UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
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 000-52284
SJ Electronics, Inc.
(Exact name of registrant as specified in its charter)
NEVADA | 87-0530644 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
5F, No.166, Sinhu 2nd Road, Neihu District, Taipei City, 114 Taiwan
(Address of principal executive offices)(Zip code)
(011)-886-2-87918838
(Registrant’s telephone number, including area code)
Indicate by check mark whether the regisrant (1) 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 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 | þ Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 21,984,215 shares of Common Stock, $.001 par value, were outstanding as of August 18, 2008
SJ ELECTRONICS, INC.
TABLE OF CONTENTS
Page | ||
PART I | Financial Information | 3 |
Item 1. | Financial Statements | 3 |
Item 2. | Management’s Discussion and Analysis or Plan of Operation | 4 |
Item 4T. | Controls and Procedures | 9 |
PART II | Other Information | 9 |
Item 6. | Exhibits | 9 |
Signatures | 10 | |
Exhibits/Certifications |
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SJ ELECTRONICS, INC. (FORMERLY ACHERON, INC.) |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
June 30, 2008 and 2007 |
INDEX |
PAGE(S) | ||
CONDENSED CONSOLIDATED BALANCE SHEETS | F-1 | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | F-2 | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | F-3 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | F-4 |
3
SJ ELECTRONICS, INC. | |
(FORMERLY ACHERON, INC.) | |
CONDENSED CONSOLIDATED BALANCE SHEET | |
(In US Dollars) |
June 30, | Dec 31, | ||||||
2008 | 2007 | ||||||
(Unaudited) | (Restated) | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 697,293 | $ | 812,274 | |||
Restricted cash | 526,195 | - | |||||
Accounts receivable, net | 14,659,840 | 21,990,170 | |||||
Inventories | 10,713,968 | 7,274,943 | |||||
Due from related parties | 7,435,364 | - | |||||
Advances to suppliers | 8,461,805 | 219,217 | |||||
Total Current Assets | 42,494,465 | 30,296,604 | |||||
Other Assets | |||||||
Deferred debt issuance cost | 888,712 | 185,123 | |||||
Property, plant and equipment, net | 5,910,607 | 5,205,148 | |||||
Total Other Assets | 6,799,319 | 5,390,271 | |||||
Total Assets | $ | 49,293,784 | $ | 35,686,875 | |||
LIABILITIES AND STOCKHOLDER'S EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable and accrued liabilities | $ | 12,827,184 | $ | 13,566,018 | |||
Short-term loans | 21,139,559 | 12,902,538 | |||||
Wages payable | 1,288,680 | 671,010 | |||||
Capital lease payable | 205,130 | 179,305 | |||||
Interest payable | 81,979 | 24,478 | |||||
Due to related parties | 477,821 | 4,578,420 | |||||
Convertible Note Payable | 5,800,000 | - | |||||
Warrant liability | 107,275 | - | |||||
Common stock to be issued | 327,006 | - | |||||
Total Current Liabilities | 42,254,634 | 31,921,769 | |||||
Other Liabilities | |||||||
Capital lease payable | 134,256 | 226,220 | |||||
Total Other Liabilities | 134,256 | 226,220 | |||||
Total Liabilities | 42,388,890 | 32,147,989 | |||||
Stockholders' Equity | |||||||
Preferred stock ($0.001 par value, | |||||||
5,000,000 shares authorized, None issued or outstanding) | - | - | |||||
Common stock ($0.001 par value,100,000,000 and 40,000,000 shares authorized, | |||||||
21,984,215 and 15,000,000 outstanding as of June 30,2008 and December 31,2007, respectively) | 21,984 | 15,000 | |||||
Additional Paid-in Capital | 6,250,920 | 3,611,503 | |||||
Additional Paid-in Capital -Warrant | 143,166 | - | |||||
Retained earnings-Restricted | - | ||||||
Accumulated Deficits | (65,853 | ) | - | ||||
Accumulated other comprehensive income | 554,677 | (87,617 | ) | ||||
Total Stockholders' Equity | 6,904,894 | 3,538,886 | |||||
Total Liabilities and Stockholders' Equity | $ | 49,293,784 | $ | 35,686,875 |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-1
SJ ELECTRONICS, INC. | |
(FORMERLY ACHERON, INC.) | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |
(In US Dollars) |
For The Six Months Ended | For The Three Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
Sales | $ | 25,731,770 | $ | 24,663,182 | $ | 12,770,207 | $ | 13,824,857 | |||||
Cost of goods sold | (21,796,801 | ) | (22,909,770 | ) | (10,490,316 | ) | (12,953,927 | ) | |||||
Gross Profit | 3,934,969 | 1,753,412 | 2,279,891 | 870,930 | |||||||||
Operating Expenses: | |||||||||||||
Selling expenses | 333,745 | 391,785 | 76,810 | 101,234 | |||||||||
General and administrative | 3,416,652 | 912,608 | 1,448,155 | 674,653 | |||||||||
Loss on Disposal of Assets | 26,234 | - | - | 177,706 | |||||||||
Total operating costs and expenses | 3,776,631 | 1,304,394 | 1,524,965 | 953,594 | |||||||||
Income (Loss) From Operations | 158,338 | 449,018 | 754,926 | (82,664 | ) | ||||||||
Other income (expenses ) | |||||||||||||
Interest income (expenses)-net | (726,829 | ) | (211,319 | ) | (359,595 | ) | (111,333 | ) | |||||
Other income (expenses )-net | 502,638 | 1,445,290 | 378,480 | 1,214,059 | |||||||||
Total Other Income(Expense) | (224,191 | ) | 1,233,971 | 18,885 | 1,102,726 | ||||||||
Income (loss) Before Income Taxes | (65,853 | ) | 1,682,989 | 773,811 | 1,020,062 | ||||||||
Provision for Income taxes | - | - | - | - | |||||||||
Net income (loss) | (65,853 | ) | 1,682,989 | 773,811 | 1,020,062 | ||||||||
Other Comprehensive Income: | |||||||||||||
Foreign currency translation adjustment | 642,294 | (302,354 | ) | 154,662 | (283,677 | ) | |||||||
Comprehensive income (loss) | $ | 576,441 | $ | 1,380,635 | $ | 928,473 | $ | 736,385 | |||||
Net income (loss) per share | |||||||||||||
Basic | $ | (0.00 | ) | $ | 0.11 | $ | 0.04 | $ | 0.07 | ||||
Diluted | $ | (0.00 | ) | $ | 0.11 | $ | 0.03 | $ | 0.07 | ||||
Weighted average shares outstanding | |||||||||||||
Basic | 20,334,098 | 15,000,000 | 21,984,215 | 15,000,000 | |||||||||
Diluted | 23,635,894 | 15,000,000 | 26,926,268 | 15,000,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-2
SJ ELECTRONICS, INC. | |
(FORMERLY ACHERON, INC.) | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(In US Dollars) |
For The Six Months Ended | |||||||
June 30, | |||||||
2008 | 2007 | ||||||
(Unaudited) | (Unaudited) | ||||||
Operating activities | |||||||
Net Income (loss) | $ | (65,853 | ) | $ | 1,682,989 | ||
Adjustments to reconcile net income (loss) to net cash | |||||||
(used in) operating activities: | |||||||
Depreciation | 375,688 | 394,321 | |||||
Loss (gain) on Disposal of Assets | 26,234 | - | |||||
Amortization of stock issued for consulting services | 457,185 | - | |||||
Amortization debt issue cost | 237,400 | - | |||||
Warrants issued for service | 143,166 | - | |||||
