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, 2012
OR
[ ] 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. 000-53615
GOLDENWAY, INC.
(Exact name of registrant as specified in its charter)
Nevada | 22-3968194 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
Suites 3701-4, 37/F
Tower 6, The Gateway, Harbour City,
Tsim Sha Tsui, Kowloon,
Hong Kong
(Address of principal executive offices)
+852-3719-9399
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [X] No [ ]
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 Website, 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 [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] | Accelerated Filer [ ] |
Non-Accelerated Filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
State the number of shares outstanding of each of the Issuers classes of common equity, as of the latest practicable date:
Common Stock, $0.001 par value per share: 14,660,029 outstanding as of August 13, 2012.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2012
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION | ||
Item 1. | Interim Condensed Consolidated Financial Statements | 3 |
Notes to the Interim Condensed Consolidated Financial Statements | 8 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 |
Item 4. | Controls and Procedures | 30 |
PART II—OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 30 |
Item 1A. | Risk Factors | 31 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
Item 3. | Defaults Upon Senior Securities | 31 |
Item 4. | (Removed and Reserved) | 31 |
Item 5. | Other Information | 31 |
Item 6. | Exhibits | 31 |
SIGNATURES | 32 |
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Item 1. | Interim Condensed Consolidated Financial Statements. |
GOLDENWAY, INC.
Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended
June 30, 2012 and 2011
Table of Contents
Page | |
Interim Condensed Consolidated Balance Sheets | 4 |
Interim Condensed Consolidated Statements of Operations and Comprehensive Income | 5 |
Interim Condensed Consolidated Statements of Shareholders’ Equity | 6 |
Interim Condensed Consolidated Statements of Cash Flows | 7 |
Notes to Interim Condensed Consolidated Financial Statements | 8-18 |
3
Goldenway, Inc.
Interim Condensed Consolidated Balance Sheets
(Expressed in US dollars)
(Unaudited)
June 30, | December 31, | ||||||||
As of | Note | 2012 | 2011 | ||||||
ASSETS | |||||||||
Current Assets: | |||||||||
| |||||||||
Cash | $ | 22,730,992 | $ | 10,267,457 | |||||
Accounts receivable, net of allowance for doubtful accounts | |||||||||
($Nil for both June 30, 2012 and December 31, 2011) | 3,772,789 | 2,358,677 | |||||||
Unrealized profits on open contracts | 3 | 2,598,641 | 1,837,642 | ||||||
Other receivables | 4 | 616,254 | 722,607 | ||||||
Trading precious metals | 3 | 1,895,670 | 1,674,077 | ||||||
Deposits and prepaid expenses | 5 | 3,500,914 | 1,965,475 | ||||||
Deferred income tax assets | 449,761 | 449,234 | |||||||
Total current assets | 35,565,021 | 19,275,169 | |||||||
Property and equipment, net | 6 | 4,776,709 | 4,828,890 | ||||||
Intangible assets, net | 7 | 3,079,574 | 2,585,422 | ||||||
Goodwill | 7 | 427,136 | 427,136 | ||||||
Deposits and prepaid expenses – non-current | 5 | 687,668 | 1,105,441 | ||||||
Due from majority stockholder | 10 | 88,403 | 494,732 | ||||||
Total assets | $ | 44,624,511 | $ | 28,716,790 | |||||
| |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||
Current liabilities: | |||||||||
Accounts payable | 8 | $ | 2,922,339 | $ | 1,564,918 | ||||
Customer deposits | 11,310,489 | 8,389,460 | |||||||
Unrealized losses on open contracts | 3 | 165,719 | 245,856 | ||||||
Accrued expenses and other liabilities | 1,915,780 | 1,870,947 | |||||||
Income taxes payable | 3,896,342 | 1,921,033 | |||||||
Deferred income tax liabilities | 35,095 | 35,054 | |||||||
Due to a sister company | 10 | 240,209 | - | ||||||
Total current liabilities | 20,485,973 | 14,027,268 | |||||||
Other liabilities: | |||||||||
Deferred income tax liabilities – non-current | 1,035,838 | 968,464 | |||||||
Total liabilities | 21,521,811 | 14,995,732 | |||||||
COMMITMENTS AND CONTINGENCIES | |||||||||
Shareholders' Equity | |||||||||
Common Stock, $0.001 par value, 75,000,000 shares authorized, | 14,660 | 14,660 | |||||||
Additional paid-in capital | 12,877,163 | 12,877,163 | |||||||
Retained earnings | 10,241,198 | 889,060 | |||||||
Accumulated other comprehensive income | (30,321 | ) | (59,825 | ) | |||||
Total shareholders' equity | 23,102,700 | 13,721,058 | |||||||
Total liabilities and shareholders' equity | $ | 44,624,511 | $ | 28,716,790 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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Goldenway, Inc.
Interim Condensed Consolidated Statements of Operations and Comprehensive Income
(Expressed in US dollars)
(Unaudited)
| For the Six Months Ended | For the Three Months Ended | |||||||||||||
| June 30 | June 30 | |||||||||||||
Note | 2012 | 2011 | 2012 | 2011 | |||||||||||
REVENUES | |||||||||||||||
| |||||||||||||||
Trading revenue | $ | 28,635,938 | $ | 18,065,233 | $ | 19,291,841 | $ | 10,968,342 | |||||||
Foreign exchange brokerage services | 278,054 | - | 75,718 | - | |||||||||||
Interest income from customers’ trading accounts | 675,580 | 521,546 | 404,766 | 305,369 | |||||||||||
Fair value change of trading precious metals | 27,271 | 130,417 | (96,896 | ) | 68,211 | ||||||||||
Total revenues | 29,616,843 | 18,717,196 | 19,675,429 | 11,341,922 | |||||||||||
| |||||||||||||||
EXPENSES | |||||||||||||||
Management fees | 10 | 472,180 | 4,299,786 | 275,917 | 2,443,230 | ||||||||||
Trading expenses and commissions | 7,397,151 | 4,046,142 | 4,101,400 | 2,836,321 | |||||||||||
Employee compensation and benefits | 3,658,004 | 521,460 | 1,838,364 | 282,836 | |||||||||||
General and administrative expenses | 1,650,421 | 554,802 | 573,772 | 457,374 | |||||||||||
Advertising expenses | 10 | 2,665,526 | 480,239 | 1,528,737 | 261,881 | ||||||||||
Bad debt expenses | 673,393 | 454,762 | 673,393 | 411,894 | |||||||||||
Occupancy expenses | 405,402 | 347,059 | 215,740 | 173,773 | |||||||||||
Depreciation and amortization | 520,770 | 198,561 | 242,775 | 107,906 | |||||||||||
Data processing and service fees | 10 | 587,144 | 108,157 | 269,518 | 38,829 | ||||||||||
Total expenses | 18,029,991 | 11,010,968 | 9,719,616 | 7,014,044 | |||||||||||
Other income | 13,736 | 4,738 | 7,619 | 2,300 | |||||||||||
INCOME BEFORE INCOME TAXES | 11,600,588 | 7,710,966 | 9,963,432 | 4,330,178 | |||||||||||
INCOME TAXES | |||||||||||||||
Provision for income taxes | 2,151,983 | 1,378,016 | 1,741,399 | 729,409 | |||||||||||
Deferred income tax provision (recovery) | 96,467 | (17,642 | ) | 59,967 | (502 | ) | |||||||||
| |||||||||||||||
| 2,248,450 | 1,360,374 | 1,801,366 | 728,907 | |||||||||||
NET INCOME | 9,352,138 | 6,350,592 | 8,162,066 | 3,601,271 | |||||||||||
OTHER COMPREHENSIVE INCOME | |||||||||||||||
Foreign currency translation | 29,504 | (2,950 | ) | (9,693 | ) | (10,282 | ) | ||||||||
COMPREHENSIVE INCOME | $ | 9,381,642 | $ | 6,347,642 | $ | 8,152,373 | $ | 3,590,989 | |||||||
| |||||||||||||||
| |||||||||||||||
NET INCOME | $ | 9,352,138 | $ | 6,350,592 | $ | 8,162,066 | $ | 3,601,271 | |||||||
| |||||||||||||||
WEIGHTED AVERAGE COMMONSHARE OUTSTANDING | |||||||||||||||
Basic and Diluted | 9 | 14,660,029 | 14,660,029 | 14,660,029 | 14,660,029 | ||||||||||
| |||||||||||||||
BASIC AND DILUTED EARNINGS PERCOMMON SHARE | |||||||||||||||
Basic and Diluted | 9 | $ | 0.64 | $ | 0.43 | $ | 0.56 | $ | 0.25 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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Goldenway, Inc.
Interim Condensed Consolidated Statements of Shareholders’ Equity
As of June 30, 2012 and December 31, 2011
(Expressed in US dollars)
(Unaudited)
Common Stock | ||||||||||||||||||
Accumulated | ||||||||||||||||||
Additional | Other | Total | ||||||||||||||||
Number of | Paid-in | Retained | Comprehensive | Shareholders’ | ||||||||||||||
Shares | Par Value | Capital | Earnings | Income | Equity | |||||||||||||
BALANCE, December 31, 2011 | 14,660,029 | $ | 14,660 | $ | 12,877,163 | $ | 889,060 | $ | (59,825 | ) | $ | 13,721,058 | ||||||
Net income for the period | - | - | - | 1,190,072 | - | 1,190,072 | ||||||||||||
Foreign currency translation adjustment | - | - | - | - | 39,197 | 39,197 | ||||||||||||
| ||||||||||||||||||
BALANCE, March 31, 2012 | 14,660,029 | $ | 14,660 | $ | 12,877,163 | $ | 2,079,132 | $ | (20,628 | ) | $ | 14,950,327 | ||||||
Net income for the period | - | - | - | 8,162,066 | - | 8,162,066 | ||||||||||||
Foreign currency translation adjustment | - | - | - | - | (9,693 | ) | (9,693 | ) | ||||||||||
| ||||||||||||||||||
BALANCE, June 30, 2012 | 14,660,029 | $ | 14,660 | $ | 12,877,163 | $ | 10,241,198 | $ | (30,321 | ) | $ | 23,102,700 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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Goldenway, Inc.
