NOTE 1 — ORGANIZATION AND PRINCIPAL ACTIVITIES
SKY Digital Stores, Corp. (the “Company") was incorporated on March 23, 2006 in the state of Nevada under the name Hoopsoft Development Corp. The Company changed its name to SKY Digital Stores, Corp. (Formerly known as Yellowcake Mining Inc.) on March 17, 2011. Hong Kong First Digital Holding Ltd. (“First Digital”) was incorporated in Hongkong on September 30, 2010.
On May 5, 2011, the Company completed the acquisition of First Digital, a company that is in the business of designing, manufacturing and selling of mobile communication and digital products, by means of a share exchange. Pursuant to the terms of the Exchange Agreement, the Company acquired all of the outstanding shares (the “Shares”) of First Digital from the First Digital’s Stockholders; and First Digital’s Stockholders transferred and contributed all of their Shares to the Company. In exchange, the Company issued to the First Digital’s Stockholders, their designees or assigns, an aggregate of 23,716,035 shares (the “Shares Component”) or 97.56% of the shares of common stock of the Company issued and outstanding after the Closing (the “Share Exchange”), at $0.20 per share. The parties understand and acknowledge that such exchange is based upon an acquisition value of First Digital at $4,743,207, which is agreed and acceptable by all parties. As a result of the Share Exchange, First Digital became our wholly owned subsidiary and its subsidiaries business became our main operational business. Consequently, the Share Exchange has caused the Company to cease to be a shell company.
The Share Exchange Transaction described above is being accounted for as a reverse acquisition and recapitalization of First Digital because, prior to the transactions, the Company was a non-operating public shell and, subsequent to the transactions, the stockholders of First Digital own a majority of the outstanding common stock of the Company and exercise significant influence over the operating and financial policies of the consolidated entity. Pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), the merger or acquisition of a private operating company into a non-operating public shell with nominal net assets is considered a capital transaction.
First Digital operates through its wholly owned subsidiaries, Shenzhen Donxon Mobile Communication Technology Co., Ltd. (“Donxon”) and Shenzhen Xing Tian Kong Digital Company Limited (“Xingtiankong”). Donxon was incorporated in the People’s Republic of China (the “PRC”) on April 9, 2003. First Digital acquired all $4,112,913 (RMB 30,000,000) of registered Capital of Donxon on September 30, 2010. On February 28, 2011, First Digital formed Xingtiankong in the city of Shenzhen under the laws of the PRC with registered capital of $151,704 (RMB 1,000,000). First Digital owns 100% of the issued and outstanding capital stock of Donxon and Xingtiankong.
On April 7, 2011, Xingtiankong acquired all of the registered capital of Shenzhen Dasen Communication Technology Company Limited (“Shenzhen Dasen”) with total consideration of $1,237,816. Shenzhen Dasen was incorporated in the city of Shenzhen under the laws of PRC on November 26, 2007. Xintiankong owns 100% of the issued and outstanding capital stock of Shenzhen Dasen. Shenzhen Dasen is the holder of 70% of the issued and outstanding capital of Foshan Dasen Communication Chain Service Company Limited (“Foshan Dasen”), a company incorporated in PRC on January 19, 2007, and two PRC individuals own the remaining 30% ownership interest in Foshan Dasen. Shenzhen Dasen was established on November 26, 2007 in Shenzhen, PRC. It engages in the retail business of selling mobile communication products and accessories in PRC and operates the retailing business through its retail website (http://www.dasen.com.cn/) and three branch chain stores located within Guangdong Province.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
On August 1, 2011, the Company incorporated a subsidiary, Xinyang City Donxon Mobile Communication Technology Company Limited, in Henan Province (“Xinyang Donxon”). Xinyang Donxon will perform as a logistics center and a customer service, training and manufacturing facility for the Company.
In July and August, 2011, the Company entered into licensing management agreements with multiple independently owned retailing stores throughout Guangdong province, PRC. According to the agreement entered into, the Company will provide branding, product sourcing and management training to the store management and charge a fixed management fee each month.
On October 12, 2011, Donxon entered into an acquisition agreement (“Agreement”) with Vaslink Technology Ltd. (“Vaslink”) and the sole shareholder of Vaslink to acquire Vaslink for $1,180,675 (RMB 7,500,000) in Company’s common stock. Vaslink is a company engaged in the research, development, wholesale and retail of computer information technology, communications products, hardware and software in Guangzhou, PRC. On March 22, 2012, the Company issued an aggregate of 974,583 shares of common stock pursuant to an Acquisition Agreement among Donxon, Vaslink and the sole Shareholder of Vaslink.
On March 12, 2012, Xingtiankong formed Shenzhen Xingtiankong Digital Technology Company Limited (“Xingtiankong Digital”) in the city of Shenzhen under the laws of the PRC with registered capital of $787,116 (RMB 5,000,000). Xingtiankong holds 60% and two PRC individuals hold 40% ownership of Xingtiankong Digital. Xingtiankong Digital is engaged in expanding retail store business and recruiting authorized resellers.