Changes in operating assets and liabilities: | |||||||
Restricted cash | (526,195 | ) | - | ||||
Accounts receivable, net | 7,330,330 | (5,637,697 | ) | ||||
Advances to suppliers | (8,242,587 | ) | 33,370 | ||||
Inventory | (3,439,025 | ) | 964,302 | ||||
Wages payable | 617,670 | 117,114 | |||||
Interest Payable | 57,501 | - | |||||
Deferred debt issuance cost | (940,989 | ) | |||||
Accounts payable and accrued liabilities | (738,834 | ) | (1,270,291 | ) | |||
Net cash used in operating activities | (4,708,310 | ) | (3,715,893 | ) | |||
Investing activities | |||||||
Property, plant and equipment additions | (377,091 | ) | (689,794 | ) | |||
Net cash used in investing activities | (377,091 | ) | (689,794 | ) | |||
Financing activities | |||||||
Due from related parties | (7,435,364 | ) | (3,975,107 | ) | |||
Due to related parties | (4,100,599 | ) | 4,436,047 | ||||
Short term loans | 10,487,021 | 5,197,027 | |||||
Net proceeds from issuance of Notes | 5,800,000 | - | |||||
Long-term Loans Payable | (66,138 | ) | 293,540 | ||||
Net cash provided by financing activities | 4,684,920 | 5,951,507 | |||||
Effect of exchange rate changes on cash and cash equivalents | 285,500 | 60,385 | |||||
Increase (decrease) in cash and cash equivalents | (114,981 | ) | 1,606,206 | ||||
Cash and cash equivalents, beginning of period | 812,274 | 464,693 | |||||
Cash and cash equivalents, end of period | $ | 697,293 | $ | 2,070,899 | |||
Supplemental Disclosures of Cash Flow Information: | |||||||
Interest paid | $ | 675,537 | $ | 213,157 | |||
Income taxes paid | $ | - | $ | - | |||
Non-cash investing and financing activities | |||||||
Common stock issued for conversion of short-term debt | $ | 1,815,719 | $ | - | |||
Common stock issued for consulting services | $ | 457,185 | $ | - | |||
Contribute fixed asset to Capital | $ | 378,420 | $ | - |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 1 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company’s financial statements for the year ended December 31, 2007 have been restated as a result of an internal review of its previously issued financial statements. SJ Electronics, Inc. (the “Company” or “SJ Electronics”) determined that it incorrectly calculated its foreign exchange gain (loss) and incorrectly reflected a related party liability as a contribution to capital. The Company also believes such restatements reflect the correction of any errors and omissions of material disclosures in the financial statements in accordance with SFAS 154: Accounting changes and error corrections (as amended).
NOTE 2 - ORGANIZATION AND NATURE OF BUSINESS
Organization and Operations
SJ Electronics was originally formed in the State of Nevada on June 23, 1994 as Harvest E-xpress. On May 1, 1997, it changed its name to HLS (USA), Inc. On April 13, 2006, it changed its name to Acheron, Inc. On March 20, 2008, the Company changed its name to SJ Electronics, Inc. Originally, SJ Electronics’ business was grain cutting and custom machine hire. It did not succeed in its business and it began seeking another opportunity.
On February 13, 2008, SJ Electronics entered into and completed the transactions contemplated under a Securities Exchange Agreement (the “Exchange Agreement”) with the sole shareholder (the “Shareholder”) of Shing Mei Enterprises Ltd. (“Shing Mei”), a corporation organized under the laws of Samoa, pursuant to which SJ Electronics purchased from the Shareholder all issued and outstanding shares of Shing Mei’s common stock in consideration for the issuance of 15,000,000 shares of common stock of the Company (the "Share Exchange").
Prior to the closing of the Share Exchange, the Company had 21,400,000 shares of common stock issued and outstanding. The Company effected a 2 for 5 reverse split on its outstanding common stock, which left the Company with 8,560,000 shares of common stock outstanding. Immediately after the reverse split, the Company also retired 8,102,944 shares of post-split common stock, which resulted in 457,056 shares of common stock outstanding at the closing of the Share Exchange. Consequently, the Board of Directors also approved a resolution to reduce the authorized Common Stock from 100,000,000 to 40,000,000 shares.
As part of a Securities Exchange Agreement, SJ Electronics agreed to issue 4,567,500 shares of its common stock and five year warrants to purchase 2,250,000 shares at $1.00 per share to a number of accredited investors who previously had provided bridge financing to Shing Mei. These issuances were made in exchange for promissory notes evidencing debt obligations by Shing Mei and warrants to purchase Shing Mei shares. In addition, SJ Electronics also issued a total of 1,828,222 SJ Electronics shares and warrants to purchase 450,000 shares of SJ Electronics common stock to the placement agent for a bridge financing that was recently completed by the Company and for other investment banking services. In conjunction with the Share Exchange, SJ Electronics also issued into escrow for the benefit of one of Shing Mei’s executive officers, 1,000,000 shares that will be released to that individual upon the Company meeting certain earnings and other milestones. Of those, 250,000 shares were released from escrow in June 2008 after the Company achieved two milestones.
The Share Exchange resulted in a change in control of SJ Electronics as the Shareholder of Shing Mei became the majority shareholder of the Company, owning approximately 68% of the total shares issued and outstanding. Also, the Shareholder was elected a director of the Company and appointed as its executive officer. As a result of the Exchange Agreement, (i) Shing Mei became a wholly-owned subsidiary of SJ Electronics and (ii) SJ Electronics succeeded to the business of Shing Mei as its sole business. On March 20, 2008, the Board of Directors also approved a resolution to change the Company’s name to SJ Electronics, Inc. and elected two new members to the Company’s board of directors subject to the disclosure requirements under the Securities Exchange Act of 1934, as amended (the “1934 Act”). The name change became effective on March 26, 2008 upon filing of the Articles of Merger reflecting the change with the Secretary of State of the State of Nevada. Concurrently with the resolution to change the name of the Company, the Board of Directors also approved a resolution to increase the Authorized Common Stock from 40,000,000 to 100,000,000 shares which became effective on June 17, 2008 after the Company complied with the disclosure obligations under the 1934 Act, and filed a certificate of change with the Secretary of State of the State of Nevada.
