UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q/A
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2006
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 000-50883
WONDER AUTO TECHNOLOGY, INC.
(Formally known as MGCC Investment Strategies Inc.)
(Exact name of small business issuer as specified in its charter)
Nevada | 88-0495105 | |
(State or other jurisdiction of | (I.R.S. Empl. Ident. No.) | |
incorporation or organization) |
No. 56 Lingxi Street
Taihe District
Jinzhou City, Liaoning
People’s Republic of China, 121013
(Address of principal executive offices, Zip Code)
(86) 0416-5186632
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of each of the issuer’s classes of common equity, as of August 4, 2006 is as follows:
Class of Securities | Shares Outstanding | |
Common Stock, $0.0001 par value | 23,959,994 |
EXPLANATORY NOTE
Wonder Auto Technology, Inc., formerly known as MGCC Investment Strategies Inc. (the “Company”) is filing this amendment to its quarterly report on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on August 14, 2006 (the “Original Filing”) to correct the following errors that appear in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 2006 and 2005: (1) on page 2 of the Original Filing, the net of allowance of doubtful accounts in 2005 is listed as $37,748, but should be $38,745; and (2) on page 7 of the Original Filing, the last paragraph of Note 3 to the financial statements has been deleted.
This Amendment continues to speak as of the date of the Original Filing and the Company has not updated the disclosures contained therein to reflect any events that occurred after August 14, 2006, the date of the Original Filing. Pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer which are attached to this Form 10-Q/A as Exhibits 31.1, 31.2 and 32.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MGCC Investment Strategies Inc.
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(unaudited) | (unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Revenue | |||||||||||||
Sales | $ | 18,813,107 | $ | 15,751,765 | $ | 33,606,328 | $ | 25,568,558 | |||||
Cost of sales | (15,577,562 | ) | (11,815,642 | ) | (27,494,018 | ) | (19,586,891 | ) | |||||
Gross profit | 3,235,545 | 3,936,123 | 6,112,310 | 5,981,667 | |||||||||
Expenses | |||||||||||||
Administrative expenses | 263,214 | 261,365 | 536,933 | 495,213 | |||||||||
Amortization and depreciation | 36,527 | 32,224 | 71,539 | 63,120 | |||||||||
Other operating expenses | 718 | 6,449 | 754 | 6,524 | |||||||||
Selling expenses | 541,057 | 756,678 | 1,235,629 | 1,111,994 | |||||||||
841,516 | 1,056,716 | 1,844,855 | 1,676,851 | ||||||||||
Income before the following items and taxes | 2,394,029 | 2,879,407 | 4,267,455 | 4,304,816 | |||||||||
Interest income | 8,487 | 8,527 | 21,348 | 11,911 | |||||||||
Other income | 116,684 | 37,989 | 116,684 | 136,378 | |||||||||
Finance costs | (195,593 | ) | (212,889 | ) | (453,994 | ) | (372,279 | ) | |||||
Income before income taxes | 2,323,607 | 2,713,034 | 3,951,493 | 4,080,826 | |||||||||
Income taxes - Note 5 | (243,534 | ) | (347,794 | ) | (462,187 | ) | (535,006 | ) | |||||
Net income | $ | 2,080,073 | $ | 2,365,240 | $ | 3,489,306 | $ | 3,545,820 | |||||
Earnings per share: basic and diluted | $ | 0.12 | $ | 0.14 | $ | 0.20 | $ | 0.21 | |||||
Weighted average number of shares | |||||||||||||
outstanding: | |||||||||||||
basic and diluted | 17,893,079 | 17,227,198 | 17,561,978 | 17,227,198 |
See the accompanying notes to condensed consolidated financial statements
-1-
MGCC Investment Strategies Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2006 and December 31, 2005
(Stated in US Dollars)
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 12,282,042 | $ | 4,368,757 | |||
Restricted cash | 3,249,749 | 3,597,609 | |||||
Marketable securities | - | 37,159 | |||||
Trade receivables (net of allowance of doubtful accounts | |||||||
of $39,068 in 2006 and $38,745 in 2005) | 23,172,989 | 18,472,619 | |||||
Bills receivable | 5,218,710 | 3,528,649 | |||||
Other receivables, prepayments and deposits - Note 7 | 468,618 | 392,906 | |||||
Inventories - Note 8 | 10,520,050 | 7,807,610 | |||||
Deferred taxes - Note 5 | 235,767 | 261,548 | |||||
