China Electric Motor 10Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

¨	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.: 000-53017

CHINA ELECTRIC MOTOR, INC.

(Exact name of Registrant as specified in its charter)

Delaware		26-1357787
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Sunna Motor Industry Park, Jian’an, Fuyong Hi-Tech Park, Baoan District, Shenzhen, Guangdong,

People’s Republic of China

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

86-755-8149 9969

(COMPANY’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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer x	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 ¨ No x

The registrant had 20,746,743 shares of common stock, par value $0.0001 per share, outstanding as of August 5, 2010.

CHINA ELECTRIC MOTOR, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2010

INDEX

				Page
Part I	Financial Information

	Item 1.	Financial Statements

		(a)	Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009	2

		(b)	Consolidated Statements of Operations for the Three and Six months Ended June 30, 2010 and 2009 (Unaudited)	3

		(c)	Consolidated Statements of Cash Flows for the Six months Ended June 30, 2010 and 2009 (Unaudited)	4

		(d)	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Six months Ended June 30, 2010 (Unaudited)	5

		(e)	Notes to Financial Statements (Unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19

	Item 4.	Controls and Procedures		20

Part II	Other Information

	Item 1.	Legal Proceedings		20

	Item 1A.	Risk Factors		20

	Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds		22

	Item 3.	Default Upon Senior Securities		22

	Item 4.	Submission of Matters to a Vote of Security Holders		22

	Item 5.	Other Information		22

	Item 6.	Exhibits		22

Signatures				23

Part I. Financial Information

Item 1. Financial Statements

China Electric Motor, Inc. and Subsidiaries

Consolidated Balance Sheets

(In US Dollars)

	June 30,		December 31,
	2010		2009
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	37,866,706	$	10,633,518
Accounts receivable, net		9,868,346		8,526,451
Inventories, net		6,073,021		7,194,656
Total current assets		53,808,073		26,354,625
Property and equipment, net		10,872,848		7,936,284
Total Assets	$	64,680,921	$	34,290,909

Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable	$	2,509,723	$	2,217,702
Accrued liabilities and other payable		264,269		463,185
Various taxes payable		35,418		28,962
Wages payable		462,834		465,119
Corporate tax payable		1,188,062		878,305
Due to related party		-		1,581,376
Due to affiliated companies		-		334,977
Total current liabilities		4,460,306		5,969,626
Total Liabilities		4,460,306		5,969,626

Commitments and Contingencies

Shareholders' Equity
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued
Common stock, $0.0001 par value, 100,000,000 shares authorized,
20,744,743 and 14,083,030 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively.		2,074		1,408
Additional paid-in capital		28,625,293		3,899,125
Accumulated other comprehensive income		981,836		889,668
Statutory surplus reserve fund		1,177,075		1,177,075
Retained earnings (unrestricted)		29,434,337		22,354,007
Total Shareholders' Equity		60,220,615		28,321,283
Total Shareholders' Liabilities & Equity	$	64,680,921	$	34,290,909

The accompanying notes are an integral part of these consolidated financial statements.

China Electric Motor, Inc. and Subsidiaries

Consolidated Statements of Operations

(In US Dollars)

(Unaudited)

	For Three Months Ended						For Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Revenue	$	25,295,640		$	22,319,384		$	46,806,959		$	41,212,530
Cost of Goods Sold		(17,923,881	)		(16,323,353	)		(33,223,401	)		(29,862,858	)
Gross Profit		7,371,759			5,996,031			13,583,558			11,349,672
Selling Expenses		1,011,789			1,157,084			1,948,905			2,040,954

General and administrative
Merger cost		-			938,152			-			938,152
Research and development		459,444			419,415			847,735			787,995
Depreciation		6,877			5,383			11,515			10,804
Loss on disposal of assets		-			-			65,252			-
Others general and administrative		610,593			559,736			1,517,572			874,999
Total general and administrative		1,076,914			1,922,686			2,442,074			2,611,950
Total operating expenses		2,088,703			3,079,770			4,390,979			4,652,904
Income from operations		5,283,056			2,916,261			9,192,579			6,696,768

Other income (expenses)
Interest income		21,642			6,844			35,239			12,880
Imputed interest		-			(17,016	)		-			(34,032	)
Total other income (expenses)	$	21,642		$	(10,172	)		35,239		$	(21,152	)

Income (loss) before income taxes		5,304,698			2,906,089			9,227,818			6,675,616
Income taxes		(1,186,868	)		(774,715	)		(2,147,488	)		(1,532,024	)
Net income	$	4,117,830		$	2,131,374		$	7,080,330		$	5,143,592

Basic earnings per share	$	0.20		$	0.11		$	0.37		$	0.29
Weighed-average shares outstanding, Basic		20,744,743			18,655,137			19,378,648			17,846,874
Diluted earnings per share	$	0.20		$	0.11		$	0.36		$	0.28
Weighed-average shares outstanding, Diluted		20,832,957			19,248,641			19,420,586			18,145,266

The accompanying notes are an integral part of these consolidated financial statements.

China Electric Motor, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In US Dollars)

(Unaudited)

	For Six Months Ended
	June 30,
	2010			2009

Cash Flows From Operating Activities
Net Income (loss)	$	7,080,330		$	5,143,592
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on dispose of assets		65,252			-
Imputed interest expense		-			34,032
Depreciation		451,554			305,405
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net		(1,341,895	)		(2,722,613	)
Inventories, net		1,121,635			(259,071	)
Accrued merger cost		-			625,000
Prepaid expenses and other receivables		-			15,103
Increase (decrease) in:
Accounts payable		(95,836	)		(178,882	)
Accrued liabilities and other payable		(198,916	)		-
Various taxes payable		6,456			97,030
Wages payable		(2,285	)		77,893
Corporate tax payable		309,757			304,759
Net cash provided by operating activities		7,396,052			3,442,308

Cash Flows From Investing Activities
Purchases of property and equipment		(3,239,728	)		(1,533,415	)
Proceeds from disposal of fixed assets		174,312			-
Payment to related parties		(634,559	)		(57,543	)
Net cash used in investing activities		(3,699,975	)		(1,590,958	)

Cash Flows From Financing Activities
Net proceeds from short-term loan		-			500,000
Net proceeds from issuance of shares		23,444,943			945,127
Net cash provided by financing activities		23,444,943			1,387,584
Effect of exchange rate changes on cash		92,168			4,992
Net increase (decrease) in cash and cash equivalents		27,233,188			3,301,469

Cash and cash equivalents, beginning of period		10,633,518			2,655,808

Cash and cash equivalents, end of period	$	37,866,706		$	5,957,277

Supplemental disclosure information:
Interest paid	$	-		$	-
Income taxes paid	$	1,841,528		$	1,226,684

The accompanying notes are an integral part of these consolidated financial statements.