For accounting purpose, the transaction has been accounted for as a reverse acquisition under the purchase method. Accordingly, Shing Mei and its subsidiaries are treated as the continuing entity for accounting purposes.
Shing Mei Enterprises Ltd. (“ShingMei”) was incorporated in SAMOA in August of 2003 with a registered capital of $4,000,000.
F-4
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 2 - ORGANIZATION AND NATURE OF BUSINESS (continued)
In October 2004, Shing Mei acquired 100% ownership of S.J. Electronics (Gongming loutsun Shenzhen) Co., Ltd., located in the City of Shenzhen in the Peoples Republic of China (“PRC”).
In November 2005, Shing Mei established its own 100% subsidiary, Xujun Electronic (Ganzhou) Co., Ltd, located in the city of Quannan of Jiangxi Province in PRC.
In January 2006, Shing Mei established its own 100% subsidiary, Guangxi Hezhou Xujun Electronics Co., Ltd. located in the city of Hezhou of Guangxi Province in PRC.
In August 2006, Shing Mei established its own 100% subsidiary, S.J. Electronics Technology (Shenzhen) Co., Ltd. located in the city of Shenzhen of Guangdong Province in PRC.
In August 2007, Shing Mei established its own 100% subsidiary, FuChuan Xujun science and Technology Electronics Co., Ltd. located in the city of FuChuan of Guangxi Province in PRC.
Shing Mei owns 100% equity interest on its five subsidiaries (collectively referenced throughout as the “Company”) as of June 30, 2008, located in Shenzhen of Guangdong Province, Jiangxi Province and Guangxi Province in PRC individually.
The Company’s primary business activities are the manufacturing of electronic cable products and assembling of wire harness products by its five subsidiaries in PRC, as well as sales of its products to overseas customers.
The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and may not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Company’s current report on Form 8-K filed on February 14, 2008 and registration statement on Form S-1 filed on August 4, 2008. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of the management, the consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present them in conformity with US GAAP.
Principles of Consolidation
The consolidated financial statements include the accounts of the Shing Meiand its subsidiaries. Significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as well as the reported amounts of revenues and expenses. Actual results could differ from these estimates.
F-5
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash on deposit with various financial institutions in PRC, and all highly-liquid investments with original maturities of three months or less at the time of purchase. Banks and other financial institutions in PRC do not provide insurance for funds held on deposit.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. The Company analyzes the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. The Company has had a positive collection experience since its inception. The Company does not have any bad debt allowance as at June 30, 2008 and 2007.
Inventories
Inventories, which are primarily comprised of raw materials, work-in-process goods, packaging materials, and finished goods, are stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) method. Cost is determined on the basis of a moving average. The Company evaluates the need for reserves associated with obsolete, slow-moving and non-salable inventory by reviewing net realizable values on a periodic basis.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method, with an estimated 0% salvage value of original cost, over the estimated useful lives of the assets as follows:
Molds | 2 years |
Machinery and equipment | 5-10 years |
Electronic equipment | 5-10 years |
Computer equipment | 5-10 years |
Office equipment | 5-10 years |
Automobile | 5-10 years |
5-10 years | |
Other equipment | 5-10 years |
Expenditures for repairs and maintenance, which do not improve or extend the expected useful lives of the assets, are expensed as incurred while major replacements and improvements are capitalized.
When property or equipment is retired or disposed of, the cost and accumulated depreciation are removed from the accounts, with any resulting gains or losses being included in net income or loss in the year of disposition.
Impairment of Long-Lived Assets
The Company evaluates potential impairment of long-lived assets, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires the Company to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. The Company believes that long-lived assets in the accompanying balance sheets are appropriately valued as at June 30, 2008 and 2007.
F-6
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred pursuant to PRC law, including such factors as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value-added tax laws have been complied with, and collectability is reasonably assured. The Company generally recognizes revenue when its products are shipped.
Comprehensive Income
The Company has adopted SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
Concentration of Credit Risk
The Company maintains cash balances at various financial institutions in PRC which do not provide insurance for amounts on deposit.
The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area. The Company mitigates this risk by spreading its deposits over 20 banks.
The Company operates principally in PRC and grants credit to its customers. Although the PRC is economically stable, it is always possible that unanticipated events both domestically and in foreign countries could disrupt either the Company’s operations or those of its customers.
Earnings per Share
The Company computes earnings per share (“EPS’) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
The calculation of diluted weighted average common shares outstanding for the three months and six months ended June 30, 2008 and 2007 is applied to warrants using the treasury stock method to determine if they are dilutive. The common stock issuable upon conversion of the convertible notes payable is also included on an “as if converted” basis when the convertible notes are dilutive.
Foreign Currency Translation
The functional currency of Shing Mei is Hong Kong Dollar (“HKD”). The Company maintains its financial statements using the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.
However, the functional currency of all four subsidiaries of the Company is the Renminbi (“RMB”), the PRC’s currency. Those Subsidiaries maintain their financial statements using their own functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.
F-7
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For financial reporting purposes, the financial statements of Shing Mei, which are prepared in HKD, are translated into the Company’s reporting currency, United States Dollars (“USD”). All the financial statements of its four subsidiaries, which are prepared in RMB, are translated into the Company’s reporting currency, USD. Balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) as a component of stockholders’ equity.
The exchange rates used for foreign currency translation were as follows (USD$1 = RMB):
Period Covered | Balance Sheet Date Rates | Average Rates | ||
Six months ended June 30, 2007 | 7.6120 | 7.71170 | ||
Six months ended June 30, 2008 | 6.8591 | 7.05911 |
The exchange rates used for foreign currency translation were as follows (USD$1 = HKD):
Period Covered | Balance Sheet Date Rates | Average Rates | ||
Six months ended June 30, 2007 | 7.81840 | 7.796640 | ||
Six months ended June 30, 2008 | 7.79700 | 7.779664 |
Fair Value of Financial Instruments
The Company's financial instruments include cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses, value-added taxes, short-term and long-term bank loans, and loans payable to related parties. The carrying amounts of financial instruments other than long-term obligations approximate fair value due to their short maturities. Long-term obligations approximate fair value based upon rates currently available for similar instruments.
Debt Issuance Costs
Certain costs associated with the issuance of debt instruments are capitalized and included in non-current assets on the consolidated balance sheet. These costs are amortized to interest expense over the terms of the related debt agreements on a straight-line basis. Amortization of deferred financing costs included in interest expense was $237,460 for the six months ended June 30, 2008.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which includes an amendment of FASB Statement No. 115, (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, (“SFAS No. 115”), applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective for the Company’s consolidated financial statements for the annual reporting period beginning after November 15, 2007. The Company is currently evaluating the impact of this new pronouncement on its consolidated financial statements.
On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, Noncontrolling interest in Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We have not yet determined the impact of the adoption of SFAS No. 160 on our consolidated financial statements and footnote disclosures.