Interim Condensed Consolidated Statements of Cash Flows
(Expressed in US dollars)
(Unaudited)
For the Six Months Ended | ||||||
30 June | ||||||
| 2012 | 2011 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net income | $ | 9,352,138 | $ | 6,350,592 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Net unrealized profit | (841,136 | ) | (1,645,421 | ) | ||
Depreciation and amortization | 520,770 | 198,561 | ||||
Deferred income tax | 96,467 | (17,642 | ) | |||
Change in fair value of trading precious metals | (27,271 | ) | (130,417 | ) | ||
Bad debt expenses | 673,393 | 454,762 | ||||
Changes in assets and liabilities: | ||||||
(Increase) decrease in assets - | ||||||
Accounts receivable | (2,087,505 | ) | (846,953 | ) | ||
Other receivables | 106,353 | (346,575 | ) | |||
Trading precious metals | (194,322 | ) | (286,973 | ) | ||
Deposits and prepaid expenses | (1,117,666 | ) | 43,994 | |||
Due from majority stockholder | 406,329 | - | ||||
Increase (decrease) in liabilities - | ||||||
Accounts payable | 1,357,421 | 463,845 | ||||
Accrued expenses and other liabilities | 44,833 | (219,168 | ) | |||
Customer deposits | 2,921,029 | 3,820,140 | ||||
Income taxes payable | 1,945,730 | (60,379 | ) | |||
Due to a sister company | 240,209 | - | ||||
Net cash provided by operating activities | 13,396,772 | 7,778,366 | ||||
| ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Purchase of property and equipment | (341,842 | ) | (172,369 | ) | ||
Purchase of intangible assets | (591,944 | ) | - | |||
Due to majority stockholder | - | (6,811,855 | ) | |||
Prepayment on equipment | - | (4,508,361 | ) | |||
Net cash used in investing activities | (933,786 | ) | (11,492,585 | ) | ||
| ||||||
NET INCREASE (DECREASE) IN CASH | 12,462,986 | (3,714,219 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 549 | (1,284 | ) | |||
Cash, beginning of period | 10,267,457 | 7,975,652 | ||||
Cash, end of period | $ | 22,730,992 | $ | 4,260,149 | ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOWSINFORMATION: | ||||||
Interest received | $ | 675,580 | $ | 521,546 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Non-cash Investing Activities
Before the reverse merger and recapitalization as described in Note 1, the Company declared dividends totaling $14,005,862 during the six months ended June 30, 2011 to reduce the due from majority stockholder account. No such dividend was declared during the six months ended June 30, 2012.
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
1. | Nature of Operations and Basis of Presentation |
Goldenway, Inc. (formerly Cyber Informatix, Inc.) (“CII”) was organized under the laws of the State of Nevada on September 10, 2007, as a software design and e-commerce company. From September 10, 2007 (date of incorporation) through to the date of reverse acquisition discussed below, CII was a development stage company, engaged in the business of distributing economically-priced downloadable application software via the Internet, but with minimal operations. | |
On September 30, 2011, CII closed a share exchange agreement (the “Share Exchange Agreement”), with Goldenway Precious Metals Limited (“GPML”), its sole shareholder, Goldenway Investments Holding Limited (“GIHL”), and Mr. Terry G. Bowering, CII’s majority stockholder, pursuant to which CII acquired 100% of the issued and outstanding capital stock of GPML in exchange for 24,587,299 shares of CII’s common stock, par value $0.001, which constituted 80.80% of CII’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement. This transaction was recorded as a reverse merger and recapitalization (“RTO”) for accounting purposes whereby CII (the legal acquirer) is considered the accounting acquiree and GPML (the legal acquiree) is considered the accounting acquirer and the historical operations are those of the accounting acquirer. As a result of this transaction, GPML is deemed to be a continuation of the business of CII. Accordingly, the accompanying interim condensed consolidated financial statements are those of GPML. The assets and liabilities of GPML have been brought forward at their book value and no goodwill has been recognized. The historical shareholders’ equity of CII prior to the share exchange has been retroactively restated for the equivalent number of shares received as if the share exchange occurred as of the beginning of the first period presented. | |
Subsequent to the RTO, CII changed its name to Goldenway, Inc. | |
GPML was incorporated in Hong Kong on April 7, 2009. GPML has obtained licenses from the Chinese Gold & Silver Exchange Society (the “CGSE”) and is involved in the trading of precious metals spot contracts, through its electronic trading platform, and precious metals. The GPML is one of the CGSE’s recognized E-Trading members. | |
On November 1, 2011, GPML acquired 100% of Goldenway Global Investments (UK) Limited (“Goldenway UK”) which was incorporated in United Kingdom on July 14, 1997. Goldenway UK has obtained a license from the London Financial Services Authority (“FSA”) and is involved in the provision of foreign exchange brokerage services. | |
The accompanying interim condensed consolidated financial statements include the accounts of the CII, GPML and Goldenway UK (collectively referred as the “Company”, “we”, “our” or “us”). All inter-company balances and transactions have been eliminated on consolidation. The accompanying interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). | |
In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of a normal recurring nature. The result of operations for any interim period is not necessarily indicative of results for the full year. | |
The interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Form 10-K dated March 29, 2012; except as disclosed in Note 2. They do not include certain footnote disclosures and financial information normally included in annual financials prepared in accordance with U.S. GAAP and, therefore, should be read in conjunction with the Form 10-K as aforementioned. |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
2. | Summary of Significant Accounting Policies |
Recently Adopted Accounting Standards | |
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This standard results in a common requirement between the FASB and the International Accounting Standards Board (IASB) for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s interim condensed consolidated financial statements. | |
In June, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s interim condensed consolidated financial statements. | |
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other (Topic 350): The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s interim condensed consolidated financial statements. | |
In December 2011, the FASB issued ASU 2011-12, “Comprehensive income”. The amendments are being made to allow FASB time to re- deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.ASU No. 2011-12 is effective for the Company on January 1, 2012. The adoption of this ASU did not have a material impact on the Company’s interim condensed consolidated financial statements. | |
Recent Accounting Pronouncements | |
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet”. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements. | |
On July 27, 2012, the FASB issued ASU No. 2012-02 under which an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 or January 1, 2013 for the Company. Early adoption is permitted. The adoption of ASU No. 2012-02 is not expected to have a material impact on the Company’s consolidated financial statements. |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
2. | Summary of Significant Accounting Policies – continued |
Foreign exchange rates used: |
June 30, | December 31, | June 30, | ||||||||
2012 | 2011 | 2011 | ||||||||
Period end USD/HK$ exchange rate | 7.7572 | 7.7663 | 7.7814 | |||||||
Average USD/HK$ exchange rate | 7.7607 | 7.7841 | 7.7771 |
3. | Fair Value Measurement |
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the related hierarchy levels as of June 30, 2012 and December 31, 2011: |
Fair Value Measurements on a Recurring Basis | |||||||||||||
As of June 30, 2012 | |||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||
Assets: | |||||||||||||
Unrealized profits on open contracts | $ | - | $ | 2,598,641 | $ | - | $ | 2,598,641 | |||||
Trading precious metals | 1,895,670 | - | - | 1,895,670 | |||||||||
Total | $ | 1,895,670 | $ | 2,598,641 | $ | - | $ 4,494,311 | ||||||
Liabilities: | |||||||||||||
Unrealized losses on open contracts | $ | - | $ | 165,719 | $ | - | $ | 165,719 |
Fair Value Measurements on a Recurring Basis | |||||||||||||
As of December 31, 2011 | |||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||
Assets: | |||||||||||||
Unrealized profits on open contracts | $ | - | $ | 1,837,642 | $ | - | $ | 1,837,642 | |||||
Trading precious metals | 1,674,077 | - | - | 1,674,077 | |||||||||
$ | 1,674,077 | $ | 1,837,642 | $ | - | $ | 3,511,719 | ||||||
Liabilities: | |||||||||||||
Unrealized losses on open contracts | $ | - | $ | 245,856 | $ | - | $ | 245,856 |
Level 1 Financial Assets
The Company has investments in gold and silver that are Level 1 financial instruments and are recorded based upon listed or quoted gold and silver market prices. The investments in gold and silver are recorded inTrading precious metals.
Level 2 Financial Assets
The Company has open spot contracts that are Level 2 financial instruments and are recorded based on the difference in market price of the underlying precious metal open spot contracts between the date when the contracts are entered and the balance sheet date. The open spot contracts are recorded inUnrealized profits on open contracts and Unrealized losses on open contracts.
- 10 -
Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
4. | Other Receivables |
Other receivables consisted of the following as of June 30, 2012 and December 31, 2011: |
June 30, | December 31, | ||||||
2012 | 2011 | ||||||
Funds in transit | $ | 48,327 | $ | 81,868 | |||
CGSE rebate receivable | 515,190 | 611,750 | |||||
Staff loan | 21,779 | 28,989 | |||||
VAT receivable | 30,958 | - | |||||
$ | 616,254 | $ | 722,607 |
Funds in transit represents the amount transferred from agents but have yet to be received by the Company as of December 31, 2011. Funds in transit were received subsequent to the period end date (in January 2012). Normally funds in transit will be received within 5 business days. CGSE charges the Company a fee for each precious metal price trading transaction and issues rebates based on the transaction volume.