Total current assets | 55,147,925 | 38,466,857 | |||||
Know-how | 1,433,434 | 1,421,556 | |||||
Trademarks and patents | 2,986 | 1,907 | |||||
Property, plant and equipment, net - Note 9 | 10,696,999 | 10,648,082 | |||||
Land use right - Note 10 | 571,421 | 580,020 | |||||
Deposit for acquisition of property, plant and equipment | 999,686 | 819,183 | |||||
Deferred taxes - Note 5 | 176,076 | 152,316 | |||||
TOTAL ASSETS | $ | 69,028,527 | $ | 52,089,921 |
See the accompanying notes to condensed consolidated financial statements
-2-
MGCC Investment Strategies Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2006 and December 31, 2005
(Stated in US Dollars)
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
LIABILITIES | |||||||
Current liabilities | |||||||
Trade payables | $ | 13,605,486 | $ | 10,299,879 | |||
Bills payable | 7,981,016 | 7,060,222 | |||||
Other payables and accrued expenses - Note 11 | 791,971 | 709,822 | |||||
Provision for warranty | 1,290,273 | 914,403 | |||||
Dividend payable | - | 1,699,282 | |||||
Income tax payable | 148,417 | 161,277 | |||||
Amount due to a stockholder | - | 5,149 | |||||
Amount due to a related company | 64,480 | - | |||||
Secured short-term bank loans - Note 12 | 7,493,911 | 7,431,813 | |||||
Total current liabilities | 31,375,554 | 28,281,847 | |||||
Secured long-term bank loans - Note 12 | 4,995,941 | 4,954,542 | |||||
TOTAL LIABILITIES | 36,371,495 | 33,236,389 | |||||
COMMITMENTS AND CONTINGENCIES - Note 13 | |||||||
STOCKHOLDERS’ EQUITY | |||||||
Preferred stock: authorized 10,000,000 shares; $0.0001 par | |||||||
value, none issued and outstanding | |||||||
Common stock: authorized 90,000,000 shares $0.0001 par | |||||||
value; issued and outstanding 23,959,994 shares in 2006; | |||||||
issued and outstanding 17,227,198 shares in 2005 | 2,396 | 1,723 | |||||
Additional paid-in capital - Note 14 | 22,140,143 | 11,998,377 | |||||
Statutory and other reserves | 2,347,848 | 2,347,848 | |||||
Accumulated other comprehensive income | 616,425 | 444,670 | |||||
Retained earnings | 7,550,220 | 4,060,914 | |||||
TOTAL STOCKHOLDERS’ EQUITY | 32,657,032 | 18,853,532 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 69,028,527 | $ | 52,089,921 |
See the accompanying notes to condensed consolidated financial statements
-3-
MGCC Investment Strategies Inc.
Condensed Consolidated Statements of Cash Flows
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
Six months ended June 30 | |||||||
(Unaudited) | |||||||
2006 | 2005 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 3,489,306 | $ | 3,545,820 | |||
Adjustments to reconcile net income to net cash (used in) | |||||||
provided by operating activities: | |||||||
Depreciation | 664,243 | 558,464 | |||||
Amortization of trademarks and patents | 185 | 170 | |||||
Amortization of land use right | 13,391 | 12,991 | |||||
Deferred taxes | 5,457 | 47,591 | |||||
Recovery of obsolete inventories | (79,990 | ) | (73,125 | ) | |||
Changes in operating assets and liabilities: | |||||||
Trade receivables | (4,527,526 | ) | (9,212,657 | ) | |||
Bills receivable | (1,653,822 | ) | (203,337 | ) | |||
Other receivables, prepayments and deposits | (72,138 | ) | (1,325,301 | ) | |||
Inventories | (2,556,444 | ) | 2,412,204 | ||||
Trade payables | 3,206,449 | 5,565,285 | |||||
Bills payable | 858,294 | 603,391 | |||||
Other payables and accrued expenses | 77,167 | 824,341 | |||||
Provision for warranty | 366,729 | 134,715 | |||||
Income tax payable | (14,150 | ) | 249,576 | ||||
Net cash flows (used in) provided by operating activities | (222,849 | ) | 3,140,128 | ||||
Cash flows from investing activities | |||||||
Payments to acquire trademarks and patents | (1,244 | ) | - | ||||
Payments to acquire and for deposit for acquisition of | |||||||
property, plant and equipment | (797,301 | ) | (806,701 | ) | |||
Decrease in restricted cash | 347,860 | 300,855 | |||||
Proceeds from sales of marketable securities | 37,317 | - | |||||
Cash acquired from the RTO | 419 | - | |||||
Net cash flows used in investing activities | $ | (412,949 | ) | $ | (505,846 | ) |
See the accompanying notes to condensed consolidated financial statements
-4-
MGCC Investment Strategies Inc.