The Company’s business is mainly operated by Donxon and Shenzhen Dasen, engaged in the business of designing, manufacturing and selling of mobile communications and digital products and retailing stores in the PRC.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements of the Company as of March 31, 2012, and for the three months ended March 31, 2012 and 2011, included herein, have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the rules and regulations of SEC. The unaudited condensed consolidated financial statements include the financial statements of the Company and its 100% owned subsidiaries First Digital, Donxon, Xingtiankong and Xinyang Donxon. Pursuant to the Share Exchange Agreement entered into on May 5, 2011, stockholders of First Digital became the majority stockholders of the Company. Certain information and disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements reflect all adjustments that in the opinion of management are necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The unaudited condensed consolidated financial statements of the Company reflect the principal activities of the following entities. All material intercompany transactions have been eliminated.
Name of the entity
|
Date of
Formation
|
Place of
Incorporation
|
|
Ownership
Percentage
|
|
Sky Digital Stores, Corp.
|
March 23, 2006
|
Nevada
|
|
Parent
|
|
First Digital
|
September 30, 2010
|
Hong Kong, China
|
|
100%
|
|
Donxon
|
April 9, 2003
|
Shenzhen, China
|
|
100%
|
|
Xintiankong
|
February 28, 2011
|
Shenzhen, China
|
|
100%
|
|
Xinyang Donxon
|
August 1, 2011
|
Xinyang, China
|
|
100%
|
|
Vaslink
|
September 11, 2007
|
Guangzhou, China
|
|
100%
|
|
Shenzhen Dasen
|
November 26, 2007
|
Shenzhen, China
|
|
100%
|
|
Foshan Dasen
|
January 19, 2007
|
Foshan, China
|
|
70%
|
|
Xingtiankong Digital
|
March 12, 2012
|
Shenzhen, China
|
|
60%
|
|
Reclassifications
Certain amounts from the prior period have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of consolidated 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 periods presented. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the recoverability of the carrying amounts of recorded assets and liabilities, estimated useful lives of property and equipment, lives of intangible assets, inventory obsolesce and the allowance for doubtful accounts.
Fair Value of Financial Instruments
The Company has categorized its assets and liabilities at fair value based upon the fair value hierarchy specified by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820,
Fair Value Measurements and Disclosures
. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
i.
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
|
ii.
|
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
iii.
|
Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
|
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. As of March 31, 2012 and December 31, 2011, the carrying amounts of financial assets and liabilities, such as cash, accounts receivable, accounts payable, short-term loans, stockholder loans and other payables, approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Company. The fair value of long-term bank loans also approximate their recorded value because long-term borrowings bear a floating rate of interest. As the stated interest rate reflects the market rate, the carrying value of the bank borrowings approximates its fair value.
Foreign Currency Translation and Transactions
The accompanying consolidated financial statements are presented in U.S. dollars (“USD”). - The functional currency for First Digital Holdings is Hong Kong Dollar (“HKD”). The functional currency for all PRC subsidiaries is Renminbi (“RMB”), the currency of the PRC. - In accordance with the Codification ASC 830, “
Foreign Currency Matters”
, an entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. All assets and liabilities were translated at the current exchange rate, at respective balance sheet dates, stockholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the reporting periods. The resulting translation adjustments are reported as other comprehensive income and accumulated other comprehensive income in stockholders’ equity in accordance with the Codification ASC 220
Comprehensive Income
.
Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. There were no material transaction gains or losses in the periods presented. Cash flow from the Company’s operations included in the statement of cash flow is calculated based upon the functional currency using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with arithmetical changes in the corresponding balances on the consolidated balance sheet. No presentation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company since it has not engaged in any significant transactions that are subject to the restrictions.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
Period end RMB : USD exchange rate
|
|
|
6.2960
|
|
|
|
6.3523
|
|
|
|
6.7886
|
|
Average RMB : USD exchange rate
|
|
|
6.3085
|
|
|
|
6.4544
|
|
|
|
6.8172
|
|
Period end HKD : USD exchange rate
|
|
|
7.7643
|
|
|
|
7.7688
|
|
|
|
7.7785
|
|
Average HKD : USD exchange rate
|
|
|
7.7605
|
|
|
|
7.7839
|
|
|
|
7.7879
|
|
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.
Cash and Cash Equivalents
Cash includes cash on hand and deposits in PRC and Hong Kong banks which are unrestricted as to withdrawal or use. The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Management believes that these major financial institutions are of high credit quality. Since a majority of bank accounts are located in the PRC, these bank balances are unsecured.
The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.
Restricted Cash
Restricted cash is related to deposits required by bank for banker’s acceptance notes and loans. These balances are subject to withdrawal restrictions and are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.
The balance of total restricted cash was $428,846 and $4,518,048 as of March 31, 2012 and December 31, 2011, respectively.
