ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Transactions with Classic Electronics Ltd.
Mr. Ben Wong, a director of ACL, owns 99.9% of the equity of Classic Electronics Ltd. (Classic). The remaining 0.1% of Classic is owned by a non-related party. As of June 30, 2009 and December 31, 2008, the
Company had outstanding accounts receivable from Classic totaling $1,717,320 and $1,717,320, respectively. This account receivable has been outstanding for more than 12 months.
Classic has historically met its payment obligations to the Company and the Company has no reason to believe that Classics receivables are not collectible. Pursuant to a written personal guarantee agreement, Mr. Yang
has personally guaranteed up to $10.0 million of the outstanding accounts receivable from Classic. The Company has received verbal assurances from Mr. Yang of his intent and ability to perform under the above-referenced guarantee and based on
information provided by Mr. Yang, his net worth is approximately $17 million. In addition, as discussed in Note 13, the Company has entered into a payment plan with Classic, which payment plan contains a due on demand clause.
Transactions with Solution Semiconductor (China) Ltd.
Mr. Yang is a director and the sole beneficial owner of the equity interests of Solution Semiconductor (China) Ltd. (Solution). On April 1, 2009, the Company renewed a lease agreement with Solution pursuant to
which the Company leases one facility. The lease agreement for this facility expires on March 31, 2012. The Companys monthly lease payment under this lease is $1,090. The Company incurred and paid to Solution an aggregate rent expense of
$3,270 and $3,270 for the three months ended June 30, 2009 and 2008, respectively, and $6,540 and $6,540 for the six months ended June 30, 2009 and 2008, respectively.
Two facilities located in Hong Kong owned by Solution were used by the Company as collateral for loans from DBS Bank (Hong Kong) Limited (DBS Bank) (formerly Overseas Trust Bank Limited) and The Bank of East
Asia, Limited (BEA Bank) respectively.
Transactions with Systematic Information Ltd.
Mr. Yang is a director and the sole beneficial owner of the equity interests of Systematic Information Ltd. (Systematic Information). On September 1, 2008, the Company entered into a lease agreement with
Systematic pursuant to which the Company leases office space for a monthly rent of $641. The lease agreement for this property expires on August 31, 2010. The aggregate rent expense was $1,923, $1,923, $3,846 and $3,846 for the
three months ended June 30, 2009 and 2008 and the six months ended June 30, 2009 and 2008, respectively.
During the three months ended June 30, 2009 and 2008, and the six months ended June 30, 2009 and 2008, the Company received management fees of $1,359, $0, $1,359 and $0 respectively, from Systematic
Information. There were $100,000 and $0 accounts payable due to Systematic Information as of June 30, 2009 and December 31, 2008. The management fee was charged as back office support for Systematic Information.
A workshop located in Hong Kong owned by Systematic Information was used by the Company as collateral for loans from BEA Bank.
Transactions with Systematic Semiconductor Ltd.
Mr. Yang is the sole beneficial owner of the equity interests of Systematic Semiconductor Ltd. (Systematic Semiconductor). During the three months ended June 30, 2009 and 2008, and the six months ended June 30,
2009 and 2008, the Company received management fees of $1,923, $3,846, $5,769 and $7,692 respectively, from Systematic Semiconductor. There were no outstanding accounts receivable due from Systematic Semiconductor as of June 30,
2009 and December 31, 2008. The management fees were charged as the back office support to Systematic Semiconductor.
11
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Transactions with Aristo Technologies Ltd.
Mr. Yang is the sole beneficial owner of the equity interests of Aristo Technologies Ltd. (Aristo). During the three months ended June 30, 2009 and 2008, and the six months ended June 30, 2009 and 2008, the
Company received management fees of $11,538, $0, $11,538 and $0 respectively, from Aristo. The management fees were charged as the back office support to Aristo.
During the three months ended June 30, 2009 and 2008, and the six months ended June 30, 2009 and 2008, the Company sold $4,200,013, $3,731,920, $6,505,899 and $5,496,412 respectively, of memory products to
Aristo. Outstanding accounts receivable due from Aristo totaled $8,436,736 and $6,695,409 as of June 30, 2009 and December 31, 2008, respectively.
During the three months ended June 30, 2009 and 2008, and the six months ended June 30, 2009 and 2008, the Company purchased $4,819,652, $523,757, $7,523,791 and $1,436,206, respectively, of memory products
from Aristo. There were no outstanding accounts payable to Aristo as of June 30, 2009 and December 31, 2008.
Aristo has historically met its payment obligations to the Company and the Company has no reason to believe that Aristos receivables are not collectible. In addition, as discussed in Note 13, the Company entered into
a payment plan with Aristo according to which the outstanding balance of accounts receivable will be paid over the course of 2010 which payment plan contains a due on demand clause.
Transactions with Aristo Components Ltd.
Mr. Ben Wong is a 90% shareholder of Aristo Components Ltd. (Aristo Comp). During the three and six months ended June 30, 2009, the Company received management fees of $3,076 and $5,769, respectively,
from Aristo Comp. There were no outstanding accounts receivable due from Aristo Comp as of June 30, 2009 and December 31, 2008. The management fee was charged as back office support for Aristo Comp.
Transactions with City Royal Limited
Mr. Yang is a 50% shareholder of City Royal Limited (City). The remaining 50% of City is owned by the wife of Mr. Yang. A residential property located in Hong Kong owned by City was used by the Company as
collateral for loans from DBS Bank.
