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| ZOOM > SEC Filings for ZOOM > Form 10-Q on 16-Nov-2009 | All Recent SEC Filings |
16-Nov-2009
Quarterly Report
Forward Looking Information
The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect", and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict. We encourage you to read those risk factors carefully along with the other information provided in this current report on Form 8-K and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.
You should read this Management's Discussion and Analysis in conjunction with the Consolidated Financial Statements and Related Notes.
Business Overview
Gold Lion was founded by Mr. Gu Lei in September 2002 in the British Virgin Islands, and Gu was the sole owner of one issued and outstanding share of common stock. Through a resolution of Gold Lion on November 26, 2008, Gold Lion issued 705 shares to Gu and 294 shares to Mr. Du Songtao, resulting in a total of 1,000 issued and outstanding shares of common stock. Pursuant to a pledge agreement dated November 26, 2008, Du pledged his 294 shares to Mr. Cao Wei, with all rights to such shares including voting rights. Consequently, Gu and Cao jointly control 100% of Gold Lion.
On August 2, 2007, Gu founded Profit Harvest in Hong Kong, and in December 2008, 100% ownership of Profit Harvest was transferred to Gold Lion. Profit Harvest is engaged in sale of mobile phone products and components to retailers and other wholesalers.
Pursuant to a capital injection agreement (the "Agreement") by and among Tianjin Communication and Broadcasting Group Co., Ltd. ("TCBGCL"), TCBGCL Labour Union, Hebei Leimone Science and Technology Co., Ltd.("Hebei Leimone"), Tianjin 712 Communication and Broadcasting Co., Ltd.("712"), Beijing Depu Investment Co., Ltd. and other natural person shareholders on May 8, 2007 and a resolution of the shareholder's meeting on June 30, 2007, Hebei Leimone, a company controlled by Gu, acquired 25.1333% of TCB Digital from TCBGCL Labour Union and various natural person shareholders for cash consideration of RMB9,000,000. Pursuant to this Agreement, Hebei Leimone and Beijing Depu Investment Co., Ltd., a company controlled by Cao, were to invest additional RMB15,928,700 and RMB10,377,600 respectively in TCB Digital, bringing the total investment from Hebei Leimone and Beijing Depu Investment Co., Ltd to $4,679,111 (RMB35,306,300). After this additional investment was made as of June 30, 2007, Hebei Leimone and Beijing Depu held 36.03% and 15% equity interests respectively of TCB Digital, a total of 51.03% ownership in TCB Digital. Pursuant to an agreement dated June 30, 2007, Cao irrevocably pledged his 15% equity interest in TCB Digital to Gu in exchange for a 29.4% stake in Gu's company. TCB Digital is mainly engaged in research & development, processing, manufacturing, servicing and marketing of mobile handsets, electronic products and communication equipment.
Pursuant to the share transfer agreement by and among Hebei Leimone, Beijing Depu Investment Co., Ltd and Jiangsu Leimone dated December 15, 2008, Hebei Leimone and Beijing Depu Investment Co., Ltd. transferred their 51.03% equity interest of TCB Digital to Jiangsu Leimone on December 30, 2008.
Plan of Operation
During the next twelve months, Gold Lion expects to take the following steps in connection with the development of its business and the implementation of our plan of operations:
º Gold Lion intends to continue with its marketing strategies to deliver its
products and services in China;
º Gold Lion will gradually shift its focus to the 2.5G-3G mobile
communications business;
º Gold Lion will develop high-end smart mobile phones in cooperation with
international mobile communications companies, such as China Telecom, SK
Telecom, and others.
Critical Accounting Policies and Estimates
The preparation of Gold Lion's consolidated financial statements in conformity with accounting principles generally accepted in the United States ("US GAAP") requires it to make estimates and judgments that affect its reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. Gold Lion based its estimates and judgments on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Future events, however, may differ markedly from current expectations and assumptions. While there are a number of significant accounting policies affecting Gold Lion's consolidated financial statements; Gold Lion believes the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; asset impairment.
Revenue Recognition
In accordance with US GAAP, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that Gold Lion recognizes in the financial statements contained herein.
Sale of goods
Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of Gold Lion exists and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
Gold Lion maintains an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when Gold Lion assesses the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. Gold Lion initially records a provision for doubtful accounts based on its historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of its accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, Gold Lion considers: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) its historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.
Income taxes
Gold Lion accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under this method, deferred income taxes are recognized for the estimated tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts and each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management's opinion; it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities. Gold Lion adopted FIN 48, Accounting for Uncertainty in Tax Positions.
Asset Impairment
Gold Lion periodically evaluates the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. Gold Lion also utilizes judgment to determine other factors within fair value analyses, including the applicable discount rate.
Results of Operations for the Quarter ended September 30, 2009
Revenues
Gold Lion's revenues were $55,290,880 for the quarter ended September 30, 2009, an increase of 204% or $37,127,229 compared to $18,163,651 in the corresponding period in 2008. The increase of revenues in 2009 as compared to 2008 was mainly due to the addition of activities from Jiangsu Leimone Electronics Co., Ltd. and Profit Harvest which were both in ramp up phases in 2008, and a significant increase in orders from one of Gold Lion's existing customers, a major mobile communications original equipment manufacturer in China. For the nine months ended September 30, 2009 and 2008, revenues were $137,240,898 and $41,144,293 respectively, representing a 234% increase.