The staff loan is the advance to a director of Goldenway UK. The amount is unsecured, non-interest bearing and has no fixed repayment terms.
5. | Deposits and Prepaid Expenses |
Deposits and prepaid expenses consisted of the following as of June 30, 2012 and December 31, 2011: |
June 30, | December 31, | ||||||
2012 | 2011 | ||||||
Deposit in Hantec Bullion Limited (a) | $ | 476,266 | $ | 475,708 | |||
Advertising expenses | 429,469 | 481,912 | |||||
Funds to transfer agents | 1,227,144 | 590,817 | |||||
Legal and professional fee | 596,910 | 437,078 | |||||
Other deposits and prepaid expenses (b) | 1,458,793 | 1,085,401 | |||||
Deposits and prepaid expenses | $ | 4,188,582 | $ | 3,070,916 | |||
Represented by: | |||||||
Deposits and prepaid expenses – current | $ | 3,500,914 | $ | 1,965,475 | |||
Deposits and prepaid expenses – non-current | 687,668 | 1,105,441 | |||||
$ | 4,188,582 | $ | 3,070,916 |
(a) | The Company executed trading of precious metal spot contracts through Hantec Bullion Limited (“Hantec”), a private precious metal trading company in Hong Kong. All the deposit with Hantec can be used for future trading or withdrawn at the Company’s discretion. | |
(b) | The balance mainly represented the deposits for utility, e-trading fees, other miscellaneous prepaid expenses for daily operations and data processing and service fee prepaid to Shenzhen Gateway Technology Limited (“Gateway”) (Note 10). |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
6. | Property and Equipment |
Property and equipment, including leasehold improvements, consisted of the following as of June 30, 2012 and December 31, 2011: |
June 30, | December 31, | ||||||
2012 | 2011 | ||||||
Office equipment | $ | 23,512 | $ | 23,106 | |||
Computer equipment | 616,496 | 411,772 | |||||
Leasehold improvements | 363,387 | 363,194 | |||||
Furniture and fixtures | 45,148 | 44,503 | |||||
Motor vehicle | 206,461 | 80,127 | |||||
Motor vessel | 4,531,198 | 4,516,244 | |||||
5,786,202 | 5,438,946 | ||||||
Less: Accumulated depreciation | (1,009,493 | ) | (610,056 | ) | |||
Property and equipment, net | $ | 4,776,709 | $ | 4,828,890 |
Depreciation expense was $204,695 and $421,475 for the three and six months ended June 30, 2012, respectively (as compared to $75,759 and $134,310, respectively, in the same periods ended June 30, 2011), and was recorded as depreciation and amortization in the Company’s interim condensed consolidated statements of operations and comprehensive income.
7. | Intangible Assets and Goodwill |
Intangible assets and goodwill consisted of the following as of June 30, 2012 and December 31, 2011: |
June 30, | December 31, | ||||||
2012 | 2011 | ||||||
Precious metal price trading licenses(i) | $ | 638,117 | $ | 637,369 | |||
Precious metal trading platform(ii) | 1,236,506 | 643,807 | |||||
FSA license(iii) | 1,529,578 | 1,529,578 | |||||
Intangible assets | 3,404,201 | 2,810,754 | |||||
Less: accumulated amortization | (324,627 | ) | (225,332 | ) | |||
Intangible assets, net | $ | 3,079,574 | $ | 2,585,422 | |||
June 30, | December 31, | ||||||
2012 | 2011 | ||||||
Goodwill arising on consolidation | $ | 427,136 | $ | 427,136 |
(i) | The Company acquired a precious metal price trading license from an unrelated party in 2009 and a physical precious metal trading license from another unrelated party in 2010. These licenses allow the Company to engage in the precious metal price trading activities with the public in Hong Kong, as a result, the Company became a member of the CGSE, and can engage in trading of physical precious metals. | |
Both licenses can be traded freely with no expiration date and hence, considered to have indefinite useful lives. | ||
(ii) | In 2010, the Company purchased an online precious metal trading platform from Gateway, which is controlled by Mr. Hao Tang. The platform is amortized over its useful life of 5 years. During the six months ended June 30, 2012, the Company acquired a) another online trading platform from GIHL; b) software development for the online precious metal trading platform from Gateway; and c) a license for new trading software for trading platform in a) from MetaQuotes, all of the newly-acquired intangible assets are amortized over its useful lives of 5 years. Details of a) and b) are set out in Note 10 to the interim condensed consolidated financial statements. | |
(iii) | These are FSA licenses identified and goodwill recognized from the acquisition of Goldenway UK. |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
7. | Intangible Assets and Goodwill - continued |
Amortization expense was $38,080 and $99,295 for the three and six months ended June 30, 2012, respectively (as compared to $32,146 and $64,251, respectively, in the same periods ended June 30, 2011), and was recorded as depreciation and amortization in the Company’s interim condensed consolidated statements of operations and comprehensive income.
The estimated amortization expenses for the next 5 years are as follow:
2012 | $123,651 |
2013 | $247,301 |
2014 | $247,301 |
2015 | $150,617 |
2016 | $118,389 |
8. | Accounts Payable |
Accounts payable consisted of the following as of June 30, 2012 and December 31, 2011: |
June 30, | December 31, | ||||||
2012 | 2011 | ||||||
Commissions payable to agents | $ | 2,846,304 | $ | 1,143,573 | |||
Withdrawals requested by customers | 42,648 | 215,135 | |||||
Other vendors | 33,387 | 206,210 | |||||
$ | 2,922,339 | $ | 1,564,918 |
As of December 31, 2011, the balance with other vendors includes a balance of $54,382, payable to a company whose director is also a director of Goldenway UK.
9. | Earnings Per Share |
Earnings per share information for the three and six months ended June 30, 2012 and 2011 were determined by dividing net income attributable to the shareholders for the period by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding. | |
For the three and six months ended June 30, 2012 and 2011, the Company did not have any securities that may potentially dilute the basic earnings per share. Therefore the basic and diluted earnings per share for the respective periods are equal. |
For the Six Months Ended | For the Three Months Ended | ||||||||||||
| June 30 | June 30 | |||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||
Numerator | |||||||||||||
Net income attributable to common shareholders | $ | 9,352,138 | $ | 6,350,592 | $ | 8,162,066 | $ | 3,601,271 | |||||
| |||||||||||||
Denominator | |||||||||||||
Weighted average shares of common stock | 14,660,029 | 14,660,029 | 14,660,029 | 14,660,029 | |||||||||
| |||||||||||||
Basic and diluted earnings per common stock | $ | 0.64 | $ | 0.43 | $ | 0.56 | $ | 0.25 |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
10. | Related Party Transactions and Balances |
The Company has engaged in related party transactions with certain majority stockholders, directors and officers of the Company as described below. Management believes that the transactions described below and in the related notes were completed on terms substantially equivalent to those that could prevail in arm’s-length transactions. | |
Entities under common control are: |
Entities | Business | Relationship | |
Gateway | IT services | Affiliated Company - Controlled by Mr. Hao Tang | |
GIHL | Investment | Majority Stockholder | |
Goldenway Global Investments (New Zealand) Limited (“GWNZ”) | Foreign exchange trading and related brokerage services | GIHL Subsidiary or Sister Company | |
Goldenway Investments (HK) Limited (“HK”) | Securities and futures Broker | GIHL Subsidiary or Sister Company | |
Mr. Hao Tang | N/A | Controlling Party of Majority Stockholder | |
Keen Ocean Technology Limited (“Keen Ocean”) | Inactive | Affiliated Company - Controlled by Mr. Jian Qin Huang, a director of the Company | |
Goldenway Global Investors L.P. (“GGILP”) | Investment holding | Partnership partly-owned by Majority Stockholder |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
10. | Related Party Transactions and Balance - continued |
Gateway
During the three and six months ended June 30, 2012, the Company incurred $32,209 and $64,427, respectively, in IT service fees to Gateway (as compared to $32,146 and $64,251, respectively, for the same periods ended June 30, 2011). The expense was recorded as a data processing and service fee under the interim condensed consolidated statements of operations and comprehensive income. As of June 30, 2012, the Company prepaid $26,857 to Gateway for future IT services (as compared to $91,206 as at December 31, 2011) and recorded the amounts as other deposits and prepaid expenses (Note 5).
During the six months ended June 30, 2012, the Company also incurred $193,000 of software developments for the online precious metal trading platform (Note 7(ii)).GIHL
During the three and six months ended June 30, 2012, the Company incurred $275,917 and $472,180 management fees to GIHL, respectively (as compared to $2,443,230 and $4,299,786, respectively, as at June 30, 2011). The Company also made advances to the GIHL during the year ended December 31, 2011. As of June 30, 2012, the Company has $88,403 net receivable to the GIHL (as compared to $494,732 as of December 31, 2011).