F-8
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On December 4, 2007, the FASB issued SFAS No.141R, Business Combinations (SFAS No. 141R). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to expand disclosures about the nature and financial effect of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We have not yet determined the impact of the adoption of SFAS No. 141R on our consolidated financial statements and footnote disclosures.
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective on January 1, 2009. The Company is in the process of evaluating the new disclosure requirements under SFAS 161.
NOTE 4 - ACCOUNTS RECEIVABLE
The Company has accounts receivable in the amount of $14,659,840 as of June 30, 2008. There was no allowance for a bad debt provision for all periods as the Company, since inception, has a positive collection experience. No allowance is considered necessary.
Accounts receivables from the customers have been factored to banks as collateral to bank loans to obtain working capital. The above customers, all publicly listed companies in Taiwan, have passed creditability investigation of the lending banks. According to the bank loan agreement, when the accounts receivables are factored, the banks will collect the payments when due, charge interest on amount paid, and return the balance to the Company.
The following details the accounts receivable factored as collateral for the Company’s short-term bank loans:
June 30, 2008 | December 31, 2007 | ||||||
A/R FACTORY: | |||||||
Delta Electronics International Ltd. | $ | 878,357 | $ | 185,675 | |||
FSP Technology Inc | 1,154,212 | 2,716,000 | |||||
Canon Group. | 1,079,425 | - | |||||
Lite-On Technology Corp. | 3,984,534 | - | |||||
Yet Foundate Ltd | 875,648 | - | |||||
Lite-On Overseas Trading Co., Ltd. | 699,575 | - | |||||
Chicony Electronics (Dongguan) Co., Ltd. | 189,113 | 619,000 | |||||
Chicony Electronics (Suzou) Co., Ltd. | 90,922 | 113,000 | |||||
884,926 | 1,535,896 | ||||||
The short term loans of A/R Factory TOTAL: | $ | 9,836,710 | $ | 5,169,571 |
F-9
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 5 - INVENTORY
Inventory consists of the following:
June 30, 2008 | December 31, 2007 | ||||||
Raw materials | $ | 3,391,856 | $ | 2,090,579 | |||
Work in process | 2,325,316 | 1,584,957 | |||||
Finished goods | 5,233,447 | 3,715,971 | |||||
Subtotal | $ | 10,950,619 | $ | 7,391,507 | |||
(236,651 | ) | (116,564 | ) | ||||
Inventory Total | $ | 10,713,968 | $ | 7,274,943 |
NOTE 6 - ADVANCES TO SUPPLIERS
As of June 30, 2008, the Company has advances to suppliers in the total amount of $8,461,804. Advances to suppliers represent amounts prepaid for production to assure a continued supply of materials. The advances are applied against amounts due the supplier as the materials are shipped.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, 2008 | December 31, 2007 | ||||||
Equipment & Machinery | $ | 6,385,587 | $ | 5,418,553 | |||
Automobiles | 61,675 | 52,789 | |||||
Other Equipment | 95,988 | 178,660 | |||||
Computer Equipment | 105,717 | 82,170 | |||||
Molds | 329,339 | 50,219 | |||||
Office Equipment | 14,434 | 13,573 | |||||
Electronic Equipment | 538,702 | 350,951 | |||||
Leasehold Improvements | 294,167 | 500,641 | |||||
Fixed Assets | $ | 7,825,609 | $ | 6,647,556 | |||
Less: Accumulated Depreciation | (1,915,002 | ) | (1,442,408 | ) | |||
Total Fixed Assets -Net | $ | 5,910,607 | $ | 5,205,148 |
Depreciation expense for the six months ended June 30, 2008 and 2007 was $375,688 and $394,321, respectively.
F-10
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 8 - BANK LOANS
As of June 30, 2008, the Company had several outstanding bank loans which were used primarily for general working capital purposes. These are recurring loans which carry annual interest rates of 5.5% ~7.5% with maturity dates of 6 months except loan from Lite-on Group, which is interest free and due upon demand. These loans are secured by the Company’s bank deposit. All bank credit facilities are created under Accounts Receivable Factoring with collectable authority from the customers or the Company. Those bank credit lines are rollover within one-year terms.
The outstanding bank loans are as below table:
June 30, 2008 | December 31, 2007 | ||||||
Short term loans | |||||||
A/R Factoring | |||||||
Far Eastern International Bank | $ | - | $ | 185,675.00 | |||
Taipei Fubon Bank Hongkong Branch | 1,434,246 | 3,448,000 | |||||
The HSBC-Mong Kok Branch | 8,122,474 | - | |||||
En Tie Commercial Bank | 279,990 | 1,535,896 | |||||
A/R Factoring Total: | $ | 9,836,710 | $ | 5,169,571 | |||
L/C loans | |||||||
Taipei Fubon Bank Hongkong Branch | $ | 168,789.00 | $ | 486,500.00 | |||
The HSBC-Mong Kok Branch | 8,996,048 | 4,996,467 | |||||
Lite-on Group | 888,012 | - | |||||
Grand Capital Int'l LTD | 1,250,000 | - | |||||
L/C loans Total | $ | 11,302,849 | $ | 5,482,967 | |||
Bridge Loan | 2,250,000 | ||||||
Short term loans Total | $ | 21,139,559 | $ | 12,902,538 |
NOTE 9 - CAPITAL LEASE PAYABLE
June 30, 2008 | December 31, 2007 | ||||||
Chailease Internaitonal Finance Corporation (ShenZhen Office) | |||||||
Capital lease payable | $ | 339,386 | $ | 405,525 | |||
Less: Current portion | (205,130 | ) | (179,305 | ) | |||
Capital Lease- long term portion | $ | 134,256 | $ | 226,220 | |||
Interest rate range | 14.70286 | % | 14.70286 | % |
The capital lease has been arranged from Chailease International Finance Corporation in Jan 2007. The principal value is RMB 4,000,000 at inception and is to be repaid in 36 months from February 2007 to January 2010. The effective interest rate is 14.7% per annum. The balance principal was $339,386 as at June 30, 2008.
F-11
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 10 - CONVERTIBLE DEBENTURES
In December, 2007, Shing Mei borrowed $2,250,000 by issuing 10% convertible notes due March 31, 2008 in the aggregate principal amount of $2,250,000. The notes are convertible into the common stock of Shing Mei at a conversion price of $0.50 per share. As part of the financing Shing Mei issued to the lenders five year warrants to purchase 2,250,000 shares of the common stock of Shing Mei at an exercise price of $1.00 per share. The notes are secured by the Shing Mei’s stock owned by its management.
On March 13, 2008, the notes were partially converted into a total of 3,698,937 shares of the Company’s common stock. As of June 30, 2008, the balance of the notes was $434,281, which consists of warrant liability of $107,275 and liability of stock to be issued of $327,006.