Consolidated Statements of Cash Flows (Cont’d)
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
Six months ended June 30 | |||||||
(Unaudited) | |||||||
2006 | 2005 | ||||||
Cash flows from financing activities | |||||||
Dividend paid to stockholders | $ | (1,706,516 | ) | $ | (1,304,500 | ) | |
Repayment of bank loans | - | (1,387,800 | ) | ||||
Repayment to stockholders | (5,149 | ) | - | ||||
Net proceeds from issuance of shares | 10,142,020 | 100 | |||||
Advance from a related company | 64,480 | - | |||||
Net cash flows provided by (used in) financing activities | 8,494,835 | (2,692,200 | ) | ||||
Effect of foreign currency translation on cash and cash equivalents | 54,248 | - | |||||
Net increase (decrease) in cash and cash equivalents | 7,913,285 | (57,918 | ) | ||||
Cash and cash equivalents - beginning of period | 4,368,757 | 1,829,761 | |||||
Cash and cash equivalents - end of period | $ | 12,282,042 | $ | 1,771,843 | |||
Supplemental disclosures for cash flow information: | |||||||
Non-cash financing activity: | |||||||
Cash paid for: | |||||||
Interest | $ | 434,868 | $ | 362,552 | |||
Income taxes | $ | 470,878 | $ | 237,839 |
See the accompanying notes to condensed consolidated financial statements
-5-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
1. | Corporate information |
MGCC Investment Strategies Inc. (the “Company”) was incorporated in State of Nevada on June 8, 2000. The Company’s shares are quoted for trading on the Over-The-Counter Bulletin Board in the United States of America.
Pursuant to the Plan of Reorganization dated on June 22, 2006, the Company acquired 100% ownership interest in Wonder Auto Limited (“WAL”), a limited company incorporated in the British Virgin Islands, in consideration for the issuance of the Company’s 17,227,198 common shares (as adjusted for a 2.449719-for-1 forward stock split on July 26, 2006 (“Forward Stock Split”)) to the former stockholders of WAL (“WAL Former Stockholders”) and 3,899,996 shares as adjusted for Forward Stock Split to new investors.
The aforesaid transaction was completed on June 22, 2006 and thereafter WAL became a wholly owned subsidiary of the Company and WAL Former Stockholders became the majority stockholders of the Company. This transaction constituted a reverse takeover transaction (“RTO”).
Following the RTO, through WAL, the Company indirectly owned Man Do Auto Technology Co., Ltd. (“Man Do Auto”) and Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou Halla”). The entire issued and outstanding common stock of Man Do Auto is directly held by the WAL. In respect of Jinzhou Halla, 61% of its common stock is directly held by the WAL whilst 39% is indirectly held by the WAL through Man Do Auto.
2. | Description of business |
Following the reverse takeover transaction as detailed in note 3(ii), the Company commenced to be engaged in the manufacture and distribution of automotive electrical components, namely starters and alternators, in the PRC.
The products of the Company are suitable for use in various types of automobiles. However, the Company currently has more market presence in the sedan and passenger cars, pickup trucks and sport utility vehicles segments.
The customers include renowned automakers and automotive components suppliers in the PRC. As an integral part of developing customer relationship, the Company also offers to its customers product design and development services for their new car models or automotive components based on customers’ required specifications.
The raw materials used in production are mainly divided into four groups, namely metal parts, semiconductors, chemical and packaging materials.
It is the Company’s policy to only purchase raw materials from selected suppliers, both locally and overseas from South Korea because management believed that the South Korean suppliers provide the Company with goods that domestic manufacturers cannot produce consistently at a high quality.
-6-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
3. | Basis of presentation |
(i) | The accompanying condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America for interim consolidated financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements. |
In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form S-1/A as filed with the Securities and Exchange Commission on August 7, 2006.
