UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 000-51824
COMPUTER GRAPHICS INTERNATIONAL INC.
(Exact name of Registrant as Specified in its Charter)
| Nevada | 30-0715357 | |
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
Room 01B, 02/F, Podium Building,
Guodu Golf Garden, North of Xinsha Road
Futian District, Shenzhen, 518048 People’s Republic of China
(Address of Principal Executive Offices) (Zip Code)
+ (86)-755-22211114
(Registrant’s Telephone Number, Including Area Code)
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 SNo£
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 S 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.
| Large Accelerated Filer ¨ | Accelerated Filer ¨ | |
| Non-Accelerated Filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox
As of March 20, 2014, there were outstanding 16,331,854 shares of the Registrant’s Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COMPUTER GRAPHICS INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Index to consolidated financial statements
| Page | ||
| Consolidated Balance Sheets as of December 31, 2013 and September 30, 2013 | F-2 | |
| Consolidated Statements of Operations and Comprehensive Loss for the three months ended December 31, 2013 and 2012 | F-3 | |
| Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012 | F-4 | |
| Notes to the Consolidated Financial Statements | F-5 – F-19 | |
| F-1 |
| COMPUTER GRAPHICS INTERNATIONAL INC. | |||||||
| CONSOLIDATED BALANCE SHEETS | |||||||
| (AMOUNTS IN USD, EXCEPT SHARES) | |||||||
| Notes | December 31, | September 30, | ||||||||||
| 2013 | 2013 | |||||||||||
| (Unaudited) | ||||||||||||
| ASSETS | ||||||||||||
| Current Assets | ||||||||||||
| Cash and cash equivalents | $ | 185,394 | $ | 290,038 | ||||||||
| Accounts receivable, net of provision of $275,958 (September 30, 2013 : $235,499) | 156,274 | 277,386 | ||||||||||
| Other receivables | 207,388 | 150,424 | ||||||||||
| Total Current Assets | 549,056 | 717,848 | ||||||||||
| Property and equipment, net of accumulated depreciation of $638,589 (September 30, 2013 : $584,640) | 3 | 525,721 | 575,597 | |||||||||
| Rental deposits | 14 | 36,367 | 37,251 | |||||||||
| Monies held by a legal firm/Deposit for acquisition of a subsidiary | 13 | 49,068 | 65,026 | |||||||||
| Total Assets | $ | 1,160,212 | $ | 1,395,722 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||
| Current Liabilities | ||||||||||||
| Short term loan | 4 | $ | 425,254 | $ | 471,437 | |||||||
| Accounts payable | 25,564 | 52,393 | ||||||||||
| Accrued expenses and other payable | 586,661 | 525,291 | ||||||||||
| Deferred Revenue | 51,409 | 55,917 | ||||||||||
| Total Current Liabilities | 1,088,888 | 1,105,038 | ||||||||||
| Amount due to a stockholder | 5 | 724,195 | 838,844 | |||||||||
| Total Liabilities | 1,813,083 | 1,943,882 | ||||||||||
| Stockholders' Deficit | ||||||||||||
| Common stock, US$0.0001 par value, 900,000,000 shares | ||||||||||||
| authorized, 16,331,854 and 16,331,854 shares issued and | ||||||||||||
| outstanding at December 31,2013 and September 30, 2013 respectively (#) | 7 | 1,633 | 1,633 | |||||||||
| Additional paid-in capital (#) | 1,124,411 | 1,124,411 | ||||||||||
| Statutory reserves | 9 | 500,088 | 500,088 | |||||||||
| Accumulated other comprehensive income | 299,364 | 304,088 | ||||||||||
| Accumulated deficit | (2,578,367 | ) | (2,478,380 | ) | ||||||||
| Total Stockholders' Deficit | (652,871 | ) | (548,160 | ) | ||||||||
| Total Liabilities and Stockholders' Deficit | $ | 1,160,212 | $ | 1,395,722 | ||||||||
| (#) Reflects the 1-for-2.18 reverse split of the Company's outstanding common stock effected on June 7, 2011. |
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
| F-2 |
| COMPUTER GRAPHICS INTERNATIONAL INC. | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATION AND COMPREHENSIVE LOSS | ||||||||
| FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012 | ||||||||
| (UNAUDITED) | ||||||||
(AMOUNTS IN USD, EXCEPT SHARES)
|
| For Three Months Ended | ||||||||
| 2013 | 2012 | |||||||
| Sales | $ | 834,037 | $ | 1,085,904 | ||||
| Cost of sales | (359,385 | ) | (1,032,437 | ) | ||||
| Gross profit | 474,652 | 53,467 | ||||||
| Selling, general and administrative expenses | (575,367 | ) | (688,264 | ) | ||||
| Loss from operations | (100,715 | ) | (634,797 | ) | ||||
| Other Income | ||||||||
| Interest income | 177 | 127 | ||||||
| Interest expense | (9,700 | ) | - | |||||
| Sundry income | 11,179 | 8,242 | ||||||
| Bank charges | (928 | ) | (710 | ) | ||||
| Non operation expense | - | (9,542 | ) | |||||
| Total other income (expenses) | 728 | (1,883 | ) | |||||
| Net loss | $ | (99,987 | ) | $ | (636,680 | ) | ||
| Other comprehensive income | ||||||||
| Foreign currency translation loss (gain) | 4,724 | (8,618 | ) | |||||
| Comprehensive loss | $ | (104,711 | ) | $ | (628,062 | ) | ||
| Net loss per common share (*) | ||||||||
| Basic (in dollars per share) | $ | (0.01 | ) | $ | (0.04 | ) | ||
| Diluted (in dollars per share) | $ | (0.01 | ) | $ | (0.04 | ) | ||
| Weighted average common shares outstanding (*) | ||||||||
| Basic (in shares) | 16,331,854 | 16,301,717 | ||||||
| Diluted (in shares) | 16,331,854 | 16,301,717 | ||||||
(*) Reflects the 1-for-2.18 reverse split of the Company’s outstanding common stock effected on June 7, 2011.