Accounts Receivable
Accounts receivable are recognized and carried at original invoice amounts less allowance for any uncollectible amounts. The Company does periodical reviews as to whether the carrying values of accounts have become impaired. The assets are considered to be impaired if the collectability of the balances become doubtful, accordingly, the management estimates the valuation allowance for anticipated uncollectible receivable balances. When facts subsequently become available to indicate that the allowance provided requires an adjustment, then the adjustment will be recorded as a change in allowance for doubtful accounts. Usually, the credit term is within 180 days. If amount with aging is over 180 days, then allowance for doubtful accounts may be estimated and recorded.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of March 31, 2012 and December 31, 2011, no allowance for doubtful accounts was deemed necessary as a majority of the outstanding receivables were collected within three months subsequent to the closing of period indicated.
Inventories
Inventories are stated at the lower of cost or market value, using the FIFO method. The cost of inventories comprises all costs of purchases, costs of labors, direct fixed and variable production overheads and other costs incurred in bringing the inventories to their present location and condition. The Company provides inventory reserves based on excess and obsolete inventories determined principally by customer demand.
Management periodically evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required. Inventory valuation allowance as of March 31, 2012 and December 31, 2011 amounted to $20,042 and $0, respectively.
Trade Deposit
The Company makes advances to certain vendors for purchase of its inventory items or raw material. Advance payments are included in “Trade Deposit”. Advances to suppliers are interest free and unsecured, which are recorded when payment is made by the Company and relieved against inventory when goods are received.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
|
Years
|
Machinery and equipment
|
5 years
|
Office equipment
|
3-5 years
|
Leasehold improvements
|
2 years
|
Vehicle
|
4 years
|
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of March 31, 2012 and December 31, 2011, there was no impairment of long-lived assets.
Intangibles Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified as of the balance sheet dates.
In conjunction the acquisition of Shenzhen Dasen and Vaslink, the Company capitalized $93,575 and $451,857 of identifiable intangible assets, respectively. The identifiable intangible assets consist primarily of trade name, customer relationships and technology. Trade name, customer relationships and technology are to be amortized over 10 years, their estimated useful life. The Company recorded amortization expenses for intangible assets of $24,183 and $0 for the three months ended March 31, 2012 and 2011.
Goodwill
The Company tests goodwill for impairment annually in the fourth quarter by comparing the fair value of each of the Company’s reporting units to the respective carrying value of the reporting units. Additionally, the Company may perform tests between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit below its carrying amount. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, would be recorded in operating income and could adversely affect net income and earnings per share. Shenzhen Dasen and Vaslink are the only reporting units that carry goodwill subject to impairment test. Shenzhen Dasen was acquired by the Company on April 7, 2011 and Vaslink was acquired by the Company on October 12, 2011. No impairment indicators occurred subsequent to the acquisition.
Revenue Recognition
Effective April 7, 2011, the Company had two types of revenue streams from its two lines of businesses, namely (i) design, manufacturing and sale of mobile phones and digital products (Donxon), (ii) retailing stores (Shenzhen Dasen).
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company records revenues when all of the following criteria have been met:
-
|
Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders, to determine the existence of an arrangement;
|
-
|
Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment;
|
-
|
Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB destination point;
|
-
|
Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
|
Income from Commission and Licensing Stores
The Company receives commissions from sale of digital products for third parties. The Company does not charge customers differently from the prices provided by third parties. The Company has no discretion on the digital product prices or the applicable commission rates as they are dictated by the third parties. Commissions from selling of digital products are recognized after phone cards are sold to retail customers. The Company presents revenues from such transactions on a net basis in the statements of income as the Company, generally, does not assume inventory risks and has no obligations for cancelled phone cards.
The Company entered into agreements with multiple independently owned retailing stores throughout Guangdong province, PRC in the third quarter of 2011. According to the revised agreements entered into by the parties, the Company is entitled to a management fee from these licensing stores. The management fee will be a fixed fee each month. The company recognizes fixed management fee each month.
Product Warranty
The Company provides product warranties to its customers that its products will meet the functionality standards agreed to in each sales arrangement. The warranty period ranges from three months up to a one-year. The Company expenses all warranty expenses at the earlier of the time their existence is known or as expenses are incurred. For the three months ended March 31, 2012 and 2011, warranty expenses have been minimal and no warranty reserve was considered necessary. The Company believes the existence of the product warranty in a sales contract does not constitute a deliverable in the arrangement and thus there is no need to apply FASB ASC Topic 605-25 separation and allocation model for a multiple deliverable arrangement. FASB ASC Topic 450 specifically addresses the accounting for standard warranties and neither SAB 104 nor FASB ASC Topic 605-25 supersedes FASB ASC Topic 450.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company has adopted the provisions of ASC subtopic 740-10 (“ASC 740-10”). ASC 740-10 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognizing, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company applies the provisions of ASC 740-10,
Accounting For Uncertainty In Income Taxes
, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in its combined financial statements. ASC 740-10 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740-10 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. There are no material uncertain tax positions as of March 31, 2012 and December 31, 2011, respectively. All tax returns since inception are subject to examination by tax authorities.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Stock-based Compensation
Share-based payment transactions with employees, such as share options and non-vested shares, are measured based on the grant-date fair value of the equity instrument issued, and recognized as compensation expense over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period.