(ii) | Pursuant to the Plan of Reorganization dated on June 22, 2006, the Company issued 21,127,194 shares as adjusted of common stock, par value $0.0001 per share, to the stockholders of WAL (17,227,198 shares as adjusted for Forward Stock Split to WAL Former Stockholders and 3,899,996 shares as adjusted for Forward Stock Split to new investors), representing approximately 88.2% of the Company post-exchange issued and outstanding common stock, in exchange for 100% of the outstanding capital stock of WAL. |
The RTO has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of WAL become the historical financial statements of the Company, with no adjustment to the carrying value of the assets and liabilities. The 2,832,800 shares of the Company outstanding prior to the RTO are accounted for at $419 of net book value at the time of the RTO. The accompanying consolidated financial statements reflect the recapitalization of the stockholders equity as if the transaction occurred as of the beginning of the first period presented.
4. | Summary of significant accounting policies |
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
-7-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Use of estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes, provision for warranty and the estimation on useful lives of property, plant and equipment. Actual results could differ from those estimates.
Revenue recognition
Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are put into use by its customers, the sales price is fixed or determinable and collection is reasonably assured.
Basic and diluted earnings per share
The Company reports basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade and bills receivables. As of June 30, 2006, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade and bills receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.
Regarding bills receivable, they are undertaken by the banks to honor the payments at maturity and the customers are required to place deposits with the banks equivalent to certain percentage of the bills amount as collateral. These bills receivable can be sold to any third party at a discount before maturity. The Company does not maintain allowance for bills receivable in the absence of bad debt experience and the payments are undertaken by the banks.
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MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Concentrations of credit risk (cont’d)
During the reporting periods, customers represented 10% or more of the Company’s condensed consolidated sales are :-
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Beijing Hyundai Motor Company | $ | 3,366,638 | $ | 1,785,634 | $ | 6,113,553 | $ | 1,785,634 | |||||
Harbin Dongan Auto-Engine Company | |||||||||||||
Limited | 299,849 | 1,198,859 | 1,595,159 | 2,727,738 | |||||||||
Shenyang Aerospace Mitsubishi Motors | |||||||||||||
Engine Manufacturing Company | |||||||||||||
Limited | 3,981,016 | 1,983,120 | 5,295,576 | 3,404,495 | |||||||||
$ | 7,647,503 | $ | 4,967,613 | $ | 13,004,288 | $ | 7,917,867 |
Allowance of doubtful accounts
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance, the Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
Based on the above assessment, during the reporting years, the management establishes the general provisioning policy to make allowance equivalent to 100% of gross amount of trade receivables due over 1 year. Additional specific provision is made against trade receivables aged less than 1 year to the extent which they are considered to be doubtful.
Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from three to six months in the normal course of business. The Company does not accrue interest on trade accounts receivable.
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MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Allowance of doubtful accounts (cont’d)
Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss. This general provisioning policy has not changed in the past since establishment and the management considers that the aforementioned general provisioning policy is adequate and not too excessive and does not expect to change this established policy in the near future.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements; decrease due to market conditions, product life cycle changes. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.
In addition, the Company estimates net realizable value based on intended use, current market value and inventory ageing analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.
Based on the above assessment, the Company establishes a general provision to make a 50% provision for inventories aged over 1 year.
Historically, the actual net realizable value is close to the management estimation.
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MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
Depreciation is provided on straight-line basis over their estimated useful lives. The principal depreciation rates are as follows :-
Annual rate | Residual value | ||
Buildings | 3% | 10% | |
Plant and machinery | 9% | 10% | |
Motor vehicles | 9% | 10% | |
Furniture, fixtures and equipment | 15% | 10% | |
Tools and equipment | 15% | Nil to 10% | |
Leasehold improvements | 20% | Nil |
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
Land use right
Land use right is stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of the lease of 30 years obtained from the relevant PRC land authority.
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets. During the reporting periods, the Company has not identified any indicators that would require testing for impairment.
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MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Recently issued accounting pronouncements
In February 2006, the Financial Accounting Standards Board issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 155”), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. We do not expect the adoption of SFAS No. 155 to have a material impact on our consolidated financial position, results of operations or cash flows as the Company currently has no financial instruments within the scope of SFAS No. 155.
In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
5. | Income taxes |
BVI
WAL and Man Do Auto were incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.