China Electric Motor, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

For the Six Months Ended June 30, 2010

(In US Dollars)

(Unaudited)

								Accumulated
					Additional			Other		Statutory		Retained		Total
	Common Shares				Paid-in			Comprehensive		Reserve		Earnings		Stockholders'		Comprehensive
	Shares		Amount		Capital			Income (Loss)		Fund		(Unrestricted)		Equity		Income
Balance at December 31, 2009		14,083,030	$	1,408	$	3,899,125		$	889,668	$	1,177,075	$	22,354,007	$	28,321,283
Sale of common shares		5,750,000		575		23,444,465			-		-		-		23,445,040
Exercise of warrants		626,870		63		(63	)		-		-		-		-
Conversion of debts to director		284,843		28		1,281,766									1,281,794
Foreign currency translation adjustment		-		-		-			92,168		-		-		92,168		92,168
Net income		-		-		-			-		-		7,080,330		7,080,330		7,080,330
Comprehensive income		-		-		-			-		-		-		-	$	7,172,498
Balance at June 30, 2010 (Unaudited)		20,744,743	$	2,074	$	28,625,293		$	981,836	$	1,177,075		29,434,337	$	60,220,615

The accompanying notes are an integral part of these consolidated financial statements.

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2009 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the United States Securities and Exchange Commission (the “SEC”) on March 31, 2010.

China Electric Motor, Inc. (“China Electric”, formerly SRKP 21, Inc.) was incorporated in the State of Delaware on October 11, 2007 and, through its wholly-owned subsidiary in the People’s Republic of China (“PRC”), is engaged in the production, marketing, sales and research and development of specialized micro-motor products for the domestic and international market. Our products, which are incorporated into household appliances, vehicles and other consumer devices, are sold under our “Sunna” brand name.

China Electric, its wholly-owned subsidiary, Attainment Holdings Limited (“Attainment”); Attainment Holdings’ wholly-owned subsidiary, Luck Loyal International Investment Limited (“Luck Loyal); and Luck Loyal’s wholly-owned subsidiary, Shenzhen YuePengCheng Motor Co., Ltd. (“YuePengCheng”) shall be collectively referred throughout as the “Company.”

In connection with our public offering on February 3, 2010, Jianrong Li, a former director of the Company and the current President of Attainment and Luck Loyal and President and director of YuePengCheng, converted approximately $1.3 million of debt owed to Ms. Li into shares of the Company’s common stock. The shares were issued at a conversion price equal to the per share price of the shares of common stock sold in the Company’s public offering, which was $4.50 per share. The Company issued a total of 284,843 shares of common stock to Ms. Li pursuant to the conversion. As a result of the conversion of the debt into equity, the debt is no longer outstanding.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting year. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Advertising Costs

The Company expenses advertising costs as incurred. The Company incurred $192,894 and $283,510 on advertising expenses for the six months ended June 30, 2010 and 2009, respectively.

Foreign Currency Translation

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, 2010		6.80874		6.81710
Six Months Ended June 30, 2009		6.82476		6.82268

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, 2010		7.80000		7.80000
Six Months Ended June 30, 2009		7.74979		7.75250

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

NOTE 3 – INVENTORY

Inventory includes raw materials, work-in-process (“WIP”), and finished goods. Finished goods contain direct material, direct labor and manufacturing overhead and do not contain general and administrative costs.

Inventory consists of the following:

	June 30,		December 31,
	2010		2009
Raw materials	$	2,074,030	$	2,348,911
Finished goods		2,070,549		2,472,236
Work-in-process		1,928,442		2,373,509
Inventory, net	$	6,073,021	$	7,194,656

NOTE 4 – PROPERTY AND EQUIPMENT

Property and Equipment consist of the following:

	June 30,			December 31,
	2010			2009
Building	$	4,480,916		$	3,707,135
Machinery and equipment		8,631,576			6,477,478
Electronic, office and other equipment		249,399			149,693
Accumulated depreciation		(2,489,043	)		(2,398,022	)
Property and equipment, net	$	10,872,848		$	7,936,284

The depreciation expense for the three and six months ended June 30, 2010 and 2009 is as follows:

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Cost of goods sold	$	241,383	$	151,196	$	440,039	$	294,601
Operating expenses		6,877		5,383		11,515		10,804
Total	$	248,260	$	156,579	$	451,554	$	305,405

NOTE 5 – DUE TO DIRECTOR

Due to director consists of the following:

	June 30,		December 31,
	2010		2009
Due to director - Li, Jianrong: Luck Loyal loans		-		1,581,376
Total	$	-	$	1,581,376

In November 2007, Luck Loyal acquired 25% ownership interest in YuePengCheng from Taiwan Qiling Shashi Enterprises (“Qiling”), a company owned by a relative of Ms. Jianrong Li; and in September 2008 acquired the remaining 75% ownership interest in YuePengCheng from Shenzhen YuePengDa Development Enterprises (“YuePengDa”), a company owned by the son of Ms. Jianrong Li. Pursuant to the agreements, Luck Loyal paid Qiling and YuePengDa RMB 2.5 million and RMB 7.5 million, respectively. These amounts were contributed by a director of Luck Loyal, Ms. Jianrong Li, in 2007 and 2008.

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

During the three months ended March 31, 2010, we incorrectly transferred approximately $1.3 million to an account controlled by Ms. Jianrong Li (the “Transfer”), the wife of the Company’s Chairman of the Board, the mother of its Chief Executive Officer, and the director of several of our subsidiaries. These funds were transferred to Ms. Li to facilitate a deposit payment related to a contemplated acquisition by the Company. The acquisition was abandoned and in April 2010 the full balance of these funds was returned to the Company. In addition to the Transfer, there were several unrelated transfers to and from Ms. Li. Prior to the Transfer, the outstanding balance to Ms. Li was a “due to” Ms. Li. After the Transfer, the balance became a “due from” Ms. Li. After the Transfer, the balance became a “due from” Ms. Li. Management subsequently evaluated these transactions and determined that the transfers violated Section 402 of the Sarbanes-Oxley Act of 2002. No further transfers, loans, advances or similar arrangements will be made by the Company or any of its subsidiaries to Ms. Li or any of our officers or directors or any of their family members.

Due to affiliated company

Due to affiliated company consists of the following:

	June 30,		December 31,
	2010		2009
Due to affiliated company, Excel Profit		-		334,977
Total	$	-	$	334,977

In connection with the initial closing of the Private Placement on May 6, 2009, a shareholder (Excel Profit) of the Company issued a promissory note in the principal amount of $335,000 bearing no interest to an unrelated party (the “Note”). The Company assumed the obligations of the Note as of the date of the Note’s issuance since the note proceeds were received by Luck Loyal but not transferred to the shareholder. The principal was originally due and payable on or before the earlier of (a) nine months from the date of issuance of the Note or (b) upon the receipt by the Company after the date of the Note of at least $1 million in additional proceeds in the Private Placement, however, the noteholder agreed to extend the Company’s repayment of the Note until the closing of the public offering of the Company’s commons stock. The Company repaid the note in full in February 2010.