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
| F-3 |
| COMPUTER GRAPHICS INTERNATIONAL INC. | ||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
| FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 AND 2012 | ||||||||||||
| (UNAUDITED) | ||||||||||||
| (AMOUNTS IN USD) |
| For Three Months Ended | ||||||||
| 2013 | 2012 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (99,987 | ) | $ | (636,680 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| provided by / (used in) operating activities: | ||||||||
| Amortization of prepaid post combination employee benefit | 16,316 | 51,686 | ||||||
| Depreciation | 52,707 | 102,151 | ||||||
| Allowance for doubtful accounts | 38,924 | |||||||
| Share-based payment expense | - | 90,262 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 83,586 | 91,644 | ||||||
| Value-added tax recoverable/payable | - | (19,334 | ) | |||||
| Other receivables, net | (56,826 | ) | 58,251 | |||||
| Rent deposits | 1,110 | - | ||||||
| Accounts payable | (27,084 | ) | 142,494 | |||||
| Accrued expense and other payable | 61,221 | (101,768 | ) | |||||
| Deferred revenue | (4,838 | ) | - | |||||
| Net cash provided by / (used in) operating activities | 65,129 | (221,294 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Acquisition of property and equipment | - | (1,546 | ) | |||||
| Disposal of property and equipment | 560 | 40,291 | ||||||
| Net cash provided by investing activities | 560 | 38,745 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of short-term loan | (48,948 | ) | - | |||||
| Proceeds from a stockholder | - | 252,014 | ||||||
| Proceeds to a stockholder | (114,863 | ) | - | |||||
| Net cash (used in) provided by financing activities | (163,811 | ) | 252,014 | |||||
| Effect of exchange rate changes on cash and cash equivalents | (6,522 | ) | 693 | |||||
| Net (decrease) increase in cash and cash equivalents | (104,644 | ) | 70,158 | |||||
| Cash and cash equivalents, beginning balance | 290,038 | 263,228 | ||||||
| Cash and cash equivalents, ending balance | $ | 185,394 | $ | 333,386 | ||||
| Cash paid during the period for: | ||||||||
| Income tax | $ | - | $ | - | ||||
| Interest paid | $ | 9,700 | $ | - | ||||
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
| F-4 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(UNAUDITED)
(AMOUNTS IN USD)
Note 1 -ORGANIZATION
Computer Graphics International Inc. (“CGII” or “the Company”) (formerly known as AMP Productions, Ltd.), was incorporated under the laws of the State of Nevada on February 27, 2003. China Digital Image Organization Co., Limited (“China Digital”) was incorporated in Hong Kong on August 5, 2009. China Digital holds 100% of Shenzhen Digital Image Technologies Co., Ltd. (“SDIT”), a company incorporated in Shenzhen, Peoples’ Republic of China (“PRC”), and ultimately holds 100% of Shenzhen Digital Image 3D Design and Development Co., Ltd. (“SHENZHEN 3D DESIGN”) and Guangzhou Digital Image Technologies Co., Ltd. (“GDIT”), the companies incorporated in Shenzhen and Guangzhou, PRC, respectively.
Pursuant to a series of transactions completed in October, 2010, China Digital became the holding company of SDIT and SHENZHEN 3D DESIGN (the "Group Reorganization"). In October, 2010, China Digital acquired a 100% interest in SDIT (which directly holds a 100% interest in SHENZHEN 3D DESIGN) at a consideration of CNY2,000,000 (equivalent to $283,265). Prior to and after this acquisition, both China Digital and SDIT were controlled by the same party, Hua Zeng. Hua Zeng already controlled and held a 100% interest in SHENZHEN 3D DESIGN in January, 2007. In August, 2010, SDIT acquired a 100% interest of SHENZHEN 3D DESIGN. Prior to and after this acquisition, both SDIT and SHENZHEN 3D DESIGN were controlled by Hua Zeng.
Since China Digital, SDIT and SHENZHEN 3D DESIGN were under common control of the ultimate controlling party, Hua Zeng both before and after the completion of the Group Reorganization, the Group Reorganization has been accounted for using merger accounting. The Consolidated Financial Statements have been prepared on the basis as if China Digital had always been the holding company of SDIT and SHENZHEN 3D DESIGN and the group structure had been in existence throughout the periods ended December 31, 2013 and 2012 as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”.
On March 31, 2011, CGII entered into and closed a share purchase and exchange agreement (the “Share Exchange Agreement”) with China Digital, the shareholders of China Digital, and Thomas E. Mills, pursuant to which CGII acquired 100% of the issued and outstanding capital stock of China Digital (the “Share Exchange”) in exchange for (i) 14,462,684 shares of CGII’s common stock, representing 97% of the increased issued and outstanding stock of CGII, and (ii) payment (“the Cash Component”) of $2,368,471. The Cash Component was payable in full within 12 months after the Closing.
In connection with the Share Exchange, Thomas E. Mills sold 260,124 shares of CGII’s common stock to Truth Giver Group Limited, a company incorporated under the laws of the British Virgin Islands and owned by Hua Zeng and Jing Wang, in exchange for an aggregate payment of $300,000.
On completion of the Share Exchange, CGII acquired all of the outstanding issued capital of China Digital. For accounting and financial reporting purposes, the acquisition has been treated as a reverse acquisition of CGII by China Digital. On completion of the reverse acquisition, the prior business of CGII was abandoned and all liabilities of CGII were paid off or assumed by Thomas E. Mills, the former director of CGII. For China Digital, the reverse acquisition is accounted for as a recapitalization. Consequently, the assets and liabilities of China Digital have been brought forward at their book value and no goodwill has been recognized on the reverse acquisition of CGII. The historical financial statements prior to March 31, 2011 are those of China Digital.
| F-5 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 1 -ORGANIZATION (CONTINUED)
On September 26, 2011, the Company’s wholly owned subsidiary, SDIT entered into a Letter of Intent for Share Purchase (the “Acquisition Agreement”) with Li Dongxiang and Zeng Xianguang (together, the “Sellers”) with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd, the then recently formed start-up company involved in three dimensional technology (“Guangzhou”). Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to SDIT in exchange for CNY6,000,000 (equivalent to $981,354). There is no prior relationship between the Company and its affiliates and Guangzhou and its affiliates.
