UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
Commission File No. 333-70156
CIRMAKER TECHNOLOGY CORPORATION
-------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 98-0228169
- ------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
No. 8, Lane 377, Chung Cheng Road, Feng Yeh Li, Yang Mei
Taoyuan 326, Taiwan
Republic of China
---------------------------------------------------------------
(Address of Principal Executive Offices)
+886-3-282-1006
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(Issuer's Telephone Number, Including Area Code)
The number of shares outstanding of each of the issuer's classes of common
equity, as of August 19, 2005 are as follows:
Class of Securities Shares Outstanding
------------------- ------------------
Common Stock, $0.001 par value 27,987,443
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30,
------------
2005
------------
ASSETS
Current assets
Cash and cash equivalents $ 206,428
Restricted cash 977,528
Trade receivables, net 8,451,235
Inventory 2,252,206
Deferred tax asset 351,123
Other current assets 930,389
------------
Total current assets 13,168,909
Property, plant and equipment (net) 5,444,872
Equity investments 86,970
Deferred tax asset 414,769
Other assets 52,986
------------
Total assets $ 19,168,506
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank notes $ 4,216,575
Trade payables 3,131,714
Accrued liabilities and taxes payable 1,483,261
Due to stockholder 1,469,762
Convertible debentures 645,000
Current portion of long-term debt 1,487,492
------------
Total current liabilities 12,433,804
Bank notes, long-term 2,121,197
Accrued pension liability 415,614
------------
Total liabilities 14,970,615
Minority interest 1,227,358
Commitments and contingencies
Stockholders' equity
Preferred stock: par value $.001; 50,000,000 shares
authorized; no shares issued and outstanding -
Common stock: par value $.001; 100,000,000 shares
authorized; 27,967,443 shares issued and outstanding 27,967
Additional paid in capital 7,498,993
Accumulated deficit (4,971,597)
Accumulated other comprehensive income 415,170
------------
Total stockholders' equity 2,970,533
------------
Total liabilities and stockholders' equity $ 19,168,506
============
The accompanying notes are an integral part
of the unaudited consolidated financial statements.
2
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Six months ended Three months ended
June 30, June 30,
------------------------------ -----------------------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues
Net sales $ 6,543,276 $ 9,356,163 $ 3,892,521 $ 5,434,900
Cost of sales 5,747,920 8,707,090 3,388,612 5,159,453
------------ ------------ ------------ ------------
Gross profit 795,356 649,073 503,909 275,447
Operating expenses
Research and development 67,864 61,866 31,344 28,934
Sales and marketing 344,556 291,121 183,108 150,660
General and administrative 948,037 1,478,937 530,212 843,206
------------ ------------ ------------ ------------
Total operating expenses 1,360,457 1,831,924 744,664 1,022,800
------------ ------------ ------------ ------------
Loss from operations (565,101) (1,182,851) (240,755) (747,353)
Other income (expense)
Interest expense (189,827) (144,615) (94,299) (60,608)
Foreign currency transaction gain (loss) (173,604) (31,803) (91,143) 41,402
Other income (loss), net (183,037) 929 (177,670) (23,394)
------------ ------------ ------------ ------------
Total other income (expense) (546,468) (175,489) (363,112) (42,600)
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (1,111,569) (1,358,340) (603,867) (789,953)
Provision for income taxes (benefit) (40,883) (136,292) (21,469) (61,825)
------------ ------------ ------------ ------------
Loss before minority interest (1,070,686) (1,222,048) (582,398) (728,128)
Minority interest in net loss of subsidiaries 182,621 182,884 109,485 126,588
------------ ------------ ------------ ------------
Net loss $ (888,065) $ (1,039,164) $ (472,913) $ (601,540)
============ ============ ============ ============
Foreign currency translation adjustment 301,552 49,845 65,959 (96,465)
------------ ------------ ------------ ------------
Comprehensive loss $ (586,513) $ (989,319) $ (406,954) $ (698,005)
============ ============ ============ ===========
Basic and diluted net loss per share $ (0.03) $ (0.04) $ (0.02) $ (0.02)
============ ============ ============ ===========
Weighted average number of shares outstanding 27,911,000 26,094,000 27,967,000 26,381,000
============ ============ ============ ===========
The accompanying notes are an integral part
of the unaudited consolidated financial statements.