12
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8. Bank Facilities
With respect to all of the debt and credit arrangements referred to in this Note 8 and Note 9, the Company pledged its assets to a bank group in Hong Kong comprised of DBS Bank, BEA and Standard Chartered Bank, as
collateral for all current and future borrowings from the bank group by the Company. In addition to the above pledged collateral, the debt is also secured by:
|
1.
|
For loans from DBS Bank, a fixed cash deposit of $703,974 (HK$5,491,000), a security interest on two residential properties and a workshop located in Hong Kong owned by Atlantic, a security interest on a residential
property located in Hong Kong owned by City, a security interest on a workshop located in Hong Kong owned by Solution, plus a personal guarantee of Mr. Yang;
|
|
|
2.
|
For loans from BEA, a fixed cash deposit of $1,382,529 (HK$10,783,728) a security interest on a workshop located in Hong Kong owned by Systematic Information, a security interest on a workshop located in Hong Kong
owned by Solution, plus an unlimited personal guarantee of Mr. Yang;
|
|
|
3.
|
For loans from Standard Chartered Bank, an unlimited personal guarantee of Mr. Yang
|
|
The summary of banking facilities at June 30, 2009 is as follows:
|
|
Granted facilities
|
|
|
Utilized facilities
|
|
|
Not utilized
|
|
|
|
|
|
|
|
|
|
facilities
|
|
|
Overdraft
|
$
|
25,641
|
|
$
|
-
|
|
$
|
25,641
|
|
Installment Loan
|
|
2,509,176
|
|
|
2,442,401
|
|
|
66,775
|
|
Factoring Loan
|
|
5,769,230
|
|
|
881,178
|
|
|
4,888,052
|
|
Import/Export Loan
|
|
7,435,897
|
|
|
7,101,000
|
|
|
334,897
|
|
Letter of Guarantee
|
|
384,615
|
|
|
384,615
|
|
|
-
|
|
|
|
$
|
16,124,559
|
|
$
|
10,809,194
|
|
$
|
5,315,365
|
|
With the exception of the $384,615 letter of guarantee issued by DBS Bank, which will expire on 31 October, 2009, amounts borrowed by the Company under the revolving lines of credit described above are repayable within
a period of three (3) months of drawdown. Other loan facilities repayable are referred to in Note 9 Long Term Debt.
13
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9. Long Term Debt
Long Term Debt consisted of the following at June 30, 2009 and December 31, 2008:
|
Date of Maturity
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
Installment loan to DBS bank
|
|
|
|
|
|
|
|
payable in monthly
|
|
|
|
|
|
|
|
installments of $9,663
|
|
|
|
|
|
|
|
including interest at 2.75%
|
July 2026
|
|
$
|
1,610,595
|
|
$
|
1,648,222
|
below the Hong Kong dollar
|
|
|
|
|
|
|
|
Prime Rate
|
|
|
|
|
|
|
|
|
Installment loan to DBS bank
|
|
|
|
|
|
|
|
payable in monthly
|
|
|
|
|
|
|
|
installments of $3,782
|
|
|
|
|
|
|
|
including interest at 2%
|
July 2011
|
|
|
91,298
|
|
|
112,312
|
below the Hong Kong dollar
|
|
|
|
|
|
|
|
Prime Rate
|
|
|
|
|
|
|
|
|
Installment loan to DBS bank
|
|
|
|
|
|
|
|
payable in monthly
|
|
|
|
|
|
|
|
installments of $5,240
|
|
|
|
|
|
|
|
including interest at 2.5%
|
July 2023
|
|
|
740,508
|
|
|
761,624
|
below the Hong Kong dollar
|
|
|
|
|
|
|
|
Prime Rate
|
|
|
|
|
|
|
|
|
|
|
|
2,442,401
|
|
|
2,522,158
|
|
Less: current maturities
|
|
|
|
162,672
|
|
|
160,447
|
|
|
|
|
$
|
2,279,729
|
|
$
|
2,361,711
|
|
An analysis of long-term debt as of June 30, 2009
|
|
|
|
|
|
|
and December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
Current portion
|
|
|
$
|
162,672
|
|
$
|
160,447
|
|
After 1 year, but within 2 years
|
|
|
|
297,463
|
|
|
316,063
|
After 2 years, but within 5 years
|
|
|
|
261,058
|
|
|
257,789
|
After 5 years
|
|
|
|
1,721,208
|
|
|
1,787,859
|
|
|
|
|
2,279,729
|
|
|
2,361,711
|
|
|
|
|
$
|
2,442,401
|
|
$
|
2,522,158
|
14
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10.
Cash Flow Information
Cash paid during the six months ended June 30, 2009 and 2008 is as follows:
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Interest
|
$
|
282,810
|
|
$
|
500,304
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
-
|
|
$
|
-
|
|
|
Non-Cash Activities:
|
|
|
|
|
|
|
Income tax provision
|
$
|
397,436
|
|
$
|
-
|
|
NOTE 11. Fair Value of Financial Instruments
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant
assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entitys own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In
determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (market approach). We also consider the impact of a significant decrease in volume
and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are
observable, either directly or indirectly;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the companys own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk
adjustments, but incorporates the companys own credit risk as observed in the credit default swap market.
The following table presents the Companys assets and liabilities that are measured at fair value on a recurring basis at June 30, 2009:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
1,068,951
|
|
|
-
|
|
|
-
|
|
|
1,068,951
|
|
Restricted cash
|
|
2,086,504
|
|
|
-
|
|
|
-
|
|
|
2,086,504
|
|
Total assets
|
$
|
3,155,455
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,155,455
|
|
15
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12. Derivative instruments
On February 1, 2009, the Company adopted SFAS 161 as referenced in Note 1. The adoption of SFAS 161 requires additional disclosures about the Companys objectives and strategies for using derivative instruments, the
accounting for the derivative instruments and related hedged items under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and the effect of derivative instruments and related hedged items on the financial
statements. The adoption had no financial impact on the consolidated condensed financial statements.