NOTE 6 – STATUTORY RESERVES

As stipulated by the relevant laws and regulations for enterprises operating in PRC, the Company is required to make annual appropriations to a statutory surplus reserve fund. Specifically, the Company is required to allocate 10% of its profits after taxes, as determined in accordance with the PRC accounting standards applicable to the Company, to a statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company. The Company reserved $1,177,075 for six months ended June 30, 2010 and for the year ended December 31, 2009.

NOTE 7 – INCOME TAX

Income Tax

Luck Loyal is a holding company registered in Hong Kong and has no operating profit for tax liabilities.

The Company is registered and entitled as a “Hi-Tech Corporation” in the PRC. The Company has tax advantages granted by the local government for corporate income taxes and sales taxes.

The effective tax rate for the Company for the years ended December 31, 2010 is 22%, compared to the rate of 20% for the same period of 2009. The Company paid $1,841,528 for PRC Enterprises Income Tax for the six months ended June 30, 2010, compared to $1,226,684 during the same period of 2009.

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

Accounting for Uncertainty in Income Taxes

The Company adopted the provisions of Accounting for Uncertainty in Income Taxes on January 1, 2007. The provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with the standard “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of Accounting for Uncertainty in Income Taxes also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.

Various Taxes

The Company is subject to pay various taxes such as Value added tax (VAT), City development tax, and Education tax to the local government tax authorities. The Value added tax (VAT) collected on sales is netted against taxes paid for purchases of cost of goods sold to determine the amounts payable and refundable. The city development tax and education tax are expensed as general and administrative expense.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

The Company leased its factory premises and staff quarters for approximately $300,000 per year. This lease was terminated effective September 30, 2009, after the Company purchased this factory building. The lease agreement was terminated without penalties.

The Company signed a new lease agreement for the remaining buildings from the lessor for approximately $176,000 per year.

In April, 2010, the Company signed a new lease agreement for a new building from the lessor for approximately $122,482 per year.

Rent expense totaled $129,403 and $153,397 for six months ended June 30, 2010 and 2009, respectively.

NOTE 9 – SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION

The Company has not segregated business units for managing different products and services that the Company has been carrying and selling on the market. The assets and resources of the Company have been utilized, on a corporate basis, for overall operations of the Company. The Company has not segregated its operating assets by segments as it is impracticable to do so since the same assets are used to produce products as one segment.

The geographic information for revenue is as follows:

	Three months ended June 30,								Six months ended June 30,
	2010				2009				2010				2009
China Mainland	$	16,489,148	65.2	%	$	14,256,100	63.9	%	$	30,664,936	65.5	%	$	24,485,919	59.4	%
Korea		4,359,197	17.2	%		4,373,874	19.6	%		8,349,641	17.8	%		9,092,984	22.1	%
Hong Kong		4,447,295	17.6	%		3,689,410	16.5	%		7,792,382	16.7	%		7,633,627	18.5	%
Total	$	25,295,640			$	22,319,384			$	46,806,959			$	41,212,530

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

The geographic information for accounts receivables which are classified based on the customers is as follows:

	June 30,		December 31,
	2010		2009
China Mainland	$	6,879,574	$	6,037,505
Korea		1,373,504		1,408,311
Hong Kong		1,615,268		1,080,635
Total	$	9,868,346	$	8,526,451

NOTE 10 –COMMON STOCK

On January 28, 2010, the Company completed a public offering consisting of 5,000,000 shares of common stock. Roth Capital Partners, LLC (“Roth”) and WestPark Capital, Inc. (“WestPark,” and together with Roth, the “Underwriters”) acted as co-underwriters in the public offering. The Company’s shares of common stock were sold to the public at a price of $4.50 per share, for gross proceeds of approximately $22.5 million. Compensation for the Underwriters’ services included discounts and commissions of $1,462,500, a $281,250 non-accountable expense allowance, roadshow expenses of approximately of $10,000, and legal counsel fees (excluding blue sky fees) of $40,000. The Underwriters also received warrants to purchase an aggregate of 500,000 shares of common stock at an exercise price of $5.625 per share. The warrants, which have a term of five years, are not exercisable until at least one-year from the date of issuance. The warrants also carry registration rights.

On January 28, 2010, the Underwriters exercised their over-allotment option in full for the offer and sale of 750,000 additional shares of common stock at $4.50, for gross proceeds of approximately $3.4 million. Discounts and commissions to the Underwriters totaled $219,375.

On January 28, 2010, the Company converted $1,281,794 of outstanding debt it owed to Ms. Jianrong Li into 284,843 shares of the Company’s common stock upon the closing of the Company’s public offering, based on a conversion price of $4.50 per share.

On February 11, 2010, 11 investors holding warrants to purchase an aggregate of 626,894 shares of the Company’s common stock elected to exercise such options. Because each of the investors exercised the warrants pursuant to a cashless exercise, the Company issued an aggregate of 626,870 shares of its common stock to the investors.

The Company has 10 million shares of preferred stock authorized with none issued.

NOTE 11– WARRANTS

Warrants remaining from Share Exchange

Prior to the closing of a share exchange transaction on May 6, 2009 (the “Share Exchange”) and initial closing of a private placement transaction on May 6, 2009 (the “Private Placement”), the shareholders of the Company held an aggregate of 4,612,662 warrants to purchase shares of the Company’s common stock, and an aggregate of 3,985,768 warrants were cancelled in conjunction with the closing of the Share Exchange. Immediately after the closing of the Share Exchange and initial closing of the Private Placement, the original shareholders of the company held an aggregate of 626,894 warrants with an exercise price of $0.000154.

On February 11, 2010, the 11 original shareholders holding warrants to purchase an aggregate of 626,894 shares of the Company’s common stock elected to exercise such warrants. Because each of the shareholders exercised the warrants pursuant to a cashless exercise, the Company issued an aggregate of 626,870 of its common stocks to the shareholders.

In connection with the public offering that closed on February 3, 2010, the Company granted the Underwriters warrants to purchase an aggregate of 500,000 shares of common stock at an exercise price of $5.625 per share. The warrants, which have a term of five years, are not exercisable until at least one-year from the date of issuance. The warrants also carry registration rights.