3
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended
June 30,
-------------------------------
2005 2004
-------------- -------------
Cash flows from operating activities:
Net loss $ (888,065) $ (1,039,164)
Adjustments to reconcile net loss to
net cash provided by (used in) operations:
Depreciation and amortization 276,395 292,926
Provision for losses on receivables 104,570 258,072
Inventory reserves 85,636 9,578
Stock and warrants issued for services 223,400 -
Minority interest (182,621) (182,884)
Other, net 74,547 (86,766)
Changes in operating assets and liabilities:
Trade receivables (1,166,679) (602,101)
Inventory 214,865 23,059
Other current assets (49,868) 17,431
Trade payables 2,279,353 346,979
Accrued liabilities and taxes payable 547,148 111,683
------------ ------------
Net cash provided by (used in) operations 1,518,681 851,187)
Cash flows from investing activities:
Change in restricted cash (165,983) (335,199)
Purchase of property and equipment (208,196) (385,654)
Advance on disposal of long-term investment - 73,600
Other investing activities - (114,827)
------------ ------------
Net cash used in investing activities (374,179) (762,080)
Cash flows from financing activities:
Proceeds from (repayments of) bank notes (2,303,470) 24,444
Proceeds from due to related party 849,912 202,269
Proceeds from long-term debt 149,694 1,324,354
Proceeds from the issuance of debentures 125,000 -
------------ ------------
Net cash provided by (used in) financing activities (1,178,864) 1,551,067
Effect of rate changes on cash 205,771 30,972
Increase (decrease) in cash and cash equivalents 171,409 (31,228)
Cash and cash equivalents, beginning of period 35,019 237,125
------------ ------------
Cash and cash equivalents, end of period $ 206,428 $ 205,897
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 162,667 $ 131,997
============ ============
Cash paid for income taxes $ - $ -
============ ============
The accompanying notes are an integral part
of the unaudited consolidated financial statements.
4
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and item 310 of Regulation SB. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for annual financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The accounts of the Company and
all of its subsidiaries are included in the consolidated financial
statements. All significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated operating results for
the six months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-KSB for the year ended
December 31, 2004.
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION
CIRMAKER TECHNOLOGY CORPORATION
Cirmaker Technology Corporation, a Nevada corporation (the "Company"),
formerly called Wrestle - Plex Sports Entertainment Group, Ltd. was
incorporated on June 1, 2000. The Company, while operating under the name
of Wrestle - Plex, was in the development stage, and operated to provide
sports entertainment, specifically in the area of professional wrestling.
In 2002, the Company discontinued its operations and devoted all of its
efforts toward effecting a business combination with an operating entity.
On December 3, 2002, the Company entered into a stock purchase agreement
which was later amended (as so amended, the "Purchase Agreement"), with
Cirmaker Industry Co., Ltd. ("Cirmaker Taiwan"). Pursuant to the Purchase
Agreement, on March 21, 2003 (the "Acquisition Date") the Company acquired
approximately 75% of the issued and outstanding capital stock of Cirmaker
Taiwan.
CIRMAKER TAIWAN
Cirmaker Taiwan was incorporated under the Company Law of Taiwan, Republic
of China ("ROC") on June 18, 1984.
Cirmaker Taiwan is in the business of manufacturing a wide variety of
electronic parts and components for sales primarily in the Asian markets.
Its products include digital TV receivers (set top boxes), computer heat
dispersion systems, electronic terminals, and various other electronic
parts and accessories. The Company also imports and exports computer chips
and various electronic products.
5
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION (Cont.)
ACQUISITION OF CIRMAKER TAIWAN
Pursuant to the Purchase Agreement, Cirmaker Taiwan's stockholders
exchanged 16,100,000 shares of Cirmaker Taiwan capital stock (approximately
75% of the outstanding Cirmaker Taiwan capital stock), for 8,050,000 shares
of the Company's common stock, in a 2 for 1 stock exchange, on the
Acquisition Date. At June 30, 2005 there were 5,284,000 remaining shares of
Cirmaker Taiwan that had not yet been exchanged with the Company. Cirmaker
Taiwan will continue to negotiate with its minority interest stockholders
to exchange their Cirmaker Taiwan shares for shares of the Company.
The Purchase Agreement has not yet been approved by the Taiwan Ministry of
Economic Affairs ("Taiwan Ministry"). The Company is currently working on
obtaining this approval from the Taiwanese government.
Due to the fact that the Purchase Agreement has not yet been approved by
the Taiwan Ministry, the Company entered into separate Trust Agreements
with 10 individuals, all related parties to Cirmaker Taiwan. In each trust,
a certain number of shares of Cirmaker Taiwan's stock are currently being
held in each of their names, as nominees of and trustees for the Company.
Approximately 90% of these shares held in trusts are being held by a major
shareholder who is also the President of the Company ("major stockholder")
and members of his family.
Since the former stockholders of Cirmaker Taiwan and their related or
affiliated parties now effectively control a majority of the issued and
outstanding shares of the common stock of the Company subsequent to the
merger, and have appointed the current board of directors, this acquisition
was accounted for as a recapitalization of Cirmaker Taiwan, whereby
Cirmaker Taiwan is deemed to be the accounting acquirer and has adopted the
capital structure of the Company. The Company has changed its fiscal year
end to December 31, to match that of Cirmaker Taiwan as the accounting
acquirer. Due to the recapitalization of Cirmaker Taiwan, all reference to
the shares of Cirmaker Taiwan's common stock, have been restated to reflect
the equivalent number of total shares of the Company's outstanding common
stock on a post-acquisition basis.