Shares awards issued to non-employees (other than non-employee directors), such as consultants, are measured at fair value at the earlier of the commitment date or the date the service is completed and recognized over the period the service is provided.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Statutory Reserves
Pursuant to the applicable laws in the PRC, the Company makes appropriations to two non-distributable reserve funds, the statutory surplus reserve and the statutory public welfare reserve. The appropriations are based on after-tax net earnings as determined in accordance with the PRC generally accepted accounting principles, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve is based on an amount at least equal to 10% of after-tax net earnings until the reserve is equal to 50% of the entity's registered capital. Appropriation to the statutory public welfare fund is based on 5% to 10% of after-tax net earnings and is not mandatory. The statutory public welfare reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable, other than in liquidation.
The Company does not make appropriations to the discretionary surplus reserve fund. As of March 31, 2012 and December 31, 2011, the Company had appropriated $356,864 and $356,864 of statutory surplus reserve funds, respectively.
Non-controlling Interest
Non-controlling interest represents minority shareholder’s 30% ownership interest in Foshan Dasen and 40% ownership interest in Shenzhen Xin Tian Kong Technology.
Effective April 7, 2011, the Company adopted ASC 810 “Noncontrolling interests in consolidated financial statements”. A noncontrolling interest in a subsidiary of the Company represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable to the Company. This pronouncement requires noncontrolling interests to be presented as a separate component of equity in the consolidated balance sheet and modifies the presentation by requiring earnings and other comprehensive income to be attributed to controlling and noncontrolling interests.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Economic and Political Risks
The Company’s operations are conducted primarily 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 economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Segment Reporting
ASC 280, “Disclosure about Segments of an Enterprise and Related Information”, requires disclosure of reportable segments used by management for making operating decisions and assessing performance. Reportable segments are categorized by products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. All of the Company’s operations are conducted in two industry segments (see Note 12).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. As of March 31, 2011 and December 31, 2011, the Company’s cash was with banks in the PRC and Hongkong, where there is currently no rule or regulation mandated on obligatory insurance of bank accounts.
For the three months ended March 31, 2012, two customers accounted for 49.2%, and 11.5% of the Company’s sales. For the three months ended March 31, 2011, no single customer accounted for more than 10% of the Company’s sales.
For the three months ended March 31, 2012, three vendors provided 24.8%, 22.9% and 13.1% of the Company’s total purchases, respectively. For the three months ended March 31, 2011, three vendors accounted for 15.1%, 14.3% and 10.3% of the Company’s total purchases, respectively.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — INVENTORIES, NET
As of March 31, 2012 and December 31, 2011, Inventories consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,706,872
|
|
|
$
|
511,182
|
|
Finished goods
|
|
|
4,366,417
|
|
|
|
3,119,494
|
|
Less: Provision for inventory allowance
|
|
|
(20,042)
|
|
|
|
-
|
|
|
|
$
|
6,053,247
|
|
|
$
|
3,630,676
|
|
|
|
|
|
|
|
|
NOTE 4 — TRADE DEPOSIT
The Company advances cash as deposits to certain vendors for the purchase of inventory. Advances to vendors are interest free and unsecured, which are recorded when payments are made by the Company and relieved against inventory when goods are received. As of March 31, 2012 and December 31, 2011, trade deposits amounted to $1,558,272 and $1,042,237, respectively.
NOTE 5 — PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Machinery and equipment
|
|
$
|
126,193
|
|
|
$
|
95,354
|
|
Office equipment
|
|
|
387,954
|
|
|
|
310,900
|
|
Leasehold improvements
|
|
|
306,423
|
|
|
|
303,705
|
|
Vehicle
|
|
|
64,040
|
|
|
|
63,474
|
|
Sub-total
|
|
|
884,610
|
|
|
|
773,433
|
|
Less: Accumulated depreciation
|
|
|
(341,699)
|
|
|
|
(217,224)
|
|
Property and equipment, net
|
|
$
|
542,911
|
|
|
$
|
556,209
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense for the three months ended March 31, 2012 and 2011 amounted to $56,927 and $6,022, respectively.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — INTANGIBLE ASSETS, NET
As of March 31, 2012 and December 31, 2011, net intangible assets, consist of the following:
|
Gross
|
|
Weighted-average
|
|
|
|
Net
|
|
|
carrying
|
|
remaining amortization
|
|
Accumulated
|
|
carrying
|
|
|
amount
|
|
period
|
|
amortization
|
|
amount
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
Customer Relations
|
$
|
18,408
|
|
8.96 years
|
|
$
|
(1,112
|
)
|
$
|
17,296
|
|
Technology
|
|
446,108
|
|
9.58 years
|
|
|
(25,327
|
)
|
|
420,781
|
|
Trade name
|
|
75,391
|
|
9.50 years
|
|
|
(4,516
|
)
|
|
70,785
|
|
Others
|
|
12,705
|
|
9.00 years
|
|
|
(3,925
|
)
|
|
8,780
|
|
Total intangible assets, net
|
$
|
552,612
|
|
|
|
$
|
(34,880
|
)
|
$
|
517,732
|
|
|
Gross
|
|
Weighted-average
|
|
|
|
Net
|
|
|
carrying
|
|
remaining amortization
|
|
Accumulated
|
|
carrying
|
|
|
amount
|
|
period
|
|
amortization
|
|
amount
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Customer Relations
|
$
|
18,245
|
|
9.21 years
|
|
$
|
(560
|
)
|
$
|
17,685
|
|
Technology
|
|
442,152
|
|
9.83 years
|
|
|
(6,461
|
)
|
|
435,691
|
|
Trade name
|
|
74,722
|
|
9.75 years
|
|
|
(3,658
|
)
|
|
71,064
|
|
Others
|
|
12,593
|
|
9.25 years
|
|
|
(3,225
|
)
|
|
9,368
|
|
Total intangible assets, net
|
$
|
547,712
|
|
|
|
$
|
(13,903
|
)
|
$
|
533,809
|
|
The Company recorded amortization expenses for intangible assets of $24,183 and $0 for the three months ended March 31, 2012 and 2011, respectively.