Cost of sales
For the third quarter of 2009, Gold Lion's cost of sales was $52,262,849 or 94.5% of revenues, while cost of sales for the corresponding period in 2008 was $16,210,431 or 89.2% of revenues. For the nine months ended September 30, 2009, our cost of sales was $128,412,782 or 93.6% of revenues, while cost of sales for the corresponding nine months in 2008 was $35,786,102 or 87.0% of revenues. Our competitive pricing for the contract manufacturing was instrumental in capturing significantly increased business activities.
Gross profit for the third quarter of 2009 rose 55% to $3,028,031 compared to $1,953,220 for the 2008 quarter. Gross profit as a percentage of revenues for the third quarter of 2009 was 5.5%, compared to 10.8% for the 2008 quarter. The decline in gross margins is primarily due to the low gross margin of the increased business volume from a large existing customer as mentioned above.
Selling, general and administrative expenses
Sales and marketing expenses mainly represent salaries of sales personnel, and marketing and transportation costs; and this was $36,431 for the third quarter in 2009 compared to $30,375 for the 2008 period. The relative stability in such costs is attributed to on-going business activities carried over from the last quarter.
General and administrative expenses primarily consisted of compensation for personnel, depreciation, travel expenses, rental, materials expenses related to ordinary administration, and fees for professional services; and this amounted to $255,122 for the third quarter of 2009 compared to $214,637 for the 2008 period.
For the third quarter of 2009, total operating expenses were $291,553 or 0.5% of revenues, which was an increase of $46,541 from $245,012 but a reduction from 1.3% of revenues for the 2008 period. This was a result of management's continued emphasis on cost control and operational efficiency.
Research and development expense
Gold Lion did not itemize R&D expenses for the third quarters of 2009 and 2008 due to recent PRC tax rules which stipulate that pre-approved R&D expenses can be applied as a credit against taxes, and we did not have such R&D expenses during these quarters. Beginning with next year, management plans to set up internal accounting guidelines to more appropriately reflect R&D activities for U.S. financial reporting.
Other income/(expenses)-net
Gold Lion's other expenses-net was $319,351 for the third quarter of 2009, which was mainly comprised of interest expense of $380,096. For the corresponding 2008 period, other expenses-net was $339,714 which mainly included interest expense of $433,335.
Net income
For the quarter ended September 30, 2009, Gold Lion's net income from operations was $1,734,056 or an increase of $1,004,183 or 138% as compared to $729,873 for the 2008 period. Net margins, the ratio of net income over revenues, for the third quarter of 2009 and 2008 were 3.1% and 4.0% respectively. For the nine month periods ended September 30, 2009 and 2008, net incomes were $4,354,153 and $713,681 respectively; while net margins were 3.2% and 1.7% respectively.
Other comprehensive income/(loss)
For the third quarter of 2009, Gold Lion's other comprehensive income was $10,817 as compared to a loss of ($381,315) for the 2008 period. Other comprehensive income/(loss) in 2009 and 2008 resulted from foreign currency exchange changes particularly the Renminbi's appreciation against the U.S. dollar. This gain for the third quarter of 2009 can result in a loss in future periods if the trend in the exchange rate of the Reminbi to the U.S. dollar reverses.
Gold Lion generally finances its operations from cash flow generated internally, interest-free credit lines in the form of banker acceptances and short-term loans from domestic banks. As of September 30, 2009, Gold Lion had cash and cash equivalents of $2,472,305. This represented an increase of $1,659,536 from $812,769 as of December 31, 2008.
Net cash used in operating activities for the nine months ended September 30, 2009 was $6,934,078 as compared to net cash used in operating activities for the 2008 period of $7,954,576. In the first nine months of 2009, operational use of funds included an increase in accounts receivable of $5,909,296 and an increase in advances to suppliers of $20,283,253 while offset by a reduction in inventories of $2,015,176 and an increase in advances from customers of $11,528,554. Other operational uses of cash included a decrease in accounts payable of $860,014 and an increase in advances to related parties of $790,359; while other inflows of cash included a reduction in prepaid expenses of $932,518 and an increase in accrued expenses of $492,578.
Net cash used for investing activities was to $3,345,574 in the first three quarters of 2009 which was primarily cash used as deposits in the amount of $3,215,194 for securing interest free credit facilities such as banker acceptances.
Net cash provided by financing activities was $11,945,268 in the first three quarters of 2009 which included proceeds from short-term loans of $18,414,296 and proceeds from notes payable of $6,430,389 and also collection on advances to related parties in the amount of $11,671,204. During this period, there was an outflow due to advance to related parties of $9,846,445 and repayment of short-term loans of $15,067,570 and also an outflow of $1,169,162 for repayment of long-term loans.
On a going-forward basis over the next 12 months, Gold Lion intends to continue to rely on short-term loans and notes to fund its operational cash needs. Following the merger with and the change of control of Zoom, and subsequent to the quarter ended September 30, 2009 the Company completed a private sale of equity of $10,005,000 in aggregate to institutional and accredited individual investors. The first traunch of $4,967,696 was closed as of October 16, 2009 and the balance of $5,037,304 remains in escrow until shareholders approve of the transaction at a Special Meeting of Shareholders scheduled for November 17, 2009, as indicated in the Company's filing of definitive proxy information with the SEC on November 5, 2009. The Company believes it has sufficient funds for its operations over the next 12 months.
Off Balance Sheet Arrangements
As of September 30, 2009, Gold Lion had no off balance sheet arrangements.
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