In March, 2008, all material terms of the term sheet for the issuance and sale of the 15% Senior Secured Convertible Notes due 2009 were approved and agreed upon by the Company. In May 2008, pursuant to the original terms agreed upon, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) to sell to certain accredited investors and to certain non-US persons our 15% Senior Secured Convertible Notes Due 2009 (the “15% Notes”) at closings to occur on or before July 31, 2008. On May 15, 2008 the first closing under the Note Purchase Agreement took place at which we sold to certain investors and to non-US persons 15% Notes in the aggregate principal amount of $2,950,000. On May 30, 2008 the second closing under the Note Purchase Agreement took place at which we sold to certain investors and to non-US persons 15% Notes in the aggregate principal amount of $700,000. On June 10, 2008 the third and the final closing under the Note Purchase Agreement took place at which we sold to certain investors and to non-US persons 15% Notes in the aggregate principal amount of $2,150,000. The aggregate principal amount of the 15% Notes sold at all three closings under the Note Purchase Agreement was $5,800,000. The maturity date of the 15% Notes is one year after the date of issuance. The outstanding principal of the 15% Notes accrue interest at the rate of 15% per annum. All accrued interest on such 15% Notes is payable at maturity.
The holders of the Notes have the right to convert their notes into the Company’s common stock at a conversion price of $1.30 per share, subject to adjustments (the “Conversion Price”). Under the Note Purchase Agreement, if the Company’s “pre-tax income” for the year ended December 31, 2008 is less than $10,000,000, then Conversion Price will be reduced by the percentage shortfall, up to maximum of $0.65 per share (the “Performance Adjustment”). In the event of a conversion, accrued interest shall be automatically converted into common stock.
In connection with the sale of the 15% Notes, the Company also issued warrants to purchase 446,154 shares of common stock with an exercise price of $1.30 per share subject to adjustments. These warrants contain the same Performance Adjustment provisions as the 15% Notes.
Management reviewed the accounting for these transactions and concluded that the conversion option did not constitute an embedded derivative under SFAS No. 133. Management also concludes that the transaction does not include a beneficial conversion feature pursuant to EITF 98-5 and 00-27 since the fair market value of the Company’s common stock at the commitment date was lower than the conversion price.
In connection with the issuance of the Notes, we incurred issuance costs of $940,989, which primarily consisted of investment banker fees and legal and other professional fees. These costs will be classified within Other Assets and will be amortized as interest expense using the effective interest method over the term of the Notes. Additionally, interest expense of $81,979 on the 15% Notes has been accrued as of June 30, 2008.
Note 11 - STOCKHOLDERS’ EQUITY
A. Issuance of Common Stock
Prior to the closing of the Share Exchange, the Company had 21,400,000 shares of common stock issued and outstanding. The Company effected a 2 for 5 reverse split on its outstanding common stock, which left the Company with 8,560,000 shares of common stock outstanding. Immediately after the reverse split, the Company also retired 8,102,944 shares of post-split common stock, which resulted in 457,056 shares of common stock outstanding at the closing of the Share Exchange.
F-12
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
Note 11 - STOCKHOLDERS’ EQUITY (continued)
As a part of the Securities Exchange Agreement, SJ Electronics agreed to issue 4,567,500 shares of its common stock and five year warrants to purchase 2,250,000 shares at $1.00 per share to a number of accredited investors, in exchange for promissory notes of $2,250,000 (Note 9), evidencing debt obligations by Shing Mei and warrants to purchase Shing Mei shares. As of June 30, 2008, the Company issued a total of 3,698,937 upon conversion of $1,815,719 promissory note.
In addition, SJ Electronics also issued a total of 1,828,222 SJ Electronics shares and warrants to purchase 450,000 shares of SJ Electronics common stock to the placement agent for a bridge financing that was recently completed by the Company and for other investment banking services.
In conjunction with the Share Exchange, SJ Electronics also issued into escrow for the benefit of one of Shing Mei’s executive officers, 1,000,000 shares that will be released to that individual upon the Company meeting certain earnings and other milestones. Of those, 250,000 shares were released from escrow in June 2008 after the Company achieved two milestones.
As of June 30, 2008, there were 21,984,215 shares of common stock issued and outstanding and no preferred stock.
B. Warrants
On February 14, 2008, upon the execution of the Share Exchange Agreement, the Company issued to the investors and placement agents (i) five-year warrants to purchase 2,250,000 shares of the Company’s common stock at $1.00 per share, and (ii) five-year warrants to purchase 450,000 shares of the Company’s common stock at $0.50 per share. Furthermore, on June 10, 2008, upon the execution of a Note Purchase Agreement, the Company issued to the placement agent involved in the sale of the 15% Notes, five-year warrants to purchase 446,154 shares of the Company’s common stock at $1.30 per share. All warrants contain a cashless exercise provision. Accordingly, in accordance with EITF 00-19, the warrants are classified as equity.
The fair value of the warrants was calculated using the Black-Scholes options pricing model using the following assumptions: Volatility 100%, risk free interest rate of 3.85%, and expected term of 5 years.
The amount of $143,166 represents the fair value of warrants issued to the consultant to purchase 446,154 shares of the Company's common stock.
Following is a summary of the status of warrants outstanding as of June 30, 2008:
Outstanding Warrants | |||||
Exercise Price | Number | Average Remaining Life | |||
$ | 1.00 | 2,250,000 | 4.5 years | ||
$ | 0.50 | 450,000 | 4.5 years | ||
$ | 1.30 | 446,154 | 4.9years | ||
3,146,154 |
NOTE 12 - STATUTORY RESERVES
As stipulated by the relevant laws and regulations for enterprises operating in PRC, the subsidiaries of the Company are required to make annual appropriations to a statutory surplus reserve fund. Specifically, the subsidiaries of the Company are required to allocate 10% their profits after taxes, as determined in accordance with the PRC accounting standards applicable to the subsidiaries of the Company, to a statutory surplus reserve until such reserve reaches 50% of the registered capital of the subsidiaries of the Company. So far the PRC subsidiaries have not allocated any statement reserves.
F-13
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company and its subsidiaries have entered into several tenancy agreements for the lease of factory premises and staff quarters. The Company’s commitment for minimum lease payments under these non-cancelable operating leases for the next five years and thereafter are as follows as follows:
Year Ending December 31, | ||||
2009 | $ | 243,706 | ||
2010 and thereafter | 304,632 | |||
$ | 548,338 |
Social insurance for employees
According to the prevailing wage laws and regulations of the PRC, the Company and its subsidiaries are required to cover their employees with medical, retirement and unemployment insurance programs. Management believes that due to the transient nature of its employees, the Company does not need to provide all employees with such social insurances, and has paid the social insurances for the Company’s employees who have completed three months’ continuous employment with the Company. The three month period is a probation period after which the employee becomes part of permanent staff.