In addition, for the six months ended June 30, 2012, the Company incurred approximately $258,000 set up fees for its online trading platforms. The fees were capitalized as intangible assets. The Company also incurred a monthly maintenance fee of approximately $46,000 and $93,000, for the three and six months ended June 30, 2012 respectively, from GIHL.GWNZ
During the three and six months ended June 30, 2012, the Company earned $75,718 and $278,054, respectively, in commissions from GWNZ (as compared to $nil during the same periods ended June 30, 2011). As of June 30, 2012, the Company has $240,209 net payable to GWNZ (as compared to $nil as of December 31, 2011).HK
The Company entered into a marketing and advertising service agreement with HK, whereby the Company is obligated to pay approximately $700,000 annually. The agreement is subject to annual renewal. During the three and six months ended June 30, 2012, the Company incurred $173,929 and $347,907, respectively, for advertising services (as compared to $173,589 and $346,955, respectively, for the same periods ended June 30, 2011). As of June 30, 2012, the Company was obligated to pay approximately $350,000 to HK for the remaining of the year under this agreement.Dividend
Prior to the closing of the share exchange transaction, GPML declared a dividend of $6,364,922 and $14,005,862, or $0.06 and $0.14 per share, respectively, for the three and six months ended June 30, 2011, on the 100,000,000 shares issued to GIHL. No dividend was declared during the three and six months ended June 30, 2012.Mr. Hao Tang
Mr. Hao Tang, the major shareholder and an officer of the Company, has a trading account on the Company’s trading platform as of June 30, 2012. No trading activity was made by Mr. Tang during the three and six months ended June 30, 2012 and 2011. His deposit balance in the trading account with the Company as of June 30, 2012 remains $56,857, which is the same as it was as of December 31, 2011.Keen Ocean
In May 2012, the Company acquired a license for new trading software for trading platform of $140,666 (Note 7(ii)) through Keen Ocean.GGILP
During the three months and six months ended June 30, 2012, the Company sold 10 taels of gold bars of $18,669 to GGILP, in the ordinary course of business.
All balances with related parties are unsecured, non-interest bearing and have no fixed terms of repayments.
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
11. | Commitments |
Leases- The Company leases office space under non-cancellable operating lease agreements that expire on various dates through 2015. Future annual minimum lease payments, including maintenance and management fees, for non-cancellable operating leases, are as follows: |
Year ending December 31, | ||||
2012 | $ | 1,029,387 | ||
2013 | 1,736,659 | |||
2014 | 1,651,185 | |||
2015 | 854,656 | |||
$ | 5,271,887 |
12. | Regulatory Requirements |
The Company, as a member of the CGSE, is subject to working capital and asset requirements. Under the requirements, the minimum required working capital, defined as cash plus precious metals, is approximately $193,000 (HK$ 1.5 million) and the minimum required assets are $645,000 (HK$ 5 million). | |
As of June 30, 2012, the GPML has $21,297,231 and $1,895,670 cash and trading precious metals, respectively, (as compared to $9,845,686 and $1,674,077 as of December 31, 2011). | |
The GPML’s total assets are $45,135,062 as of June 30, 2012 (as compared to $28,645,454 as of December 31, 2011). | |
In addition, the FSA requires Goldenway UK to maintain a regulatory basic capital of $157,000 (EUR 125,000), and a Pillar 2 capital requirement of $792,000 (GBP 507,000). As of June 30, 2012, Goldenway UK has net asset of $801,055. | |
The Company was in compliance with all the requirements as of June 30, 2012 and December 31, 2011. | |
13. | Segment Information |
The Company has two reportable segments: i) Foreign Exchange Brokerage Services and Others segment and ii) Precious Metals segment. The Foreign Exchange Brokerage Services and Others segment consists of Goldenway UK and CII, while the Precious Metals segment represents GPML. These two segments offer different products and services. The reportable segments are managed separately because they provide distinct products and provide different services. | |
Financial information with respect to the reportable segments and reconciliation to the amounts reported in the Company’s interim condensed consolidated financial statements for the three and six months ended June 30, 2012 are as follows: |
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
13. | Segment Information - continued |
For the three and six months ended June 30, 2012, the information on the Company’s operations by reportable segment is as follows:
For the three months ended June 30, 2012 | Foreign Exchange | ||||||||||||
Brokerage Services | Precious Metals | Elimination | Consolidated | ||||||||||
$ | $ | $ | $ | ||||||||||
Revenue from foreign exchange brokerage services | 75,718 | - | 75,718 | ||||||||||
Trading revenue | - | 19,291,841 | 19,291,841 | ||||||||||
Fair value change of trading precious metals | - | (96,896 | ) | (96,896 | ) | ||||||||
Interest income from customers’ trading accounts | - | 404,766 | 404,766 | ||||||||||
Total revenues | 75,718 | 19,599,711 | 19,675,429 | ||||||||||
Income before income taxes | (418,939 | ) | 10,383,977 | (1,606 | ) | 9,963,432 | |||||||
Income taxes | - | 1,801,366 | 1,801,366 | ||||||||||
Depreciation and amortization | 2,042 | 240,733 | 242,775 |
For the six months ended June 30, 2012 | Foreign Exchange | ||||||||||||
Brokerage Services | Precious Metals | Elimination | Consolidated | ||||||||||
$ | $ | $ | $ | ||||||||||
Revenue from foreign exchange brokerage services | 278,054 | - | 278,054 | ||||||||||
Trading revenue | - | 28,635,938 | 28,635,938 | ||||||||||
Fair value change of trading precious metals | - | 27,271 | 27,271 | ||||||||||
Interest income from customers’ trading accounts | - | 675,580 | 675,580 | ||||||||||
Total revenues | 278,054 | 29,338,789 | 29,616,843 | ||||||||||
Income before income taxes | (1,004,210 | ) | 12,604,852 | (54 | ) | 11,600,588 | |||||||
Income taxes | - | 2,248,450 | 2,248,450 | ||||||||||
Depreciation and amortization | 22,204 | 498,566 | 520,770 |
As of June 30, 2012 | Foreign Exchange | ||||||||||||
Brokerage Services | Precious Metals | Elimination | Consolidated | ||||||||||
$ | $ | $ | $ | ||||||||||
Additions to property and equipment | - | 341,842 | 341,842 | ||||||||||
Additions to intangible assets | - | 591,944 | 591,944 | ||||||||||
Goodwill | - | - | 427,136 | 427,136 | |||||||||
Segment assets | 1,729,713 | 45,135,062 | (2,240,264 | ) | 44,624,511 |
During the three and six months ended June 30, 2011, the Company had only one reportable segment being the Precious Metals segment.
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Goldenway, Inc.
Notes to Interim Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2012 and 2011
(Expressed in US dollars)
(Unaudited)
14. | Contingencies and Subsequent Events |
On May 14, 2012, the Company’s solicitors commenced a legal action in the High Court of Hong Kong for the collection of an outstanding debt of RMB 4,037,244 (approximately, $639,000) due from one of the Company’s payment agents (referred to hereafter as the “Proceeding”). The Proceeding is scheduled to be heard by the High Court. In view of this, management has determined that no provision should be provided for the Proceeding as its outcome is still too remote and inconclusive as of the date of this report.
Pursuant to a board resolution dated July 31, 2012, the board of directors (the “Board”) has determined that it is advisable and in the best interests of the Company and its stockholders to change the Company’s domicile from Nevada to Hong Kong (the “Reorganization”) by: (i) causing the incorporation of a wholly-owned subsidiary of the Company in the Hong Kong Special Administrative Region of the People’s Republic of China, to be named Goldenway Financial Holdings Limited (“Goldenway Financial”); (ii) merging the Company with and into Goldenway Financial, with Goldenway Financial continuing as the surviving entity, pursuant to the terms and provisions to be set forth in an agreement and plan of merger to be entered into between the Company and Goldenway Financial (the “Plan of Merger”); and (iii) causing the exchange of each issued and outstanding share of the Company’s common stock, par value $0.001, with one ordinary share of Goldenway Financial, par value $0.001 per share. The Company plans to obtain the approval of its stockholders prior to implementing the Plan of Merger.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OFOPERATIONS. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Form 10-Q.
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included herein, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
Use of Certain Defined Terms
Except where the context otherwise requires and for the purposes of this report only:
- the “Company,” “we,” “us,” and “our” refer to the combined business of Goldenway, Inc., a Nevada corporation, and its wholly-owned subsidiaries, (i) Goldenway Precious Metals Limited, a Hong Kong company, or “Goldenway Precious Metals”; and (ii) Goldenway Global Investments (UK) Limited, a United Kingdom company or “Goldenway UK”;
- “BVI” refers to the British Virgin Islands;
- the “CGSE” refers to “The Chinese Gold and Silver Exchange Society”;
- “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
- “Goldenway Investments” refers to Goldenway Investments Holdings Limited, the former sole shareholder of Goldenway Precious Metals and now the Company’s 71% majority stockholder;
- “Goldenway HK” refers to Goldenway Investments (HK) Limited, an entity owned and controlled by Goldenway Investments;
- “Hong Kong” refers to the Hong Kong Special Administrative Region of the People's Republic of China and “Hong Kong dollars,” “HKD,” or “HK$” refer to the legal currency of Hong Kong;
- “Renminbi” and “RMB” refer to the legal currency of China;
- “SEC” refers to the Securities and Exchange Commission;
- “Securities Act” refers to the Securities Act of 1933, as amended; and
- “U.S. dollars,” “dollars”, “USD” and “$” refer to the legal currency of the United States.
Business Overview
Through our subsidiary, Goldenway Precious Metals, we are a recognized electronics trading member of the Chinese Gold and Silver Exchange Society, or the CGSE, in Hong Kong, and hold a Type AA License which authorizes us to engage in the electronic trading of Kilo Gold and Loco London Gold and Silver. We also engage in the provision of foreign exchange brokerage services in the United Kingdom through our newly acquired subsidiary, Goldenway UK.
We provide precious metals spot contract trading services via our 24-hour electronic trading platform and telephone transaction system in Hong Kong. Our electronic trading platform provides our customers with CGSE price quotations on gold and silver spot contracts, on a Loco London basis, as well as information updates on the gold and silver market, based on an evaluation of third-party market pricing sources such as M-Finance and Bloomberg. In addition to our retail customers, we also trade spot contracts of precious metals with other third-party providers of spot contract services in Hong Kong, and we purchase gold products from walk-in customers on a spot basis for conversion into bullion. See details regarding our services under the “Our Products, Services and Customers” heading in this report.
