U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended June 30, 2006.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ____ to ____.
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Commission File Number: 000-50140
ACL SEMICONDUCTORS INC.
(Name of registrant as specified in its charter)
DELAWARE 16-1642709
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
B24-B27,1/F., BLOCK B
PROFICIENT INDUSTRIAL CENTRE, 6 WANG KWUN ROAD
KOWLOON, HONG KONG
(Address of principal executive offices)
(852) 2799-1996
(Registrant's telephone number)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer.
Large accelerated filer [__]___ Accelerated filer [__]_ Non-accelerated filer
__[X]__
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of June 30, 2006 was approximately $653,992 based upon the
closing price of $0.12 of the registrant's common stock on the OTC Bulletin
Board, as of the last business day of the most recently completed second fiscal
quarter (June 30, 2006). (For purposes of determining this amount, only
directors, executive officers, and 10% or greater stockholders have been deemed
affiliates).
Registrant had 27,829,936 shares of common stock, par value $0.001 per share,
outstanding as of August 10, 2006.
Transitional small business disclosure format (check one) Yes [ ] No [X]
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited)
and December 31, 2005 1-2
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2006 (unaudited) and June 30, 2005 3
Condensed Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 2006 (unaudited) and June 30, 2005 4-5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
ITEM 4. CONTROLS AND PROCEDURES 23-24
PART II OTHER INFORMATION 25
SIGNATURES 26
EXHIBITS 27-30
ITEM 1. FINANCIAL STATEMENTS.
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
June 30, December 31,
2006 2005
(Unaudited)
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,289,236 $ 2,537,799
Restricted cash 1,410,256 769,231
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2006 and 2005 489,695 515,557
Accounts receivable, related parties 4,610,498 2,175,737
Inventories, net of reserve of $174,359 for 2006
and $141,026 for 2005 2,111,095 1,087,752
Refundable deposits -- 1,000,000
Other current assets 423,204 263,300
----------- -----------
Total current assets 10,333,984 8,349,376
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 92,140 102,037
OTHER DEPOSITS 380,939 381,044
----------- -----------
$10,807,063 $ 8,832,457
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of As of
June 30, December 31,
2006 2005
(Unaudited)
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 4,474,560 $ 4,495,819
Accounts payable, related party 736,809 --
Accrued expenses 206,092 272,782
Lines of credit and notes payable 4,083,841 2,842,285
Payable related to debt settlement -- 76,088
Due to stockholders for converted pledged collateral 112,385 112,385
Income tax payable 240,185 217,453
Other current liabilities 13,852 55,019
------------ ------------
Total current liabilities 9,867,724 8,071,831
------------ ------------
Total liabilities 9,867,724 8,071,831
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock - $0.001 par value, 50,000,000 shares
authorized, 27,829,936 issued and outstanding 27,830 27,830
Additional paid in capital 3,488,527 3,360,405
Amount due from stockholder/director (87,002) (102,936)
Accumulated deficit (2,490,016) (2,524,673)
------------ ------------
Total stockholders' equity 939,339 760,626
------------ ------------
$ 10,807,063 $ 8,832,457
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
NET SALES:
Related parties $ 5,577,040 $ 7,882,140 9,745,723 19,526,862
Other 15,468,906 18,674,004 36,479,392 35,690,002
Less discounts to customers (2,083) (55,530) (5,599) (69,997)
------------ ------------ ------------ ------------
21,043,863 26,500,614 46,219,516 55,146,867
COST OF SALES 20,327,980 26,250,016 44,552,696 53,933,388
------------ ------------ ------------ ------------
GROSS PROFIT 715,883 250,598 1,666,820 1,213,479
OPERATING EXPENSES:
Selling 149,477 100,177 363,677 248,832
General and administrative 509,486 456,764 968,573 957,974
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 56,920 (306,343) 334,570 6,673
OTHER INCOME (EXPENSES):
Interest expense (140,323) (46,022) (295,155) (100,054)
Miscellaneous 24,021 (1,815) 46,876 (3,592)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (59,382) (354,180) 86,291 (96,973)
INCOME TAXES 19,740 (56,815) 51,634 9,500
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (79,122) $ (297,365) $ 34,657 $ (106,473)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (0.00) $ (0.01) $ 0.00 $ (0.00)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 27,829,936 27,829,936 27,829,936 27,829,936
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Six Months Ended
