, 2009 was approximately $10.3 million, as compared to $8.0
million for the three months ended March 31, 2008, an increase of approximately
$2.3 million or 28.0 percent. Gross margin for the three months ended March 31,
2009 was 61.6 percent, which increased from the gross margin of 54.7 percent for
the three months ended March 31, 2008. The increase in our gross margin was
mainly due to the increase in the gross margin of our system contracting
projects, offset by the decrease in the gross margins of product sales and
maintenance services during the period.
Gross
margin of system contracting projects was 63.0 percent for the three months
ended March 31, 2009, compared to 50.8 percent for the three months ended March
31, 2008. This increase in the gross margin of system contracting projects was
mainly attributable to our successful execution of total solution projects from
iron and steel industry during this period, which contributed more than 70
percent revenue for the three months ended March 31, 2009. Total solution
projects from iron and steel industry contributed higher gross margins than the
projects from other industries, as a higher percentage of our self-manufactured
proprietary products were used in the projects from iron and steel industy,
which contribute higher gross margins. The other reason contributing to higher
gross margins of system contracting projects was attributable to the improved
efficiency in the execution of large projects, which lowered the projects’ costs
during the period. The gross margin of product sales was 61.2 percent for the
three months ended March 31, 2009, compared to 70.8 percent for the three months
ended March 31, 2008. The decrease in the gross margin of product sales was
mainly attributable to a lower percentage of our self-manufactured proprietary
products sold in product sales contracts, which contributed higher gross margins
than our outsourced products manufactured by third parties.
|
|
For the Three Months Ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Y/Y Change
|
|
|
|
Amount ($)
|
|
|
% of
Total
Revenue
|
|
|
Amount ($)
|
|
|
% of
Total
Revenue
|
|
|
Amount ($)
|
|
|
%
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expense
|
|
|
1,902,318
|
|
|
|
11.4
|
%
|
|
|
1,162,062
|
|
|
|
7.9
|
%
|
|
|
740,256
|
|
|
|
63.7
|
%
|
General
Administrative
|
|
|
1,680,639
|
|
|
|
10.1
|
%
|
|
|
1,798,710
|
|
|
|
12.2
|
%
|
|
|
-118,071
|
|
|
|
-6.6
|
%
|
Depreciation
and Amortization
|
|
|
193,394
|
|
|
|
1.2
|
%
|
|
|
167,262
|
|
|
|
1.1
|
%
|
|
|
26,132
|
|
|
|
15.6
|
%
|
R&D
|
|
|
314,030
|
|
|
|
1.9
|
%
|
|
|
266,649
|
|
|
|
1.8
|
%
|
|
|
47,381
|
|
|
|
17.8
|
%
|
Total
Operating Expenses
|
|
|
4,090,381
|
|
|
|
24.5
|
%
|
|
|
3,394,683
|
|
|
|
23.1
|
%
|
|
|
695,698
|
|
|
|
20.5
|
%
|
Operating
expenses were approximately $4.1 million for the three months ended March 31,
2009 as compared to approximately $3.4 million for the three months ended March
31, 2008, an increase of approximately $0.7 million or 20.5 percent. The
increase in operating expenses was mainly due to the increase in our selling
expense, depreciation and amortization, and R&D expenditure, offset by the
decrease in general administrative expenses during the period.
Selling
expenses were approximately $1.9 million for the three months ended March 31,
2009 as compared to approximately $1.2 million for the three months ended March
31, 2008, an increase of approximately $0.7 million or 63.7 percent. The
significant increase in our selling expenses was mainly attributable to the
increase in our sales-related activities including strengthening relationships
with new clients, marketing of new products and solutions and, expanding our
business into new industries and geographic locations including nuclear power,
transportation and various international markets.
General
administrative expenses were approximately $1.7 million for the three months
ended March 31, 2009, as compared to approximately $1.8 million for the three
months ended March 31, 2008, a decrease of approximately $0.1 million or 6.6
percent. The decrease in general administrative expenses were mainly
attributable to our improved control over operating expenditures and a reduction
in bad debt expenses. This was offset by an increase in option
expenses, employee salary expense as the result of an increase in number of
employee during the period.