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We face daily fluctuations in the price of gold and silver, foreign exchange rates, as well as interest rates. Although we have not done so since incorporation, through our client agreement with Goldenway HK, an entity owned and controlled by Goldenway Investments, our majority stockholder, we may engage in the trade of futures contracts and other derivative instruments to hedge against these market risks. Goldenway HK holds Type 1 and Type 2 licenses approved by the Securities and Futures Commission, or the SFC, which enables Goldenway HK to deal in futures contracts as defined under Hong Kong’s Securities and Futures Ordinance, or the SFO. Through our client agreement we are also able to ensure our ability to cover any excess customer demand for gold and silver.
Our revenue from our electronic trading platform trading spot contracts of precious metals is derived from the difference between the customer’s bid and offer prices and the eventual settlement price. If we receive customers’ spot contract orders requesting physical delivery, we will meet their demands either by selling bullion from our inventory or purchasing the bullion from a third-party bullion provider and reselling them to our customers. Hence, our revenue from our purchase and sale of gold and silver products is earned on the resale of the resulting bullion to our customers based on the revaluation of precious metals on hand at higher prices.
In addition, through our subsidiary, Goldenway UK, our revenue generated is derived from the provision of foreign exchange brokerage services to active retail customers globally.
Our revenues increased from $18.72 million for the six months ended June 30, 2011 to $29.62 million for the six months ended June 30, 2012, representing an increase of approximately 58.2%. Our net income increased to $9.35 million for the six months ended June 30, 2012, from $6.35 million for the six months ended June 30, 2011. Revenue generated from spot contracts traded on the electronic trading platform accounted for approximately 96.7% and 96.5% (including the investment loss from spot contracts) of our revenues for the six months ended June 30, 2012 and 2011, respectively. Revenue generated from rollover interest revenue accounted for approximately 2.3% and 2.8% of our revenues for the six months ended June 30, 2012 and 2011, respectively. Revenue generated from realized and revaluation of precious metals accounted for 0.1% and 0.7% of our revenues six months ended June 30, 2012 and 2011, respectively. Revenue generated from foreign exchange brokerage services, resulted in 0.9% and nil of our revenues six months ended June 30, 2012 and 2011, respectively.
Our principal executive offices are located at Suites 3701-4, 37/F, Tower 6, The Gateway, Harbour City, Tsim Sha Tsui, Kowloon, Hong Kong. The telephone number at our principal executive office is +852 3719-9399. All our transactions and the technologies, including the servers that carry out these transactions, are all executed and located in Hong Kong.
Recent Developments
Pursuant to a board resolution dated July 31, 2012, our board of directors has determined that it is advisable and in the best interests of the Company and its stockholders to change the Company’s domicile from Nevada to Hong Kong (the “Reorganization”), in order to reduce our operational, administrative, legal and accounting costs over the long term and have better access to foreign capital markets. The Company plans to effect the Reorganization by: (i) causing the incorporation of a wholly-owned subsidiary of the Company in the Hong Kong Special Administrative Region of the People’s Republic of China, to be named Goldenway Financial Holdings Limited, or Goldenway Financial; (ii) merging the Company with and into Goldenway Financial, with Goldenway Financial continuing as the surviving entity, pursuant to the terms and provisions to be set forth in an agreement and plan of merger to be entered into between the Company and Goldenway Financial; and (iii) causing the exchange of each issued and outstanding share of the Company’s common stock, par value $0.001, with one ordinary share of Goldenway Financial, par value $0.001 per share. The Company plans to obtain the approval of its stockholders prior to effecting the Reorganization in accordance with Nevada law.
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Results of Operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth key components of our results of operations during the three months ended June 30, 2012 and 2011, both in dollars and as a percentage of our net sales.
For the Three Months Ended | ||||||||||||
June 30, | June 30, | |||||||||||
2012 | 2011 | |||||||||||
(Unaudited) | (Unaudited) | |||||||||||
Amount | % of | Amount | % of | |||||||||
Total | Total | |||||||||||
REVENUES | Revenue | Revenue | ||||||||||
Trading revenue | $ | 19,291,841 | 98.0% | $ | 10,968,342 | 96.7% | ||||||
Foreign exchange brokerage services | 75,718 | 0.4% | - | - | ||||||||
Interest income from customers’ trading accounts | 404,766 | 2.1% | 305,369 | 2.7% | ||||||||
Fair value change of trading precious metals | (96,896 | ) | (0.5 | )% | 68,211 | 0.6% | ||||||
Total revenues | 19,675,429 | 100% | 11,341,922 | 100% | ||||||||
EXPENSES | ||||||||||||
Management fees | 275,917 | 1.4% | 2,443,230 | 21.5% | ||||||||
Trading expenses and commissions | 4,101,400 | 20.8% | 2,836,321 | 25.0% | ||||||||
Employee compensation and benefit | 1,838,364 | 9.3% | 282,836 | 2.5% | ||||||||
General and administrative expenses | 573,772 | 2.9% | 457,374 | 4.0% | ||||||||
Advertising expenses | 1,528,737 | 7.8% | 261,881 | 2.3% | ||||||||
Bad debt expenses | 673,393 | 3.4% | 411,894 | 3.6% | ||||||||
Occupancy expenses | 215,740 | 1.1% | 173,773 | 1.5% | ||||||||
Depreciation and amortization | 242,775 | 1.2% | 107,906 | 1.0% | ||||||||
Data processing and service fees | 269,518 | 1.4% | 38,829 | 0.3% | ||||||||
Total expenses | 9,719,616 | 49.4% | 7,014,044 | 61.7% | ||||||||
Other income | 7,619 | - | 2,300 | - | ||||||||
INCOME BEFORE INCOME TAXES | 9,963,432 | 50.6% | 4,330,178 | 38.3% | ||||||||
INCOME TAXES | ||||||||||||
Provision for income taxes | 1,741,399 | 8.9% | 729,409 | 6.4% | ||||||||
Deferred income tax provision (recovery ) | 59,967 | 0.3% | (502 | ) | - | |||||||
1,801,366 | 9.2% | 728,907 | 6.4% | |||||||||
NET INCOME | 8,162,066 | 41.4% | 3,601,271 | 31.9% | ||||||||
OTHER COMPREHENSIVE INCOME | ||||||||||||
Foreign currency translation | (9,693 | ) | - | (10,282 | ) | (0.1)% | ||||||
COMPREHENSIVE INCOME | $ | 8,152,373 | 41.4% | $ | 3,590,989 | 31.8% |
Revenue. Total revenue increased by $8.33 million, or 73.5%, to $19.68 million for the three months ended June 30, 2012, compared to $11.34 million for the three months ended June 30, 2011. This net increase was primarily due to (i) an increase in trading volume, which was in line with the increase in the number of customers as well as an increase in income from spread, the net difference between the prices at which we buy and sell, or sell and buy, Loco London Gold and Silver contracts, which accounted for 99.9% of the net increase; (ii) an increase in rollover interest revenue, which is one of our carrying costs, on customers’ open positions on spot contracts of precious metals upon exceeding the daily cut-off period (mainly caused by the changes in the amount and the length of period for unliquidated contracts), which accounted for 1.2% of the net increase; (iii) an increase in commission income earned by Goldenway UK for introducing trading customers to principal(s), which accounted for 0.9% of the net increase and (iv) a decrease in fair value change of trading precious metals, which accounted for (2.0)% of the net increase. Commissions to Goldenway UK are determined by the number and size of transactions executed by the customers and is recognized currently in income and on a trade date basis. Revenue from spot contracts traded on our electronic trading platform accounted for approximately 98.0% and 96.7% of our revenues for the three months ended June 30, 2012 and 2011, respectively. During the three months ended June 30, 2012 and 2011, revenue generated from rollover interest revenue accounted for approximately 2.1% and 2.7% of our revenues, respectively. Loss generated from realized and revaluation of precious metals accounted for (0.5)% of our revenues for the three months ended June 30, 2012, whereas revenue generated from the same activity accounted for 0.6% of our revenues for the three months ended June 30, 2011, due to changes in market prices from period to period. Revenue generated from foreign exchange brokerage services (which commenced in January 2012), resulted in 0.4% and nil of our revenues, for the respective periods.
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Expenses.During the three months ended June 30, 2012, the expenses were comprised of Management fees, Trading expenses and commissions, Employee compensation and benefit, General and administrative expenses, Advertising expenses, Bad debts expenses, Occupancy expenses, Depreciation and amortization, and Data processing and service fees. Expenses increased by $2.71 million, or 38.6%, during the three months ended June 30, 2012, to $9.72 million, as compared to $7.01 million during the 2011 period, due to increases in each expense component discussed in more detail below.
Management fee.Management fee expenses are comprised of rental, entertainment, travel and computer expenses of Goldenway Investments. Management fee was $0.28 million for the three months ended June 30, 2012, compared to $2.44 million for the three months ended June 30, 2011. The $2.16 million, or 88.7% decrease in management fee is mainly attributable to our amendment of our management fee agreement with Goldenway Investments during the 2011 fourth quarter, to remove the mark-up rate component and to apportion operating costs based on the number of employees engaged in activities for the Company so that the Company could incur costs, such as employee costs, directly.
Trading expenses and commissions.Trading expenses and commissions increased by $1.26 million, or 44.6%, to $4.10 million for the three months ended June 30, 2012, compared to $2.84 million for the three months ended June 30, 2011. The increase in trading expenses and commissions was mainly driven by (i) an increase in trading volume, which accounted for 29.1% of the increase; and (ii) an increase in customers brought in by agents, which led to an increase in collection fees for customer deposits and commissions to agents, which accounted for 70.9% of the increase.