The Company did not have any assets or liabilities on the Acquisition Date.
All financial information included in these financial statements, prior to
the Acquisition Date is the financial information of Cirmaker Taiwan, as if
Cirmaker Taiwan had been the registrant. The financial information since
the Acquisition Date, is that of the Company and its subsidiaries, on a
consolidated basis.
6
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION (Cont)
ACQUISITION OF CIRMAKER TAIWAN (Continued)
After the Acquisition Date, Cirmaker Taiwan created three wholly-owned
subsidiaries. These subsidiaries are called Masterwealth Limited
("Masterwealth"), a British Virgin Islands corporation, Cirmaker Technology
Corp. ("Technology"), a British Virgin Islands corporation, and Evergreat
Technology Corp. ("Evergreat"), a Mauritius corporation. In addition,
Masterwealth and Evergreat each have a wholly owned subsidiary corporation
organized in the People's Republic of China ("PRC") with each of these PRC
corporations having the same name as its parent company (collectively
"Cirmaker PRC"). Cirmaker PRC is expected to manufacture and distribute its
products, particularly set top boxes, in the PRC. The Company expects to
make future significant capital investments and expand its business
operations in the PRC. The Company is currently seeking to obtain approval
from the Taiwan Ministry on the formation of, and the Company's investment
in Masterwealth Limited, and its PRC subsidiary.
On October 1, 2004, the Company formed a wholly owned subsidiary, Cirmaker
Technologies Europe Limited ("Cirmaker UK") in England and Wales. Cirmaker
UK has not yet commenced its operations.
CONTROL BY PRINCIPAL STOCKHOLDERS
The directors, executive officers of the Company and their related or
affiliated parties own, beneficially and in the aggregate, a significant
percentage of the voting power of the outstanding common shares of the
Company. Accordingly, if the directors, executive officers and related or
affiliated parties, voted their shares uniformly, they could have the
ability to control the approval of most corporate actions, including
increasing the authorized capital stock and issuance of additional stock of
the Company and the dissolution, merger or sale of substantially all of the
Company's assets.
RESTRICTIONS ON TRANSFER OF ASSETS OUT OF TAIWAN AND CHINA
Dividend payments by Cirmaker Taiwan and Cirmaker PRC are limited by
certain statutory regulations in Taiwan and China. In Taiwan, restrictions
will be imposed due to non-approval of the above-mentioned business
acquisition by the Taiwan Ministry. In China, no dividends may be paid
without first receiving prior approval from the Foreign Currency Exchange
Management Bureau. Dividend payments are restricted to 85% of profits,
after tax in China. Repayments of loans or advances from Cirmaker PRC,
unless certain conditions are met, will be restricted by the Chinese
government. The Company has no current plans to declare any dividends in
Taiwan or China.
7
1. ORGANIZATION, NATURE OF OPERATIONS AND BUSINESS ACQUISITION (Cont)
BUSINESS RISKS
The Company has obtained various patents for its products. Intellectual
property protection measures may not be sufficient to prevent
misappropriation of the technology, or competitors may independently
develop technologies that are substantially equivalent or superior to the
Company's technology. Legal systems of many foreign countries, including
the PRC, do not protect intellectual property rights to the same extent as
the legal system of the United States. If the Company cannot adequately
protect the proprietary information and technology, the business financial
condition and results of operations could be materially adversely affected.
Other factors that could affect the Company's future operating results and
cause future results to vary materially from expectations include, but are
not limited to, lower than anticipated business derived from its customers,
an inability to attract new customers and grow on its own, an inability to
control expenses, technology changes in the industry, changes in regulatory
requirements, a decline in the financial stability of the Company's
customers and general uncertain economic conditions overseas, especially in
China. Negative developments in these or other risk factors could have a
material adverse effect on the Company's future financial position, results
of operations, cash flows and its ability to continue operations.
2. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company's investment in Cirmaker Technology (Dong Guan) Ltd., a wholly
owned subsidiary, will be approximately $1,400,000 for a manufacturing
facility in the PRC, owned by the Company. This manufacturing facility will
produce CPU cooling fins and set top boxes. To date the Company has
invested $673,870 of the total expected investment of $1,400,000.
In February 2004, the Company signed an agreement with Shaanxi New Century
Electronics Co. Ltd. for the production of set top boxes. The total
investment will be approximately $500,000 in 2005 for a 66% stock interest
in the company.
CONTINGENCIES
The Purchase Agreement between the Company and Cirmaker Taiwan has not yet
been approved by the Taiwan Ministry (refer to note 1). The Company is
currently working on obtaining this approval. Management believes that the
consequences of non-approval are not material to the Company's financial
statements.
