Amendment No. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the quarterly period ended September 30th, 2012
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the transition period from __________ to __________
Commission file number 333-155486
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 ☐ No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 ☐
Explanatory Note: We are amending our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 to add Exhibit 101 consisting of our interactive data files pursuant to Rule 405 of Regulation S-T.
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date
7,104,000 common shares issued and outstanding as of September 3 0, 2012.
PART I - FINANCIAL INFORMATION.................................................................................................................................. 4
Item 1. Financial Statements........................................................................................................................................ 4
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations........... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................................20
Item 4. Controls and Procedures............................................................................................................................... 20
PART II - OTHER INFORMATION....................................................................................................................................... 22
Item 1. Legal Proceedings.......................................................................................................................................... 22
Item 1A. Risk Factors................................................................................................................................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................................................ 22
Item 3. Defaults Upon Senior Securities.................................................................................................................. 22
Item 4. [Removed and Reserved].............................................................................................................................. 22
Item 5. Other Information........................................................................................................................................... 22
Item 6. Exhibits............................................................................................................................................................. 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Our interim financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.
While the information presented in the accompanying interim financial statements for the quarter ended September 30 , 2012 is unaudited, it includes all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim period. These interim financial statements follow the same accounting policies and methods of their application as our December 31, 2011 annual audited financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim financial statements be read in conjunction with our December 31, 2011 annual audited financial statements.
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Ya Zhu Silk, Inc. (Yazhu or the "Company") was incorporated in the State of Nevada on July 22, 2008. Prior to June 29, 2011, the Company was a development stage company attempting to import and to distribute high quality silk fabrics made in China. The silk operation ceased after the following acquisition (see below).
On October 14th, 2010, AMS-INT Asia Limited (AMS) was incorporated under the laws of Hong Kong Special Administrative Region (HKSAR) of the People s Republic of China ( PRC) by Matt Li (Li) and Ferngrue Yue (Yue), which hold 92% and 8% of common stock issued, respectively. The Company is primarily engaged in the provision of financing and international sales and support for the mobile device products and services that are delivered and manufactured by suppliers located in PRC. Its wholly foreign-owned subsidiary, AMS Shenzhen Co., Ltd. (AMS Shenzhen or WFOE) was incorporated in Shenzhen, Peoples Republic of China (PRC) on June 14, 2011 as a limited liability company.
Guangzhou Xingwei Communications Technology Ltd. Inc. ("Xingwei") was incorporated under the laws of the Peoples Republic of China on January 11th, 2007. Xingwei is primarily engaged in the service, research and development of computer software and hardware, telecom technology in China.
Beijing Yiyueqiji Science and Technology Development Ltd. Inc. ("Yiyueqiji ") was incorporated under the laws of the Peoples Republic of China on December 29, 2009. Yiyueqiji is primarily engaged in the manufacturing and distributing of E-reading technology and equipment in China.
On June 29, 2011, AMS entered into a series of contractual arrangements with Xingwei and Yiyueqiji (Operating Companies), respectively. Through the contractual agreements, AMS has the ability to substantially influence the daily operations and financial affairs of the Operating Companies, in addition to being able to appoint their senior executives and approve all matters requiring stockholder approval. The structure of the contractual arrangements are such that the Operating Companies are effectively variable interest entities (VIEs) of AMS. Accordingly, AMS consolidates results of operation, assets and liabilities in their financial statements of Xingwei and Yiyueqiji. AMS will absorb 100% of the expected losses and gains of the Operating Companies, which results in AMS being their primary beneficiary.
The accounts of the Operating Companies are consolidated in the accompanying consolidated financial statements pursuant to Accounting Standards Codification Topic 810, Consolidation As a VIE, sales of the Operating Companies are included in the Companys total sales, its income from operations is consolidated with the Companys, and the Companys net income includes all of net income of the Operating Companies. The Company does not have any non-controlling interest and accordingly, did not subtract any net income in calculating the net income attributable to the Company.
The Companys continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and/or obtaining additional financing from its shareholders or other sources, as may be required.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Companys ability to do so. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. Management is endeavoring to increase revenue generating operations. While priority is on generating cash from operations through the sale of the Companys products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Companys equity and debt securities, which may not be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements have been prepared in conformity with U.S. GAAP. All references to U.S. GAAP are in accordance with The FASB Accounting Standards Codification (ASC) and the Hierarchy of Generally Accepted Accounting Principles.