Employee compensation and benefit. Employee compensation and benefit increased by $1.56 million, or 550.0%, to $1.84 million for the three months ended June 30, 2012, compared to $0.28 million for the three months ended June 30, 2011. The increase was primarily due to an increase in the number of new employees hired in connection with our amendment of the management fee agreement, as well as in connection with the fulfillment of the necessary vacancies for the newly-developed department, such as dealing function.
General and administrative expenses. General and administrative expenses increased by $0.11 million, or 25.4%, to $0.57 million for the three months ended June 30, 2012, as compared to $0.46 million for the three months ended June 30, 2011. The net increase was primarily due to (i) an increase in office expenses necessitated by the increase in employees of $0.24 million; (ii) a decrease in consultancy and professional fees in connection with financial reporting and Sarbanes-Oxley compliance of $0.19 million; and (iii) an increase in exchange loss, which was mainly driven by the translation between HKD to USD of $0.06 million.
Advertising expenses. Advertising expenses increased by $1.27 million, or 483.8%, to $1.53 million for the three months ended June 30, 2012, compared to $0.26 million for the three months ended June 30, 2011. The increase was primarily due to (i) a $0.04 million advertising fee to our celebrity spokesperson during the three months ended June 30, 2012 which was not incurred in the 2011 period as most of it was recognized in early 2010, which accounted for 2.8% of the increase; and (ii) an increase in the cost of our online promotional activities during the 2012 period, which accounted for 78.7% of the increase. Pursuant to our renewed client agreement with Goldenway HK, we are obligated to pay consulting fees to Goldenway HK for marketing and advertising services.
Bad debts expenses. Bad debt expenses increased by $0.26 million, or 63.5% to $0.67 million for the three months ended June 30, 2012, compared to $0.41 million for the same period in 2011. The increase is primarily attributable to an increase in doubtful payments from gateway agents during the second quarter of 2012.
Occupancy expenses. Occupancy expenses increased by $0.05 million, or 24.2%, to $0.22 million for the three months ended June 30, 2012, compared to $0.17 million for the three months ended June 30, 2011. The increase is mainly attributable to additional occupancy expenses for our new subsidiary, Goldenway UK.
Depreciation and amortization.Depreciation and amortization increased by $0.13 million, or 125.0%, to $0.24 million for the three months ended June 30, 2012, as compared to $0.11 million for the three months ended June 30, 2011. This increase was primarily due to the acquisition of more computer equipment and servers, and a motor vehicle during the 2012 period and a motor vessel in third quarter 2011.
Data processing and service fee.Data processing and service fees increased by $0.23 million, or 594.1%, to $0.27 million for the three months ended June 30, 2012, as compared $0.04 million for the three months ended June 30, 2011. The increase was primarily due to (i) an increase in customers which caused a corresponding increase in rental fees for the occupancy of more proxy servers, which accounted for approximately 25.1% of the increase; (ii) the commencement in January 2012 of additional monthly consultancy fee payments to Goldenway Investments for the maintenance of our additional online trading platform (pursuant to a new service and maintenance agreement, dated January 1, 2012, between the Company and Goldenway Investments), which accounted for approximately 20.1% of the increase; (iii) an increase of maintenance fee for the trading platform by Goldenway UK, which accounted for approximately 32.5% of the increase; and (iv) an increase of the expenditure for strengthening the internet security, which accounted for approximately 20.0% of the increase.
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Income before income taxes.Income before income taxes increased by $5.63 million, or 130.0%, to $9.96 million for the three months ended June 30, 2012, as compared $4.33 million for the three months ended June 30, 2011. This increase was primarily due to the increase in our customer base, resulting in an increase of trading revenue and total expenses of $8.33 million and $2.71 million, respectively, for the three months ended June 30, 2012.
Income taxes.Income taxes increased by $1.07 million, or 147.1%, to $1.80 million for the three months ended June 30, 2012, compared to $0.73 million for the three months ended June 30, 2011, due to an increase in income before income taxes for the reasons as explained above during the 2012 second quarter.
Net income.For the foregoing reasons, we generated a net income of $8.16 million for the three months ended June 30, 2012, an increase of $4.56 million, or 126.6%, from $3.60 million for the three months ended June 30, 2011.
Other comprehensive income.Our other comprehensive income was $0.01 million for both of the three months ended June 30, 2012 and 2011. The balance relates to the foreign currency translation, which is the exchange rate fluctuations from translation of the Company’s Hong Kong and UK subsidiaries’ accounts from Hong Kong dollars, our functional currency, to United States dollars, our reporting currency.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth key components of our results of operations during the six months ended June 30, 2012 and 2011, both in dollars and as a percentage of our net sales.
For the Six Months Ended | ||||||||||||
June 30, | June 30, | |||||||||||
2012 | 2011 | |||||||||||
(Unaudited) | (Unaudited) | |||||||||||
Amount | % of | Amount | % of | |||||||||
Total | Total | |||||||||||
REVENUES | Revenue | Revenue | ||||||||||
Trading revenue | $ | 28,635,938 | 96.7% | $ | 18,065,233 | 96.5% | ||||||
Foreign exchange brokerage services | 278,054 | 0.9% | - | - | ||||||||
Interest income from customers’ trading accounts | 675,580 | 2.3% | 521,546 | 2.8% | ||||||||
Fair value change of trading precious metals | 27,271 | 0.1% | 130,417 | 0.7% | ||||||||
Total revenues | 29,616,843 | 100% | 18,717,196 | 100% | ||||||||
EXPENSES | ||||||||||||
Management fees | 472,180 | 1.6% | 4,299,786 | 23.0% | ||||||||
Trading expenses and commissions | 7,397,151 | 25.0% | 4,046,142 | 21.6% | ||||||||
Employee compensation and benefit | 3,658,004 | 12.4% | 521,460 | 2.8% | ||||||||
General and administrative expenses | 1,650,421 | 5.6% | 554,802 | 3.0% | ||||||||
Advertising expenses | 2,665,526 | 9.0% | 480,239 | 2.6% | ||||||||
Bad debt expenses | 673,393 | 2.3% | 454,762 | 2.4% | ||||||||
Occupancy expenses | 405,402 | 1.4% | 347,059 | 1.9% | ||||||||
Depreciation and amortization | 520,770 | 1.8% | 198,561 | 1.1% | ||||||||
Data processing and service fees | 587,144 | 2.0% | 108,157 | 0.6% | ||||||||
Total expenses | 18,029,991 | 60.9% | 11,010,968 | 59.0% | ||||||||
Other income | 13,736 | - | 4,738 | - | ||||||||
INCOME BEFORE INCOME TAXES | 11,600,588 | 39.1% | 7,710,966 | 41.0% | ||||||||
INCOME TAXES | ||||||||||||
Provision for income taxes | 2,151,983 | 7.3% | 1,378,016 | 7.4% | ||||||||
Deferred income tax provision (recovery ) | 96,467 | 0.3% | (17,642 | ) | (0.1)% | |||||||
2,248,450 | 7.6% | 1,360,374 | 7.3% | |||||||||
NET INCOME | 9,352,138 | 31.5% | 6,350,592 | 33.7% | ||||||||
OTHER COMPREHENSIVE INCOME | ||||||||||||
Foreign currency translation | 29,504 | 0.1% | (2,950 | ) | - | |||||||
COMPREHENSIVE INCOME | $ | 9,381,642 | 31.6% | $ | 6,347,642 | 33.7% |
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Revenue. Total revenue increased by $10.90 million, or 58.2%, to $29.62 million for the six months ended June 30, 2012, compared to $18.72 million for the six months ended June 30, 2011. This increase was primarily due to (i) the net increase in trading volume, which was in line with the increase in the number of customers as well as an increase in income from spread, which accounted for 96.9% of the net increase; (ii) an increase in rollover interest revenue (mainly caused by the changes in the amount and the length of period for unliquidated contracts), which accounted for 1.4% of the net increase; (iii) an increase in commission income to Goldenway UK, which accounted for 2.6% of the net increase; and (iv) a decrease in fair value change of trading precious metals, which accounted for (0.9)% of the net increase. Revenue from spot contracts traded on our electronic trading platform accounted for approximately 96.7% and 96.5% of our revenues for the six months ended June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012 and 2011, revenue generated from rollover interest revenue accounted for approximately 2.3% and 2.8% of our revenues, respectively. Revenue generated from realized and revaluation of precious metals during the same periods accounted for 0.1% and 0.7% of our revenues, respectively, mainly due to changes in market prices. Revenue generated from foreign exchange brokerage services (which commenced in January 2012), resulted in 0.9% and nil of our revenues, respectively.
Expenses.During the six months ended June 30, 2012, the expenses were comprised of Management fee, Trading expenses and commissions, Employee compensation and benefit, General and administrative expenses, Advertising expenses, Bad debt expenses, Occupancy expenses, Depreciation and amortization, and Data processing and service fees. Expenses increased by $7.02 million, or 63.7%, during the six months ended June 30, 2012, to $18.03 million, as compared to $11.01 million during the 2011 period, due to increases in each expense component discussed in more detail below.
Management fee.Management fee expenses are comprised of rental, entertainment, travel and computer expenses of Goldenway Investments. Management fee was $0.47 million for the six months ended June 30, 2012, compared to $4.30 million for the six months ended June 30, 2011. The $3.83 million, or 89.0% decrease in management fee, is mainly attributable to the amendment of our management fee agreement with Goldenway Investments during the 2011 fourth quarter, to remove the mark-up rate component and to apportion operating costs based on the number of employees engaged in activities for the Company so that the Company could incur costs, such as employee costs, directly.