8
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements and information relating to
us that are based on the beliefs of our management as well as assumptions made
by, and information currently available to, our management. When used in this
report, the words "anticipate", "believe", "estimate", "expect", "intend",
"plan" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect
management's current view concerning future events and are subject to certain
risks, uncertainties and assumptions, including among many others: the risk
factors described below under "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors that May Affect
Future Operating Results", our potential inability to raise additional capital,
our potential inability to compete with other companies that may be more
experienced and better capitalized than us, changes in domestic and foreign
laws, regulations and taxes, changes in economic conditions, uncertainties
related to the legal systems in our target markets, including, China's legal
system and economic, political and social events in China and other target
markets, foreign relations between Taiwan, China and our other potential target
markets, a general economic downturn, a downturn in the securities markets,
Securities and Exchange Commission and National Association of Securities
Dealers, Inc. regulations which may affect trading in the securities of "penny
stocks," and other risks and uncertainties. Should any of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this report as
anticipated, estimated or expected.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND AND OVERVIEW
Our corporate name is Cirmaker Technology Corporation. We were incorporated
in the State of Nevada under the name Wrestle-Plex Sports Entertainment Group,
Ltd. on June 1, 2000. During the period from our inception until December 2002
we operated as a development stage sports entertainment provider, specifically
in the area of professional wrestling.
On December 3, 2002, we entered into a stock purchase agreement, which was
subsequently amended, with Cirmaker Industry Co. Ltd. (Cirmaker Taiwan), a
corporation organized under the Company Law of the Republic of China (Taiwan) in
1984. Pursuant to the stock purchase agreement, we have acquired approximately
75% of the issued and outstanding capital shares of Cirmaker Taiwan. As the
other stockholders of Cirmaker Taiwan continue to exchange their Cirmaker Taiwan
shares for shares of our common stock pursuant to the stock purchase agreement,
we may acquire the remaining shares and thereby make Cirmaker Taiwan a
wholly-owned subsidiary. In the past year, the Company has continued to acquire
shares from the remaining stockholders of Cirmaker Taiwan, though it still has
not acquired all of the outstanding shares. The acquisition of our initial
interest in Cirmaker Taiwan was consummated in March 2003. The business
operations of Cirmaker Taiwan and Cirmaker PRC have now become our primary
focus.
Cirmaker Taiwan was established in 1984. Cirmaker Taiwan started out
manufacturing terminals and connectors. In the past twenty years, Cirmaker
Taiwan has gained substantial experience in the production of electronic parts,
including developing, designing, and tooling of these parts. In addition to its
strength in research and development, Cirmaker Taiwan's manufacturing processes
9
are ISO 9001 and 9002 certified.
Since its inception, Cirmaker Taiwan has manufactured a wide variety of
electronic parts and components. Our current products include electronic
terminals, electronic blocks and accessories, electronic panel control and
locking components, power distribution blocks and accessories, electronic timer
and relay sockets, optical fiber connectors and adapters, car audio components,
DVD players, electronics, cooling fins and systems for laptop and personal
computers, electrical tools and similar devices. Recently, Cirmaker Taiwan has
focused its efforts on two primary product lines, digital TV receivers
(including cable, satellite and terrestrial receivers) and heat dispersion
systems for personal and laptop computers. Cirmaker Taiwan also is currently
manufacturing LCD backlight components and it has produced Voice Over Internet
Protocol (VoIP) telephones.
Our reverse acquisition of Cirmaker Taiwan was subject to the approval of
the Taiwan Ministry of Economic Affairs. We did not obtain approval from this
Taiwanese governmental agency at the time of the reverse acquisition. We are
currently seeking this approval but no assurances can be given on when or if
such approval will be forth coming.
Our equity interest in Cirmaker Taiwan is currently held by several
affiliates in trust for us. There can be no assurance that the trust arrangement
will be upheld. In the event that it is not upheld, it is possible that the
creditors of the trustees may be able to seize the equity of Cirmaker Taiwan.
Management expects to effect the transfer of Cirmaker Taiwan equity from the
trust directly into the name of Cirmaker Technology Corporation on or about the
end of August 2005.
ASSETS
At June 30, 2005, we had cash of $206,428 as compared to $205,897 as of
June 30, 2004. We had $977,528 in restricted cash as of June 30, 2005 as
compared to $1,015,632 as of June 30, 2004. Restricted cash is cash held in
reserve to meet debt covenants The decrease in cash reflects an increase
restricted cash.
At June 30, 2005, trade receivables totaled $8,451,235 as compared with
$6,949,476 as of June 30, 2004. Trade receivables increased in the current
period compared to the prior year due to a change in the payment method used by
the Company's main cooling fin customer.
Inventory was $2,252,206 at June 30, 2005 compared to $1,617,077 at June
30, 2004. Inventory increased in the current period compared to the prior year
due to an increase in copper inventory.