The estimated future amortization expenses related to intangible assets as of March 31, 2012 are as follows:
Year ending December 31,
|
|
|
|
|
2012
|
|
$
|
36,957
|
|
2013
|
|
|
54,402
|
|
2014
|
|
|
54,402
|
|
2015
|
|
|
54,402
|
|
2016
|
|
|
54,402
|
|
Thereafter
|
|
|
263,167
|
|
Total
|
|
$
|
517,732
|
|
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Company's short-term and long-term bank loans as of March 31, 2012 and December 31, 2011:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Short-term bank loans
Shenzhen Development Bank
|
|
|
|
|
|
|
Interest at 6.56%, payable June 27, 2012
|
(a)
|
|
$
|
3,970,794
|
|
|
$
|
3,935,582
|
|
Interest at 7.54%, payable November 9, 2012
|
(b)
|
|
|
2,382,476
|
|
|
|
1,416,810
|
|
China Construction Bank
|
|
|
|
|
|
|
|
|
Interest at 7.87%, payable October 16, 2012
|
(c)
|
|
|
1,429,486
|
|
|
|
-
|
|
Total short-term bank loans
|
|
$
|
7,782,756
|
|
|
$
|
5,352,392
|
|
Long-term bank loan
Shenzhen Development Bank
|
|
|
|
|
|
|
Interest at 7.98%, payable July 5, 2013
|
(d)
|
|
$
|
1,588,318
|
|
|
$
|
-
|
|
Total long-term bank loan
|
|
$
|
1,588,318
|
|
|
$
|
-
|
|
(a)
|
On May 26, 2011, Donxon entered into a maximum guarantee agreement with Shenzhen Development Bank. Pursuant to the agreement, Shenzhen Development Bank extended a line of credit of $7,943,695 (RMB 50,000,000) to Donxon. On June 28, 2011, Donxon entered into a short-term bank loan agreement with Shenzhen Development Bank for $3,970,794 (RMB 25,000,000) against the line of credit with a 6.56% annual interest rate. Pursuant to the Loan Agreement, interest expense is payable monthly. The credit line were secured by Mr. Lin, Xiangfeng(CEO), a business associate and an unrelated party with the total guaranteed amount of $23,831,085 (RMB 150,000,000). The full amount of the loan will be repaid on June 27, 2012.
|
(b)
|
On January 12, 2012, Donxon entered into a short-term bank loan agreement with Shenzhen Development Bank for $2,382,476 (RMB 15,000,000) with a floating rate of 15% over the applicable one year benchmark interest rate from the People’s Bank of China. Pursuant to the Loan Agreement, interest expense is payable monthly.
|
(c)
|
On October 17, 2011, the Company, Shenzhen AIV Technology Co., Ltd. (“AIV Technology”), Shenzhen Huafoli Co., Ltd. (“Huafoli”) and Shenzhen SPA Moment Investment Development Co., Ltd. (“SPA Moment”) entered into short-term bank loan agreements with China Construction Bank. The total amount of these loans was $4,766,217 (RMB 30,000,000) and secured on cross-guarantee basis. The Company is contingently liable as the guarantor with respect to the maximum exposure of $3,336,352 (RMB 21,000,000) to these three companies, who are unrelated third parties. These three companies are also contingently liable as the guarantor for the Company with respect to the short-term bank loan with China Construction Bank Shenzhen Branch for $1,429,486 (RMB 9,000,000) with 20% more than the benchmark interest rate of the loan (7.87% as of 12/31/2011). Mr. Lin, Xiangfeng (CEO) provided guarantees to these loans with the maximum amount of $4,766,217 (RMB 30,000,000) by his personal assets and credits.
|
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — BANK LOANS (Continued)
Pursuant to the Loan Agreement, interest rate will be adjusted every three months and the Company deposited $428,846(RMB 2,700,000) as restricted cash for the loan. The full amount of the loan will be repaid on October 16, 2012.