The unaudited condensed interim financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K. The results of the nine month periods ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
P RINCIPLE OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries based in the PRC, which include AMS, AMS Shenzhen, Xingwei, and Yiyueqiji. As a result of entering contractual arrangements with AMS, the Company consolidates AMS, AMS Shenzhen, Xingwei, and Yiyueqiji in accordance with SEC Regulation SX-3A-02 and Accounting Standards Codification (ASC) 810, Consolidation. All intercompany balances and transactions have been eliminated in consolidation.
The Operating Companies are considered VIEs, and the Company is the primary beneficiary. On June 29, 2011, via AMS as an intermediary company, the Company entered into the contractual arrangements with the Operating Companies pursuant to which the Company is to receive 100% of the Operating Companies net income.
The accounts of the Operating Companies are consolidated in the accompanying financial statements pursuant to ASC Topic 810. As a VIE, the Operating Companies net revenues are included in the Companys total net revenues, their income from operations is consolidated with the Companys, and the Companys net income includes all of the Operating Companies net income. There is no non-controlling interest in net income and accordingly, no net income is subtracted in calculating the net income attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Operating Companies that requires consolidation of the Operating Companies financial statements with its financial statements.
The consolidated assets and liabilities of the Operating Companies will be transferred at their historical cost. The Company is deemed a continuation of the business of the Operating Companies, and the historical financial statements of the Operating Companies will become the historical financial statements of the Company. Accordingly, the financial statement data are those of the Operating Companies for all periods prior to our acquisition, and the financial statements of the consolidated companies from the acquisition date forward.
These consolidated financial statements include the financial statements of Operating Companies, its subsidiary and variable interest entities. All significant inter-company balances or transactions have been eliminated on consolidation.
USE OF ESTIMATES
The preparation of condensed consolidated interim financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
For purposes of the combined statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions in the PRC and balances are uninsured. As of September 30, 2012 and December 31, 2011, the Company has no cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Companys cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the contract amount after deduction of trade discounts, allowances, if any, and do not bear interest. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.
The Company reviews its allowance for doubtful accounts monthly. Past due balances over 1 year and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by aging of such balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. No provision for bad debts was made for the six and three months periods ended September 30, 2012 and 2011, respectively.
Inventories, consisting of raw materials and finished goods acquired from third party vendors, are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Costs of finished goods are composed of direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required. The Company has not recorded an inventory reserve at September 30, 2012 and December 31, 2011, respectively.
ADVANCES TO SUPPLIERS
Advances to suppliers represent the cash paid in advance for purchasing of inventory items from suppliers. The advance payments are meant to ensure preferential pricing and delivery.
Equipment is carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Production and office equipment
Maintenance and repair costs are expensed as incurred, whereas significant renewals and betterments are capitalized.
The Company recognizes revenue from the sales of products and rendering of services when the earnings process has been completed, as evidenced by agreement with the customer, delivery of products and transfer of title has occurred, the fees are fixed or determinable and collectability is reasonably assured, as prescribed by ASC 605, Revenue recognition (ASC 605).
The primary revenue of the Company is from selling Chinese mobile phone original equipment manufacturers (OEMs) code division multiple access (CDMA) chip sets which have its integrated software installed. The integrated software is a micro system that provides the control and processing of an entire mobile phones call logics and the voice channel processing.
The Company use distributors for sales of its chip sets. The Company enters into generally short term arrangements with its distributors, which on rare occasions may include certain obligations of the Company such as acceptance or price protection clauses. The Company does not have a history of providing refunds, discounts or other price concessions in connection with price protection clauses that the Company may provide to a distributor. The Company believes that such provisions are within the control of the Company and expects any benefits provided to the distributor to be insignificant. As such, the Company believes that it is able to reasonably estimate price concessions as remote, such that the price is fixed and determinable and revenue is recognized upon delivery of the product sold. The Company does not have any other post shipment obligations.