Plant, Property and Equipment, net of accumulated depreciation, was
$5,444,872 as of June 30, 2005 compared to $6,187,475 as of June 30, 2004. We
invested approximately $195,646 in the last six months in fixed assets,
including office equipment, manufacturing equipment, buildings and plants.
We also held equity investments at June 30, 2005 of $86,970 compared to
$631,223 as of June 30, 2004. The decrease results from the sale of such equity
investments.
LIABILITIES AND STOCKHOLDERS' EQUITY
10
As of June 30, 2005, we had short term bank note obligations of $4,216,575
as compared to $5,028,916 as of June 30, 2004. Bank note obligations decreased
in the current period compared to the prior year due to the continuing payback
of the loan obligations.
We had trade payables of $3,131,714 as of June 30, 2005 as compared to
$2,616,714 as of June 30, 2004. Trade payables increased due to the purchase of
copper.
As of June 30, 2005, long-term debt less current maturities was $2,121,197
as compared to $2,540,277 as of June 30, 2004. Long-term debt decreased due to
payment of a bank loan.
As of June 30, 2005, stockholder's equity was $2,970,533 as compared to
$3,915,481 as of June 30, 2004. The decrease in stockholders' equity is
primarily due to a net loss by the Company. As of June 30, 2005, our interest in
Cirmaker Taiwan of approximately 75% was $1,227,358 compared to $1,607,859 as of
June 30, 2004.
RESULTS OF OPERATIONS AND CASH FLOWS
We generated $6,543,276 and $9,356,163 in sales revenue during the six
month period ended June 30, 2005 and 2004, respectively. The decrease was due to
a limited supply of copper in the market, which resulted in delays in the
production and delivery of products.
Operating expenses were $1,360,457 and $1,831,924 during the six month
period ended June 30, 2005 and 2004, respectively. The decrease in expenses is
due to a shift in production from Taiwan to China where employment costs are
lower.
As of June 30, 2005, we had $206,428 in cash and cash equivalents. During
the six months ended June 30, 2005, $1,518,681 in cash was provided from
operating activities. During the same period we also used $374,179 in investing
activities and our financing activities used $1,178,804.
LIQUIDITY
We had $206,428 in cash and cash equivalents as of June 30, 2005. As of
such date we also had total current assets of $13,168,909.
We believe that our cash balances and revenues generated from our
operations will be sufficient to fund our operations for the next twelve months
at levels consistent with our operations in 2004. We will require additional
capital, however, in order to expand our operations and fully implement our
business plan.
Operations to date have been primarily financed by revenues from
operations, bank loans, stockholder debt and equity transactions. Our future
operations are dependent upon the identification and successful completion of
permanent equity financing, the continued support of shareholders and profitable
operations. Currently, we have not received a firm commitment on any such
financing and management can provide no assurance that such a commitment will be
obtained. Management is actively seeking such financing.
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 our financial condition,
11
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
CRITICAL ACCOUNTING POLICIES
Preparation of our financial statements requires management to make
judgments, assumptions, and estimates regarding uncertainties that affect the
reported amounts of assets, liabilities, stockholders' equity, revenues and
expenses. Note 2 of the Company's Consolidated Financial Statements for the year
ended December 31, 2004 that were filed with our 10-KSB describes our
significant accounting policies used in the preparation of our unaudited
Consolidated Financial Statements. The most significant areas involving
management judgments and estimates are described below. Actual results in these
areas could differ materially from management's estimates under different
assumptions or conditions.
Revenue Recognition
- -------------------
We recognize revenue from the sale of our products when the following four
criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred and title has passed according to the sale terms, (3) the seller's
price to the buyer is fixed or determinable; and (4) collectibility is
reasonably assured.
Shipping and handling costs incurred by us are included in cost of
goods sold and those costs, that are billed to customers, are included in net
sales.
Significant Estimates
- ---------------------
Several areas require significant management estimates relating to
uncertainties for which it is reasonably possible that there will be a material
change in the near term. The more significant areas requiring the use of
management estimates related to valuation of trade receivables and inventory
reserves, contingent liabilities, fair value of long term investments,
impairment of long-lived assets, fair value of services for stock based
compensation and the useful lives for amortization and depreciation.
Trade Receivables
- -----------------
Trade receivables are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition and credit history, and current economic
conditions. Trade receivables are written off when deemed uncollectible upon
evaluation of such account by management.
Inventories
- -----------
Inventories are stated at the lower of cost or market. The majority of
inventory values are based upon weighted average costs. Management regularly
reviews inventory for obsolescence to determine whether a write-down is
necessary. Various factors are considered in making this determination,
including recent sales history and predicted trends, industry market conditions
and general economic conditions.
12
Equity Investments
- ------------------
All equity investments are recorded at cost and are written down to their
estimated recoverable amount if there is evidence of a decline in value that is
other than temporary.