(d)
|
On December 29, 2011, Shenzhen Dasen entered into a long-term bank loan with China Construction Bank for $1,588,318 (RMB 10,000,000) with a variable interest rate. The loan was guaranteed by Credit Orienwise Group, Inc., an unrelated party. Mr. Lin, Xingfeng (CEO) also provided guarantees to Credit Orienwise Group Inc. by his personal assets and credits. Pursuant to the Loan Agreement, interest rate is adjusted every three month and Shenzhen Dasen deposited $158,832 (RMB 1,000,000) as security deposit in Guarantor’ account. The purpose of such bank loan is for the working capital. The Company will make monthly principal payments of RMB 500,000 starting on the seventh month after the loan is funded. The balance is due on June 28, 2013. Shenzhen Dasen paid $63,550 (RMB 400,000) to the guarantor as guarantee fee. The guarantee fee was recorded as deferred financing costs in the consolidated balance sheets. The Company is amortizing the guarantee fee over the term of the guarantee.
|
NOTE 8 – LOANS TO/FROM THIRD PARTIES
Loan to/from unrelated parties consist of the following at:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
Loan to third parties
|
|
|
|
|
|
|
|
Yangguang Xingye Trading Co., Ltd.
|
(a)
|
|
$
|
1,377,388
|
|
|
$
|
-
|
|
Hainatong Technology Co., Ltd.
|
(a)
|
|
|
794,159
|
|
|
|
-
|
|
Jinrihui Solar Energy Technology Co., Ltd.
|
(a)
|
|
|
794,159
|
|
|
|
-
|
|
Nanchang Xinduo Trading Co., Ltd.
|
(b)
|
|
|
189,011
|
|
|
|
187,334
|
|
Lv Shuangrong
|
(c)
|
|
|
376,598
|
|
|
|
-
|
|
Total loan to third parties
|
|
|
$
|
3,531,315
|
|
|
$
|
187,334
|
|
Loan from third parties
Shenzhen Qifeng Supply Chain Service Co., Ltd.
|
(d)
|
|
$
|
1,175,354
|
|
|
$
|
1,164,932
|
|
Yangguang Xingye Trading Co., Ltd.
|
(d)
|
|
|
-
|
|
|
|
209,058
|
|
Deke Mobile Technology Co., Ltd.
|
(d)
|
|
|
267,304
|
|
|
|
112,951
|
|
Yiyatong Supply Chain Co., Ltd.
|
(e)
|
|
|
-
|
|
|
|
472,270
|
|
Junhuiyuan Investment Inc.
|
(e)
|
|
|
-
|
|
|
|
902,035
|
|
Total loan from third parties
|
|
|
$
|
1,442,658
|
|
|
$
|
2,861,246
|
|
(a)
|
In January 2012, the Company entered into various loan arrangements to these unrelated third parties for a six month term with interest rate at 7.872% per annum. The interest expense imputed on the outstanding loan receivable were $60,312 and $0 for the three months ended March 31, 2012 and 2011, respectively.
|
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – LOANS TO/FROM THIRD PARTIES (Continued)
(b)
|
In April, 2011, the Company entered into a two year loan agreement with this unrelated third-party. The amount is unsecured, non-interest bearing and due on demand.
|
(c)
|
In September, 2009, one of the founders of Vaslink, Ms. Lv Shuangrong, entered into a three-year loan agreement Vaslink to borrow, $366,702 (RMB 2,500,000), with interest rate of 6.65% per annum. The interest expenses imputed on the outstanding loan receivable were $6,249 and $6,097 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the remaining balances of loan to Lv Shuangrong totaled $376,598 (RMB 2,371,052) and
has been subsequently repaid in May 2012.
|
(d)
|
Loans to unrelated parties are unsecured, payable on demand and bear no interest. In order to build good relationship, the Company advanced funds to its vendors and customers. The amount of loans to unrelated parties was $1,442,658 and $2,861,246 as of March 31, 2012 and December 31, 2011. The full balance will be received during 2012.
|
(e)
|
Loans to these unrelated parties were repaid in March 2012.
|
NOTE 9 — RELATED PARTY TRANSACTIONS
During the normal course of the business, the Company, from time to time, temporarily lends money to its shareholders for business purposes or borrows money from its principal shareholders or officers to finance its working capital as needed, or advance money to its principal shareholders for business marketing purposes.
Amount due from related party as of March 31, 2012 and December 31, 2011 are as below:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Due from related party
Shenzhen Libaohua Technology Co., Ltd. ("Libaohua")
|
|
$
|
3,176,635
|
|
|
$
|
-
|
|
Total amount due from related party
|
|
$
|
3,176,635
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
On January 4, 2012, the Company entered into a short term loan agreement with Libaohua for $794,159 (RMB 5,000,000) with an interest rate of 7.878%. The amount will be repaid by Libaohua on or before June 27, 2012.