The initial determination of whether an employee is entitled to coverage is made by the Company, based on the statutory provisions for included employees. The employees have a right to appeal the Company’s decision not to provide the coverage, and, if an employee exercises this right and files a complaint against the Company and prevails, the Company may be required to pay for the insurance retroactively and pay an administrative fine. The Company believes that it is in compliance with applicable law and that any liability which it may incur will not be material.
Principal Customer
A significant percentage of the Company’s business is generated from one customer. The following table sets forth information as to the revenue derived in the quarter ended June 30, 2008 from this customer that accounted for more than 10% of our revenue.
June 30, 2008 | December 31, 2008 | ||||||||||||
Amount | Percent | Amount | Percent | ||||||||||
Lite-on Groups | $ | 15,945,000 | 65 | % | $ | 28,126,000 | 50 | % |
NOTE 14 - INCOME TAXES
Shing Mei is registered in Samoa and wholly owns its five subsidiaries in the PRC.
The subsidiary, S.J. Electronics (Gongming Loutsun Shenzhen) Co., Ltd., is registered as an assembling factory which has no income tax obligation according to the Income tax regulation of PRC.
The other four subsidiaries owned by Shing Mei are under the tax laws of PRC. Those Subsidiaries are entitled to a preferential Enterprise Income Tax (“EIT”) rate of 15%, which a full exemption for the first two profitable years, followed by a 50% reduction on EIT for the following three consecutive years.
As a result of the above tax exemptions, there were no income taxes payable by Shing Mei at December 31, 2007 and 2006. Under current law, Shing Mei is entitled to a 50% tax exemption for the following three years.
F-14
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 14 - INCOME TAXES (continued)
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
NOTE 15 - SEGMENT INFORMATION
SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Group believes that it operates in one business segment (research, development, production, marketing and sales of electronic products) and in one geographical segment (China), as all of the Company’s current operations are carried out in China.
NOTE 16 - OPERATING RISK
Country risk
The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government 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 can give no assurance that those changes in political and other conditions will not result in or have a material adverse effect upon the Company’s business and financial condition.
NOTE 17 - RELATED PARTY TRANSACTIONS
Name and relationship of related parties
Company Name | Relationship | |||
As at Dec 31, 2007 | S.J. Electronics (Gongming loutsun Shenzhen ) Co., Ltd. | Same chairman as Shing Mei | ||
Guangxi Hezhou XU JUN Electronics Co., Ltd. | Same chairman as Shing Mei | |||
Xujun Electronic (Ganzhou) Co., Ltd | Same chairman as Shing Mei | |||
S.J. Electronics Technology (Shenzhen) Co., Ltd. | Same chairman as Shing Mei | |||
TechPower-Semi Enterprise Co., Ltd. | Same chairman as Shing Mei | |||
S.J. International Pte., Ltd. | Same chairman as Shing Mei | |||
S.J. Electronics Ltd. | Same chairman as Shing Mei | |||
FuChuan Xujun Science and Technology Elec. Co., Ltd. | Same chairman as Shing Mei | |||
As at June 30, 2008 | S.J. Electronics (Gongming loutsun Shenzhen ) Co., Ltd. | Same chairman as Shing Mei | ||
Guangxi Hezhou XU JUN Electronics Co., Ltd. | Same chairman as Shing Mei | |||
Xujun Electronic (Ganzhou) Co., Ltd | Same chairman as Shing Mei | |||
S.J. Electronics Technology (Shenzhen) Co., Ltd. | Same chairman as Shing Mei | |||
FuChuan Xujun Science and Technology Elec. Co., Ltd. | Same chairman as Shing Mei | |||
TechPower-Semi Enterprise Co., Ltd. | Same chairman as Shing Mei | |||
S.J. International Pte., Ltd. | Same chairman as Shing Mei | |||
S.J. Electronics Ltd. | Same chairman as Shing Mei |
F-15
SJ Electronics, Inc.
(Formerly Acheron, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 2008 and 2007
NOTE 17 - RELATED PARTY TRANSACTIONS (continued)
Due from related parties
June 30, 2008 | ||||
S.J. electronics Ltd.(Taipei) | $ | 7,435,364 | ||
Total Due from related parties: | $ | 7,435,364 |
Due to related parties
June 30, 2008 | ||||
Shareholder | $ | 477,821 | ||
Total Due to related parties: | $ | 477,821 |
NOTE 18 - INVESTMENT ADVISORY AGREEMENT
In November 2007, the Company entered into an investment advisory agreement whereby the Company has agreed to pay the advisor a fee of $175,000 annually beginning January, 2008, a cash fee equal to 10% of the gross proceeds of private placement or PIPE financings, and warrants to purchase 10% of shares of common stock sold in such financing or underlying securities sold in such financing. Additionally, at the closing of a reverse merger and PIPE transaction the advisor and shell shareholders will own a combined 10% of the reorganized public company. The investment advisory fee is payable from the proceeds of a future financing.
F-16
Forward Looking Statements
Some of the statements contained in this Management’s Discussion and Analysis (“MD&A”) that are not historical facts are “forward-looking statements” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements that such statements, which are contained in this MD&A, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties, and other factors affecting our operations, market growth, services, products, and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
1. Our ability to attract and retain management, and to integrate and maintain technical information and management information systems;
2. Our ability to generate customer demand for our services;
3. The intensity of competition; and
4. General economic conditions.
All written and oral forward-looking statements made in connection with this MD&A that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Company Overview
SJ Electronics, Inc. (“Company”, “we” or “us”) was formed as a Nevada corporation on June 23, 1994 as Harvest E-xpress and later changed its name to HLS (USA), Inc. (from May 1, 1997 through April 12, 2006), and Acheron, Inc. (from April 13, 2006 through March 19, 2008). On March 20, 2008, we changed our name to SJ Electronics, Inc.
4
On February 13, 2008, the Company entered into and completed the transactions contemplated under a Securities Exchange Agreement (the “Exchange Agreement”) with Yu-Ping “Agatha” Shen, the sole shareholder (the “Shareholder”) of Shing Mei Enterprises Ltd., a corporation organized under the laws of Samoa (“Shing Mei”), pursuant to which the Company purchased from the Shareholder all issued and outstanding shares of Shing Mei’s common stock in consideration for the issuance of 15,000,000 shares of Common Stock of the Company (the “Share Exchange”).
The Share Exchange resulted in a change in control of the Company, with the Shareholder owning 15,000,000 shares of common stock of the Company out of a total of 21,984,215 issued and outstanding shares after giving effect to the Share Exchange, or approximately 68%. As a result of the Share Exchange, (i) Shing Mei became a wholly-owned subsidiary of the Company and (ii) the Company succeeded to the business of Shing Mei as its sole business. The transaction was accounted for as a reverse merger (the “Reverse Merger”). As a result, the historical financial results are those of Shing Mei and its subsidiaries.