Management evaluates related information in addition to quoted market
prices, if any, in determining the fair value of these investments and whether
an other than temporary decline in fair value exists. Factors indicative of an
other than temporary decline include recurring operating losses, credit defaults
and subsequent rounds of financings at an amount below the cost basis of the
investment. The list is not all inclusive and management periodically weighs all
quantitative and qualitative factors in determining if any impairment loss
exists.
The majority of equity investments are primarily based on a contractual
relationship between us and the investee. Therefore, it is not practicable to
estimate the fair value of the equity instruments, because there are no
transactions that in substance, are involving the equity investment alone.
Fair Value Of Financial Instruments
- -----------------------------------
Our financial instruments, trade receivables, bank notes, trade payables
and accrued liabilities approximate their carrying amounts due to the short-term
nature of these instruments. Fair values of cash equivalents represent quoted
market prices, if available. If no quoted market prices are available, fair
values are estimated based on other factors. The fair value of amounts due to
related parties is not determinable since it is not negotiated at arms length.
The carrying value of our long-term debt approximates fair value.
INFLATION
We believe that inflation has not had a material impact on our results of
operations for the six month period ended June 30, 2005.
SEASONALITY
We may experience variations in revenues and operating costs due to
seasonality, however, we do not believe that these variations will be material.
OUTLOOK
Management plans to continue to enhance our position as a provider of
electronic components and systems to a variety of industries. We will also begin
to fulfill our existing and projected customer orders for advanced digital
television receivers, primarily in major cities located in Taiwan and China. In
addition, we will continue with the development and sale of our electrical
cooling systems for laptop and personal computers.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks described below are the material risks facing our
company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations.
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If any of the following risks actually occur, our business, financial
condition, results of operations or product market share could be materially
adversely affected. In such case, the trading price of our common stock could
decline and you could lose all or part of your investment.
We need substantial additional capital in order to fully implement our business
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plan.
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Our current business plan contemplates capital expenditures beyond our
current capital resources. For example, we plan on expanding our manufacturing
facility in Dong Guan, China. Our expansion plans include the acquisition of
equipment and the renovation of the facility. We estimate the cost of this
expansion to be approximately $1,400,000. We have also identified a potential
acquisition target in mainland China. The target company owns a facility that
could be used for the assembly of our set top boxes in China. We anticipate that
the cost of this acquisition will be approximately $500,000. We do not currently
have enough capital to make these and other anticipated capital expenditures.
Management expects that these expenditures will be met through a combination of
increased revenues from product sales and the sale of our common stock in
private or public offerings. However, we have not received a firm commitment on
any such financing and management can provide no assurance that such a
commitment will be obtained.
Our success depends in large part on whether or not our products will be
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accepted by consumers in our target markets.
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Our business strategy is currently focused on two products, digital TV
receivers and computer heat dispersion systems. We have been developing the
components and systems that enable analog televisions to access the digital
television broadcasting network which is developing in China and our ultimate
success depends in large part upon the full development of a national digital
television broadcasting network in China. There are many obstacles to the
creation of a national digital television broadcasting network in China,
including, consumer acceptance, compliance with governmental regulations and the
need to obtain governmental approvals. If third party efforts to establish a
digital television broadcasting network in China fail, our digital to analog set
top boxes will not be in demand and our results of operations and prospects
would be materially adversely affected.
14
Rapid technological changes and short product life cycles in our industry could
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harm our business.
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The technology underlying our products and other products in our industry,
in general, is subject to rapid change, including the potential introduction of
new types of products and technologies, which may have a material adverse impact
upon our business. We will need to maintain an ongoing research and development
program, and our potential future success, of which there can be no assurances,
will depend in part on our ability to respond quickly to technological advances
by developing and introducing new products, successfully incorporating such
advances in existing products, and obtaining licenses, patents, or other
proprietary technologies to be used in connection with new or existing products.
We spent approximately $67,864 for research and development expenses during the
six months ended June 30, 2005. There can be no assurance that our research and
development will be successful or that we will be able to foresee and respond to
such advances in technological developments and to successfully develop
additional products. Additionally, there can be no assurances that the
development of technologies and products by competitors will not render our
products or technologies non-competitive or obsolete.
There are several risks relating to the infringement of our proprietary
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technology.
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We have obtained patents for our computer CPU cooling systems in Taiwan,
Japan, China, South Korea and the U.S.A. We cannot guarantee that these and
other intellectual property protection measures will be sufficient to prevent
misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to ours or otherwise obtain access to our know-how or that others will not be
issued patents which may prevent the sale of our products or require licensing
and the payment of significant fees or royalties by us for the pursuit of our
business. In addition, the legal systems of many foreign countries, including
China, do not protect intellectual property rights to the same extent as the
legal system of the United States. If we are unable to adequately protect our
proprietary information and technology, our business, financial condition and
results of operations could be materially adversely affected.