A Supplemental Letter of Intent for Share Purchase Agreement (“Supplemental Agreement”) was entered into between Li Dongxiang and Zeng Xianguang (together, the “Sellers”) and three non-shareholder employees of Guangzhou Fanyutuo 3D Technology and SDIT on September 26, 2011.
Extracts to the Supplemental Agreement are :-
| i) | The Sellers and three non-shareholder employees of Guangzhou guarantee themselves to work for SDIT; |
| ii) | 5 working days after execution of the Supplemental Agreement 50% of the amount of $981,354 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction; |
| iii) | 5 working days after completion of two years employment by the Sellers and the three non-shareholder employees with SDIT, 30% of the amount of $981,354 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction; |
| iv) | 5 working days after completion of three years employment by the Sellers and the three non-shareholder employees with SDIT, 20% of the amount $981,354 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction; |
| v) | As the Supplemental Agreement forms part and parcel of the Acquisition Agreement, in accordance with the terms of the Acquisition Agreement, any dispute arising from the Agreement, both parties shall resolve by mutual negotiations or in the event of such negotiations fail, the dispute should be resolved by arbitrations or by Court Action in PRC; |
| vi) | In the event that any one of the Sellers and the three non-shareholder employees left employment with SDIT during the three years Agreement period, the acquisition price shall not establish. |
The acquisition of Guangzhou was in essence to secure the long term employment of the Sellers and the three non-shareholder employees to work for SDIT.
Guangzhou was a start-up company with minimal assets and liabilities that were considered of no real value. Following the acquisition, Guangzhou was placed in dormancy with no business activities undergoing. In light of the aforesaid, the management considers that the acquisition is not a business combination, as defined under ASC Topic 805, in substance and therefore the purchase consideration is accounted for as employee benefits. The employee benefits so expensed are reported under Selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
On August 22, 2012, the Company filed dissolution for Shenzhen Digital Image 3D Design and Development Co., Ltd. (“SHENZHEN 3D DESIGN”) and discontinued its operation.
The Company operates in a single reportable segment. The principal activities of the Company are engaged in sales in majority of software promotion related products to customers in the nature of demonstration video and motion pictures using the application of three-dimension vision technology.
These consolidated financial statements present the Company and its subsidiaries on a historical basis.
| F-6 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 2 -GOING CONCERN
The accompanying audited Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying Consolidated Financial Statements, the Company incurred a net loss of $99,987 for the three months ended December 31, 2013 and had accumulated deficit of $2,578,367 at December 31, 2013. These create an uncertainty about the Company’s ability to continue as a going concern. In this regard, the management decided to close some less profitable branches and laid off excessive staff. Furthermore, the Company’s Chairman has issued a letter of undertaking that he will provide financial support to the Company. The Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These Unaudited Consolidated Financial Statements were prepared by the Company pursuant to the rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to present fairly the operating results for the respective periods. Certain information and footnote disclosures normally present in Annual Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) were omitted pursuant to such rules and regulations. These Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and footnotes for the year ended September 30, 2013. The results for the three months ended December 31, 2013, are not necessary indicative of the results to be expected for the full year ending September 30, 2014.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and represent the historical results of the consolidated group. The Company adopted the new accounting guidance (“Codification”) on July 1, 2009. For the three months ended December 31, 2013, all reference for periods subsequent to July 1, 2009 are based on the codification. The Company's functional currency is the Chinese Renminbi; however the accompanying Consolidated Financial Statements have been translated and presented in United States Dollars.
Principles of Consolidation
For Group Reorganization under Common Control
The Consolidated Financial Statements incorporate the financial statement items of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party.
The net assets of the combining entities or businesses are combined using the existing book values from the controlling party’s perspective. No amount is recognized in respect of goodwill or excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest.
The Consolidated Statements of Operations and Comprehensive Income (Loss) include the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under common control, where this is a shorter period.
A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. Such business combinations are referred to as common control combinations which is in line with U.S. GAAP.
| F-7 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation (continued)
For Reverse Acquisition
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company accounts, transactions and profits have been eliminated in consolidation.
Employee Benefits
In respect of the Company’s acquisition of a subsidiary, Guangzhou as referred to in note 1, management considers that the amount of acquisition price of $981,354 (CNY6,000,000), should be accounted for as employee benefits under Selling, general and administrative expenses in the Consolidated Statement of Operations and Comprehensive Income on the following basis :-
| i) | 50% of the amount $981,354 i.e. $490,677 (CNY3,000,000) paid to the Sellers 5 working days after execution of the Supplemental Agreement was in the nature of inducement fee for securing the employment of the Sellers and the three non-shareholder employees. The payment should be accounted for as employee benefits and charged to the Consolidated Statement of Income and Comprehensive Income upon payment. |
| ii) | 50% of the amount $981,354 i.e. $490,677 (CNY3,000,000) will continue to be held under escrow as monies held by a legal firm for meeting future contingent payment under the terms of payment as set out in note 1 : |
$294,406 (CNY1,800,000) [September 30, 2013 : $292,616 (CNY1,800,000)] is payable to the Sellers on completion of the two years employment by the Sellers and the three non-shareholder employees with SDIT. This contingent payment will therefore be expensed in a systematic basis over the period of two years commencing from September 26, 2011.
The remaining amount of $196,271 (CNY1,200,000) [September 30, 2013 : $195,078 (CNY1,200,000] is payable to the Sellers on completion of the three years employment by the Sellers and the three non-shareholder employees with SDIT. This contingent payment will therefore be expensed in a systematic basis over the period of three years commencing from September 26, 2011.
Pursuant to a letter of confirmation dated 10 February, 2012 executed by the two Selling shareholders, should any of the Sellers and the three non-shareholder employees cease employment with SDIT before the expiry of the three-years period, the balance consideration of CNY3,000,000 will be reduced by CNY600,000 for any one of the Sellers and the three non-shareholder employees each.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| F-8 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income (Loss)
The Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the three months ended December 31, 2013 and 2012 included net income and foreign currency translation adjustments.