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

The summary of the status of the Company’s outstanding warrants and changes as of March 31, 2010 are as follows:

	Number of			Weighted average
	Warrants			Exercise Price
December 31, 2009		626,894		$	0.000154
Granted		500,000		$	5.625
Exercised		(626,870	)	$	0.000154
Forfeited		(24	)	$	0.000154
June 30, 2010		500,000		$	5.625

NOTE 12– REGISTRATION PAYMENT ARRANGEMENT

Pursuant to the Registration Rights Agreement (“Agreement”) dated May 6, 2009, by and among the Company, Attainment and certain of the original stockholders of the Company prior to the Share Exchange who are affiliates of WestPark Capital, Inc. (the “Original Stockholders”), the Company agreed to file a registration statement covering the resale of the shares held by the Original Stockholders (the “Subsequent Registration Statement”) no later than the tenth (10th) day after the end of the six month period immediately following the filing date of the registration statement covering the shares of common stock sold in the Private Placement (the “Required Filing Date”). The Company agreed to use its reasonable best efforts to cause the Subsequent Registration Statement to become effective within one hundred fifty (150) days after the Required Filing Date or the actual filing date, whichever is earlier, or one hundred eighty (180) days after the Required Filing Date or the actual filing date, whichever is earlier, if the Registration Statement is subject to a full review by the SEC (the “Required Effectiveness Date”).

Subsequent Registration Statement by the Required Filing Date or if the Subsequent Registration Statement does not become effective on or before the Required Effectiveness Date due to the failure of the Company to fulfill its obligations under the Agreement, the Company is required to issue, as liquidated damages, to each of the Original Stockholders, shares of common stock (the “Penalty Shares”) equal to a total of 0.0333% of each Original Stockholder’s respective shares for each calendar day that the Subsequent Registration Statement has not been filed or declared effective by the SEC (and until the Subsequent Registration Statement is filed with or declared effective by the SEC), as applicable. No Penalty Shares shall be due to the Original Stockholders if the Company is using its best efforts to cause the Subsequent Registration Statement to be filed and declared effective in a timely manner.

The registration statement covering the shares of common stock sold in the Private Placement was originally filed with the SEC on October 14, 2009. Therefore, the Required Filing Date was on or about April 24, 2010. The Subsequent Registration Statement was originally filed on March 4, 2010 and was declared effective by the SEC on March 19, 2010. Therefore, the Company does not owe any Penalty Shares.

China Electric Motor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Amounts and disclosures at and for the three and six months ended June 30, 2010 and 2009 are unaudited)

NOTE 13– RECONCILIATION OF EARNINGS PER SHARE (EPS)

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Numerator
Net income available to common stockholders	$	4,117,830	$	2,131,374	$	7,080,330	$	5,143,592

Denominator
Weighted-average shares outstanding for earnings per share, basic		20,744,743		18,655,137		19,378,648		17,846,874
Effect of dilutive securities:
Warrants		88,214		593,504		41,938		298,392
Convertible preferred stock		-		-		-		-
Weighted-average shares outstanding for earnings per share, diluted		20,832,957		19,248,641		19,420,586		18,145,266
Net income per share:
Basic	$	0.20	$	0.11	$	0.37	$	0.29
Diluted	$	0.20	$	0.11	$	0.36	$	0.28

NOTE 14–SUBSEQUENT EVENTS

The Company’s Board of Directors approved the China Electric Motor, Inc. 2010 Omnibus Incentive Plan (the “Plan”) covering three million shares (3,000,000) of the Company’s common stock on June 28, 2010. The Company’s stockholders approved the Plan at the Company’s annual meeting of stockholders on August 2, 2010. The Company has agreed to make the following grants pursuant to the Plan within five business days of the approval of the Plan by the stockholders: (1) 50,000 shares of restricted stock to each of Xinming Xiao, the Company’s Chief Operating Officer, and Shenping Wang, the Company’s Chief Technology Officer, which will vest for each upon the third anniversary of such officer’s respective date of appointment; 20,000 shares to each of James M. Lee and Tony Shen, two of the Company’s independent directors, with such shares to vest in 8 equal quarterly installments; and 150,000 shares to Heung Sang Fong, the Company’s Chief Financial Officer and Corporate Secretary and one of its directors, which shares shall be immediately vested upon the date of grant. The Company has also agreed to grant an additional 300,000 shares of its common stock to Mr. Fong pursuant to the Plan on January 31, 2012, with 250,000 of such shares to vest immediately upon the date of grant and 50,000 of such shares to vest on May 31, 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion relates to a discussion of the financial condition and results of operations of China Electric Motor, Inc. (“China Electric”), China Electric’s wholly-owned subsidiary Attainment Holdings Limited (“Attainment Holdings”), Attainment Holdings’ wholly-owned subsidiary, Luck Loyal International Investment Limited (“Luck Loyal), and Luck Loyal’s wholly-owned subsidiary, Shenzhen YuePengCheng Motor Co., Ltd. (“Shenzhen YPC”) (collectively referred to throughout as the “Company,” “we,” “our,” and “us”).

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with its financial statements and the related notes, and the other financial information included in this report.”

Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes, and the other financial information included in this report.

This report contains forward-looking statements. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

Overview

Through Shenzhen YPC, we engage in the design, production, marketing and sale of micro-motor products. Our products, which are incorporated into household appliances, vehicles and other consumer devices, are sold under our “Sunna” brand name.

We sell our products directly to original equipment manufacturers and to distributors and resellers. We do not have any long-term sales contracts with any of our customers. As a result it is necessary for us to estimate, based in part on non-binding estimates by our customers and potential customers, the requirements for our products. In addition, in some instances, we develop products based on anticipated customer demand with no assurance that we will receive the anticipated orders. To the extent that we do not receive the anticipated orders or that our customers require products in greater quantities than anticipated, our revenue and margins will be affected.

A small number of customers account for a very significant percentage of our revenue. For the six months ended June 30, 2010, we had 5 customers who each accounted for 5% of total sales, who together accounted for 31.5% of our total sales for the period. None of those customers accounted for at least 10% of our total sales for six months ended June 30, 2010. Those 5 customers accounted for 27% of our trade receivables as of June 30, 2010. During the six months ended June 30, 2009, we had 6 customers that generated at least 5% of our total sales, who together accounted for 50.5% of our total sales for the period. Two of those customers, Shenzhen Hongxinyu Trading Co., Ltd and Shanghai Keyu International Trading Co., Ltd accounted for at least 10% of our total sales, specifically accounting for 11% and 10% of our total sales for the period, respectively. At June 30, 2009, those two customers represented 16% and 11%, respectively, of our trade receivables. Unless we replace a customer, the loss of any of these customers could have a material adverse effect upon our revenue and net income.