Since all of the Company sales are done in USD, the
bank is exposed to foreign currency exchange rate fluctuations in the normal
course of its business. As part of its risk management strategy, the Company
purchases FX forward contracts from the banks to secure the exchange rate for
a period of time in order to hedge any FX exposure between HKD and USD throughout
the purchase and sale period. The Company applies hedge accounting based upon
the criteria established by SFAS 133, whereby the Company designates its derivatives
as cash flow hedges. Cash flows from the derivative programs were classified
as operating activities in the Consolidated Statement of Cash Flows.
As of June 30, 2009, there is a participating forward currency option agreement between the Company and Standard Chartered Bank for the Company to buy US$500,000 from Standard Chartered Bank at a contract rate of 7.735
at specified dates up to January 7, 2010 for settlement with the bank on a monthly basis. According to the terms of the agreement, the Company agreed to buy USD in triple amounts if the spot rate is less than the contract rate at settlement dates.
The gain on this forward contract during the year ended December 31, 2008 was $36,346 and has been recorded in Net income on cashflow hedge under Other income (expenses).
As of June 30, 2009, the target redemption forward currency option agreement between the Company and Standard Chartered Bank for the Company to buy US$750,000 from Standard Chartered Bank at a lower strike contract rate
of 7.75 and an upper strike contract rate of 7.85 at specified dates up to April 29, 2010 for settlement with the bank on a monthly basis has matured and terminated on January 29, 2009. According to the terms of the agreement, the Company agreed to
buy USD in triple amounts if the spot rate is less than the lower strike contract rate or greater than the upper strike contract rate at settlement dates. The gain on this forward contract has been recorded in Net income on cashflow
hedge under Other income (expenses).
As of June 30, 2009, there is a pivot bonus forward currency option agreement between the Company and Standard Chartereded Bank for the Company to buy US$1,000,000 from Standard Chartered Bank at a lower strike contract
rate of 7.73 and an upper strike contract rate 7.749 at specified dates up to July 2, 2009 for settlement with the bank on a monthly basis. According to the terms of the agreement, the Company agreed to buy in triple amounts if the spot rate is less
than the lower strike contract rate at settlement date. The gain on this forward contract during the year ended December 31, 2008 was $56,410 and has been recorded in Net income on cashflow hedge under Other income
(expenses).
As of June 30, 2009, there is an autocancelable target redemption forward agreement between the Company and Standard Chartered Bank for the Company to buy US$1,000,000 from Standard Chartered Bank at a contract rate of
7.725 at specified dates up to March 1, 2011 for settlement with the bank on a monthly basis. According to the terms of the agreement, the Company agreed to buy USD in triple amounts if the spot rate is less than the contract rate at settlement
dates. The gain on this forward contract during the year ended December 31, 2008 was $0 and has been recorded in Net income on cashflow hedge under Other income (expenses).
As of June 30, 2009, the Company has holdings of US$500,000 Commodity Basket Linked Notes which were issued by Standard Chartered Bank at specified dates up to February 17, 2009. According to the terms of agreements,
the Company agreed to receive interest at a rate equal to 6% if the Basket Return is larger than 0% and 100% redeemed if the Basket Return is less than or equal to 0% on the maturity date. The Company fully redeemed the securities at cost value on
the maturity date of February 17, 2009
16
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The gross notional and fair value of derivative financial instruments in the Consolidated Balance Sheet as of June 30, 2009 were as follows:
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
Gross
|
|
Other
|
|
Long-term
|
|
Other
|
|
Other
|
|
|
Notional
(1)
|
|
Current
|
|
Financing
|
|
Accrued
|
|
Liabilities
|
|
|
|
|
Assets
|
|
Receivables
|
|
Liabilities
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
under SFAS 133
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
2,500,000
|
|
-
|
|
-
|
|
-
|
|
-
|
Total derivatives not designated as hedging
|
|
|
|
|
|
|
|
|
|
|
instruments under SFAS 133
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
$
|
2,500,000
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(1)
Represents the face amounts of contracts that were outstanding as of June 30, 2009.
|
|
|
|
|
The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended June 30, 2009 was as follows:
|
|
Gain (Loss)
|
|
Gain (Loss) Reclassified from
|
|
Gain Recognized in
|
|
|
Recognized in
|
|
Accumulated OCI Into Income
|
|
Income on Derivative(1)
|
|
|
OCI on Derivative
|
|
(Effective Portion)
|
|
|
|
|
(Effective Portion)
|
|
|
|
|
|
|
Three
|
|
Six
|
|
|
|
Three
|
|
Six
|
|
|
|
|
Three
|
|
|
Six
|
|
|
months
|
|
months
|
|
|
|
months
|
|
months
|
|
|
|
|
months
|
|
|
months
|
|
|
ended
|
|
ended
|
|
|
|
ended
|
|
ended
|
|
|
|
|
ended
|
|
|
ended
|
|
|
June 30,
|
|
June
30,
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
2009
|
|
2009
|
|
Location
|
|
2009
|
|
2009
|
|
Location
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Interest and
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
US$500,000
|
|
|
|
|
|
other, net
|
|
|
|
|
|
and other, net
|
|
$
|
3,051
|
|
$
|
6,756
|
Foreign exchange contracts
|
|
|
|
|
|
Interest and
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
USD750,000
|
|
|
|
|
|
other, net
|
|
|
|
|
|
and other, net
|
|
|
-
|
|
|
1,259
|
Foreign exchange contracts
|
|
|
|
|
|
Interest and
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
US$1,000,000
|
|
|
|
|
|
other, net
|
|
|
|
|
|
and other, net
|
|
|
15,385
|
|
|
30.770
|
Foreign exchange contracts
|
|
|
|
|
|
Interest and
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
US$1,000,000
|
|
|
|
|
|
other, net
|
|
|
|
|
|
and other, net
|
|
|
9,936
|
|
|
9,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,372
|
|
$
|
48,721
|
17
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13.