PRC
Enterprises income tax (“EIT”) to Jinzhou Halla in the PRC is charged at 27%, in which 24% for national tax and 3% for local tax, of the assessable profits. As approved by the local tax authority in the PRC, Jinzhou Halla was entitled to two years’ exemption from EIT followed by three years’ 50% tax reduction, commencing from the first cumulative profit-making year in the fiscal financial year of 2001. Accordingly, Jinzhou Halla was subject to tax rate of 13.5% for 2003, 2004 and 2005. Furthermore, Jinzhou Halla, being a Foreign Investment Enterprise (“FIE”), is engaged in advanced technology industry, Jinzhou Halla was approved to enjoy a further three years’ 50% tax reduction for 2006, 2007 and 2008.
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MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
5. | Income taxes (Cont’d) |
The components of the provision for income taxes from continuing operations are :-
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Current taxes - PRC | $ | 266,562 | $ | 411,510 | $ | 456,730 | $ | 487,415 | |||||
Deferred taxes - PRC | (23,028 | ) | (63,716 | ) | 5,457 | 47,591 | |||||||
$ | 243,534 | $ | 347,794 | $ | 462,187 | $ | 535,006 |
The expenses differs from the PRC statutory income tax rate of 27% from continuing operations in the PRC as follows :-
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Provision for income taxes at statutory | |||||||||||||
income tax rate | $ | 627,374 | $ | 732,519 | $ | 1,066,903 | $ | 1,101,823 | |||||
Non-deductible items for tax | 37,620 | 2,461 | 37,650 | 7,580 | |||||||||
Income not subject to tax | (20,678 | ) | (39,391 | ) | (22,932 | ) | (39,391 | ) | |||||
Tax concessions | (400,782 | ) | (347,795 | ) | (619,434 | ) | (535,006 | ) | |||||
$ | 243,534 | $ | 347,794 | $ | 462,187 | $ | 535,006 |
Deferred tax assets (liabilities) as of June 30, 2006 and December 31, 2005 are composed of the following :-
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
The PRC | |||||||
Current deferred tax assets: | |||||||
Allowance for doubtful debts | $ | 5,274 | $ | 5,231 | |||
Provision for obsolete inventories | 15,587 | 26,211 | |||||
Provision for warranty | 174,187 | 123,444 | |||||
Accrued liabilities | 40,719 | 37,188 | |||||
Others | - | 69,474 | |||||
$ | 235,767 | $ | 261,548 | ||||
Non current deferred tax assets(liabilities): | |||||||
Depreciation of property, plant and equipment | $ | 332,966 | $ | 298,021 | |||
Amortization of land use right | 12,434 | 12,621 | |||||
Amortization of know-how | (169,324 | ) | (158,326 | ) | |||
$ | 176,076 | $ | 152,316 |
-13-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
6. | Comprehensive income |
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Net income | $ | 2,080,073 | $ | 2,365,240 | $ | 3,489,306 | $ | 3,545,820 | |||||
Foreign currency translation adjustments | 78,529 | (4 | ) | 171,755 | (480 | ) | |||||||
Total comprehensive income | $ | 2,158,602 | $ | 2,365,236 | $ | 3,661,061 | $ | 3,545,340 |
7. | Other receivables, prepayments and deposits |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Advances to staff | $ | 212,981 | $ | 110,178 | |||
Value added tax and other tax recoverable | 153,627 | 145,669 | |||||
Prepayments | 37,509 | 126,573 | |||||
Other receivables | 64,501 | 10,486 | |||||
$ | 468,618 | $ | 392,906 |
8. | Inventories |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Raw materials | $ | 2,886,181 | $ | 2,733,814 | |||
Work-in-progress | 491,378 | 301,958 | |||||
Finished goods | 7,257,949 | 4,965,991 | |||||
10,635,508 | 8,001,763 | ||||||
Provision for obsolete inventories | (115,458 | ) | (194,153 | ) | |||
$ | 10,520,050 | $ | 7,807,610 |
-14-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
9. | Property, plant and equipment |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Costs: | |||||||
Buildings | $ | 4,941,103 | $ | 4,869,688 | |||
Plant and machinery | 10,908,605 | 10,440,533 | |||||
Furniture, fixtures and equipment | 349,745 | 309,952 | |||||
Tools and equipment | 931,414 | 877,572 | |||||
Leasehold improvements | 117,538 | 24,773 | |||||
Motor vehicles | 383,260 | 341,337 | |||||
17,631,665 | 16,863,855 | ||||||
Accumulated depreciation | (6,934,666 | ) | (6,215,773 | ) | |||
Net | $ | 10,696,999 | $ | 10,648,082 |
An analysis of buildings, plant and machinery pledged to banks for banking loans (note 12a) is as follows :-
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Costs: | |||||||