Risks and Uncertainties
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 business may be influenced 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 is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. There were no contingencies of this type as of December 31, 2013 and September 30, 2013.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. There were no contingencies of this type as of December 31, 2013 and September 30, 2013.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
| F-9 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded based on the Company’s historical collection history. There was $275,958 and $235,499 allowance for doubtful accounts as of December 31, 2013 and September 30, 2013.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
| Furniture and fixture | 5 years | |||
| Leasehold improvement | 5 years | |||
| Motor vehicles | 10 years | |||
| Office equipment | 3-5 years |
Property and Equipment (continued)
As of December 31, 2013 and September 30, 2013 Property and Equipment consist of the following:
| December 31, 2013 | September 30, 2013 | |||||||
| Furniture and fixture | $ | 130,011 | $ | 129,025 | ||||
| Leasehold improvement | 490,677 | 487,694 | ||||||
| Motor vehicles | 133,181 | 132,127 | ||||||
| Office equipment | 410,441 | 411,391 | ||||||
| 1,164,310 | 1,160,237 | |||||||
| Less: Accumulated Depreciation | (638,589 | ) | (584,640 | ) | ||||
| Property and equipment, net | $ | 525,721 | $ | 575,597 | ||||
Depreciation expense for the three months ended December 31, 2013 and 2012 was $52,707 and $102,151, respectively.
| F-10 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Share-Based payment
Share-based payment is accounted for based on the FASB Statement No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (“FAS No. 123R”) and Emerging Issue Task Force 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”) and Emerging Issue Task Force 00-18 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” (“EITF 00-18”) (codified in FASB ASC Topic 505-50). The Company recognized in the Consolidated Statement of Operations and Comprehensive Income (Loss) the fair value of shares, stock options and other equity-based compensation issued to non-employees when the service provided by non-employees is completed, or the date when the shares were issued (provided that the shares issued are fully vested and not subject to forfeiture) with the prepaid services presented as contra equity. This is in accordance with the consensus reached in EITF 00-18 that in the event that a note or receivable is acquired in exchange for the fully vested, nonforfeitable equity instruments, the note or receivable should be displayed as contra-equity by the grantor. The Company as grantor interprets that the term “receivable” also embraces prepaid service fees. For employees, the Company recognized in the Consolidated Statement of Operations and Comprehensive Income (Loss) the grant date fair value of the shares, stock options and other equity-based compensation over the requisite service period.
In the case of stock-based compensation expense on stocks, options and other equity based compensation to employees awarded by different tranches over the requisition service period, the expense is accounted for using the “graded vesting method”. Under the “graded vesting method”, each of the shares in different tranches would be accounted for as a separate award and the grant date fair value of each tranche would be recognized over the requisite service period for that tranche. The requisite service period for each of the tranches would begin on the grant date and ends on the date that the tranche is earned.
Long-Lived Assets
The Company adopted the Property, Plant and Equipment Topic of the Codification, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes previous accounting guidance, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2013 and September 30, 2013, there were no impairments of its long-lived assets.
Fair Value of Financial Instruments
The Financial Instrument Topic of the Codification requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the Balance Sheet for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with SEC Staff Accounting bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized at the completion of delivery to customers when a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured at the date of completion of delivery. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
| F-11 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred. For the three months ended December 31, 2013 and 2012, the Company incurred advertising expenses of $Nil and $Nil respectively.
Shipping and Handling Fees
The Company follows FASB ASC Topic 605-45, “Handling Costs, Shipping Costs”. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling fees as part of selling, general and administrative expenses. For the three months ended December 31, 2013 and 2012, the Company incurred shipping and handling expenses of $1,995 and $2,247 respectively.
Income Taxes
The Company utilizes the accounting standards (“SFAS”) No. 109, “Accounting for Income Taxes,” codified in Financial Accounting Standard Board Accounting Standards Codification (“ASC”) Topic 740 which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in Selling, general and administrative expenses in the Statements of Operations and Comprehensive Income (Loss). The adoption of FIN 48 did not have a material impact on the Company’s financial statements. At December 31, 2013 and September 30, 2013, the Company did not take any uncertain positions that would necessitate recording a tax related liability.
Statement of Cash Flows
In accordance with SFAS 95 “Statement of Cash Flows”, codified in FASB ASC Topic 230, cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Basic and Diluted Earnings per Share
Earnings per share are calculated in accordance with FASB ASC Topic 260, “Earnings per Share”. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
| F-12 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has diversified customer base. The majority of sales are either cash receipt in advance or cash receipt upon delivery. During the three months ended December 31, 2013, two customers accounted for 11% and 11% of net revenue, respectively. During the three months ended December 31, 2012, two customers accounted for 33% and 13% of net revenue, respectively. As of December 31, 2013 and September 30, 2013, six and five customers accounted for more than 5% of net accounts receivable, respectively (note 12). For those credit sales, the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
| F-13 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 4 -Short term loan
Short-term loan represent borrowings from commercial bank that are due within one year which consisted of the following:
| December 31, 2013 | September 30, 2012 | |||||||
| Loan from China Construction Bank | $ | 425,254 | $ | 471,437 | ||||
| $ | 425,254 | $ | 471,437 | |||||
On August 9, 2013, the Company obtained a short-term bank loan of $487,694 (RMB 3,000,000) from China Construction Bank that bore an annual interest rate at 8.4% and will be due on August 8, 2014.
The interest expense for the three months ended December 31, 2013 and 2012 was $9,700 and Nil, respectively.
Note 5 -DUE TO A STOCKHOLDER
As of December 31, 2013 and September 30, 2013, the Company has amount due to a shareholder of $724,195 and $838,844, respectively. The amount due to a stockholder is unsecured, interest-free and will not be required to repay to the stockholder until such time that the Company has the necessary financial resources to repay the amount due.
Note 6 -INCOME TAXES
The Company operates in more than one jurisdiction with its main operations conducted in PRC and virtually no activities in USA, with complex regulatory environments subject to different interpretations by the taxpayer and the respective governmental taxing authorities. The Company evaluates its tax positions and establishes liabilities, if required.