Subsequent Events
Effective as of October 1, 2009, Classic, a related party, and the Company agreed to a payment plan for the pay down of accounts receivable from Classic of $1,717,320 as of June 30, 2009 according to which Classic has
agreed to pay to the Company $650,000 before the end of 2009 with the remainder of the accounts receivable balance to be paid during 2010. Mr. Alan Yang, our Chief Executive Officer, director and majority stockholder has personally guaranteed up
to $10 million of outstanding accounts receivable of Classic.
Effective as of October 1, 2009, Aristo, a related party, and the Company agreed to a payment plan for the pay down of accounts receivable from Aristo that have aged more than 90 days according to which Aristo has agreed to
pay to the Company over the course of 2010. Mr. Alan Yang, our Chief Executive Officer, director and majority stockholder is the sole beneficial owner of Aristo.
On November 2, 2009, the Company entered into two leases for office space. The leases expire on November 30, 2014. The monthly lease payments are $4,487 and $7,051, respectively.
18
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods
described.
The information contained in this Form 10-Q is intended to update the information contained in our annual report on Form 10-K for the year ended December 31, 2008, as amended, (the
Form 10-K), and our quarterly report on Form 10-Q for the quarter ended March 30, 2009 (the First Quarter Form 10-Q), both as filed with the Securities and Exchange Commission, and presumes that readers have access to, and
will have read, the Managements Discussion and Analysis of Financial Condition and Results of Operation, our consolidated financial statements and the notes thereto, and other information contained in the Form 10-K and First
Quarter Form 10-Q. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements and the notes thereto included elsewhere in
this Form 10-Q.
Forward-Looking Statements
Information included in this Form 10-Q may contain forward-looking statements. Except for the historical information contained in this discussion of the business and the discussion and
analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Companys plans for sales growth and expectations of
gross margin, expenses, new product introduction, and the Companys liquidity and capital needs. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or
achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and
expectations, are generally identifiable by use of the words may, will, should, expect, anticipate, estimate, believe, intend or project or
the negative of these words or other variations on these words or comparable terminology. In addition to the risks and uncertainties described in Risk Factors contained in the Form 10-K, these risks and uncertainties may include consumer
trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. Forward-looking statements are based on assumptions that may be incorrect,
and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a
result of various factors. Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Company Overview and Background
The Company, through its wholly-owned subsidiary Atlantic Components Limited, a Hong Kong corporation (Atlantic), is engaged primarily in the business of distribution of memory
products under the Samsung brand name which principally comprise DRAM, Graphic RAM and FLASH for the Hong Kong and Southern China markets. The Companys wholly-owned subsidiary, Alpha Perform Technology Limited (Alpha),
which previously engaged in this business, ceased activities as of January 1, 2004, and all its operations were consolidated with those of Atlantic.
As of June 30, 2009, ACL had more than 150 active customers in Hong Kong and Southern China.
ACL is in the mature stage of operations. As a result, the relationships between sales, cost of sales, and operating expenses reflected in the financial information included in this document to
a large extent represent future expected financial relationships. Much of the cost of sales and operating expenses reflected in the Companys financial statements are recurring in nature.
19
Overview
Net sales
Sales from Samsung HK are recognized upon the transfer of legal title of the electronic components to the customers. The quantities of memory products the Company sells fluctuate with changes
in demand from its customers. The suggested prices set by Samsung HK that the Company charge its customers are subject to change by the Company based on prevailing economic conditions and their impact on the market.
Net sales for the three months ended June 30, 2009 (sometimes referred to as 2009 2Q) were $74,004,040, representing an increase of 64% or $28,758,347 compared to the three
months ended June 30, 2008 (sometimes referred to as 2008 2Q). The net sales for the six months ended June 30, 2009 increased by $37,270,468, or 38% compared to the six months ended June 30, 2008. The sales increase was primarily
driven by the upward trends in market prices for Samsungs products mainly DRAM and FLASH.
The Companys gross profit for 2009 2Q was $2,207,517, representing a 58% increase compared to $1,394,945 for 2008 2Q. The gross profit for the six months ended June 30, 2009
increased by $2,958,126, or 155% compared to the six months ended June 30, 2008. This increase in gross profit was mainly due to the strong demand for Graphic RAM and FLASH products. After the insolvency of Qimonda AG, the Company has recorded
increasing demand for Graphic RAM products due to limited supplies. The Company also recorded increasing demands for consumer electronics products in the PRC market such products require the usage of FLASH products. In addition to strong demand in
Southern China, demand by Apple for FLASH products for its newly launched iPhone 3G S was also strong.
The Company has enhanced and optimized its internal controls to minimize unnecessary costs.
Cost of sales
Cost of sales consists of costs of goods purchased from Samsung HK, and purchases from other Samsung authorized distributors. Many factors affect the Companys gross margin, including, but
not limited to, the volume of production orders placed on behalf of its customers, the competitiveness of the memory products industry and the availability of cheaper Samsung memory products from overseas Samsung distributors due to regional demand
and supply situations. Nevertheless, the Companys procurement operations are supported by Samsung HK pursuant to a distributorship agreement between the Company and Samsung HK. However, the distributorship is for a one-year period and even
though it has been renewed more than 10 times, there is no assurance that it will be renewed again in the future.
Operating expenses
The Companys operating expenses for the six months ended June 30, 2009 and 2008 were comprised of sales and marketing and general and administrative expenses only.
Sales and marketing expenses consisted primarily of costs associated with advertising and marketing activities.
General and administrative expenses include all corporate and administrative functions that serve to support the Companys current and future operations and provide an infrastructure to
support future growth. Major items in this category include management and staff salaries, rent/leases, professional services, and travel and entertainment. The Company expects these expenses to increase as a result of increased legal and accounting
fees anticipated in connection with the Companys compliance with ongoing reporting and accounting requirements of the Securities and Exchange Commission and as a result of anticipated expansion by the Company of its business operations. Sales
and marketing expenses are expected to fluctuate as a percentage of sales due to the addition of sales personnel and various marketing activities planned throughout the year.