Recent Events

During the three months ended March 31, 2010, we incorrectly transferred approximately $1.3 million to an account controlled by Ms. Jianrong Li, the wife of our Chairman of the Board and the mother of our Chief Executive Officer, to effect certain corporate functions. Although, the entire amount of the transfers was returned to our account in April 2010, the transfers that we made to Ms. Li violated Section 402 of the Sarbanes-Oxley Act of 2002. No further transfers, loans, advances or similar arrangements will be made by us or any of our subsidiaries to Ms. Li or any of our officers or directors or any of their family members. However, as a result of the transfers by us to Ms. Li, we and/or our Chief Executive Officer and Chairman of the Board could become subject to sanctions, penalties, investigations or other proceedings.

Public Offering

In February 2010, we completed a public offering consisting of 5,000,000 shares of our common stock. Roth Capital Partners, LLC (“Roth”) and WestPark Capital, Inc. (“WestPark,” and together with Roth, the “Underwriters”) acted as co-underwriters in the public offering. Our shares of common stock were sold to the public at a price of $4.50 per share, for gross proceeds of approximately $22.5 million. Compensation for the Underwriters’ services included discounts and commissions of $1,462,500, a $281,250 non-accountable expense allowance, roadshow expenses of approximately of $10,000, and legal counsel fees (excluding blue sky fees) of $40,000. The Underwriters also received warrants to purchase an aggregate of 500,000 shares of our common stock at an exercise price of $5.625 per share. The warrants, which have a term of five years, are not exercisable until at least one-year from the date of issuance. The warrants also carry registration rights.

On February 24, 2009, the Underwriters exercised their over-allotment option in full for the offer and sale of 750,000 additional shares of common stock at $4.50, for gross proceeds of approximately $3.4 million. Discounts and commissions to the Underwriters totaled $219,375.

As of June 30, 2010, we had used approximately $5 million of the proceeds of the public offering.

Li Conversion

In connection with our public offering on February 3, 2010, Jianrong Li, a former director of the Company and the current President of Attainment and Luck Loyal and President and director of Shenzhen YPC, converted approximately $1.3 million of debt owed to Ms. Li into shares of the Company’s common stock. The shares were issued at a conversion price equal to the per share price of the shares of common stock sold in the Company’s public offering, which was $4.50 per share. The Company issued a total of 284,843 shares of common stock to Ms. Li pursuant to the conversion. As a result of the conversion of the debt into equity, the debt is no longer outstanding.

Stock Incentive Plan

At our annual meeting of stockholders on August 2, 2010, our stockholders approved the China Electric Motor, Inc. 2010 Omnibus Incentive Plan covering three million shares (3,000,000) of our common stock. We may issue various types of awards under the plan, including, but not limited to, stock options and restricted shares of common stock. We currently have agreed to make the following grants pursuant to the plan within five business days of the approval of the plan by our stockholders: (1) 50,000 shares of restricted stock to each of Xinming Xiao, our Chief Operating Officer, and Shenping Wang, our Chief Technology Officer, which will vest for each upon the third anniversary of the officer’s respective date of appointment; 20,000 shares to each of James M. Lee and Tony Shen, two of our independent directors, with such shares to vest in 8 equal quarterly installments; and 150,000 shares to Heung Sang Fong, our Chief Financial Officer and Corporate Secretary and one of our directors, which shares shall be immediately vested upon the date of grant. We have also agreed to grant an additional 300,000 shares of our common stock to Mr. Fong pursuant to the plan on January 31, 2012, with 250,000 of such shares to vest immediately upon the date of grant and 50,000 of such shares to vest on May 31, 2012. We currently anticipate that we will grant an approximately 1,200,000 additional shares of our common stock pursuant to the plan to various of our employees and directors shortly after the approval of the plan, including 250,000 shares to Yue Wang, our Chief Executive Officer, 55,000 shares to Hongyang Chen, our Executive Vice President, 20,000 shares to Liang Tang, one of our independent directors and 20,000 shares to Guoqiang Zhang, one of our independent directors. We anticipate that one-third of such grants will vest immediately vest upon the date of grant, one-third will vest on the one-year anniversary of the grant date and one-third will vest on the second anniversary of the grant date. These grants of awards pursuant to the plan will cause us to incur significant non-cash equity-based compensation charges equal to the number of shares granted multiplied by the closing trading price of our common stock on the date of grant. This non-cash charge will be amortized over the vesting period of the shares. These non-cash charges will negatively impact our results of operations, specifically our net income and net income per share. Additionally, such shares granted pursuant to the plan, as well as future awards made pursuant to the plan, could have a significant adverse effect on the trading price of our common stock, especially if a significant volume of the stock issued is sold into the public market. Further, the issuance of these stock awards pursuant to the plan will have a dilutive impact on other stockholders by decreasing their ownership percentage of our outstanding common stock. An adverse impact on the trading price of our common stock may negatively affect our ability to use to our securities to raise capital or to acquire other companies using our securities.

Critical Accounting Policies, Estimates and Assumptions

The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Accounts Receivable

We typically provide payment terms ranging from 30 to 45 days. We examine the creditworthiness of our customers prior to any transaction to limit our collection risk. We use estimates in determining our allowance for bad debts that are based on our historical collection experience, current trends, credit policy and a percentage of our accounts receivable by aging category. In determining these percentages, we review historical write-offs in our receivables. In determining the appropriate reserve percentages, we also review current trends in the credit quality of our customers, as well as changes in our internal credit policies.

We maintain reserves for potential credit losses on accounts receivable. Management review the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patters to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than anticipated, or for customer-specific circumstances, such as financial difficulty.

There were no bad debts written off for the six months ended June 30, 2010 and 2009 respectively, as there were no accounts receivable outstanding in excess of 90 days at June 30, 2010 and 2009. The aging of the accounts receivable (in thousands) is as follows:

	June 30,		December 31,
	2010		2009
1-30 days	$	9,356,798	$	8,526,451
31-60 days		511,548		-
60-90 days		-		-
Total	$	9,868,346	$	8,526,451

Inventories

Inventory levels are based on projections of future demand and market conditions. Inventories are stated at cost, not in excess of market, using the weighted average cost method. Any sudden decline in demand and/or rapid product improvements and technological changes can result in excess and/or obsolete inventories. Because most of our products are customized and unique to a particular customer, there is a risk that we will forecast inventory needs incorrectly and purchase or produce excess inventory. As a result, actual demand may differ from forecasts, and such differences, if not managed, may have a material adverse effect on future results of operations due to required write-offs of excess or obsolete inventory. To mitigate such exposure, we require a binding purchase order or a signed agreement by our customer agreeing to pay for and take possession of finished goods inventory parts for the duration of the agreement. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories equal to the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. To the extent that we increase our reserves for future period, operating income will be reduced.