In March, 2008, all material terms of the term sheet for the issuance and sale of the 15% Senior Secured Convertible Notes due 2009 were approved and agreed upon by the Company. In May 2008, pursuant to the original terms agreed upon, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) to sell to certain accredited investors and to certain non-US persons our 15% Senior Secured Convertible Notes Due 2009 (the “15% Notes”) at closings to occur on or before July 31, 2008. On May 15, 2008 the first closing under the Note Purchase Agreement took place at which we sold to certain investors and to non-US persons 15% Notes in the aggregate principal amount of $2,950,000. On May 30, 2008 the second closing under the Note Purchase Agreement took place at which we sold to certain investors and to non-US persons 15% Notes in the aggregate principal amount of $700,000. On June 10, 2008 the third and the final closing under the Note Purchase Agreement took place at which we sold to certain investors and to non-US persons 15% Notes in the aggregate principal amount of $2,150,000. The aggregate principal amount of the 15% Notes sold at all three closings under the Note Purchase Agreement was $5,800,000. The maturity date of the 15% Notes is one year after the date of issuance. The outstanding principal of the 15% Notes accrue interest at the rate of 15% per annum. All accrued interest on such 15% Notes is payable at maturity.
The holders of the Notes have the right to convert their notes into the Company’s common stock at a conversion price of $1.30 per share, subject to adjustments (the “Conversion Price”). Under the Note Purchase Agreement, if the Company’s “pre-tax income” for the year ended December 31, 2008 is less than $10,000,000, then Conversion Price will be reduced by the percentage shortfall, up to maximum of $0.65 per share (the “Performance Adjustment”). In the event of a conversion, accrued interest shall be automatically converted into common stock.
In connection with the sale of the 15% Notes, the Company also issued warrants to purchase 446,154 shares of common stock with an exercise price of $1.30 per share subject to adjustments. These warrants contain the same Performance Adjustment provisions as the 15% Notes.
The Company has recently restated its previously issued financial statements for fiscal years ended December 31, 2007 and 2006, as a result of an internal review during which the Company determined that it incorrectly calculated its foreign exchange gain (loss) and incorrectly reflected a related party liability as a contribution to capital.
SJ Electronics, Inc., through Shing Mei and its five subsidiaries, is an international designer, developer and manufacturer of computer components including connectors, wire harness and cable assemblies. SJ Electronics, Inc. specializes in the manufacturing and sales of computer, communication and consumer electronic (3C) power components, including information technology (IT) communications cables, computer & IT appliance power supply cable sets and IT communications signal cable sets.
Results of Operations
Comparison of Three Months Ended June 30, 2008 and June 30, 2007
Sales
During the three months ended June 30, 2008, we had sales of $12,770,207 as compared to sales of $13,824,857 for the three months ended June 30, 2007, a decrease of approximately 7.6%. This decrease is attributable to the slower sales of wire harnesses and cables. We believe that our sales should resume growth in the second half of 2008 as we are broadening our product offering and improving the quality and cost of our products.
5
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 2008 decreased $2,463,611 or 19%, from $12,953,927 for the three months ended June 30, 2007 to $10,490,316 for the three months ended June 30, 2008. The decrease in our cost of goods sold was greater than the corresponding 7.6% decrease in our sales for the three months ended June 30, 2008 as compared to that of the same period in 2007. This larger decrease in cost of goods sold is directly attributable to our efforts to purchase raw materials, particularly copper wire, on favorable terms in the cash markets.
Gross Profit
Gross profit was $2,279,891for three months ended June 30, 2008 as compared to $870,930 for the three months ended June 30, 2007, representing gross margins of approximately 17.85% and 6.3%, respectively. The increase in our gross margins came as a result of our efforts to obtain a competitive purchase price of raw materials by paying for raw materials by cash instead of by credit.
Selling Expenses
Selling expenses totaled $76,810 for the three months ended June 30, 2008, as compared to $101,234 for the three months ended June 30, 2007, a decrease of approximately 24%. This decrease is primarily attributable to less shipping expenses incurred in the same period of 2008 than those of 2007.
General and Administrative Expenses
General and administrative expenses totaled $ 1,448,155 for the three months ended June 30, 2008, as compared to $ 674,653 for the three months ended June 30, 2007, an increase of approximately 115%. This increase is partially attributable to the increase in loss in foreign currency exchange fluctuation between Chinese Renminbi (“RMB”) and Hong Kong Dollar (“HKD”) as we use both RMB and HKD for purchase of raw materials and receive payment for the sale of our products in HKD. As RMB appreciated against HKD in the second quarter of 2008 as compared to the same period in 2007, we incurred losses from the currency exchange. We also incurred significantly higher legal and accounting expenses during the quarter as a result of our now being a public entity versus being private in the prior year’s quarter. Additionally, there was also $143,166 amortization of warrant issued and $52,277 in amortization of debt issuance cost in second quarter 2008.
(Gain) Loss on Disposal of Assets
We have not disposed of assets during the three months ended June 30, 2008 on disposal of assets. We incurred a loss of ($177,706) on disposal of assets during the three months ended June 30, 2007.
Interest Income (Expenses) and Other Income (Expenses)
We incurred interest expense of $359,595 for the three months ended June 30, 2008 for the payment of the interest on outstanding indebtedness under our one year lines of credit and accounts receivable loans and amortization of debt issuance cost while the interest payment for the same period in 2007 was $111,333 for our loans. We currently have total loans outstanding of $21,139,559. Other income was comprised of certain miscellaneous revenue at the amount of $378,480 for the three months ended June 30, 2008 and $1,214,059 for the same period in 2007.
Income Taxes
Shing Mei is not subject to any tax in Samoa. Our five subsidiaries in China had the income tax holiday for 2007. S.J. Electronics (Gongming Loutsun Shenzhen) Co., Ltd. was registered as an assembling factory which has no income tax obligation according to the income tax regulation of the PRC. Our other four subsidiaries in China were qualified for a tax holiday pursuant to the PRC laws and regulations governing foreign invested enterprises for the first two profitable years, followed by a 50% reduction on their income tax for the following three consecutive years.
6
Net Income
Our net income for the three months ended June 30, 2008 was $773,811 as compared to our net income of $1,020,062 for the three months ended June 30, 2007. The decrease in net income is primarily attributable to the increased expenses related to our going public, equity financing initiatives, foreign exchange rate losses and consulting expense amortized, as well as the increase in the cost of raw materials that we experienced in 2008. Our management believes that net income will increase going forward because we plan to continue improving our current products, begin introducing new products, and we believe that we will be expanding our sales into additional markets in Asia and the United States.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments. Comprehensive income for the three months ended June 30, 2008 was $154,662 compared to comprehensive loss of $283,677 for the three months ended June 30, 2007.