Buildings | $ | 2,686,223 | $ | 3,810,749 | |||
Plant and machinery | 3,842,590 | 2,663,964 | |||||
6,528,813 | 6,474,713 | ||||||
Accumulated depreciation | (1,785,606 | ) | (1,593,770 | ) | |||
Net | $ | 4,743,207 | $ | 4,880,943 |
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Depreciation | $ | 89,079 | $ | 55,486 | $ | 177,792 | $ | 116,795 |
During the reporting periods, depreciation is included in :-
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Cost of sales and overheads of | |||||||||||||
inventories | $ | 305,783 | $ | 243,344 | $ | 606,279 | $ | 508,504 | |||||
Other | 29,720 | 25,644 | 57,964 | 49,960 | |||||||||
$ | 335,503 | $ | 268,988 | $ | 664,243 | $ | 558,464 |
-15-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
10. | Land use right |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Right to use land | $ | 806,712 | $ | 800,027 | |||
Accumulated amortization | (235,291 | ) | (220,007 | ) | |||
$ | 571,421 | $ | 580,020 |
The Company obtained the right from the relevant PRC land authority for a period from August 1996 to August 2026 to use the land on which the office premises, production facilities and warehouse of the Company are situated. This right was pledged to a bank for the bank loans granted to the Company (Note 12b).
During the six months ended June 30, 2006 and 2005, amortization amounted to $13,391 and $12,991 respectively.
11. | Other payables and accrued expenses |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Accrued audit fee | $ | 22,482 | $ | 110,114 | |||
Other accrued expenses | 306,604 | 256,102 | |||||
Other tax payable | 182,303 | 12,479 | |||||
Payable for acquisition of property, plant and equipment | 91,502 | 166,789 | |||||
Staff welfare payable - Note 11a | 106,382 | 82,325 | |||||
Other payables | 82,698 | 82,013 | |||||
$ | 791,971 | $ | 709,822 |
Note :-
a. | Staff welfare payable represents accrued staff medical, industry injury claims, labor and unemployment insurances. All of which are third parties insurance and the insurance premiums are based on certain percentage of salaries. The obligations of the Company are limited to those premiums contributed by the Company. |
-16-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
12. | Secured bank loans |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Bank loans repayable as follows: | |||||||
Within 1 year | $ | 7,493,911 | $ | 7,431,813 | |||
After 1 year but within 2 years | 4,995,941 | 4,954,542 | |||||
$ | 12,489,852 | $ | 12,386,355 |
As of June 30, 2006, the Company’s banking facilities are composed of the following :-
Amount | ||||||||||
Facilities granted | Granted | Utilized | Unused | |||||||
Secured bank loans | $ | 14,238,431 | $ | 12,489,852 | $ | 1,748,579 |
The above banking loans were secured by the following :-
(a) | Property, plant and equipment with carrying value of $4,743,207 respectively (note 9); |
(b) | Land use right with carrying value of $571,421 (note 10); and |
(c) | Guarantees executed by the Company’s sole director, Qingjie Zhao, who is also a stockholder of the Company holding 61.05% common stock of the Company; and by a related company controlled by certain of the Company’s stockholders including Qingjie Zhao, Xiangdong Gao, Meina Zhang, Qing Lin, Yuquan Zhou, Chengyu Zhang and Chenye Zhang; and |
(d) | All the bank loans are denominated in RMB and carry interest rates ranging from 7.254% to 7.488% per annum with maturity dates ranging from 1 year to 3 years. |
During the reporting periods, there was no covenant requirement under the banking facilities granted to the Company.
13. | Commitments and contingencies |
a. | Capital commitment |
As of June 30, 2006, the Company had capital commitments amounting to $644,010 in respect of the acquisition of property, plant and equipment which were contracted for but not provided in the financial statements.
-17-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
13. | Commitments and contingencies (Cont’d) |
b. | Operating lease arrangement |
As of June 30, 2006, the Company had two non-cancelable operating leases for its warehouses. The leases will expire in 2006 and 2007 respectively and the expected payments are as follows :-
Year / period | ||||
Period from July 1, 2006 to December 31, 2006 | $ | 2,750 | ||
2007 | 1,279 | |||
$ | 4,029 |
The rental expense relating to the operating leases was $2,731 and $1,235 for the six months ended June 30, 2006 and June 30, 2005 respectively.