Depreciation
and amortization expenses were approximately $0.19 million for the three months
ended March 31, 2009 as compared to approximately $0.17 million for the three
months ended March 31, 2008, an increase of $26,132 or 15.6 percent. The
increase in depreciation and amortization expenses was mainly due to equipment
acquisitions for business operations.
R&D
expenses were approximately $0.31 million for the three months ended March 31,
2009 as compared to approximately $0.27 million for the three months ended March
31, 2008, an increase of $47,381 or 17.8 percent. The increase in our R&D
expenses was mainly attributable to our increased efforts in new product
development.
Operating
income was approximately $6.2 million for the three months ended March 31, 2009
as compared to approximately $4.6 million for the three months ended March 31,
2008, an increase of approximately $1.5 million or 33.5 percent. The increase in
our operating income was mainly attributable to the increase in our revenues and
higher gross margin during this period.
Total
other income was approximately $0.2 million for the three months ended March 31,
2009 as compared to approximately $0.1 million for the three months ended March
31, 2008, an increase of approximately $0.1 million or 66.6 percent. This
increase was mainly attributable to the increase in our interest income during
the period.
Income
before income tax was approximately $6.4 million for the three months ended
March 31, 2009 as compared to approximately $4.8 million of income before income
tax for the three months ended March 31, 2008, an increase of approximately $1.6
million or 34.4 percent. The reason for the increase in income before income tax
was mainly due to an increase in our revenues and the improvement in our
gross margins during the period. Provision for income tax was approximately
$793,567 for the three months ended March 31, 2009 as compared to approximately
$48,642 for the three months ended March 31, 2008, an increase of $744,925. This
significant increase in our provision for income tax was mainly due to the fact
that Sureland Industrial, our major operating subsidiary, began to pay income
tax at the rate of 12.5 percent, starting from the first quarter of 2009, after
the expiration of its tax exempt period.
Our net
income was approximately $5.6 million for the three months ended March 31, 2009
as compared to approximately $4.7 million net income for the three months ended
March 31, 2008, an increase of approximately $0.9 million or 19.1 percent.
Excluding the non-cash option expenses of $245,049 for three months ended March
31, 2009, our non-GAAP net income increased by approximately $1.1 million or
23.7 percent for the three months ended March 31, 2009. The reason for this
increase in net income was mainly due to the increase in our revenues and the
improvement in our gross margin during the period.
Currency
translation adjustments resulting from RMB appreciation amounted to negative
$0.2 million and $2.1 million as of the three months ended March 31, 2009 and
2008, respectively. The negative amount of currency translation adjustments
during the three month period ended March 31, 2009 was due to the depreciation
of RMB during the period.
The
comprehensive income, which adds the currency adjustment to net income, was
approximately $5.5 million for the three months ended March 31, 2009 as compared
to approximately $6.8 million in comprehensive income for the three months ended
March 31, 2008, a decrease of $1.3 million or 19 percent.
Liquidity
and Capital Resources
As of
March 31, 2009, we had working capital of $70.0 million including cash and cash
equivalents of $29.4 million.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Statement
of Cash Flow
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
2,487,961
|
|
|
$
|
(1,799,124
|
)
|
Net
cash (used in) investing activities
|
|
|
(55,740
|
)
|
|
|
(18,693
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
426,650
|
|
|
|
(348,582
|
)
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
(158,088
|
)
|
|
|
167,872
|
|
Net
cash flow
|
|
$
|
2,700,783
|
|
|
$
|
(1,998,527
|
)
|
Operating
Activities
Net cash
provided by operating activities was approximately $2.5 million for the three
months ended March 31, 2009 as compared to approximately $1.8 million net cash
used by operating activities for the same period in 2008. Net cash provided by
operating activities in the three months ended March 31, 2009 was mainly due to
the net income of $5.6 million and a $2.6 million decrease in notes receivable,
$1.0 million increase in accrued liabilities and $2.0 million increase in tax
payable, offset by a $1.3 million increase in accounts receivable, $5.2 million
increase in costs and estimated earnings in excess of billings, $1.0 million
decrease in customer deposits and $1.5 million decrease in billings in excess of
costs and estimated earnings.