The reconciliation of the U.S. statutory income tax rate to the Company’s effective income tax rate is as follows :
| Three Months Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Income tax at U.S. statutory rate (34%) | $ | (33,996 | ) | $ | (216,471 | ) | ||
| Foreign rate differential (2013 :12.5 %, 2012 : 12.5%) | 19,498 | 117,416 | ||||||
| Expenses not deductible for tax (share-based payment) | - | 30,689 | ||||||
| Others | 14,498 | 68,366 | ||||||
| Income tax (credit)/expense | $ | - | $ | - | ||||
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) through December 31, 2007 is at a statutory rate of 33%, which is comprised of 30% national income tax and 3% local income tax. As from January 1, 2008 onwards, the EIT is at a statutory rate of 25%.
On April 6, 2012, the Company obtains the approval from the tax authority of PRC that it fulfills certain tax requirements of a company engaging in the design of software and integrated circuit and thereby it is entitled to preferential tax relief for EIT. The Company is exempted from EIT in the first two profitable financial years of operation and is further granted a 50% relief from the EIT for the following three financial years. As the approval is officially given to the Company in April, 2012, no refund of tax would be made in respect of the EIT paid by the Company for the fiscal years ended December 31, 2009 and 2010, with the 50% relief from EIT becomes effective from the financial year commencing on January 1, 2011.
| F-14 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 6 -INCOME TAXES (CONTINUED)
Deferred Income Tax Asset
The primary components of temporary differences which might give rise to the Company’s deferred tax assets as of December 31, 2013 and September 30, 2013 were as follows:
| As of | ||||||||
| December 31, 2013 | September 30, 2013 | |||||||
| Balance | $ | 324,514 | $ | 157,063 | ||||
| USA | - | - | ||||||
| Hong Kong | 8,247 | 17,754 | ||||||
| PRC | 6,251 | 149,697 | ||||||
| 339,012 | 324,514 | |||||||
| Less: valuation allowance | (339,012 | ) | (324,514 | ) | ||||
| Deferred income tax benefit, net of valuation allowance | $ | - | $ | - | ||||
Increase in valuation allowance for the three months ended December 31, 2013 and 2012 was $14,498 and $68,265 respectively.
Deferred tax asset which may arise as a result of these losses have been offset in these consolidated financial statements by a valuation allowance due to the uncertainty surrounding their realization.
Deferred U.S. income taxes have not been provided on the undistributed income of the Company’s foreign subsidiaries because the Company does not plan to initiate any action that would require the payment of U.S. income taxes.
Uncertain Tax Positions
Interest associated with unrecognized tax benefits is classified as interest expense and penalties in selling, general and administrative expenses in the statements of income and comprehensive income.
For the three months ended December 31, 2013 and 2012, the Company had no unrecognized tax benefits and related interest and penalties expenses. Currently, the Company has not received any notice of examination by any tax authority in major tax jurisdictions, but the tax authority in PRC has the right to examine the Company’s tax positions in all past years.
| F-15 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 7 -COMMON STOCK AND PREFERRED STOCK
The Company is authorized to issue up to 900,000,000 shares of common stock of par value of $0.0001 per share.
The Company is authorized to issue up to 100,000,000 shares of preferred stock, par value $0.0001 per share. As of December 31, 2013, no preferred stock was issued.
Note 8 -SHARE BASED PAYMENTS
On April 19, 2011, the Company issued 1,341,894 shares of the Company’s common stock to Well Trend, an independent party, in exchange for certain consulting services pursuant to the terms of a consultancy agreement dated September 25, 2010 between Well Trend and China Digital (“Consultancy Agreement”). The consultancy services are to be performed for three years after signing the Consultancy Agreement. The shares were fully vested and not subject to forfeiture when issued. The fair value of the shares issued was $0.763 per share (adjusted for the effect on 1-for-2.18 reverse stock split) and the total fair value of the shares issued was $1,023,865. The fair value of the shares issued per share was based on the quoted market price of CGII’s shares. The total fair value of the shares issued would be recognized as share-based payment expense over the period that the consultancy services are performed. For the three months ended December 31, 2013 and 2012, the Company amortized share-based payment expenses of Nil and $85,322 respectively. The share-based payment expenses were amortized in full as of September 2013. There is no tax benefit related to the share-based payment expense recognized.
On June 24, 2011, the Company signed an employment agreement with Yongqing Ma pursuant to which the Company agreed to issue to Yongqing Ma 40,000 shares of its restricted common stock on each of June 30, 2011, 2012 and 2013 (totaling 120,000 shares), as partial remuneration to Yongqing Ma for acting as the chief financial officer of the Company. The fair value of the shares issued was $1.01 per share at the grant date and the total fair value based on grant date fair value of the 120,000 shares issued is $121,200. The fair value of the shares issued per share is based on the quoted market price of the Company’s shares.
On May 31, 2013, Yongqin Ma resigned from her position for personal reasons effective as of the same day. Under the employment agreement dated June 24, 2011 signed between the Company and Yongqin Ma, due to Ms. Ma’s resignation, she forfeited the final payment of 40,000 shares payable on June 30, 2013.
As of December 31, 2013, 80,000 shares with a grant date fair value of $80,800 were vested. 40,000 shares were issued on July 26, 2011, with the other 40,000 shares issued on July 25, 2012.
The following is a summary of the option activity:
| Number of Options | ||||
| Outstanding as of September 30, 2013 | 80,000 | |||
| Granted | - | |||
| Exercised | - | |||
| Forfeited | - | |||
| Outstanding as of December 31, 2013 | 80,000 | |||
For the three months ended December 31, 2013 and 2012, the Company recognized Nil and $90,262 respectively as share-based payment expense.
| F-16 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 9 -STATUTORY RESERVES
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory reserves. The allocation is 10 percent of income after tax and the cumulative allocations are not to exceed 50 percent of registered capital. However, voluntary allocations to statutory reserves are not prohibited. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2013 and September 30, 2013, the Company had allocated $500,088 and $500,088 in aggregate to these non-distributable reserve funds, respectively.