14. | Common stock and additional paid-in capital |
Common stock | ||||||||||
Number of | ||||||||||
shares as | ||||||||||
adjusted for | Additional | |||||||||
Forward | paid-in | |||||||||
Stock Split | Amount | capital | ||||||||
Balance, January 1, 2005 and | ||||||||||
December 31, 2005 | 17,227,198 | $ | 1,723 | $ | 11,998,377 | |||||
Recapitalization | 2,832,800 | 283 | 136 | |||||||
Shares issued for proceeds of $12 million | 3,899,996 | 390 | 11,999,610 | |||||||
Cost of raising capital | - | - | (1,857,980 | ) | ||||||
Balance, June 30, 2006 | 23,959,994 | $ | 2,396 | $ | 22,140,143 |
(a) | On June 22, 2006, the Company issued 21,127,194 shares of common stock, par value $0.0001 per share, to the stockholders of WAL, of which 17,227,198 shares to WAL Former Stockholders and 3,899,996 shares to new investors in exchange for 100% of the outstanding capital stock of WAL. |
(b) | The Company’s issued and outstanding number of common stock immediately prior to the RTO is 2,832,800 shares are accounted for at $419 of net book value at the time of the RTO. |
-18-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
14. | Common stock and additional paid-in capital (Cont’d) |
(c) | On July 12, 2006, the board of the directors of the Company approved a 2.448719-for-1 Forward Stock Split in the form of a stock dividend. Immediately following the Forward Stock Split, the Company has 23,959,994 shares of common stock issued and outstanding. The effect of Forward Stock Split has been retroactively reflected in these financial statements. All references to weighted average shares outstanding and per share amounts included in the accompanying financial statements and notes reflect the Forward Stock Split and its retroactive effects. |
15. | Defined contribution plan |
The Company has a defined contribution plan for all qualified employees in the PRC. The employer and its employees are each required to make contributions to the plan at the rates specified in the plan. The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the condensed consolidated statements of operations. The Company contributed $239,304 and $178,322 for the six months ended June 30, 2006 and 2005 respectively.
16. | Segment information |
The Company is engaged in the manufacture and distribution of automotive electrical components including alternators and starters in the PRC. The Company has two reportable segments, alternators and starters, based on the type of products. Information for the two segments is disclosed under FAS 131, “Disclosures about Segments of an Enterprise and Related Information” as below :-
-19-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
Alternators | Starters | Total | |||||||||||||||||
Six months ended June 30, | Six months ended June 30, | Six months ended June 30, | |||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
Revenue from external customers | $ | 20,587,603 | $ | 16,546,377 | $ | 13,018,725 | $ | 9,022,181 | $ | 33,606,328 | $ | 25,568,558 | |||||||
Interest income | 12,969 | 7,708 | 8,201 | 4,203 | 21,170 | 11,911 | |||||||||||||
Interest expenses | 266,404 | 234,621 | 168,464 | 127,931 | 434,868 | 362,552 | |||||||||||||
Amortization | 8,317 | 8,517 | 5,259 | 4,644 | 13,576 | 13,161 | |||||||||||||
Depreciation | 547,367 | 466,488 | 116,876 | 91,976 | 664,243 | 558,464 | |||||||||||||
Segment profit | 1,580,963 | 2,275,423 | 2,371,173 | 1,805,689 | 3,952,136 | 4,081,112 | |||||||||||||
Expenditure for segment assets | $ | 487,948 | $ | 516,289 | $ | 309,353 | $ | 290,412 | $ | 797,301 | $ | 806,701 |
Alternators | Starters | Total | |||||||||||||||||
Three months ended June 30, | Three months ended June 30, | Three months ended June 30, | |||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
Revenue from external customers | $ | 11,456,221 | $ | 10,102,198 | $ | 7,356,886 | $ | 5,649,567 | $ | 18,813,107 | $ | 15,751,765 | |||||||
Interest income | 5,104 | 5,487 | 3,325 | 3,040 | 8,429 | 8,527 | |||||||||||||
Interest expenses | 125,653 | 165,559 | 81,193 | 91,787 | 206,846 | 257,346 | |||||||||||||
Amortization | 4,139 | 4,198 | 2,669 | 2,383 | 6,808 | 6,581 | |||||||||||||