The Company is governed by the Income Tax Law of the Peoples Republic of China (the "PRC Income Tax Law") and Inland Revenue Ordinance of HKSAR (the HK IRO). The Company accounts for income taxes using the liability method prescribed by ASC 740 Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
Pursuant to accounting standards related to the accounting for uncertainty in income taxes, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.
As of September 30, 2012 and December 31, 2011, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the nine months and three months periods ended September 30, 2012 and 2011, respectively and no provision for interest and penalties is deemed necessary as of September 30, 2012 and December 31, 2011.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.
Leases where substantially all the rewards and risks of ownership of assets are transferred to the Group are recorded as long-term payables, and under the corresponding category of property, plant and equipment. Obligations under capital leases reflect the present value of future lease payments, discounted at an appropriate interest rate, and are reduced by rental payments net of imputed interest. Property, plant, and equipment under capital leases is depreciated based on the useful life of the asset. All other leases are classified as operating leases and leasing costs are amortized on a straight-line basis over the lease term. For the nine months periods ended September 30, 2012 and 2011, operating lease expenses of $35,617 and $27,777 were recorded, respectively and included in general and administrative expenses. For the three months periods ended September 30, 2012 and 2011, operating lease expenses of $12,245 and $11,698 were recorded, respectively and included in general and administrative expenses.
RESEARCH AND DEVELOPMENT COST
Research and development costs are charged to general and administration expense and cost of sales as incurred. $340,764 and $253,855 was recorded as research and development costs for the nine months periods ended September 30, 2012 and 2011, respectively. $113,398 and $61,624 was recorded as research and development costs for the three months periods ended September 30, 2012 and 2011, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the RMB and the RMB is not freely convertible into foreign currencies. The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, the financial statements of the Company, which are prepared using the functional currency, have been translated into United States dollars. Assets and liabilities translated at exchange rates at the balance sheet date, revenue and expenses are translated at the average exchange rates for the period, and members' equity is translated at historical exchange rates. Translation adjustments are included in accumulated other comprehensive income, a component of members equity.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and all changes to the statements of shareholders equity, except those due to investments by shareholders, changes in paid-in capital and distributions to shareholders. For the Company, comprehensive income for the periods ended September 30, 2012 and 2011 included net income and unrealized (loss) gain from foreign currency translation adjustments.
IMPACT OF NEW ACCOUNTING STANDARDS
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operations, financial position, or cash flow.
NOTE 3. ACCOUNTS RECEIVABLE
At September 30, 2012 and December 31, 2011, accounts receivable consisted of the following:
NOTE 4. INVENTORIES
Inventories at September 30, 2012 and December 31, 2011 consist of the following:
NOTE 5. EQUIPMENT
Equipment at September 30, 2012 and December 31, 2011 consists of the following:
For the nine months periods ended September 30, 2012 and 2011, depreciation expense amounted to $16,162 and $9,561, respectively. For the three months periods ended September 30, 2012 and 2011, depreciation expense amounted to $6,390 and $2,909, respectively.
NOTE 6. PREPAYMENT FOR ACQUISITION OF BUILDING
During the year ended December 31, 2011, the Company acquired from a third party a building for a cash consideration of US$474,196, equivalent to RMB 3,000,000, which was fully paid before December 31, 2011. As of September 30, 2012, the relevant formalities had not been completed and no land use right title and house certificate had been issued. Management estimated that the relevant formalities will be completed and the land use right certificate will be issued by June 30, 2013.
NOTE 7. ADVANCES FROM CUSTOMERS
At September 30, 2012 and December 31, 2011, advances from customers consisted of the following:
NOTE 8. RELATED PARTY TRANSACTION
In connection with an invitation from a customer's requirement to bid a mobile terminal design, the shareholders of the Company have agreed to advance a loan of $982,534 to the Company in the nine months period ended September 30, 2012. The related party balance is noninterest bearing, unsecured and payable on demand before September 30, 2012.