Revenue Recognition

We recognize revenues net of value added tax (VAT) when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title, and acceptance of ownership and assumption of risk of loss by the customer, as well as predetermined fixed pricing, persuasive evidence of an arrangement exists, and collection of the relevant receivables is probable. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales. No return allowance is made as products returns are insignificant based on historical experience.

We do not provide different policies in terms, warranties, credits, discounts, rebates, price protection, or similar privileges among customers. Orders are placed by both the distributors and OEMs and the products are delivered to the customers within 30-45 days of order; we do not provide price protection or right of return to customers. Product prices are predetermined and fixed based on contractual agreements and, therefore, customers would be responsible for any loss if they are faced with sales price reductions and technology obsolescence. We do not allow any discounts, credits, rebates or similar privileges.

We warrant our products for up to 1 year from the date the products leave our factory, under which we will pay for labor and parts, or offer a new or similar unit in exchange for a non-performing unit due to defects in material or workmanship. Customers may also return products for a variety of reasons, such as damage to goods in transit, cosmetic imperfections and mechanical failures, if within the warranty period. There is no allowance for warranty on the products sales as historical costs incurred for warranty replacements and repairs have been insignificant.

Results of Operations

	Three Months Ended June 30,												Six Months Ended June 30,
	2010						2009						2010						2009
	In Dollars			Percent of Revenues			In Dollars			Percent of Revenues			In Dollars			Percent of Revenues			In Dollars			Percent of Revenues
(in thousands, except earnings per share)
Revenue	$	25,296			100.0	%	$	22,319			100.0	%	$	46,807			100.0	%	$	41,213			100.0	%
Cost of goods sold		(17,924	)		70.9	%		(16,323	)		73.1	%		(33,223	)		71.0	%		(29,863	)		72.5	%
Gross profit		7,372			29.1	%		5,996			27.0	%		13,584			29.0	%		11,350			27.5	%

Operating Costs and Expenses:
Selling expenses		1,012			4.0	%		1,157			5.2	%		1,949			4.2	%		2,041			5.0	%
Merger cost		-			*			938			4.2	%		-			*			938			2.3	%
Research and development		459			1.8	%		420			1.9	%		848			1.8	%		788			1.9	%
Depreciation		7			*			5			*			11			*			11			*
Loss on disposal of assets		-			*			-			*			65			*			-			*
Other general and administrative		611			2.4	%		560			2.5	%		1,518			3.2	%		875			2.1	%
Total operating costs and expenses		2,089			8.2	%		3,080			13.8	%		4,391			9.4	%		4,653			11.3	%

Income from operations		5,283			20.9	%		2,916			13.1	%		9,193			19.6	%		6,697			16.2	%
Other income (expenses)
Interest income		22			*			7			*			35			*			13			*
Imputed interest		-			*			(17	)		*			-			*			(34	)		*
Total other income (expenses)		22			*			(10	)		*			35			*			(21	)		*

Income before income taxes		5,305			21.0	%		2,906			13.0	%		9,228			19.7	%		6,676			16.2	%
Provision for income taxes		(1,187	)		4.7	%		(775	)		3.5	%		(2,148	)		4.6	%		(1,532	)		3.7	%
Net income	$	4,118			16.3	%	$	2,131			9.5	%	$	7,080			15.1	%	$	5,144			12.5	%

Basic earnings per share	$	0.20					$	0.18					$	0.37					$	0.44
Diluted earnings per share	$	0.20					$	0.17					$	0.36					$	0.44

Three Months Ended June 30, 2010 and 2009

Revenues for the three months ended June 30, 2010 were $25.3 million, an increase of 13.4 %, compared to revenues of $22.3 million for the three months ended June 30, 2009. The increase in revenues was primarily attributable to an increase in the average selling price of micro-motor units sold during the three months ended June 30, 2010. During the three months ended June 30, 2010, we sold more of our higher priced-products which include our numerical control motor products than our lower-priced products Sales of our higher-profit products increased $0.2 million in the three months ended June 30, 2010 from the comparable period in 2009.

Cost of goods sold consists of the cost of motor sales and other materials. Cost of goods sold was $17.9 million for the three months ended June 30, 2010, an increase of $1.6 million, or 9.8 %, compared to $16.3 million for the three months ended June 30, 2009. This increase was primarily due to an increase in the prices of raw materials, particularly lacquered wire, and an increase in our sale of higher priced products. As a percentage of revenues, cost of goods sold decreased to 70.9% for the three months ended June 30, 2010 compared to 73.1% for the comparable period in 2009. This decrease was attributable to an increase in the average selling price of micro-motor units and an increase of sales of our higher-profit products.

Gross profit for the three months ended June 30, 2010, was $7.4 million, or 29.1 % of revenues, compared to $6.0 million, or 26.9% of revenues, for the comparable period in 2009. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the three months ended June 30, 2010 is primarily due to increase of sales of our higher-profit micro-motor products.

Selling expenses were $1.0 million for the three months ended June 30, 2010 compared to $1.2 million for the comparable period in 2009. The decrease was due to our increased efficiency in our sales efforts.

We incurred merger costs of $nil in the three months ended June 30, 2010 compared to $938,152 in the three months ended June 30, 2009 related to the share exchange transaction which closed on May 6, 2009.

Research and development (“R&D”) costs were $0.5 million or 1.8% of revenues in the three months ended June 30, 2010, compared to $0.4 million or 1.9% of revenues in the comparable period in 2009, representing a 10% increase. The increased spending on R&D in 2010 was primarily due to our increase in research and development efforts on new products. In the future, our R&D spending could increase to support the future growth of the company. As a percent of revenues, we expect the R&D spending to be in the 1.8% to 2.2% range.

Other general and administrative expenses for the three months ended June 30, 2010 were $0.6 million or 2.4% of revenues, compared to $0.6 million, or 2.5% of revenues, for the comparable period in 2009. Other general and administrative expenses include office expenses, salary and benefits, rent and utilities and other expense. As compared to the comparable period in 2009, other general and administrative expenses for the three months ended June 30, 2010 consist of an increase of $0.1 million in salary and benefits expenses and an increase of $0.1 million in professional expenses and other expenses, offset by a decrease of $0.2 million in office expenses. We expect our general and administrative expenses to increase as a result of professional fees incurred as a result of being a publicly reporting company in the United States.

Interest income for the three months ended June 30, 2010, was $21,642 compared to interest income of $6,844 for the comparable period in 2009. The increase in interest income is primarily due to an increased deposit balance in our bank account.

Imputed interest expenses for the three months ended June 30, 2010 were nil compared to $17,016 for the comparable period in 2009 because we did not calculate the imputed interests for related party transactions based on guidance provided by ASC 835-30.