Depreciation | 272,997 | 229,785 | 62,506 | 39,203 | 335,503 | 268,988 | |||||||||||||
Segment profit | 937,076 | 1,599,185 | 1,387,132 | 1,114,058 | 2,324,208 | 2,713,243 | |||||||||||||
Expenditure for segment assets | $ | 89,539 | $ | 180,815 | $ | 62,357 | $ | 114,840 | $ | 151,896 | $ | 295,655 |
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
(Unaudited) | (Audited) | (Unaudited) | (Audited) | (Unaudited) | (Audited) | ||||||||||||||
Segment assets | $ | 38,754,539 | $ | 35,053,650 | $ | 19,754,449 | $ | 16,990,104 | $ | 58,508,988 | $ | 52,043,754 |
-20-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
16. | Segment information (Cont’d) |
A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Total consolidated revenue | $ | 18,813,107 | $ | 15,751,765 | $ | 33,606,328 | $ | 25,568,558 | |||||
Total profit for reportable segments | $ | 2,324,208 | 2,713,243 | $ | 3,952,136 | $ | 4,081,112 | ||||||
Unallocated amounts relating to | |||||||||||||
operations: | |||||||||||||
Interest income | 58 | - | 178 | - | |||||||||
Other income | 1,063 | - | 1,063 | - | |||||||||
Interest expenses | (516 | ) | - | (646 | ) | - | |||||||
Other general expenses | (1,206 | ) | (209 | ) | (1,238 | ) | (286 | ) | |||||
Income before income taxes | $ | 2,323,607 | $ | 2,713,034 | $ | 3,951,493 | $ | 4,080,826 |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | (Audited) | ||||||
Assets | |||||||
Total assets for reportable segments | $ | 58,508,988 | $ | 52,043,754 | |||
Cash and cash equivalents | 10,517,272 | 9,008 | |||||
Marketable securities | - | 37,159 | |||||
Other receivables | 2,267 | - | |||||
$ | 69,028,527 | $ | 52,089,921 |
All of the Company’s long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on the customers, is set out as follows :-
Three months ended | Six months ended | ||||||||||||
June 30 | June 30 | ||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
PRC | $ | 18,132,618 | $ | 15,571,172 | $ | 32,775,779 | $ | 25,257,525 | |||||
Others | 680,489 | 180,593 | 830,549 | 311,033 | |||||||||
Total | $ | 18,813,107 | $ | 15,751,765 | $ | 33,606,328 | $ | 25,568,558 |
-21-
MGCC Investment Strategies Inc.
Notes to Condensed Consolidated Financial Statements
For the three and six months ended June 30, 2006 and 2005
(Unaudited)
(Stated in US Dollars)
17. | Subsequent events |
Following the RTO as detailed elsewhere, Timothy Halter resigned as the sole director of the Company on July 9, 2006 and Qingjie Zhao was appointed as director of the Company on the same date.
On July 12, 2006, the board of the directors of the Company approved a 2.448719-for-1 Forward Stock Split in the form of a stock dividend. The record date for the stock dividend is July 25, 2006. Customary notification was provided to the NASDAQ Stock Market and it effected the Forward Stock Split on the OTCBB at the beginning of business on July 26, 2006. Immediately following the Forward Stock Split, the Company has 23,959,994 shares of common stock issued and outstanding.
On July 12, 2006, the board of directors of the Company approved, subject to receiving the approval of a majority of the shareholders of the common stock of the Company, an amendment to its Articles of Incorporation to change the name of the Company from “MGCC Investment Strategies Inc.” to “Wonder Auto Technology, Inc.”.
Shareholder approval for the change of name was obtained by written consent of Empower Century Limited and Choice Inspire Limited, which collectively own 14,627,200 shares as adjusted for Forward Stock Split of the Company’s common stock constituting 61.05% of its outstanding common stock. The change of name will not become effective until at least 20 days after the relevant Information Statement is first mailed to its shareholders and until the appropriate filings have been made with the Nevada Secretary of State.
-22-
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.
DATED: September 15, 2006
WONDER AUTO TECHNOLOGY, INC. | ||
| | |
By: | /s/ Meirong Yuan | |
Meirong Yuan | ||
Chief Financial Officer | ||
(On behalf of the Registrant and as Principal Financial Officer) |
-23-
EXHIBIT INDEX
Exhibit Number | Description |
31.1 | Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
-24-