NOTE 9. STATUTORY RESERVES
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the PRC GAAP). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities registered capital or members equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to the statutory public welfare fund. The subsidiaries of the Company elected not to made discretionary surplus reserves since its establishment. For the nine months periods ended September 30, 2012 and 2011, appropriations to statutory reserves were $31,135 and $55,559, respectively. For the three months periods ended September 30, 2012 and 2011, appropriations to statutory reserves were $6,823 and $23,359, respectively.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements are projections of events, revenues, income, future economic performance or managements plans and objectives for future operations. In some cases, you can identify forward-looking statements by the use of terminology such as may, should, expects, plans, anticipates, believes , estimates, predicts, potential or continue or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this quarterly report on Form 10-Q include statements about:
our sales plan and mark et ing program;
our beliefs regarding the companies that may manufacture our products;
our goal is that we will turn our major revenue method from the software license model to sales of branded phones and tablets and systems solutiosn model ;
our goal is to be a global leader in the design, development and manufacture of mobile devices and the strategies we anticipate will help us reach that goal;
our expectation that the number of our employees will increase;
our belief that we may build a strategic relationships with one or more leading telecom companies;
our subsidiary should operate the major smartphone and tablet product development center and product delivery business unit for the group of companies;
our expectation that the operating companies will sign with financing backup from the manufacturing partners to grow the output of the smartphone products to a larger scale our expectation that the demand for our products will eventually increase; and
our expectation that we will be able to raise capital when we need it.
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including:
general economic and business conditions;
our ability to identify attractive products and negotiate their acquisition or licensing;
our ability to effectively develop and market products that we acquire or license;
our inability to complete the purchase of Kunekts assets;
volatility in prices for our products;
risks inherent in the mobile industry;
competition for, among other things, capital, products and skilled personnel; and
other factors discussed under the section entitled Risk Factors,
any of which may cause our or our industrys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
While these forward-looking statements and any assumptions upon which they are based are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Cautionary Note Regarding Managements Discussion and Analysis
This Managements Discussion and Analysis should be read in conjunction with the accompanying unaudited financial statements and related notes. The discussion and analysis of our financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions. The following discussion should be read in conjunction with our unaudited interim financial statements and the related notes that appear elsewhere in this quarterly report.
As used in this quarterly report, the terms we, us our and Ya Zhu Silk mean Ya Zhu Silk, Inc., a Nevada corporation and our wholly owned subsidiary, AMS-INT Asia Limited (AMS), a Hong Kong corporation. Unless otherwise stated, $ refers to United States dollars.
We were incorporated in the State of Nevada on July 22, 2008. Following incorporation, we commenced the business of importing and distributing high quality silk fabric made in China. We have subsequently changed our business and we now market mobile devices, specifically mobile phones, smartphones, and tablets. We are evolving our business to become a designer and manufacturer of mobile devices. While we currently market and sell our products to a large wide geographic areas with filed service and operations in the U.S, Canada and China, our operating companies in design and development of mobile products are primarily located within China, which include AMS, AMS Shenzhen, Xingwei and Yiyueqiji.
AMS-INT Asia Limited (AMS HongKong) is Hong Kong Special Administrative Region (HKSAR) of the People s Republic of China ( PRC) company. The Company is primarily engaged in the provision of financing and international sales and support for the mobile device products and services that are delivered and manufactured by suppliers located in PRC. AMS Shenzhen Co., Ltd. is a wholly foreign-owned subsidiary of AMS HongKong.
Guangzhou Xingwei Communications Technology Ltd. Inc. ("Xingwei") is primarily engaged in the service, research and development of computer software and hardware, telecom technology in China.
Beijing Yiyueqiji Science and Technology Development Ltd. Inc. ("Yiyueqiji ") is primarily engaged in the manufacturing and distributing of E-reading technology and equipment in China.
Our Mobile Device Business
We market mobile devices, specifically mobile phones, smartphones, and tablets. We are evolving our business to become a designer and manufacturer of mobile devices. We intend to sell our products under the brand name KUNEKT and as OEM products in our target markets, which include China, India, Southeast Asia, the Middle East, Eastern Europe and South America.
It is expected tha t Yazhu will change its name to AMS Mobile Inc.. AMS will fulfill the role of continuing to expand sales and marketing offices across emerging markets and selected advanced markets, including the United States.
O ur goal in next 6 months is to sign contracts with mobile device manufacturing companies and to obtain production financing terms from these manufacturing companies so as to allow AMS to launch large scale output of its new and existing smartphone and tablet product lines to meet expected market demand for these products. We are still working on to officially sign the deal and get their financial support to meet the company s business growth.