20
Interest expense, including finance charges, relates primarily to Atlantics short-term and long-term bank borrowings and capital lease obligations, which the Company intends to reduce.
The Company recorded a decrease in interest expense of 58%, due to the reduction of external financing from banks to maximize the Companys net income.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Net sales
|
|
$
|
74,004,040
|
|
|
$
|
45,245,693
|
|
|
$
|
135,424,667
|
|
|
$
|
98,154,199
|
|
Cost of sales
|
|
|
71,796,523
|
|
|
|
43,850,748
|
|
|
|
130,551,426
|
|
|
|
96,239,084
|
|
|
|
|
2,207,517
|
|
|
|
1,394,945
|
|
|
|
4,873,241
|
|
|
|
1,915,115
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
29,361
|
|
|
|
19,159
|
|
|
|
48,780
|
|
|
|
36,935
|
|
General and administrative
|
|
|
1,148,439
|
|
|
|
750,417
|
|
|
|
2,304,128
|
|
|
|
1,525,214
|
|
Income from operations
|
|
|
1,029,717
|
|
|
|
625,369
|
|
|
|
2,520,333
|
|
|
|
352,966
|
|
Other income (expenses)
|
|
|
(14,905
|
)
|
|
|
(229,942
|
)
|
|
|
(110,648
|
)
|
|
|
(559,319
|
)
|
Income before income taxes provision
|
|
|
1,014,812
|
|
|
|
395,427
|
|
|
|
2,409,685
|
|
|
|
(206,353
|
)
|
Income taxes provision
|
|
|
179,487
|
|
|
|
-
|
|
|
|
397,436
|
|
|
|
-
|
|
Net Income
|
|
$
|
835,325
|
|
|
$
|
395,427
|
|
|
$
|
2,012,249
|
|
|
$
|
(206,353
|
)
|
Earnings per share - basic and diluted
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
Net Sales
The following table presents our net sales for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$ 74,004,040
|
|
$ 45,245,693
|
|
63.6%
|
|
$135,424,667
|
|
$ 98,154,199
|
|
38.0%
|
Net sales increased by $28,758,347 or 63.6%, from $45,245,693 in the three months ended June 30, 2008 to $74,004,040 in the three months ended June 30, 2009. For the six months
ended June 30, 2009, net sales increased by $37,270,468 or 38%, from $98,154,199 in the six months ended June 30, 2008 to $135,424,667. The increase was mainly due to upward market price trends for Samsungs products and the strong
demand for Graphic RAM and FLASH products during the 2009 2Q, resulting in higher sales when compared to the three months ended June 30, 2008.
Cost of sales
The following table presents our cost of sales for the three months and six months ended June 30, 2009 and 2008, respectively:
Three
Months Ended June 30,
|
|
|
|
Six Months
Ended June 30,
|
|
|
2009
|
|
2008
|
|
%
Change
|
|
2009
|
|
2008
|
|
%
Change
|
|
$ 71,796,523
|
|
$ 43,850,748
|
|
63.7%
|
|
$130,551,426
|
|
$ 96,239,084
|
|
35.7%
|
Cost
of sales increased by $27,945,775, or 63.7%, from $43,850,748 for
the three months ended June 30, 2008 to $71,796,523 for the three months
ended June 30, 2009. For the six months ended June 30, 2009, cost of sales
increased by $34,312,342, or 35.7%, as compared to the six months ended
June 30, 2008. The increase in both periods was principally attributable
to the increase in net sales.
22
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
$ 2,207,517
|
|
$ 1,394,945
|
|
58.3%
|
|
$ 4,873,241
|
|
$ 1,915,115
|
|
154.5%
|
Gross profit increased by $812,572 or 58.3%, from $1,394,945 for the three months ended June 30, 2008 to $2,207,517 for the three months ended June 30, 2009. The gross profit margin
was maintained at around 3% of net sales for the 2008 Q2 and 2009 Q2. The increase in gross profit resulted primarily from strong market demand for certain memory products, resulting in an increase in prices during the 2009 Q2.
For the six months ended June 30, 2009, gross profit increased by $2,958,126 or 154.5%, from $1,915,115 for the six months ended June 30, 2008 to $4,873,241. The gross profit margin
was increased from 2% of net sales in 2008 to 4.3% of net sales in 2009. The increase in gross profit resulted primarily from strong market demand for certain memory products, resulting in an increase in prices during the half year ended
2009.
Sales and Marketing
The following table presents the sales and marketing expenses for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$ 29,361
|
|
$ 19,159
|
|
53.2%
|
|
$ 48,780
|
|
$ 36,935
|
|
32.1%
|
Sales and marketing expenses increased by $10,202 or 53.2%, from $19,159 for the three months ended June 30, 2008 to $29,361 for the three months ended June 30, 2009. For the six
months ended June, 2009, sales and marketing expenses increased by $11,845 or 32.1%, from $36,935 for the six months ended June 30, 2008 to $48,780. The percentage of expenses in the 2008, compared to net sales, was maintained at
approximately the same level as in the 2009, and the increase was principally attributable to the increase in net sales sated above.
General and Administrative
The following table presents the general and administrative expenses for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$
1,148,439
|
|
$ 750,417
|
|
53.0%
|
|
$ 2,304,128
|
|
$ 1,525,214
|
|
51.1%
|
For the three months
ended June 30, 2009, general and administrative expenses increased by $398,022
or 53%, from $750,417 in the three months ended June 30, 2008 to $1,148,439
in the three months ended June 30, 2009. For the six months ended June 30, 2009,
general and administrative expenses increased by $778,914 or 51.1%, from $1,525,214
in the six months ended June 30, 2008 to $2,304,128. The increases were
principally attributable to an increase in staff salaries and remuneration paid
to the Companys executive officers.