Furthermore, litigation may be necessary to enforce and protect our
intellectual property rights. Any intellectual property litigation could be
costly and could cause diversion of management's attention from the operation of
our business. Adverse determinations in any litigation could result in the loss
of our proprietary rights, subject us to significant liabilities or require us
to seek licenses from third parties that may not be available on commercially
reasonable terms, if at all. We could also be subject to court orders preventing
us from manufacturing or selling our products, which could adversely affect our
business.
We face potentially fierce competition.
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There are many companies with substantially more resources than we have,
that manufacture and distribute digital TV receivers and computer heat
dispersion systems. Most of our potential competitors have substantially greater
capital, marketing and development capabilities and human resources than we have
and will likely represent significant competition for us. The foregoing
conditions create a rigorous competitive climate for us and increase the risk
that our products will be unable to compete successfully with other potential
marketers of these products. Our competitors may succeed in developing products
that are more effective or less costly than any that may be developed by us and
may also prove to be more successful than us in technology, marketing and sales.
15
Our largest target sales market is in China and there are several significant
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risks relating to conducting operations in China.
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Our largest target consumer market is in China. We also expect to make
investments in China in the future. Therefore, our business, financial condition
and results of operations are to a significant degree subject to economic,
political and social events in China.
Governmental policies in China could impact our business.
Since 1978, China's government has been and is expected to continue
reforming its economic and political systems. These reforms have resulted in and
are expected to continue to result in significant economic and social
development in China. Many of the reforms are unprecedented or experimental and
may be subject to change or readjustment due to a number of political, economic
and social factors. We believe that the basic principles underlying the
political and economic reforms will continue to be implemented and provide the
framework for China's political and economic system. New reforms or the
readjustment of previously implemented reforms could have a significant negative
effect on our operations. Changes in China's political, economic and social
conditions and governmental policies which could have a substantial impact on
our business include:
* new laws and regulations or new interpretations of those laws and
regulations;
* the introduction of measures to control inflation or stimulate growth;
* changes in the rate or method of taxation;
* the imposition of additional restrictions on currency conversion and
remittances abroad; and
* any actions which limit our ability to develop, manufacture or sell
our products in China, or to finance and operate our business in
China.
Economic policies in China could negatively impact our business.
The economy of China differs from the economies of most countries belonging
to the Organization for Economic Cooperation and Development in various
respects, such as structure, government involvement, level of development,
growth rate, capital reinvestment, allocation of resources, self-sufficiency,
rate of inflation and balance of payments position. In the past, the economy of
China has been primarily a planned economy subject to one and five-year state
plans adopted by central government authorities and largely implemented by
provincial and local authorities. These plans set production and development
targets.
Since 1978, increasing emphasis had been placed on decentralization and the
utilization of market forces in the development of China's economy. Economic
reform measures adopted by China's government may be inconsistent or
ineffectual, and we may not in all cases be able to capitalize on any reforms.
Further, these measures may be adjusted or modified in ways that could result in
economic liberalization measures that are inconsistent from time to time, from
industry to industry or across different regions of the country. China's economy
has experienced significant growth in the past decade. This growth, however, has
been accompanied by imbalances in China's economy and has resulted in
significant fluctuations in general price levels, including periods of
inflation. China's government has implemented policies from time to time to
increase or restrain the rate of economic growth, control periods of inflation
or otherwise regulate economic expansion. While we may be able to benefit from
the effects of some of these policies, these policies and other measures taken
by China's government to regulate the economy could also have a significant
16
negative impact on economic conditions in China with a resulting negative impact
on our business.
China's entry into the WTO creates uncertainty.
China formally became the 143rd member of the World Trade Organization
(WTO), the multilateral trade body, on December 11, 2001. Entry into the WTO
will require China to further reduce tariffs and eliminate other trade
restrictions. While China's entry into the WTO and the related relaxation of
trade restrictions may lead to increased foreign investment, it may also lead to
increased competition in China's markets from international companies. The
impact of China's entry into the WTO on China's economy and our business is
uncertain.
Uncertainty relating to China's legal system could negatively affect us.
China has a civil law legal system. Decided court cases do not have binding
legal effect on future decisions. Since 1979, many new laws and regulations
covering general economic matters have been promulgated in China. Despite this
activity to develop the legal system, China's system of laws is not yet
complete. Even where adequate law exists in China, enforcement of contracts
based on existing law may be uncertain and sporadic and it may be difficult to
obtain swift and equitable enforcement, or to obtain enforcement of a judgment
by a court of another jurisdiction. The relative inexperience of China's
judiciary in many cases creates additional uncertainty as to the outcome of any
litigation. Further, interpretation of statutes and regulations may be subject
to government policies reflecting domestic political changes.
The deterioration of relations between Taiwan and China could negatively affect
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our business.