On January 12, 2012, the Company entered into a short term loan agreement with Libaohua on for $2,382,476 (RMB 15,000,000) with an interest rate of 7.878%. The amount will be repaid by Libaohua on or before June 30, 2012.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — RELATED PARTY TRANSACTIONS (continued)
Amount due to related parties as of March 31, 2012 and December 31, 2011 are as below:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Due to related parties
Shenzhen Top Finance Guaranty Investment Inc. ("Top Finance")
|
|
$
|
2,300,393
|
|
|
$
|
2,234,136
|
|
Individual shareholders
|
|
|
928,594
|
|
|
|
2,805,357
|
|
Total amount due to related parties
|
|
$
|
3,228,987
|
|
|
$
|
5,039,493
|
|
|
|
|
|
|
|
|
|
|
On July 7, 2011, the Company entered into a loan agreement with Top Finance, a shareholder with 8.68% of the total outstanding shares of common stock of the Company. Pursuant to the term of the loan agreement, Top Finance made a loan in the aggregate amount of $2,786,937 (RMB 19,000,000) to the Company for general corporate purposes, with no interest. The amount outstanding as of March 31, 2012 was $2,300,393 (RMB 14,483,205).
Shareholders advanced funds to the Company for working capital purposes. The loans from stockholders are unsecured and bear no interest. The amount of loans was $928,594 and $2,805,357 as of March 31, 2012 and December 31, 2011, respectively. The full amounts of the loans will be due in 2012.
NOTE 10— COMMITMENTS AND CONTINGENCIES
The Company leases offices and factory buildings from third parties under operating leases. For the three months ended March 31, 2012 and 2011, the Company has rental expenses in the amount of $114,500 and $45,378, respectively. Under the lease agreements, the Company is committed to pay approximately $365,582 in the remaining nine months of 2012, $233,011 and $176,970 in years 2013 and 2014, respectively.
Contingencies
Guarantee of Third-Party Indebtedness—No Liability Is Recorded
As China only began its economic reform and development of a market economy in the 1980s, its credit evaluation system has had only a very short history and is far less sophisticated than that in the developed countries. Therefore, when an enterprise applies for a loan from a commercial bank, it is difficult for the bank to evaluate the credit risk of the applicant. As an alternative tool, it is a common practice in China for commercial banks to require the applicant find an unrelated third-party in its local economy to provide a loan guarantee for the applicant, which very much serves as a credit check for the bank. In return, and also to avoid risk of having to make payments under the guarantee, such guarantors often require the counterparty to provide similar guarantees on their own debt. Therefore, this type of guarantee is usually
cross-guarantee.
For mutual benefit, the Company reached agreements with three unrelated third parties to provide such
a cross-guarantee on bank loans as of March 31, 2012 and December 31, 2011.
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10— COMMITMENTS AND CONTINGENCIES (Continued)
As of March 31, 2012, the Company, through its subsidiary is contingently liable as guarantor with respect to the maximum exposure of $3,326,870 (RMB21,000,000) to unrelated third parties, AIV Technology, Huafoli and SPA Moment on a cross-guarantee basis. The term of these guarantees are for one year, expiring on October 16, 2012. At any time from the date of guarantees, should AIV Technology, Huafoli and SPA Moment fail to make their due debt payments, the Company will be obligated to perform under the guarantees by primarily making the required payments, including late fees and penalties.
The Company assessed its obligation under this guarantee pursuant to the provision of ASC 460 “Guarantee”. The Company has evaluated the guarantee and concluded that fair value of the indemnification is insignificant and the likelihood of having to make payments under the guarantee is remote. As of March 31, 2012, the Company has not recorded any liabilities under these guarantees.
NOTE 11 — INCOME TAX
First Digital is a company incorporated in Hong Kong and has operations in the PRC, the only tax jurisdiction. First Digital did not earn any income that was derived in Hong Kong for the three months ended March 31, 2012 and 2011 and therefore was not subject Hong Kong Profit tax. All of the Company’s income is generated in the PRC. Accordingly, its income tax provision is calculated based on the applicable tax rates and existing legislation, interpretations and practices in respect thereof.
On March 16, 2007, the PRC promulgated New Enterprise Income Tax Law (the “New Income Tax Law”). The New Taxation Law which became effective on January 1, 2008. Under the New Taxation Law, all enterprises (both domestic enterprises and foreign invested enterprises) have one unified income tax rate of 25%.
On December 6, 2007, the State Council of the PRC issued Implementation Regulations on the New Taxation Law. The New Taxation Law and Implementation Regulations have changed the tax rate from 15% to 18%, 20%, 22%, 24% and 25% for the years ending December 31, 2008, 2009, 2010, 2011, 2012, respectively, for enterprises in Shenzhen, a “Special Economic Zone” in the PRC. Donxon is located in Shenzhen and is thus entitled to the preferential tax rates for years from 2008 to 2012.
The income tax rate for Shenzhen Dasen is 25%.
Vaslink is located in a Guangzhou High-tech Park and is entitled to the preferential income tax rate of 10% granted by local tax authority.
The following table reconciles the statutory rates to the Company’s effective tax rate for the three months ended March 31, 2012 and 2011:
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — INCOME TAX (continued)
|
|
March 31,
2012
|
|
|
March 31,
2011
|
|
|
|
|
|
|
|
|
U.S. Statutory rates
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34
|
)
|
|
|
(34
|
)
|
China Statutory income tax rate
|
|
|
25
|
|
|
|
25
|
|
Net operating loss carryforward used to offset taxable income in PRC
|
|
|
(46
|
)
|
|
|
-
|
|
Nondeductible expenses - permanent differences
|
|
|
-
|
|
|
|
3
|
|
Effective tax rate
|
|
|
(21
|
%)
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
Uncertain tax position
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in its consolidated statements of income. There were no unrecognized tax benefits for the three months ended March 31, 2012 and 2011. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions. As of March 31, 2012 and December 31, 2011, the Company did not accrue any interest and penalties.