Income tax expenses for the three months ended June 30, 2010 were $1.2 million as compared to income tax expenses of $0.8 million, for the comparable period in 2009. The increase in income tax expense for the three months ended June 30, 2010 was primarily due to an increase in our taxable income in the three months ended June 30, 2010 and an increase in our tax rate to 22% for the three months ended June 30, 2010 from 20% in the comparable in 2009. Shenzhen YPC is registered in PRC and has had tax advantages granted by local government for corporate income taxes and sales taxes. On March 16, 2007, the National People’s Congress of China enacted a new PRC Enterprise Income Tax Law, under which foreign invested enterprises and domestic companies will be subject to enterprise income tax at a uniform rate of 25%. The new law became effective on January 1, 2008. During the transition period for enterprises established before March 16, the tax rate will be gradually increased starting in 2008 and be equal to the new tax rate in 2012. We believe that our profitability will be negatively affected in the near future as a result of the new EIT Law.

Net Income for the three months ended June 30, 2010 was $4.1 million compared to $2.1 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 and 2009

Revenues for the six months ended June 30, 2010 were $46.8 million, an increase of 13.6%, compared to revenues of $41.2 million for the six months ended June 30, 2009. The increase in revenues was primarily attributable to an increase in the average selling price of micro-motor units sold during the six months ended June 30, 2010. During the six months ended June 30, 2010, we sold more of our higher-priced products which include our numerical control motor products than our lower-priced products. Sales of our higher-profit products increased $0.6 million in the six months ended June 30, 2010 from the comparable period in 2009.

Cost of goods sold consists of the cost of motor sales and other materials. Cost of goods sold was $33.2 million for the six months ended June 30, 2010, an increase of $3.3 million, or 11.3 %, compared to $29.9 million for the six months ended June 30, 2009. This increase was primarily due to an increase in the prices of raw materials, particularly lacquered wire, and an increase in our sale of higher priced products. As a percentage of revenues, cost of goods sold decreased to 71.0% for the six months ended June 30, 2010 compared to72.5% for the comparable period in 2009. This decrease was attributable to an increase in the average selling price of micro-motor units and increase of sales of our higher-profit products.

Gross profit for the six months ended June 30, 2010, was $13.6 million, or 29.0% of revenues, compared to $11.3 million, or 27.5% of revenues, for the comparable period in 2009. Management considers gross profit to be a key performance indicator in managing our business. Gross profit margins are usually a factor of cost of sales, product mix and demand for product. The increase in our gross profit margin for the six months ended June 30, 2010 is primarily due to an increase of sales of our higher-profit micro-motor products.

Selling expenses were $1.9 million for the six months ended June 30, 2010 compared to $2.0 million for the comparable period in 2009. The decrease was due to our increased efficiency in our sales efforts.

We incurred merger costs of $nil in the six months ended June 30, 2010 compared to $938,152 in the six months ended June 30, 2009 related to the share exchange transaction which closed on May 6, 2009.

Research and development (“R&D”) costs were $0.8 million or 1.8% of revenues in the six months ended June 30, 2010, remained unchanged with $0.8 million or 1.9% of revenues in the comparable period in 2009.

Other general and administrative expenses for the six months ended June 30, 2010 were $1.5 million, or 3.2% of revenues, compared to $0.9 million, or 2.1% of revenues, for the comparable period in 2009. Other general and administrative expenses include office expenses, salary and benefits, rent and utilities and other expense. The increase in general and administrative expenses for the six months ended June 30, 2010 as compared to the comparable period in 2009 was primarily due to an increase of $0.2 million in salary and benefits expenses and an increase of $0.6 million in professional expenses and other expenses, partially offset a decrease of $0.2 million in office expenses. We expect our general and administrative expenses to increase as a result of professional fees incurred as a result of being a publicly reporting company in the United States.

Interest income for the six months ended June 30, 2010, was $35,239 compared to interest income of $12,880 for the comparable period in 2009. The increase in interest income is primarily due to an increased deposit balance in our bank account.

Imputed interest expenses for the six months ended June 30, 2010 were nil, compared to $34,032 for the comparable period in 2009 because we did not calculate the imputed interests for related party transactions based on guidance provided by ASC 835-30.

Income tax expenses for the six months ended June 30, 2010 were $2.1 million as compared to income tax expenses of $1.5 million, for the comparable period in 2009. The increase in income tax expense for the six months ended June 30, 2010 was primarily due to an increase in our taxable income in the six months ended June 30, 2010 and an increase in our tax rate to 22% for the six months ended June 30, 2010 from 20% in the comparable in 2009.

Net Income for the six months ended June 30, 2010 was $7.1 million compared to $5.1 million for the six months ended June 30, 2009.

Liquidity and Capital Resources

We had cash and cash equivalents of $37.9 million as of June 30, 2010, as compared to $6.0 million as of June 30, 2009 and $10.6 million as of December 31, 2009. Our funds are kept in financial institutions located in China, and these funds are not insured. We have historically funded our operations from revenues.

In July 2010, the Company leased a new factory in Zhejiang, the second largest micro motor manufacturing hub in China. Four AC motor production lines will be installed in the new Zhejiang factory, with a total annual output capacity of approximately 14.4 million units. Two of these new lines are expected to be ready for production in the first week of September 2010 and the others are expected to begin production in November 2010. Two additional new lines for production of coreless motor units are expected to be installed in September 2010 and production is expected to begin in October 2010. Following completion of these new production lines, the Company will have a new annual output capacity of approximately 21.6 million units for AC motors and approximately 43.2 million units of new capacity for coreless motors. The lease was effective on August 1, 2010 and expires on July 31, 2013, with monthly lease payments of approximately $4,980, which will amount to a total of $179,280 over the life of the lease. The total expected investment for the new lines is approximately $12.36 million.

In connection with our public offering on February 3, 2010, Jianrong Li, a former director of the Company and the current President of Attainment and Luck Loyal and President and director of Shenzhen YPC, converted approximately $1.3 million of debt owed to Ms. Li into shares of the Company’s common stock. The shares were issued at a conversion price equal to the per share price of the shares of common stock sold in the Company’s public offering, which was $4.50 per share. The Company issued a total of 284,843 shares of common stock to Ms. Li pursuant to the conversion. As a result of the conversion of the debt into equity, the debt is no longer outstanding.

We are subject to the regulations of the PRC which restricts the transfer of cash from China, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC.

Our accounts receivable has been an increasingly significant portion of our current assets, representing $9.87 million and $7.96 million as of June 30, 2010 and 2009, respectively. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make payments in a timely manner, our liquidity and results of operations could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations. A significant deterioration in our ability to collect on accounts receivable could affect our cash flow and working capital position and could also impact the cost or availability of financing available to us.