Income from Operations
The following table presents the income from operations for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$
1,029,717
|
|
$ 625,369
|
|
64.7%
|
|
$ 2,520,333
|
|
$ 352,966
|
|
614%
|
23
Income from operations
for the three months ended June 30, 2009 increased by $404,348, or 64.7%,
from $625,369 for the three months ended June 30, 2008 to $1,029,717.
For the six months ended June 30, 2009, income from operations was $2,520,333 for
the six months ended June 30, 2009 compared to $352,966 for the six months
ended June 30, 2008. The increases were principally the result of the increase
in gross profit net of compensation paid to Company employees and executives
increased during the half year of 2009.
Interest Income
The following table presents the interest income for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$
2,093
|
|
$ 17,527
|
|
-88.1%
|
|
$ 7,014
|
|
$ 44,930
|
|
-84.4%
|
For the three months ended June 30, 2009, interest income decreased $15,434, or 88.1%, as compared to the three months ended June 30, 2008. For the six months ended June, 2009, interest
income decreased $37,916, or 84.4%, as compared to the six months ended June 30, 2009. These decreases in interest income for both comparative periods were due to a reduction in interest from restricted cash and lower interest rates.
Interest Expense
The following table presents the interest expense for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$
115,918
|
|
$ 276,477
|
|
-58.1%
|
|
$ 282,810
|
|
$ 500,304
|
|
-43.5%
|
For the three months
ended June 30, 2009, interest expense decreased by $160,559 or 58.1%, from $276,477
in the three months ended June 30, 2008 to $115,918 in the three months
ended June 30, 2009. For the six months ended June 30, 2009, interest expense
decreased by $217,494 or 43.5%, from $500,304 in the six months ended
June 30, 2009 to $282,810 in the six months ended June 30, 2009. These decreases
were mainly due to a decrease in the Companys use of open, and draw downs
on, letters of credit, to obtain goods from its suppliers, and the cancellation
of certain banking facilities during the half year of 2009.
Net Income on Cash Flow Hedge
The following table presents the net income on cash flow hedge for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$
28,372
|
|
$ 15,237
|
|
86.2%
|
|
$ 48,721
|
|
$ 60,352
|
|
-19.3%
|
For the three months
ended June 30, 2009, income on cash flow hedge increased by $13,135, or 86.2%,
as compared to the three months ended June 30, 2008. The increase was due to
a early terminated currency hedging contract as result of loss of $30,000
that occurred in the second quarter of 2008. For the six months ended June 30,
2009, net income on cash flow hedge decreased by $11,631, or 19.3%, as compared
to the six months ended June 30, 2009. The decreases were due to the expiration
or termination of several currency hedging contracts in the half year ended 2009.
24
Income Tax Provision
The following table presents the income tax provision for the three months and six months ended June 30, 2009 and 2008, respectively:
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
% Change
|
|
2009
|
|
2008
|
|
% Change
|
|
$
179,487
|
|
$ -
|
|
N/A
|
|
$ 397,436
|
|
$ -
|
|
N/A
|
Income tax increased by $236,543 or 1358.6%, from $17,411 for the three months ended June 30, 2008 to $253,954 for the three months ended June 30, 2009. For the six months ended
June 30, 2009, income tax provision increased by $633,979 or 3641.3%, from $17,411 for the six months ended June 30, 2008. The increases were primarily due to an increase in the estimated Hong Kong taxes payable by Atlantic.
Liquidity and Capital Resources
The Companys principal sources of liquidity have been cash from operations, bank lines of credit and credit terms from suppliers. The Companys principal uses of cash have been for
operations and working capital. The Company anticipates these uses will continue to be its principal uses of cash in the future.
As of June 30, 2009, the Company had revolving lines of credit and loan facilities in the aggregate amount of $16,124,559, of which $5,315,365 was available, representing an
approximately 48% reduction in the Companys borrowing lines of credit from December 31, 2008, which reduction was attributable to the termination of three lines of credit with three banks in the aggregate amount of $14,690,825. In
connection therewith, $3,083,250 of restricted bank deposits were released to the Company. Other detailed disclosures on credit facilities are made in Note 8 and Note 9 of the Condensed Consolidated Financial Statements for the quarter ended
June 30, 2009, including the amounts of facilities, outstanding balances, maturity date, and pledges of assets.
The Companys ability
to draw down under its various credit and loan facilities is, in each case, subject
to the ongoing willingness of the relevant lending institution to make advances
thereunder, and security coverage ratios as required from time to time and each
facility (other than with respect to certain long term mortgage loans) is payable
within 90 days of drawdown. As a result of the general tightening of credit markets
in Hong Kong and Asia, many lenders have revised the terms of their revolving
credit lines to levels the Company did not deem commercially reasonable. Accordingly,
on a case by case basis, the Company has elected to terminate or not renew several
of its credit facilities resulting in a significant reduction in the Companys
available short term borrowings.
To address the reduction in available credit facilities, the Company is relying on its own cash reserves and cash flows from operations to fund its ongoing operations and has tightened the
credit terms it extends to its customers. As a result, the Company does not expect that the reduction in available credit facilities is going to have a materially adverse impact upon its operations for the foreseeable future.
The Company will continue to seek additional sources of available financing on acceptable terms; however, there can be no assurance that the Company will be able to obtain the necessary
additional capital on a timely basis or on acceptable terms, if at all. In addition, if the results are negatively impacted and delayed as a result of political and economic factors beyond managements control, our capital requirements may
increase.
The short-term borrowings from banks to finance the cash flow required to finance the purchase of Samsung memory products from Samsung HK must be made a day in advance of the release of goods
from Samsung HKs warehouse before receiving payments from customers upon physical delivery of such goods in Hong Kong which, in most instances, take approximately two days from the date of such delivery.