Trading expenses and commissions.Trading expenses and commissions increased by $3.35 million, or 82.8%, to $7.40 million for the six months ended June 30, 2012, compared to $4.05 million for the six months ended June 30, 2011. The increase in trading expenses and commissions was mainly driven by (i) the increase in trading volume, which accounted for 57.5% of the increase; and ii) the increase in customers brought in by agents, which led to an increase in collection fees for customer deposits and commissions to agents, which accounted for 42.5% of the increase.
Employee compensation and benefit. Employee compensation and benefit increased by $3.14 million, or 601.5%, to $3.66 million for the six months ended June 30, 2012, compared to $0.52 million for the six months ended June 30, 2011. The increase was primarily due to an increase in the number of new employees hired in connection with our amendment of the management fee agreement, as well as in connection with the fulfillment of the necessary vacancies for the newly-developed department, such as dealing function.
General and administrative expenses. General and administrative expenses increased by $1.10 million, or 197.5%, to $1.65 million for the six months ended June 30, 2012, as compared to $0.55 million for the six months ended June 30, 2011. The increase was primarily due to (i) an increase in office expenses necessitated by the increase in employees of $0.59 million; (ii) an increase of consultancy and professional fees in connection with financial reporting and Sarbanes-Oxley compliance of $0.31 million and (iii) an increase in exchange loss, which was mainly driven by the translation between HKD to USD of $0.20 million.
Advertising expenses. Advertising expenses increased by $2.19 million, or 455.0%, to $2.67 million for the six months ended June 30, 2012, compared to $0.48 million for the six months ended June 30, 2011. The increase was primarily due to (i) an advertising fee to our celebrity spokesperson during the six months ended June 30, 2012, which accounted for 3.2% of the increase; and (ii) an increase in the cost of our online promotional activities during the 2012 period, which accounted for 74.7% of the increase. Pursuant to our renewed client agreement with Goldenway HK, we are obligated to pay consulting fees to Goldenway HK for marketing and advertising services.
Bad debts expenses. Bad debt expenses increased by $0.22 million, or 48.1% to $0.67 million for the three months ended June 30, 2012, compared to $0.45 million for the same period in 2011. The increase is primarily attributable to an increase in doubtful payments from gateway agents during the second quarter of 2012.
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Occupancy expenses. Occupancy expenses increased by $0.06 million, or 16.8%, to $0.41 million for the six months ended June 30, 2012, compared to $0.35 million for the six months ended June 30, 2011. The increase is mainly attributable to additional occupancy expenses for our new subsidiary, Goldenway UK.
Depreciation and amortization. Depreciation and amortization increased by $0.32 million, or 162.3%, to $0.52 million for the six months ended June 30, 2012, as compared to $0.20 million for the six months ended June 30, 2011. This increase was primarily due to the acquisition of more computer equipment and servers, and a motor vehicle during the 2012 period and a motor vessel in third quarter 2011.
Data processing and service fee. Data processing and service fees increased by $0.48 million, or 442.9%, to $0.59 million for the six months ended June 30, 2012, as compared $0.11 million for the six months ended June 30, 2011. The increase was primarily due to (i) an increase in customers which caused a corresponding increase in rental fees for the occupancy of more proxy servers, which accounted for 12.2% of the increase; (ii) an increase in additional monthly consultancy fee payments to Goldenway Investments commencing in January 2012, for the maintenance of our additional online trading platform (pursuant to a new service and maintenance agreement, dated January 1, 2012, between the Company and Goldenway Investments), which accounted for 19.4% of the increase; and (iii) an increase of maintenance fee for the trading platform by Goldenway UK, which accounted for approximately 55.2% of the increase.
Income before income taxes.Income before income taxes increased by $3.89 million, or 50.4%, to $11.60 million for the six months ended June 30, 2012, as compared $7.71 million for the six months ended June 30, 2011. This increase was primarily contributed by the increase in our customer base, resulting in an increase of trading revenue and total expenses of $10.90 million and $7.02 million, respectively, for the six months ended June 30, 2012.
Income taxes.Income taxes increased by $0.89 million, or 65.3%, to $2.25 million for the six months ended June 30, 2012, compared to $1.36 million for the six months ended June 30, 2011, due to an increase in income before income taxes for the reasons as explained above during the 2012 second quarter.
Net income.For the foregoing reasons, we generated a net income of $9.35 million for the six months ended June 30, 2012, an increase of $3.00 million, or 47.3%, from $6.35 million for the six months ended June 30, 2011.
Other comprehensive income. Our other comprehensive income was $0.03 million for the six months ended June 30, 2012, compared with comprehensive income of $0.01 million for the six months ended June 30, 2011. The balance relates to foreign currency translation, which is the exchange rate fluctuation from translation of the Company’s Hong Kong and UK subsidiaries’ accounts from Hong Kong dollars to United States dollars.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations and equity contributions by our stockholders. We are not aware of any other restrictions that will significantly impact our ability to transfer cash within our corporate structure or restrict the net assets of our subsidiary, Goldenway Precious Metals. As of June 30, 2012, we had cash and cash equivalents of $22.73 million, primarily consisting of cash on hand and demand deposits. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report:
Cash Flows
(all amounts in millions of U.S. dollars)
Six Months Ended | ||||||
June 30, | ||||||
2012 | 2011 | |||||
(Unaudited) | (Unaudited) | |||||
Net cash provided by operating activities | $ | 13,396,772 | $ | 7,778,366 | ||
Net cash used in investing activities | (933,786 | ) | (11,492,585 | ) | ||
Effect of exchange rate changes on cash | 549 | (1,284 | ) | |||
Net increase (decrease) in cash and cash equivalents | 12,463,535 | (3,715,503 | ) | |||
Cash, beginning of the period | 10,267,457 | 7,975,652 | ||||
Cash, end of the period | $ | 22,730,992 | $ | 4,260,149 |
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As a member of the CGSE, we are also subject to working capital and minimum asset requirements. Under the requirements, the minimum required working capital, defined as cash plus precious metals, is approximately $193,000 and the minimum required asset is $645,000. We were in compliance with these requirements as of June 30, 2012.
The United Kingdom’s Financial Services Authority, or the FSA, requires Goldenway UK to maintain a regulatory basic capital of €125,000 (approximately, $157,000), and a Pillar 2 capital requirement of £507,000 (approximately, $792,000). Capital is managed through budgeting, forecasting and daily and monthly entity and consolidated capital reporting. As of June 30, 2012, Goldenway UK had net assets of $801,055 which made the company in compliance with these requirements as of that date.
As of June 30, 2012, we had $22,730,992 in cash and $1,895,670 in gold and silver, and as of December 31, 2011, we had $10,267,457 and $1,674,077, respectively. As of June 30, 2012 and December 31, 2011, we had $44,624,511 and $28,716,790, respectively, in total assets.
Operating Activities
Net cash provided by operating activities was $13.40 million for the six months ended June 30, 2012, as compared to $7.78 million for the six months ended June 30, 2011, an increase of $5.62 million. The increase was due to the higher net income and more adjustments to reconcile net income to net cash provided by operating activities for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. For the six months ended June 30, 2012, (i) change in accounts receivable held by the Company resulted in a cash outflow of $2.09 million, compared to a cash outflow of $0.85 million for the six months ended June 30, 2011; (ii) change in other receivables resulted in a cash inflow of $0.11 million for the six months ended June 30, 2012, compared to a cash outflow of $0.35 million for the six months ended June 30, 2011; (iii) change in trading precious metals resulted in a cash outflow of $0.19 million for the six months ended June 30, 2012, compared to a cash outflow of $0.29 million for the six months ended June 30, 2011; (iv) change in deposits and prepaid expenses resulted in a cash outflow of $1.12 million for the six months ended June 30, 2012, compared to a cash inflow of $0.04 million for the six months ended June 30, 2011; (v) change in accounts payable resulted in a cash inflow of $1.36 million for the six months ended June 30, 2012, compared to a cash inflow of $0.46 million for the six months ended June 30, 2011; (vi) change in accrued expenses and other liabilities resulted in a cash inflow of $0.04 million for the six months ended June 30, 2012, compared to a cash outflow of $0.22 million for the six months ended June 30, 2011; (vii) change in customer deposits resulted in a cash inflow of $2.92 million for the six months ended June 30, 2012, compared to a cash inflow of $3.82 million for the six months ended June 30, 2011; (viii) change in income taxes payable resulted in a cash inflow of $1.95 million for the six months ended June 30, 2012, compared to a cash outflow of $0.06 million for the six months ended June 30, 2011; (ix) the changes in the balance related to a cash inflow of $0.41 million from Goldenway Investments, our majority stockholder, for the six months ended June 30, 2012; and (x) the changes in the balance related to a cash inflow of $0.24 million from Goldenway Global Investments (New Zealand) Limited, or Goldenway NZ, a company owned and controlled by Goldenway Investments, for the six months ended June 30, 2012.
Investing Activities
Net cash used in investing activities was $0.93 million for the six months ended June 30, 2012, compared to $11.49 million for the six months ended June 30, 2011, resulting in a change of $10.56 million. The change is mainly due to: (i) a cash outflow of $0.34 million for the acquisition of property and equipment during the six months ended June 30, 2012, compared to $0.17 million in cash used for such purpose during the six months ended June 30, 2011; and (ii) a cash outflow of acquisition of intangible assets of $0.59 million for the six months ended June 30, 2012.
In addition, the cash flow used in investing activities i) related to our majority stockholder, Goldenway Investments, decreased from $6.81 million used in the six months ended June 30, 2011, prior to the Company’s acquisition of Goldenway Precious Metals, to $nil used in the six months ended June 30, 2012; and ii) $4.5 million was prepaid to acquire a motor vessel in the six months ended June 30, 2011 as compared with $nil in the six months ended June 30, 2012.