NOTE 12 — SEGMENT INFORMATION
Pursuant to ASC 280 we disclose segments on a single entity basis, which in our case is the legal entity. The Company operates as two reportable segments. Substantially all of the Company’s sales and long-lived assets are in the PRC.
The Company currently operates and prepares accounting and other financial reports separately to management for six major business organizations (SKY Digital Stores, Corp., Hong Kong First Digital Holding Ltd.(“First Digital”), Shenzhen Donxon Mobile Communication Technology Co., Ltd. (“Donxon”), Vaslink Technology Ltd. (“Vaslink”), Shenzhen Xing Tian Kong Digital Company Limited (“Xingtiankong”), Shenzhen Dasen Communication Technology Company Limited (“Shenzhen Dasen”) and Xinyang City Donxon Mobile Communication Technology Company Limited (“Xinyang Donxon”).
Our mobile phone manufacturing segment relates to the segment reporting of Donxon and retail store segment relates to Shenzhen Dasen. Management monitors these two segments regularly to make decisions about resources to be allocated to the segments and assess their performance.
The following table presents summarized information by segment:
SKY DIGITAL STORES CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — SEGMENT INFORMATION (continued)
|
|
Three Months Ended March 31, 2012
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
Mobile phone manufacturing (b)
|
|
|
Retail store (a)
|
|
|
Total
|
|
|
Mobile phone manufacturing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,289,787
|
|
|
$
|
7,225,492
|
|
|
$
|
20,515,279
|
|
|
$
|
9,431,261
|
|
|
$
|
9,431,261
|
|
Cost of goods
|
|
|
12,716,467
|
|
|
|
7,020,947
|
|
|
|
19,737,414
|
|
|
|
8,444,418
|
|
|
|
8,444,418
|
|
Gross profit
|
|
|
573,320
|
|
|
|
204,545
|
|
|
|
777,865
|
|
|
|
986,843
|
|
|
|
986,843
|
|
Commission and license income
|
|
|
-
|
|
|
|
126,058
|
|
|
|
126,058
|
|
|
|
-
|
|
|
|
-
|
|
Income (loss) from operations
|
|
|
(50,292
|
)
|
|
|
(11,388
|
)
|
|
|
(61,680
|
)
|
|
|
534,084
|
|
|
|
534,084
|
|
Income tax expenses
|
|
|
32,136
|
|
|
|
18,638
|
|
|
|
50,774
|
|
|
|
151,657
|
|
|
|
151,657
|
|
Depreciation & amortization
|
|
|
74,565
|
|
|
|
6,545
|
|
|
|
81,110
|
|
|
|
6,022
|
|
|
|
6,022
|
|
Asset expenditures
|
|
|
91,885
|
|
|
|
12,446
|
|
|
|
104,331
|
|
|
|
81,676
|
|
|
|
81,676
|
|
Total Assets
|
|
$
|
21,381,436
|
|
|
$
|
6,508,980
|
|
|
$
|
27,890,416
|
|
|
$
|
22,250,876
|
|
|
$
|
22,250,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
No retail store numbers presents periods from January 1, 2011 to March 31, 2011 as retail store segment commenced on April 8, 2011.
|
(b)
|
Mobile phone manufacturing numbers include Vaslink numbers from January 1, 2012 to March 31, 2012 as Vaslink was acquired in October 2011.
|
NOTE 13 — SUBSEQUENT EVENTS
The Company has evaluated subsequent events for purposes of recognition or disclosure through the date these financial statements were issued.
Pursuant to the Stock Award Agreement dated on March 8, 2012, the Company agreed to issue 200,000 restricted shares of its common stock to independent director Mr. Bin Wang as compensation and 100,000 restricted shares of its common stock to consultant Mr. Euclid C. Wong for consulting services rendered. These shares are subject to a two-year lock up and are not allowed to be sold before March 8, 2014. The above mentioned shares were subsequently issued on April 30, 2012, at par value of $0.001 per share and valued at $255,000 based on the stock price at the grant date.
On April 17, 2012, the Company’s subsidiary Xinyang Donxon opened a factory located in Xinyang High-tech Park, with 10 mobile phone assembly lines and production capacity of 5 million mobile phones annually. Xinyang Donxon expected to obtain a land use right of 300 mu from the local government in 2012, total land use right cost is expected to be RMB 60 million which will be paid in the second quarter of 2012. Currently, the factory buildings consisted of 5 buildings and totaling 30,000 square meters, are leased from the local government. The Company is now under negotiation with the local government to use the factory buildings for free. Xinyang Donxon will perform as a manufacturing base, a logistics center and a customer service and training facility for the Company in the future.