We currently d esign, develops, sell and services wireless mobile devices with integrated software and also licenses the integrated software separately. The integrated software licensed to our customers is primarily based on code division multiple access (CDMA) chip sets. The integrated software is a micro system that provides the control and processing of an entire mobile phones call logics and the voice channel processing. We also design and develop Android-based smartphone and other mobile device related products.
We ha ve developed industry leading hybrid smartphone and other mobile device related products and it has applied for, and has been granted, 12 Chinese patents since operations began in January 2010. We are still developing tablet-based mobile device products to some OEMs.
The current hybrid products support what are known as E-book like features along with Android-based tablet features. Yiyueqiji has been constantly evolving both its software technologies and the hardware platforms that are supported. The first generation of these hybrid products was based on Marvell chip sets. The next generation of products will be based on multiple platforms, including NEC and Texas Instrument chip sets.
Plan of Operation
We were incorporated in the State of Nevada on July 22, 2008. Following incorporation, we commenced the business of importing and distributing high quality silk fabric made in China. We have since ceased the business of importing and distributing high quality silk fabric made in China. On February 20, 2012, we completed a transaction in which we purchased all of the issued and outstanding shares of AMS-INT Asia Limited in consideration for the issuance to 7,104,000 shares of our common stock, resulting in a change of control of our company. Yiyueqiji and XingWei have signed contractual management agreements with AMS, as discussed above under the heading Variable Interest Entities Agreements. Under these agreements, management of all sales and operations will be under the management of AMS, a Hong Kong company. Future investment and assets purchased and sold will also be under the full control of AMS. Chinese law forbids a non-Hong Kong company from acquiring these management agreements with mainland Chinese companies. We anticipate that AMS will continue to expand its presence and operations in Hong Kong and in China. by implementing strategic acquisitions. . We also anticipate setting up other joint venture companies in China and in the U.S.
We anticipate growth in North America as well as in our international business. We anticipate continuing to create new products including long term evolution (LTE) in 2012 and 2013. We will also enter into Android based accessories area, which include the products such as android TV terminals, android game console.
Due to increased demand for products, many consumer electronics manufacturers are experiencing shortages for certain hardware components. We continue to work closely with our suppliers to secure adequate supply. We are committed to employing disciplined financial policies, achieving our financial plan, and optimizing our capital structure. We anticipate continuing to evaluate opportunities to return capital to shareholders as we further strengthen our balance sheet.
Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative products that meet the needs of our customers globally. As we execute on meeting these objectives, we remain focused on taking the necessary action to design and deliver the products in more efficient methods
We generated $ 1,972,300 in revenue for the nine month period ended September 30 , 2012 with cost of revenue of $ 1,488,435 resulting in gross profit of $ 483,865 , compared to generating revenues for the nine month period ended September 30 , 2011 of $2,114,763 with cost of revenue of $ 1,252,572 , resulting in gross profit of $ 862,191 . We generated revenue from sales of licensed mobile phone software and software development services for mobile phone and smartphone devices.
Our expenses for the nine month period ended September 30 , 2012 were $ 493,186 consisting of general and administrative expenses of $ 359,888 and selling expenses of $ 133,298 compared to expenses of $ 571,666 for th e nine month period ended September 30 , 2011 consisting of general and administrative expenses of $419,452 and selling expenses of $ 152,214 . The de crease in expenses was primarily due to decrease of spending on new projects launch and marketing due to seasonal plans change.
Liquidity and Capital Resources
Our working capital results as at September 30 , 2012 and September 3 0 , 2011 are summarized as follows:
As at September 30 , 2012, we had cash of $1,526,482 and working capital of $1,306,925 , compared to cash of $ 1,117,593 and working capital of $ 1,170,844 as at December 31, 2011. We have incurred operating losses since inception, and this is likely to continue in the foreseeable future.
Presently, our revenue is sufficient to meet our operating and capital expenses. But Management projects that we may require an additional capital to fund our operating expenditures due to the growth of the business for the next twelve month period.
If we require any additional financing for manufacturing for large orders , we plan to raise any such additional capital primarily through equity financing and loans from our directors, provided that such funding continues to be available to our company. The issuance of additional equity securities by our company may result in a significant dilution in the equity interests of our current stockholders. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing as required on a timely basis, we will not be able to meet certain obligations as they become due and we will be forced to scale down or perhaps even cease our operations.