We provide our major customers with payment terms ranging from 30 to 45 days. Additionally, our production lead time is approximately three weeks, from the inspection of incoming materials, to production, testing and packaging. We need to keep a large supply of raw materials and work in process and finished goods inventory on hand to ensure timely delivery of our products to our customers. We typically offer certain of our customers 30 to 90 days credit terms for payment. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer’s credit worthiness deteriorates, or our customers’ actual defaults exceed historical experience, our estimates could change and impact our reported results. We have not experienced any significant amount of bad debt since the inception of our operations.

As of June 30, 2010, inventories amounted to $6.1 million, compared to $7.6 million as of June 30, 2009.

We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including pension insurance, medical insurance, unemployment insurance, and job injuries insurance, and maternity insurance, in accordance with relevant regulations. Total contributions to the funds were approximately $58,184, and $2,857 for the three months ended June 30, 2010 and 2009, respectively, and $125,308 and $8,056 for the six months ended June 30, 2010 and 2009, respectively. We expect that the amount of our contribution to the government’s social insurance funds will increase in the future as we expand our workforce and operations and commence contributions to an employee housing fund.

Net cash provided by operating activities was $7.4 million for the six months ended June 30, 2010, compared to net cash provided by operations of $3.4 million for six months ended June 30, 2009. The $4 million increase was primarily due to an increase in operating income.

Net cash used in investing activities amounted to approximately $3.7 million for the six months ended June 30, 2010, compared to net cash used in investing activities of $1.6 million for the six months ended June 30, 2009. The change was due to an increase in our investment in fixed assets.

Net cash provided by financing activities amounted to $23.4 million for the six months ended June 30, 2010, compared to $1.4 million for the six months ended June 30, 2009. The increase of cash provided by financing activities was primarily a result of the receipt of proceeds from the public offering of our common stock during the period.

The ability of Shenzhen YPC to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. A majority of our revenue being earned and currency received are denominated in RMB, which is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars. Accordingly, Shenzhen YPC’s funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations.

Based upon our present plans, we believe that cash on hand, cash flow from operations and funds available to us through financing will be sufficient to fund our capital needs for at least the next 12 months. We expect that our primary sources of funding for our operations for the upcoming 12 months and thereafter will result from our cash flow from operations to fund our operations during the upcoming 12 months and thereafter, in addition to the possibility of conducting debt and equity financings. However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we did not have sufficient available cash, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.

Seasonality

Our business is not seasonal in nature. The seasonal effect does not have material impact on our sales.

Off-Balance Sheet Arrangements

We have no material off-balance sheet transactions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information about market risks for the six months ended June 30, 2010, does not differ materially from that discussed under

Item 7A in our 2009 Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 31, 2010.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act of 1934. Based upon this evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2010.

Changes in Internal Control Over Financial Reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, our management identified material weaknesses in our controls and procedures regarding our failure to timely disclose and prevent advances made in the form of unsecured loans with no fixed repayment dates made to a family member of our Chief Executive Officer and Chairman of the Board in violation of Section 402 of the Sarbanes-Oxley Act of 2002 (“Section 402”). We have taken steps to remediate the material weakness identified during the three months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The facts of the loan transactions and remediation measures are as follows:

We have taken and intend to continute to take steps to improve the process designed to prevent such transfers to our directors, officers or related parties to ensure that future Section 402 violations do not occur. We are seeking to improve our controls and procedures in an effort to remediate these deficiencies through improving supervision, education, and training of our accounting staff. To strengthen our internal controls, the following policies have been adopted since last quarter we strengthened our governance by appointing experienced independent directors to get more objective advice and significant financial expertise. We believe that expertise from our newly appointed audit committee chair, Mr. Tony Shen, and nominating committee chair, James M. Lee, is contributing to our financial reporting process and corporate governance. We also have set up a special project team for internal controls and compliance, and engaged one of the Big-Four audit firms to assist us with implementing and maintaining adequate internal controls as required. Additionally, we set up restrictions to avoid improper money transfers, which require that any internal transfer to a related party or a related to a material transaction must be approved by the internal control manager, chief financial officer and the Board. We believe that the remedial steps that have been taking and will continually take will address the conditions identified by our Chief Executive Officer and Chief Financial Officer in our disclosure controls and procedures. We will continue to monitor the effectiveness of these improvements. Management plans to enlist additional qualified in house accounting personnel and third-party accounting personnel to ensure that management will have adequate resources in order to attain complete reporting of financial information disclosures in a timely matter.

Part II. Other Information

Item 1. Legal Proceedings

We are not involved in any material legal proceedings outside of the ordinary course of our business.

Item 1A. Risk Factors

There have been the following material changes in the risk factors of the Company as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 31, 2010:

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. In May 2010, our management identified a material weakness in our controls and procedures regarding our failure to timely disclose and prevent transfers made to Ms. Jianrong Li, in violation of Section 402 of the Sarbanes-Oxley Act of 2002. We may encounter additional problems or delays in completing activities necessary to improve our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in receiving an attestation of our assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

We made transfers to a family member of our Chairman of the Board and Chief Executive Officer in violation of Section 402 of the Sarbanes-Oxley Act of 2002 and we and/or our Chairman of the Board and Chief Executive Officer could become subject to sanctions, penalties, investigations or other proceedings.

Although we have attempted to take remedial steps to address the violation of Section 402 by requiring immediate and full repayment of all transfers, the violation of Section 402 may cause governmental authorities, such as the United States Securities and Exchange Commission, to subject us to sanctions, penalties, or investigations or other proceedings, which may not be resolved favorably and will require significant management time and attention, and we could incur costs which could materially and negatively affect our business, results of operations and cash flows. There are no assurances that an investigation or other proceedings will not commence, and if commenced, that such investigation or other proceedings will result in a favorable outcome for us.

We intend to grant a large number shares of our common stock to various of our officers, directors and employees pursuant to our 2010 Omnibus Incentive Plan for which we will incur significant non-cash charges which will negatively affect our results of operations and which may cause the market price of our common stock to drop significantly, even if our business is doing well.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

On July 13, 2010, the Company issued 2,000 shares of its common stock to RedChip Companies, Inc. pursuant to a Conference and Research Agreement by and between the Company and RedChip Companies, Inc. (“RedChip”) dated February 3, 2010. The shares were issued to RedChip in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 promulgated thereunder. RedChip qualified as an accredited investor (as defined by Rule 501 under the Securities Act).

Item 3. Default Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

Exhibit Number		Description of Document

31.1		Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

CHINA ELECTRIC MOTOR, INC.

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.

	China Electric Motor, Inc.

Dated: August 9, 2010		/s/ Yue Wang
	By:	Yue Wang
	Its:	Chief Executive Officer

		/s/ Heung Sang Fong
	By:	Heung Sang Fong
	Its:	Chief Financial Officer

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China Electric Motor (CELM) Inactive 10-Q2010 Q2 Quarterly report

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