The
increase of $5.2 million in costs and estimated earnings in excess of billings
was mainly due to the increase in the aggregate value of projects where we have
recognized revenues more than we have billed the customers, while the decrease
of $1.5 million in billings in excess of costs and estimated earnings was mainly
due to the decrease in the aggregate value of projects where we have billed our
customers more than we have recognized revenues.
Investing
Activities
Net cash
used in investing activities in the three months ended March 31, 2009 was
$55,740 as compared to net cash used in investing activities of $18,693 in the
same period of 2008. The cash used in investing activities in the three months
ended March 31, 2009 and 2008 was mainly attributable to capital
expenditures related to the purchase of new equipment.
Financing
Activities
Net cash
provided by financing activities in the three months ended March 31, 2009
totaled $426,650 as compared to $348,582 used in financing activities in the
same period of 2008. The cash provided by financing activities in the three
months ended March 31, 2009 was mainly attributable to the decrease in
restricted cash during the period.
As a
result of the total cash activities, net cash increased by approximately $2.7
million from December 31, 2008 to March 31, 2009. We believe that our
currently available working capital of $70.0 million, including cash and cash
equivalents of $29.4 million, should be adequate to sustain our operations at
our current level as well as our anticipated expansion.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Market
risk is the risk of loss to future earnings, to fair values or to future cash
flows that may result from changes in the price of a financial instrument. The
value of a financial instrument may change as a result of changes in interest
rates, exchange rates, commodity prices, equity prices and other market changes.
Our cash and cash equivalents are held for working capital purposes and consist
primarily of bank deposits. We do not enter into investments for trading or
speculative purposes.
Interest
Rate Risk
We
currently do not have any long-term debt. Our exposure to interest rate risk
primarily relates to the interest income generated by excess cash invested in
demand deposits. We have not used derivative financial instruments in our
investment portfolio in order to reduce interest rate risk. Interest earning
instruments carry a degree of interest rate risk and our future interest income
may change, depending on market interest rate movement.
Foreign
Currency Risk
Our
business is operated in the PRC, and its value is effectively denominated in
Renminbi. The fluctuation of foreign exchange rate between U.S. dollars and
Renminbi could affect the value of our common stock. Our revenues and expenses
are primarily denominated in Renminbi, and so our exposure to foreign exchange
risks should generally be limited. We do not have material monetary assets and
liabilities denominated in U.S. dollars, although to the extent that we do in
the future, the fluctuation of foreign exchange rate would affect the value of
these monetary assets and liabilities denominated in U.S. dollars. Generally,
appreciation of Renminbi against U.S. dollars will devaluate the assets and
liabilities denominated in U.S. dollar, while devaluation of Renminbi again U.S.
dollars will appreciate the assets and liabilities denominated in U.S. dollar.
In China, very limited hedging transactions are available to reduce our exposure
to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all.
Item
4. Controls and Procedures.
(a)
Evaluation of
Disclosure Controls. As required by Exchange Act Rule 13a-15(b), our
management has carried out an evaluation, under the supervision of our Chief
Executive Officer and Principal Accounting Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of March 31,
2009.
Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Principal Accounting Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Based on
that evaluation, the Chief Executive Officer and Principal Accounting Officer
have concluded that the Company’s disclosure controls and procedures were not
effective at March 31, 2009 due to the fact that the material weaknesses in the
Company’s internal control over financial reporting described in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 have
not been remediated as of March 31, 2009.
(b)
Changes in internal
control over financial reporting. There was no
change in our internal control over financial reporting that occurred in the
first quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
None
Item
1A. Risk Factors
We have
no material changes to the risk factors previously disclosed in our Form 10-K
for the year ended December 31, 2008.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders.
None
Item
5. Other Information.
None
Item
6. Exhibits
The
following exhibits are hereby filed as part of this Quarterly Report on Form
10-Q.
Exhibit
Number:
|
|
Description
|
31.1
|
|
Certification
of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification
of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.1
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Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
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33.2
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Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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CHINA
FIRE & SECURITY GROUP, INC.
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Dated:
November 20, 2009
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By:
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/s/ Brian Lin
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Brian
Lin
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Chief
Executive Officer
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Dated:
November 20, 2009
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By:
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/s/ Xiaoyuan Yuan
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Xiaoyuan
Yuan
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Principal
Accounting Officer and Principal Financial Officer
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