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The main target market for our products is mainland China and other
locations in the Asia-Pacific region. For decades, potential conflict in the
Taiwan Strait has remained a serious threat to the stability of the Asia-Pacific
region. Even today, when trade, business, and unofficial contacts between China
and Taiwan are rapidly expanding, China has not renounced the use of force
against Taiwan. If relations between China and Taiwan deteriorate or if any
material conflicts between the two nations arise, our ability to continue to do
business in China may diminish and our projected sales to China may
significantly decrease or be eliminated altogether. Accordingly, such
deterioration in relations could have a material adverse effect on our business.
You will likely suffer significant dilution. We do not intend to pay any
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dividends for the foreseeable future.
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We will likely need to issue additional shares of our capital stock in the
future in order to raise capital to satisfy our current obligations and to
otherwise carry out our business plan. Upon the issuance of these shares you
will experience dilution in the net tangible book value of your common stock. We
have never paid dividends and do not intend to pay any dividends in the
foreseeable future.
Our stock is a penny stock and there are significant risks related to buying and
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owning penny stocks.
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Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional
sales practice requirements on broker-dealers that sell non-Nasdaq listed
securities except in transactions exempted by the rule, including transactions
17
meeting the requirements of Rule 506 of Regulation D under the Securities Act
and transactions in which the purchaser is an institutional accredited investor
(as defined) or an established customer (as defined) of the broker or dealer.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, this rule may
adversely affect the ability of broker-dealers to sell our securities and may
adversely affect your ability to sell any of the securities you own.
The Securities and Exchange Commission regulations define a "penny stock"
to be any non-Nasdaq equity security that has a market price (as defined in the
regulations) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to some exceptions. For any transaction by a
broker-dealer involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks. Our market liquidity could be severely adversely affected by these
rules on penny stocks.
Our stock is very volatile and subject to significant fluctuations.
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Our stock price could be subject to wide fluctuations in the future in
response to many events or factors, including those discussed in the preceding
risk factors relating to our operations, as well as:
* actual or anticipated fluctuations in operating results;
* changes in expectations as to future financial performance or changes
in financial estimates or buy/sell recommendations of securities
analysts;
* changes in governmental regulations or policies in China;
* our, or a competitor's, announcement of new products or technological
innovations; and
* the operating and stock price performance of other comparable
companies.
General market conditions and domestic or international macroeconomic
factors unrelated to our performance may also affect our stock price. For these
reasons, investors should not rely on recent trends to predict future stock
prices or financial results. In addition, following periods of volatility in a
company's securities, securities class action litigation against a company is
sometimes instituted. This type of litigation could result in substantial costs
and the diversion of management time and resources.
ITEM 3. CONTROLS AND PROCEDURES.
An evaluation was carried out under the supervision and with the
participation of our management, including Bill Liao, our Chairman, Chief
Executive Officer and President and Grace Chang, our Chief Financial Officer and
General Manager, of the effectiveness of our disclosure controls and procedures.
Disclosure controls and procedures are procedures that are designed with the
objective of ensuring that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, such as this Form 10-QSB, is
recorded, processed, summarized and reported within the time period specified in
18
the Securities and Exchange Commission's rules and forms. Based on that
evaluation, management concluded that as of June 30, 2005, and as of the date
that the evaluation of the effectiveness of our disclosure controls and
procedures was completed, our disclosure controls and procedures were effective
to satisfy the objectives for which they are intended.
There were no changes in our internal control over financial reporting
identified in connection with the evaluation performed that occurred during the
fiscal quarter covered by this report that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
During the period from November 19, 2004 through February 15, 2005, we raised
approximately $645,000 through the sale of 25.8 units to nineteen investors.
Each unit consists of (i) 25,000 shares of our common stock, (ii) three year
warrants to purchase 25,000 shares of our common stock at an exercise price of
$0.25 per share, and (iii) 180 day convertible promissory note in the principal
amount of $25,000 that bears interest at a rate of 10% per annum and which is
convertible into common stock at maturity at a conversion price equal to $0.25
per share. The 25.8 units sold in the private placements represent a total of
3,870,000 shares of our common stock on a fully-diluted basis. Berwyn Capital
acted as the placement agent for us in the offering and received from the
Company a 10% cash fee, or $64,500, and five year warrants to purchase 258,000
shares of our common stock at an exercise price of $0.25 per share and RIO Group
Associates, Inc. received a 1.5% cash fundraising fee, or $9,675, from the
Company.
Effective January 1, 2005 and January 17, 2005, we issued to Ross Huget
Inc. and The Vine Group Inc. 192,000 and 250,000 shares of our common stock,
respectively, for services rendered and to be rendered to us.
The foregoing securities were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, Regulation
D promulgated thereunder, and with regard to the private placement described in
the first paragraph of this Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
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None.
ITEM 6. EXHIBITS
31.1 Certification of Principal Executive Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal Financial
Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CIRMAKER TECHNOLOGY CORPORATION
Date: August 23, 2005 By: /s/ Bill Liao
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Bill Liao
President
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EXHIBIT INDEX
Exhibit
No. Description
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31.1 Certification of Principal Executive Officer filed pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer filed pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal
Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002