Note 10 -OTHER COMPREHENSIVE INCOME
Balance of after-tax components comprising accumulated other comprehensive income, included in stockholders’ equity, at December 31, 2013 and September 30, 2013, are as follows:
| Foreign | Accumulated | |||||||
| Currency | Other | |||||||
| Translation | Comprehensive | |||||||
| Adjustment | Income | |||||||
| Balance at September 30, 2012 | $ | 247,866 | $ | 247,866 | ||||
| Change for 2013 | 56,222 | 56,222 | ||||||
| Balance at September 30, 2013 | $ | 304,088 | $ | 304,088 | ||||
| Change for three months period ended December 31, 2013 | (4,724 | ) | (4,724 | ) | ||||
| Balance at December 31, 2013 | $ | 299,364 | $ | 299,364 | ||||
Note 11 -CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS
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, by the general state of the PRC's economy. The Company’s business may be influenced 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.
Note 12 -MAJOR CUSTOMERS AND CREDIT RISK
Six and five customers accounted for more than 5% of accounts receivable at December 31, 2013 and September 30, 2013, totaling 82% and 78% respectively. For the three months ended December 31, 2013 and 2012, two and two customers accounted for greater than 10% of total sales amounts, totaling 22% and 46% respectively.
| F-17 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 13 -MONIES HELD BY A LEGAL FIRM AND PROVISION FOR EMPLOYEE BENEFITS
On September 26, 2011, the Company’s wholly-owned subsidiary Shenzhen Digital Image Technologies Co., Ltd. (“SDIT”) entered into a Letter of Intent for Share Purchase (the “Acquisition Agreement”) with Li Dongxiang and Zeng Xianguang (together, the “Sellers”) with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd. (“Guangzhou”), a recently formed start-up company involved in three dimensional technology. Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to SDIT in exchange for $981,354 (CNY6,000,000).
A Supplemental Letter of Intent for Share Purchase Agreement (“Supplemental Agreement”) was entered into on September 26, 2011.
Extracts to the Supplemental Agreement are:
| i) | The Sellers and three non-shareholder employees of Guangzhou guarantee themselves to work for SDIT; |
| ii) | 5 working days after execution of the Supplemental Agreement 50% of the amount of $981,354 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction; |
| iii) | 5 working days after completion of two years employment by the Sellers and the three non-shareholder employees with SDIT, 30% of the amount of $981,354 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction; |
| iv) | 5 working days after completion of three years employment by the Sellers and the three non-shareholder employees with SDIT, 20% of the amount $981,354 (CNY6,000,000) shall be paid to the Sellers through the legal firm witnessing the transaction; |
| v) | As the Supplemental Agreement forms part and parcel of the Acquisition Agreement, in accordance with the terms of the Acquisition Agreement, any dispute arising from the Agreement, both parties shall resolve by mutual negotiations or in the event of such negotiations fail, the dispute should be resolved by arbitrations or by Court Action in PRC; |
| vi) | In the event that any one of the Sellers and the three non-shareholder employees left employment with SDIT during the three years Agreement period, the acquisition price shall not establish. |
Management considers that in the event that any one of the Sellers or the three non-shareholder employees terminates employment with SDIT before completion of the three years Agreement period, any payment that had paid to the Sellers under the terms of the Supplemental Agreement will not be repaid back to the Company. The unpaid balance in respect of the remaining Agreement period, shall cease to be payable to the Sellers and that the Acquisition price shall then be reduced in proportion to the number of Sellers and the three non-shareholder employees left employment before completion of the three years Agreement period.
Management also considers that the acquisition is in fact to secure three years continuing employment of the Sellers and three non-shareholder employees of Guangzhou by SDIT.
On September 28, 2011, SDIT paid the full amount of $981,354 (CNY6,000,000) to the legal firm witnessing the transaction under Escrow.
| F-18 |
COMPUTER GRAPHICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(AMOUNTS IN USD)
(UNAUDITED)
Note 13 -MONIES HELD BY A LEGAL FIRM AND PROVISION FOR EMPLOYEE BENEFITS(CONTINUED)
50% of the amount $981,354 i.e. $490,677 (CNY3,000,000) was then paid to the Sellers following execution of the Supplemental Agreement and that the remaining balance $490,677 (CNY3,000,000) remains under the custody of the legal firm witnessing the transaction under Escrow for future payments to the Sellers in accordance with the terms of the Supplemental Agreement.
The Company therefore accounts for :
| (a) | 50% of the amount, $490,677 (CNY3,000,000) that was paid to the Sellers following execution of the Supplemental Agreement as employee benefits and expensed to consolidated statement of income and comprehensive income; |
| (b) | 30% of the amount, $294,406 (CNY1,800,000) is expensed over the two years Agreement period with the corresponding entry credited to provision for employee benefits in the balance sheet. |
| (c) | 20% of the amount, $196,271 (CNY1,200,000) is expensed over the three years Agreement period with the corresponding entry credited to provision for employee benefits in the balance sheet. |
In total, the Company incurred employee benefits of US$16,316 and $51,686 for the three months ended December 31, 2013 and 2012 respectively under the Acquisition Agreement and the Supplemental Agreement.
As of December 31, 2013 and September 30, 2013, the unamortized balances of employee benefits were $43,763 and $60,079, respectively.
Note 14 -NON-FINANCIAL IMPACT OF THE COMPANY
| Leases commitment and rental deposits |
| As of December 31, 2013, the Company had total future aggregate minimum lease payments under non-cancelable operating leases for the Company’s office premises located in PRC as follows: |
| December 31, 2013 | ||||
| Within 1 year | $ | 271,229 | ||
| 1 - 2 year | 284,969 | |||
| 2 - 3 year | 90,136 | |||
| $ | 646,334 | |||
| Rental deposits paid for leasing of the office premises in the sum of $36,367 (September 30, 2013: $37,251) are recorded as non-current asset as the lease expires over 1 year. |
Note 15 -SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition disclosure. There were no significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our consolidated financial statements.
| F-19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
The following discussion and analysis of the results of operations and financial condition of Computer Graphics International Inc. should be read in conjunction with the Company’s financial statements, and the notes to those financial statements that are included in this quarterly report and the company’s annual report for the year ended September 30, 2013. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in our annual report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Our Company
Business Overview
We are a 3D digital visual service provider founded in 2006 based in China, specialized in providing one-stop-shop service and systems based on 3D image technology to domestic governments, real estate developers, game developers, the automotive industry and other commercial customers. We operate through our wholly-owned subsidiaries Shenzhen Digital Image Technology Co., Limited and Guangzhou Digital Image Technologies Co., Ltd.