The following factors, among others, could have negative impacts on the Companys results of operations and financial position: the termination or change in terms of the Distributorship
Agreement; pricing pressures in the industry; a continued downturn in the economy in general or in the memory products sector; an unexpected decrease in demand for Samsungs memory products; the Companys ability to attract new customers;
an increase in competition in the memory products market; and the ability of some of the Companys customers to obtain financing.
Although the Company believes its expectations of future growth are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. The Company is under no duty
to update our expectations to conform them to actual results or to reflect changes in expectations.
25
Net Cash Provided by Operating Activities
In the six months ended June 30, 2009, net cash provided by operating activities was $4,298,709 while in the six months ended June 30, 2008, net cash used for operating activities was
$5,102,076, an increase of $9,400,785. This increase was primarily due to an increase of accounts receivable, other liabilities and decrease of inventories.
Net Cash Provided by Investing Activities
In the six months ended June 30, 2009, net cash provided by investing activities was $3,534,408 while in the six months ended June 30, 2008, net cash used for investing activities was
$580,452, an increase in cash provided of $4,114,860. This increase was primarily due to released of restricted cash and restricted marketable securities due to the cancellation of certain bank facilities during the period ended June 30,
2009.
Net Cash Used for Financing Activities
In the six months ended June 30, 2009, net cash used for financing activities was $8,548,521 while in the six months ended June 30, 2008, net cash provided by financing activities was
$5,014,326, with a decrease of cash provided by financing activities of $13,562,847. This decrease was due to the Companys repayment of certain bank lines of credit and cancellation of certain bank facilities during the June 30,
2009.
Principles of Consolidation
The consolidated financial statements of ACL Semiconductors Inc. include the accounts of Atlantic Components Ltd., a Hong Kong subsidiary and Alpha Perform Technology Limited, a BVI subsidiary.
All significant inter-company transactions and balances are eliminated in consolidation.
Critical Accounting Polices
The U.S. Securities and Exchange Commission (SEC) recently issued Financial Reporting Release No. 60,
Cautionary Advice Regarding
Disclosure About Critical Accounting Policies
(FRR 60), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined
the most critical accounting policies as the ones that are most important to the portrayal of a companys financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on this definition, ACLs most critical accounting policies include: inventory valuation, which affects cost of sales and gross margin; policies for revenue
recognition, allowance for doubtful accounts, and stock-based compensation. The methods, estimates and judgments ACL uses in applying these most critical accounting policies have a significant impact on the results ACL reports in its consolidated
financial statements.
Inventory Valuation.
ACLs policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires ACL to make estimates regarding the market value of its inventories,
including an assessment of excess or obsolete inventories. ACL determines excess and obsolete inventories based on an estimate of the future demand for its products within a specified time horizon, generally 12 months. The estimates ACL uses for
demand are also used for near-term capacity planning and inventory purchasing and are consistent with its revenue forecasts. If ACLs demand forecast is greater than its actual demand it may be required to take additional excess inventory
charges, which will decrease gross margin and net operating results in the future.
Allowance for Doubtful Accounts.
ACL maintains an allowance for doubtful accounts for estimated losses resulting from the inability of ACLs customers to make required payments. ACLs allowance for doubtful accounts
is based on ACLs assessment of the collectability of specific customer accounts, the aging of accounts receivable, ACLs history of bad debts, and the general condition of the industry. If a major customers credit worthiness
deteriorates, or ACLs customers actual defaults exceed ACLs historical experience, ACLs estimates could change and impact ACLs reported results.
Recent Accounting Pronouncements
In June 2009, the FASB
issued guidance on Accounting for Transfers of Financial Assets that
requires enhanced disclosures about transfers of financial assets and a companys
continuing involvement in transferred assets. This guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2009,
and will become effective for us on January 1, 2010. We expect
26
the adoption of this guidance will not have a material
impact on our disclosures, since we have not engaged in transfers of financial
assets.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4T.
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (SEC) rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This evaluation was retrospective and conducted as of June 30, 2009, the last day of the fiscal quarter
covered by this Form 10-Q. Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of June 30, 2009 because we have not completed the remediation discussed elsewhere in this Item
4T of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.
Our management has concluded that there are material weaknesses in our internal controls over financial reporting. These weaknesses include:
Company-level controls.
We did not maintain effective company-level controls as defined in the
Internal ControlIntegrated Framework published by COSO. These deficiencies related to each of the five components of internal control as defined by COSO (control environment, risk assessment, control activities, information and communication,
and monitoring). These deficiencies resulted in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. Specifically,
|
Our control environment did not sufficiently promote effective internal control over financial reporting throughout our organizational structure, and this material weakness was a contributing factor to the
other material weaknesses described in this Item 4T;
|
|
|
Our board of directors has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically:
|
|
|
|
none of our board of directors is independent;
|
|
|
|
no financial expert on our board of directors has been designated;
|
|
|
|
no formally documented financial analysis is presented to our board of directors, specifically fluctuation, variance, trend analysis or business performance reviews;
|
|
|
|
an effective whistleblower program has not been established;
|
|
|
|
there is insufficient oversight of external audit specifically related to fees, scope of activities, executive sessions, and monitoring of results;
|
|
|
|
there is insufficient oversight of accounting principle implementation;
|
|
|
|
there is insufficient review of related party transactions; and
|
|
|
|
there is insufficient review of recording of stock transactions.