Financing Activities
There were no financing activities for the six months ended June 30, 2012 and 2011.
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Operating Lease Commitments
The Company leases its office space under non-cancelable operating lease agreements that expire on various dates through 2015. Future annual minimum lease payments, including maintenance and management fees, for non cancelable operating leases, are as follows:
Year ending December 31, | (in‘000 | ) | ||
2012 | 1,029 | |||
2013 | 1,737 | |||
2014 | 1,651 | |||
2015 | 855 | |||
$ | 5,272 |
Obligations under Material Contracts
Goldenway Investments is the former parent of Goldenway Precious Metals and is now our majority stockholder. On January 1, 2010, Goldenway Precious Metals entered into a management fee agreement with Goldenway Investments, pursuant to which Goldenway Investments provides management services to Goldenway Precious Metals in exchange for management fees based on the actual operating cost incurred by Goldenway Investments, plus a mark-up rate on certain operational costs. The management fee is payable on an annual basis or on demand after provision of management services by the Goldenway Investments. Since October 1, 2011, the management fee agreement was amended to eliminate the mark-up rate component and apportion operating costs based on the number of employees engaged in activities for the Company. The management fee is payable on a monthly basis or on demand after a provision of service by the Goldenway Investments. Management fees were $0.28 million and $0.47 million, respectively, for the three and six months ended June 30, 2012, compared to $2.44 million and $4.30 million, respectively, for the three and six months ended June 30, 2011.
The Company and Goldenway Investments are also party to a maintenance and service agreement, dated January 1, 2012, pursuant to which the Company is obligated pay a monthly fee of HKD 120,000 (approximately, $0.02 million) to Goldenway Investments in exchange for precious metals trading platform maintenance services. Fees incurred under the maintenance and service agreement totaled $0.04 million and $0.09 million, respectively, for the three and six months ended June 30, 2012.
The Company is party to a marketing and advertising service agreement, dated October 1, 2009, between the Company and Goldenway Investments (HK) Limited, or Goldenway HK, a Goldenway Investments subsidiary, whereby the Company is obligated to pay an annual fee of $0.70 million to Goldenway HK, in exchange for marketing and advertising consulting services. The contract is subject to annual renewal. As of June 30, 2012, we were obligated to pay $0.35 million to Goldenway HK for the remaining of the year under this agreement. Fees incurred under the marketing and advertising service agreement totaled $0.17 million and $0.35 million, respectively, for the three and six months ended 30 June 2012.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. There have been no material changes to the critical accounting policies previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.
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Recently Adopted Accounting Standards
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This standard results in a common requirement between the FASB and the International Accounting Standards Board (IASB) for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s interim condensed consolidated financial statements.
In June, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s interim condensed consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other (Topic 350): The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s interim condensed consolidated financial statements.
In December 2011, the FASB issued ASU 2011-12, “Comprehensive income”. The amendments are being made to allow FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.ASU No. 2011-12 is effective for the Company on January 1, 2012. The adoption of this ASU did not have a material impact on the Company’s interim condensed consolidated financial statements.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet”. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
On July 27, 2012, the FASB issued ASU No. 2012-02 under which an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 or January 1, 2013 for the Company. Early adoption is permitted. The adoption of ASU No. 2012-02 is not expected to have a material impact on the Company’s consolidated financial statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
Market risk is the risk of losses in on- and off-balance sheet positions arising from movements in market prices. As we operate predominantly on an agency model with the exception of certain trades of our customers, we are not exposed to the market risk of a position moving up or down in value.
Liquidity Risk
In normal conditions, our business of providing electronic trading precious metals and related services is self financing as we generate sufficient cash flows to pay our expenses as they become due. As a result, we generally do not face the risk that we will be unable to raise cash quickly enough to meet our payment obligations as they arise. Our cash flows, however, are influenced by customer trading volume and the income we derive on that volume. These factors are directly impacted by domestic and international market and economic conditions that are beyond our control. In an effort to manage this risk, we maintain a substantial pool of liquidity. As of June 30, 2012, the percentage of cash and cash equivalents, excluding cash and cash equivalents held for customers and restricted cash, to total assets were 50.9% , as compared to 35.8% as of December 31, 2011.
Operational Risk
Our operations are subject to various risks resulting from technological interruptions, failures, or capacity constraints in addition to risks involving human error or misconduct. We are heavily dependent on our technology infrastructure, among other functions, to operate our trading platform. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our systems are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism, computer denial-of-service attacks and other similar events. If our systems fail to perform, we could experience periodic interruptions and disruptions in operations, slower response times or decreased customer satisfaction.
Our systems have in the past experienced disruptions in operations, which we believe will continue to occur from time to time. On December 8, 2011 and February 29, 2012, our trading system was seriously attacked by unknown actors and our business and operations were temporarily disrupted, which led to quoting errors. As of the date of this report, we have not been notified of any claim against us alleging harm caused to third parties by this disruption, and our customers have continued to actively place precious metals trading orders through their respective trading accounts, but we can provide no assurance that we will not receive any claims in the future in connection with this disruption.
Our IT department is working with IT security consultants to strengthen and protect our network from intentional attacks. We have also established a separate department to monitor our networks and to indentify and minimize human errors, such as clerical mistakes and incorrectly placed trades, as well as intentional misconduct, such as unauthorized trading, mischief and fraud. Furthermore, we seek to mitigate the impact of any operational issues by maintaining insurance coverage for various contingencies. Despite any precautions we may take, any systems failure that causes an interruption in our services or decreases the responsiveness of our services could, among other consequences, impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.
Regulatory Capital Risk
Various domestic and foreign government bodies and self-regulatory organizations responsible for overseeing our business activities require that we maintain specified minimum levels of regulatory capital in our operating subsidiaries. If not properly monitored or adjusted, our regulatory capital levels could fall below the required minimum amounts set by our regulators, which could expose us to various sanctions ranging from fines and censure to the imposition of partial or complete restrictions on our ability to conduct business. To mitigate this risk, we continuously evaluate the levels of regulatory capital at each of our operating subsidiaries and adjust the amounts of regulatory capital in each operating subsidiary as necessary to ensure compliance with all regulatory capital requirements.
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These may increase or decrease as required by regulatory authorities from time to time. We also maintain excess regulatory capital to provide liquidity during periods of unusual or unforeseen market volatility, and we intend to continue to follow this policy. In addition, we monitor regulatory developments regarding capital requirements to be prepared for increases in the required minimum levels of regulatory capital that may occur from time to time in the future. As of June 30, 2012, the Company’s capital position was $23.10 million, including all financial assets and liabilities.
The FSA requires Goldenway UK to maintain a regulatory basic capital of €125,000 (approximately, $157,000), and a Pillar 2 capital requirement of £507,000 (approximately, $792,000). Capital is managed through budgeting, forecasting and daily and monthly entity and consolidated capital reporting. As of June 30, 2012 Goldenway UK had net assets of $0.80 million which made the company in compliance with these requirements as of such date.
ITEM 4. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Ricky Wai Lam Lai, and our Chief Financial Officer or CFO, Mr. Yue Yuen Chan, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012. Based on that evaluation, Mr. Lai and Mr. Chan concluded that, as of June 30, 2012, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, because of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
During its evaluation of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2012, our management determined that our accounting personnel lacked the sufficient skill and experience in the application of U.S. generally accepted accounting principles (GAAP) necessary to fulfill the our public reporting obligations in accordance with U.S. GAAP and the SEC’s rules and regulations. While our accounting personnel have several years of accounting and audit experience, none of them were trained in the U.S. or hold a U.S. CPA designation. We plan to recruit qualified accounting personnel with sufficient experience and training in U.S. GAAP to cure this material weakness. We also plan to engage qualified entities to train our financial and accounting personnel so that they may attain the requisite knowledge of and experience with U.S. GAAP. In the interim, we are working with a U.S. GAAP consultant to assist us with our financial reporting.
Notwithstanding management’s determination that our internal control over financial reporting was ineffective as of June 30, 2012, we believe that the consolidated financial statements included in this report correctly present our financial condition, results of operations and cash flows for the periods covered thereby in all material respects.
Changes in Internal Controls over Financial Reporting
There were no changes in its internal controls over financial reporting in the second quarter of 2012 that would materially affect, or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business.
On May 14, 2012, the Company’s solicitors commenced a legal action in the High Court of Hong Kong for the collection of an outstanding debt of RMB 4,037,244 (approximately, $639,000) due from one of the Company’s payment agents (referred to hereafter as the "Proceeding"). The Proceeding is scheduled to be heard by the High Court. In view of this, management has determined that no provision should be provided for the Proceeding as its outcome is still too remote and inconclusive as of the date of this report. Management does not believe that a ruling against the Company in the Proceeding will have a material adverse impact on the Company’s results of operations.
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We are currently not aware of any legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 1A. | RISK FACTORS. |
There have been no material changes in the Company’s risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2011.
The risks described in our Annual Report on Form 10-K and subsequent filings with the Securities and Exchange Commission are not the only risks facing us. Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | (REMOVED AND RESERVED). |
ITEM 5. | OTHER INFORMATION. |
We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. | EXHIBITS. |
The list of exhibits included in the attached Exhibit Index is hereby incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: August 14, 2012
GOLDENWAY, INC. | |
By:/s/ Ricky Wai Lam Lai | |
Ricky Wai Lam Lai, Chief Executive Officer | |
(Principal Executive Officer) | |
By:/s/ Yue Yuen Chan | |
Yue Yuen Chan, Chief Financial Officer | |
(Principal Financial Officer and Principal AccountingOfficer) |
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EXHIBIT INDEX
33