Our headquarters are located in Shenzhen, China. We operate domestically with one branch Guangzhou office in the PRC. Through our 3D imaging technology, we participate in the visual expression of construction-related industries and help our customers complete visual technological changes from hand painting to computer-aided visual displays. We endeavor to provide our customers with the most cost-effective 3D digital visual communication products and services through the combination of the latest visual technology and terminal display equipment.
Our net sales decreased to $834,037 for the three months ended December 31, 2013 from $1,085,904 for the three months ended December 31, 2012, representing a 23% decrease.
Our Corporate History and Background
Computer Graphics International Inc., or the “Company”, was incorporated under the laws of the State of Nevada on February 27, 2003 under the name AMP Productions, Ltd. (“AMP”), with the business purpose of developing, producing, marketing, and distributing low-budget feature-length films to movie theaters and ancillary markets. From inception until the reverse acquisition transaction described below, AMP earned no revenue and suffered recurring losses and net cash outflows from operations.
On July 30, 2010, the controlling shareholders of AMP consented to a proposed 1-for-10 reverse split of AMP's issued and outstanding common stock, an increase in AMP's authorized common stock to 900,000,000 shares, and the authorization of 100,000,000 shares of preferred stock. The corporate action was approved by FINRA on September 17, 2010 and effective in the State of Nevada on September 23, 2010.
Acquisition of China Digital
On March 31, 2011, we completed a reverse acquisition transaction through a share exchange (the “Share Exchange”) with China Digital and its shareholders, whereby we acquired 100% of the issued and outstanding capital stock of China Digital in exchange for (i) 31,528,651 shares of our Common Stock, which collectively constituted approximately 97% of our issued and outstanding capital stock as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement and (ii) payment (the “Cash Component”) of $2,368,471.35. The Cash Component was payable in full within 12 months after the Closing.
| 1 |
As a result of the reverse acquisition, China Digital became our wholly-owned subsidiary and the former shareholders of China Digital became our controlling stockholders. The share exchange transaction with China Digital and the Shareholders was treated as a reverse acquisition, with China Digital as the acquirer and AMP as the acquired party. Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of China Digital and its consolidated subsidiaries.
As a result of our acquisition of China Digital, we now own all of the issued and outstanding capital stock of China Digital, which in turn owns all of the issued and outstanding capital stock of Shenzhen Holding Company. Shenzhen Holding Company in turn owns our Operating Sub, Guangzhou Digital Image Technologies Co., Ltd.
On May 31, 2011, AMP filed a certificate of amendment with the Secretary of State of Nevada changing its name to “Computer Graphics International Inc.” and effecting a 1-for-2.18 reverse stock split of its common stock (the “Reverse Stock Split”). The Reverse Stock Split took effect when approved by FINRA on June 7, 2011. As a result of the Reverse Stock Split, the number of our shares outstanding was reduced from 35,428,981 shares immediately before the Reverse Stock Split to 16,251,846 shares immediately after the Reverse Stock Split.
On September 26, 2011, the Company’s wholly owned subsidiary Shenzhen Holding Company entered into a Letter of Intent for Share Purchase (the “Acquisition Agreement”) with Li Dongxiang and ZengXianguang (together, the “Sellers”) with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd. (“Guangzhou”). Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to Shenzhen Holding Company in exchange for RMB six million (approximately US$937,236). Guangzhou is a recently formed start-up company involved in three dimensional technology. On December 27, 2011, the parties closed the purchase and sale of shares of Guangzhou pursuant to terms of the Acquisition Agreement. In connection with the closing, Guangzhou's name was changed to "Guangzhou Digital Image Technologies Co., Ltd."
Principal Factors Affecting Our Financial Performance
We believe our operating results will be primarily affected by the following factors:
| · | Our ability to expand our presence in the PRC market as we plan, including the client base, and our industry presence. |
| · | Our ability to maintain a good relationship with our suppliers for continued supply of hardware equipment at a competitive price and quality in order to continue carrying out our current pricing strategy. |
| · | Our ability to attract and retain key management personnel as well as technical staff for technology integration and new product development in this competitive market. |
Taxation
United States and Hong Kong
We are subject to United States federal income tax at a tax rate ranging from 15% to 35%. No provision for income taxes in the United States has been made as we have no taxable income derived from business effectively connected to the United States.
China Digital is incorporated in Hong Kong and is subject to Hong Kong profits tax. In accordance with the relevant tax laws and regulations of Hong Kong, a company, irrespective of its residential status, is subject to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong. No tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Therefore, China Digital is exempt from Hong Kong income tax since all the profits were derived from subsidiaries in the PRC and there were no assessable profits generated in Hong Kong. The income tax rate in Hong Kong is 16.5%.
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People’s Republic of China
Because all of our operations are conducted in the PRC, we are governed by the Enterprise Income Tax Law of the PRC (the "EIT Law"). This law and its implementing rules impose a unified EIT rate of 25% on all enterprises, unless they qualify for certain limited exceptions.
Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax at the rate of 25%. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
Since 2008, we have been subject to tax at a statutory rate of 25% on income reported in our statutory financial statements filed after appropriate tax adjustments in the relevant periods. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred.
On April 6, 2012, the Company obtained the approval from the tax authority of PRC that it fulfills certain tax requirements of a company engaging in the design of software and integrated circuit and thereby it is entitled to preferential tax relief for EIT. The Company is exempted from EIT in the first two profitable financial years of operation and is further granted a 50% relief from the EIT for the following three financial years. As the approval is officially given to the Company in April, 2012, no refund of tax would be made in respect of the EIT paid by the Company for the fiscal years ended December 31, 2009 and 2010, with the 50% relief from EIT becomes effective from the financial year commencing on January 1, 2011.
Value Added Taxes – We are also subject to value added tax, or VAT, on the sale of our products. The applicable VAT rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice in the PRC, we pay VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes which are determined to be late or deficient. Any tax penalty assessed is expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due.