|
|
|
We have not maintained sufficient competent evidence to support the effective operation of our internal controls over financial reporting, specifically related to our board of directors oversight of
quarterly and annual SEC filings; and managements review of SEC filings, journal entries, account analyses and reconciliations, and critical spreadsheet controls;
|
|
|
We had inadequate risk assessment controls, including inadequate mechanisms for anticipating and identifying financial reporting risks; and for reacting to changes in the operating environment that could
have a material effect on financial reporting;
|
|
|
|
There was inadequate communication
from management to employees regarding the general importance of controls
and employees
duties and control responsibilities;
|
27
-
We had inadequate monitoring controls, including inadequate staffing and procedures to ensure periodic evaluations of internal
controls to ensure that appropriate personnel regularly obtain
evidence that controls are functioning effectively and that identified
control deficiencies are remediated timely;
-
We had an inadequate number of trained finance and accounting personnel with appropriate expertise in U.S. generally accepted
accounting principles. Accordingly, in certain circumstances, an
effective secondary review of technical accounting matters was
not performed;
-
We had inadequate controls over our management information systems related to program changes, segregation of duties, and
access controls;
-
We had inadequate access and change controls over end-user computing spreadsheets. Specifically, our controls over the
completeness, accuracy, validity and restricted access and review of
certain spreadsheets used in the period-end financial statement
preparation and reporting process were not designed appropriately or did not operate as designed; and
-
We were unable to assess effectiveness of our internal control over financial reporting in a timely matter.
Financial statement preparation and review procedures.
We had inadequate policies, procedures and personnel to ensure that accurate, reliable interim and annual consolidated
financial statements were prepared and reviewed on a timely basis. Specifically, we had insufficient: a) levels of supporting documentation; b) review and supervision within the accounting and finance departments; c) preparation and review of
footnote disclosures accompanying our financial statements; and d) technical accounting resources. These deficiencies resulted in errors in the financial statements and more than a remote likelihood that a material misstatement of our annual or
interim financial statements would not be prevented or detected.
Inadequate reviews of account reconciliations, analyses and journal entries.
We had inadequate review procedures over account reconciliations, account and transaction analyses, and
journal entries. Specifically, deficiencies were noted in the following areas: a) management review of supporting documentation, calculations and assumptions used to prepare the financial statements, including spreadsheets and account analyses; and
b) management review of journal entries recorded during the financial statement preparation process. These deficiencies resulted in a more than a remote likelihood that a material misstatement of our annual or interim financial statements would not
be prevented or detected.
Inadequate controls over purchases and disbursements.
We had inadequate controls over the segregation of duties and authorization of purchases, and
the disbursement of funds. These weaknesses increase the likelihood that misappropriation of assets and/or unauthorized purchases and disbursements could occur and not be detected in a timely manner. These deficiencies resulted in errors in the
financial statements and in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected. Specifically,
-
We had inadequate procedures and controls to ensure proper segregation of duties within our purchasing and disbursements
processes and accounting systems;
-
We had inadequate procedures and controls to ensure proper authorization of purchase orders; and
-
We had inadequate approvals for payment of invoices and wire transfers.
As of June 30, 2009,
we had not completed the remediation of any of these material weaknesses. In
addition, we failed to furnish our management report on internal control over
financial reporting for the periods ended December 31, 2008 and December 31,
2007 in a timely manner which renders our disclosure controls and procedures
ineffective.
We are addressing the outstanding material weaknesses described above, as well as our control environment. We also expect to undertake the following remediation efforts:
-
We plan to evaluate the composition of our board of directors and to determine whether to add independent directors or to replace an
inside director with an independent director, in both
cases, in order to have a majority of our board of directors become independent;
-
We plan on drafting quarterly financial statement variance analysis of actual versus budget with relevant explanations of variances
for distribution to our board of directors.
28
-
We are in the process of developing, documenting, and
communicating a formal whistleblower program to employees. We expect
to
post the policy on the Company web site in the governance section and in the
common areas in the office. We plan on providing a toll free
number
for reporting complaints and will hire a specific third party whistleblower company
to monitor the hotline and provide
monthly reports
of activity to our board of directors.
-
Management intends to continue to provide SEC and US GAAP training for employees and retain external consultants with
appropriate SEC and US GAAP expertise to assist in financial statement
review, account analysis review, review and filing of SEC
reports, policy and procedure compilation assistance, and other related advisory services.
-
We intend on developing an internal control over financial reporting evidence policy and procedures which contemplates, among
other items, a listing of all identified key internal controls
over financial reporting, assignment of responsibility to process owners
within the Company, communication of such listing to all applicable personnel, and specific policies and procedures around the
nature and retention of evidence of the operation of controls.
-
We intend on undertaking a restricted access review to analyze all financial modules and the list of persons authorized to have edit
access to each. We will remove or add authorized
personnel as appropriate to mitigate the risks of management or other override.
-
We plan to re-assign roles and responsibilities in order to improve segregation of duties.
These specific actions are part of an overall program that we are currently developing in an effort to remediate the material weaknesses described above. We likely will not have sufficient time to implement our remediation
plan before testing our internal control over financial reporting for our current fiscal year that will end December 31, 2009.
Attached as exhibits to this report are certifications of our CEO and CFO, which are required in accordance with Rule 13a-14 of Securities Exchange Act of 1934, as amended. The discussion above in this Item 4T includes
information concerning the controls and controls evaluation referred to in the certifications and those certifications should be read in conjunction with this Item 4T for a more complete understanding of the topics presented.
We are committed to improving our internal control processes and will continue to diligently review our internal control over financial reporting and our disclosure controls and procedures. The failure to implement
adequate controls may result in deficient and inaccurate reports under the Exchange Act.
Changes in Internal Control over Financial Reporting
Except as described above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30,
2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There are no material changes from the risk factors set forth in Part I, Item 1A, in our Annual Report on Form 10K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the three months ended June 30, 2009.
Item 5. Other Information
None
30
Item 6. Exhibits
Exhibits:
|
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ACL SEMICONDUCTORS INC.
|
|
|
Date: January 6, 2010
|
By:
|
/s/Chung-Lun Yang
|
|
|
|
Chung-Lun Yang
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
Date:January 6, 2010
|
By:
|
/s/
Kenneth Lap-Yin Chan
|
|
|
|
Kenneth Lap-Yin Chan
|
|
|
Chief Financial Officer
|
32