Cash flows used in our operating activities increased from $ 23,243 for the nine month ended September 30 , 201 1 to $ (319,551) for the nine month period ended September 30 , 2012. The $ (342,794) increase is primarily due to increased spending on design, development and manufacturing activities related to our smart phone and 3G mobile devices.
Cash flows used in our investing activities increased from $(21,167) for the nine month ended September 30, 2011 to $(42,896) for the nine month period ended September 30, 2012. The $21,729 increase is primarily due to the increased payment into fixed assets.
Cash flows provided by our financing activities decreased from $953,503 for the nine month ended September 30, 2011 to $774,156 for the nine month period ended September 30, 2012. The $ 179,347 decrease is primarily due to the fact that the company has reduced its activity in seeking additional funding.
We may seek additional funding through public or private financings to fund our operations beyond 2012. However, if we are unable to raise additional capital when required or on acceptable terms, or achieve cash flow positive operations, we may have to significantly delay product development and scale back operations both of which may affect our ability to continue as a going concern .
During the next twelve months and in the long term, to remedy the deficiency in financing for proposed future operations, we intend to raise funds from equity and/or debt financings. In the short term, we intend to fund future cash shortfalls from loans from directors.
Purchase or Sale of Equipment
We do not anticipate that we will expend any significant amount on equipment over the next 12 months but that may change depending on the type of business that we acquire in the event that we are successful in doing so.
The consolidated unaudited financial statements included with this quarterly report have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the consolidated unaudited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.
Off-balance sheet arrangements
Our company has planned to raise capital through the sale of its common shares to obtain the funding necessary to carry its business plan. Our president, secretary, treasurer and director, Frank Fengrui Yue, has undertaken to raise operating capital to sustain its business over the next twelve month period, However, there is no contract in place or written agreement securing these agreements. Investors should be aware that Mr. Yues expression is neither a contract nor agreement between him and our company.
Other than the above described situation we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Application of Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by managements application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials.
Basis of Presentation
Our financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America (US GAAP). The company maintains its books and accounting records in U.S. dollar (US$), and its reporting currency is US$.
Our financial statements are prepared using the accrual method of accounting. We have elected a fiscal year ending on December 31.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.
Sales revenue is recognized at the date of shipment from our facilities to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, ownership has passed, no other significant obligations of us exist and collectability is reasonably assured.
Impact of New Accounting Standards
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on the our results of operations, financial position, or cash flow.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, our management, with the participation of our principal executive officer and our principal financial officer and principal accounting officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, management concluded that as of the end of the period covered by this quarterly report on Form 10-Q, these disclosure controls and procedures were effective.
Because of the inherent limitations in all control systems, our management believes that no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
We were unable to file the 10Q within time period even after extension due to the change of the audit firm. Our plan to remediate those material weaknesses remaining is as follows: improving the efficiency by improving the communication and starting the internal audit review work earlier.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, our management, with the participation of our principal executive officer and principal financial officer has conducted an assessment, including testing, using the criteria in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2011. The conclusion that our disclosure controls and procedures were not effective was due to the presence of the following material weaknesses in disclosure controls and procedures which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment as we had only one officer (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC Guidelines; and (iii) inadequate security and restricted access to computer systems including insufficient disaster recovery plans; and (iv) no written whistleblower policy. Our CEO/CFO plans to implement appropriate disclosure controls and procedures to remediate these material weaknesses, including (i) appointing additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopt sufficient written policies and procedures for accounting and financial reporting and a whistle blower policy; and (iii) implement sufficient security and restricted access measures regarding our computer systems and implement a disaster recovery plan.
Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending December 31, 2012: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopt sufficient written policies and procedures for accounting and financial reporting and a whistle blower policy; and (iii) implement sufficient security and restricted access measures regarding our computer systems and implement a disaster recovery plan.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period 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.
We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.
Item 1A. Risk Factors.
There are no material changes from the risk factors previously disclosed in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on Aril 16th, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Dislosures.
Item 5. Other Information
Item 6. Exhibits.
 Previosly filed on December 14, 2012
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
YA ZHU SILK, INC.
Frank Fengrue Yue, President and Director