Comparison of Six Months Ended June 30, 2008 and June 30, 2007
Sales
During the six months ended June 30, 2008, we had sales of $25,731,770 as compared to sales of $24,663,182 for the six months ended June 30, 2007, an increase of approximately 4.3%. This increase is attributable to the continued growth in sales of wire harnesses and cables. We believe that our sales should show improved growth in the second half of 2008 as we are broadening our product offering and improving the quality and cost of our products.
Cost of Goods Sold
Cost of goods sold for the six months ended June 30, 2008 decreased $1,112,969 or 4.9%, from $22,909,770 for the six months ended June 30, 2007 to $21,796,801 for the six months ended June 30, 2008. The decrease in our cost of goods sold was markedly in difference to the corresponding 4.3% increase in our sales for the six months ended June 30, 2008 as compared to that of the same period in 2007. This large decrease in cost of goods sold is directly attributable to our efforts to purchase raw materials, particularly copper wire, on favorable terms in the cash markets.
Gross Profit
Gross profit was $3,934,969 for six months ended June 30, 2008 as compared to $1,753,412 for the six months ended June 30, 2007, representing gross margins of approximately 15.3% and 7.1%, respectively. The increase in our gross margins came as a result of our efforts to obtain a competitive purchase price of raw materials by paying for raw materials by cash instead of by credit.
Selling Expenses
Selling expenses totaled $333,745 for the six months ended June 30, 2008, as compared to $391,785 for the six months ended June 30, 2007, a decrease of approximately 15%. This decrease is primarily attributable to less shipping expenses incurred in the same period of 2008 than those of 2007.
General and Administrative Expenses
General and administrative expenses totaled $3,416,652 for the six months ended June 30, 2008, as compared to $912,608 for the six months ended June 30, 2007, an increase of approximately 274%. This increase is partially attributable to the increase in loss in foreign currency exchange fluctuation between Chinese Renminbi (“RMB”) and Hong Kong Dollar (“HKD”) as we use both RMB and HKD for purchase of raw materials and receive payment for the sale of our products in HKD. As RMB appreciated against HKD in the first half of 2008 as compared to the same period in 2007, we incurred losses from the currency exchange. We also incurred significantly higher legal and accounting expenses during the quarter as a result of our now being a public entity versus being private in the prior year’s quarter. Additionally, there was also $143,166 amortization of warrant issued in first half of 2008, $457,185 amortization for stock issued for consulting services, and $237,400 in amortization of debt issuance cost.
7
(Gain) Loss on Disposal of Assets
We had a loss of $26,234 on disposal of assets during the six months ended June 30, 2008. We incurred no gains or losses on disposal of assets during the six months ended June 30, 2007.
Interest Income (Expenses) and Other Income (Expenses)
We incurred interest expenses of $726,829 for the six months ended June 30, 2008 for the payment of the interest on outstanding indebtedness under our one year lines of credit and accounts receivable loans and amortization of debt issuance cost while the interest payment for the same period in 2007 was $211,319 for our loans. We currently have total loans outstanding of $26,939,559. Other income was comprised of certain miscellaneous revenue at the amount of $502,638 for the six months ended June 30, 2008 and $1,445,290 for the same period in 2007.
Income Taxes
Shing Mei is not subject to any tax in Samoa. Our five subsidiaries in China had the income tax holiday for 2007. S.J. Electronics (Gongming Loutsun Shenzhen) Co., Ltd. was registered as an assembling factory which has no income tax obligation according to the income tax regulation of the PRC. Our other four subsidiaries in China were qualified for a tax holiday pursuant to the PRC laws and regulations governing foreign invested enterprises for the first two profitable years, followed by a 50% reduction on their income tax for the following three consecutive years.
Net Income
Our net loss for the six months ended June 30, 2008 was $65,853 as compared to our net income of $1,682,989 for the six months ended June 30, 2007. The decrease in net income is primarily attributable to the increased expenses related to our going public, equity financing initiatives, foreign exchange rate losses and consulting expense amortized, as well as the increase in the cost of raw materials that we experienced in 2008. Our management believes that net income will increase going forward because we plan to continue improving our current products, begin introducing new products, and we believe that we will be expanding our sales into additional markets in Asia and the United States.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments. Comprehensive income for the six months ended June 30, 2008 was $576,441 compared to comprehensive income of $1,380,635 for the six months ended June 30, 2007.
Liquidity and Capital Resources
In May and June of 2008, we raised an aggregate of $5,800,000 in gross proceeds from a private placement to certain accredited investors and to non-US persons of the 15% Senior Secured Convertible Notes due 2009. This capital is being used to help fund working capital.
8
In December of 2007, Shing Mei raised $2,250,000 in gross proceeds in a private placement of the 10% Notes to a number of accredited investors and to non-US persons. The capital raised from the sale of the 10% Notes was used as working capital to finance our operations.
We also utilize bank loans to finance our operations and capital expenditures. Due to the significant growth rate we are experiencing, and the standard 120 day terms we offer to our customers, we anticipate needing additional working capital financing going forward.
As of June 30, 2008, we had cash and cash equivalents of $697,293. Our current assets were $42,494,465, including $14,659,840 accounts receivable. Our current liabilities were $42,254,634, including $21,139,559 short-term loans and $12,827,184 accounts payable. Our total stockholders’ equity as of June 30, 2008 was $6,904,894.
Net cash used in operating activities was $(4,708,310) during the six months ended June 30, 2008 and $(3,715,893) during the six months ended June 30, 2007. The negative net cash flow used in operating activities during the six months ended June 30, 2008 was mainly due to the increased levels of advance to suppliers and higher inventory of raw materials. The negative cash flow from operations during the six months ended June 30, 2007 was due to increased accounts receivable.
Net cash flow used in investing activities was $(377,091) during the six months ended June 30, 2008 and $(689,794) during the six months ended June 30, 2007. Uses of cash flow for investing activities included property, plant and equipment purchases.
Net cash flow provided by financing activities was $4,684,920 during the six months ended June 30, 2008 and $5,951,507 during the six months ended June 30, 2007, a decrease of $(1,266,587). For the six months ended June 30, 2008, we received $5,800,000 loan proceeds from an issuance of convertible debt. Furthermore, during the six months ended June 30, 2008 we received $21,139,559 from bank financings as opposed to $8,296,292 in the same period of 2007.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements.
ITEM 4T. CONTROLS AND PROCEDURES.
An evaluation was carried out by the Company’s Principal Executive Officer and Principal Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2008, the end of the period covered by this Form 10-Q. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that these disclosure controls and procedures were effective at a reasonable level.
Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.
During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Exhibit Number | Description | |
31.1 | Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Peter Chang | |
31.2 | Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Agatha Shen | |
32.1 | Certification pursuant to 18 U.S.C. 1350. |
9
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.
SJ Electronics, Inc. (Registrant) | |||
Dated: August 19, 2008 | /s/ Peter Chang | ||
Peter Chang | |||
President | |||
Dated: August 19, 2008 | /s/ Agatha Shen | ||
Agatha Shen | |||
Chairman and Chief Financial Officer |
10