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Results of Operations
The following tables set forth key components of our results of operations for the three months ended December 31, 2013 and December 31, 2012, both in dollars and as a percentage of our net sales.
| Three months ended | Three months ended | |||||||||||||||||||||||
| December 31, 2013 | December 31, 2012 | Change | ||||||||||||||||||||||
| % of Net | % of Net | |||||||||||||||||||||||
| Amount | Sales | Amount | Sales | Amount | % | |||||||||||||||||||
| Net Sales | $ | 834,037 | 100 | % | $ | 1,085,904 | 100 | % | $ | (251,867 | ) | (23 | )% | |||||||||||
| Cost of sales | 359,385 | 43 | % | 1,032,437 | 95 | % | (673,052 | ) | (65 | )% | ||||||||||||||
| Gross profit | 474,652 | 57 | % | 53,467 | 5 | % | 421,185 | 788 | % | |||||||||||||||
| Selling, general and administrative expenses | 575,367 | 69 | % | 688,264 | 63 | % | (112,897 | ) | (16 | )% | ||||||||||||||
| Loss from operations | (100,715 | ) | (12 | )% | (634,797 | ) | (58 | )% | 534,082 | 84 | % | |||||||||||||
| Other income and interest expense | 728 | 0 | % | (1,883 | ) | 0 | % | 2,611 | (139 | )% | ||||||||||||||
| Loss before income taxes | (99,987 | ) | (12 | )% | (636,680 | ) | (58 | )% | 536,693 | (84 | )% | |||||||||||||
| Income tax expense | - | - | - | - | - | - | ||||||||||||||||||
| Net income | $ | (99,987 | ) | (12 | )% | $ | (636,680 | ) | (58 | )% | $ | 536,693 | (84 | )% | ||||||||||
Net Sales. Our net sales decreased to $834,037 for the three months ended December 31, 2013 from $1,085,904 for the three months ended December 31, 2012, representing a 23% decrease. The decrease is primarily due to strong competition from many small companies with low operating costs in the market.
Cost of Sales. Our cost of sales decreased to $359,385 for the three months ended December 31, 2013 from $1,032,437 for the three months ended December 31, 2012, representing a 65% decrease. The cost of goods sold per sales ratio decreased to 43% for the three months ended December 31, 2013 from 95% for the three months ended December 31, 2012, mainly due to decreased hardware cost related to decreased sales.
Gross Profit.Our gross profit increased to $474,652 for the three months ended December 31, 2013 from $53,467 for the three months ended December 31, 2012, representing a 788% increase. This increase was primarily due to the decreased cost of sales.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased to $575,367 for the three months ended December 31, 2013 from $688,264 for the three months ended December 31, 2012, representing a 16% decrease. The changes are mainly due to decreased expenses related to less employee benefit than last period.
Other Income (Expenses). Other income increased to $728 for the three months ended December 31, 2013 from other expenses $1,883 for the three months ended December 31, 2012. This increase was mainly due to increased subsidy income of $11,179 netting of increased interest expenses of $9,700.
Loss Before Income Taxes. Our loss before income taxes decreased to $ 99,987 for the three months ended December 31, 2013 from $636,680 for the three months ended December 31, 2012, representing an 84% decrease. The decrease was mainly due to the decrease in cost of sales.
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Income tax expenses. Our income tax expense was nil for the three months ended December 31, 2013 and December 31, 2012 because there was no taxable income.
Liquidity and Capital Resources
As of December 31, 2013 and December 31, 2012, we had cash and cash equivalents of $185,394 and $333,386, respectively, primarily consisting of cash on hand and demand deposits. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily through cash flows from operations and equity contributions by our shareholders.
The following table sets forth a summary of our cash flows for the periods indicated:
Cash Flow
(all amounts in U.S. dollars)
| The Three Months Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net cash provided by (used in) operating activities | $ | 65,129 | $ | (221,294 | ) | |||
| Net cash provided by investing activities | 560 | 38,745 | ||||||
| Net cash (used in) provided by financing activities | (163,811 | ) | 252,014 | |||||
| Effects of exchange rate change in cash | (6,522 | ) | 693 | |||||
| Net (decrease) increase in cash and cash equivalents | (104,644 | ) | 70,158 | |||||
| Cash and cash equivalent at beginning of the period | 290,038 | 263,228 | ||||||
| Cash and cash equivalent at end of the period | $ | 185,394 | $ | 333,386 | ||||
Operating activities
Net cash provided in operating activities was $65,129 for the three months ended December 31, 2013, as compared to net cash used in operating activities of $221,294 for the three months ended December 31, 2012. The change is attributable to the decrease in net loss of $536,693, the decrease of $83,586 in accounts receivable, the increase of $56,826 in other receivables, the decrease of $27,084 in accounts payable, the increase of $61,221 in accrued expenses and other payable, the decrease of $1,110 in rent deposits, the decrease of $4,838 in deferred revenue.
Investing activities
Net cash provided by investing activities for the three months ended December 31, 2013 was $560, as compared to $38,745 net cash provided by investing activities for the three months ended December 31, 2012. The change was attributable to disposal of property and equipment.
Financing activities
Net cash used in financing activities for the three months ended December 31, 2013was $163,811, as compared to $252,014 net cash provided by financing activities for the three months ended December 31, 2011.The change was due to repayment of a short-term loan of $48,948 and proceeds to a shareholder of $114,863.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on January 14, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine safety disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
| Exhibits: | ||||
| 31.1 | * | Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002. | ||
| 31.2 | * | Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002. | ||
| 32.1 | * | Certification of Principal Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002. | ||
| 32.2 | * | Certification of Principal Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002. | ||
| 101. | INS* | XBRL Instance Document | ||
| 101. | SCH* | XBRL Taxonomy Extension Schema Document | ||
| 101. | CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101. | DEF* | XBRL Taxonomy Extension Definition Linkbase Document | ||
| 101. | LAB* | XBRL Taxonomy Extension Label Linkbase Document | ||
| 101. | PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | ||
*Filed herewith.
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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.
COMPUTER GRAPHICS INTERNATIONAL INC. | ||
| Date: March 27, 2014 | By: | /s/ Jing Wang |
Jing Wang Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: March 27, 2014 | By: | /s/ Xiaohong Peng |
Xiaohong Peng Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |
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