June 30, June 30,
2006 2005
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ 34,657 $ (106,473)
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 16,122 12,815
Bad debts -- 6,200
Change in inventory reserve 33,333 64,102
Fair value of options issued to employees 128,122 --
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other 25,862 (545,701)
Accounts receivable - related parties (697,953) 1,477,740
Inventories (1,056,676) (603,310)
Other deposits 105 --
Other current assets (159,904) (20,404)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable (21,259) 310,848
Accrued expenses (66,689) (169,509)
Payable related to debt settlement (76,088) --
Income tax payable 22,732 (20,431)
Other current liabilities (41,167) 7,627
----------- -----------
Total adjustments (1,893,460) 519,977
----------- -----------
Net cash (used for) provided by
operating activities (1,858,803) 413,504
----------- -----------
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Six Months Ended
June 30, June 30,
2006 2005
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Repayments from stockholders 15,934 4,298
Increase of restricted cash (641,025) (1,025,641)
Loan repayments by related party -- 611,446
Repayments from related party -- 30,000
Purchases of property, equipment and improvements (6,225) (9,172)
----------- -----------
Net cash used for investing activities (631,316) (389,069)
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds on lines of credit and
notes payable 1,241,556 68,127
Principal payments on long-term debt -- (104,295)
Loan received from related parties -- 414,195
Repayments to related party -- (86,276)
----------- -----------
Net cash provided by financing activities 1,241,556 291,751
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,248,563) 316,186
CASH AND CASH EQUIVALENTS, beginning of the period 2,537,799 512,548
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 1,289,236 $ 828,734
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 295,155 $ 43,210
=========== ===========
Income tax paid $ 20,089 $ 29,930
=========== ===========
Increase of accounts receivable-related parties
through return of acquisition deposits $ 1,000,000 $ --
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
ACL SEMICONDUCTORS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial statements
of ACL Semiconductors Inc. and its subsidiaries, Atlantic Components Ltd. and
Alpha Perform Technology Limited (collectively, "ACL" or the "Company"). The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. These condensed consolidated financial statements and related notes
should be read in conjunction with the Company's audited financial statements
for the fiscal years ended December 31, 2005, 2004 and 2003 filed in the Form
10-K filed by the Company on April 17, 2006. In the opinion of management, these
condensed consolidated financial statements reflect all adjustments which are of
a normal recurring nature and which are necessary to present fairly the
consolidated financial position of ACL as of June 30, 2006 and December 31,
2005, and the results of operations for the three-month and six-month periods
ended June 30, 2006 and 2005 and the cash flows for the six-month periods ended
June 30, 2006 and 2005. The results of operations for the six months ended June
30, 2006 are not necessarily indicative of the results, which may be expected
for the entire fiscal year. All significant intercompany accounts and
transactions have been eliminated in preparation of the condensed consolidated
financial statements.
On April 13, 2006, the Company entered into a Rescission Agreement with the
seller of Classic Electronics Ltd. ("Classic") to rescind the original Stock
Purchase Agreement entered on December 30, 2005. The seller agreed to fully
refund the acquisition deposits of $1.0 million during 2006.
The acquisition deposit of $1 million was reclassified to increase the accounts
receivable from Classic as the original deposit amount was recorded to offset
the accounts receivable from Classic. Due to the termination of the acquisition,
the original entry was reversed in the accompanying condensed balance sheets as
of June 30, 2006.
NATURE OF BUSINESS OPERATIONS
ACL Semiconductors Inc. ("Company" or "ACL") was incorporated under the State of
Delaware on September 17, 2002. Through a reverse-acquisition of Atlantic
Components Ltd., a Hong Kong based company, effective September 30, 2003, the
Company's principal activity is the distribution of electronic components under
the "Samsung" brandname which comprise DRAM and graphic RAM, FLASH, SRAM and
MASK ROM for the Hong Kong and Southern China markets. Atlantic Components Ltd.,
its wholly-owned subsidiary, was incorporated in Hong Kong on May 30, 1991 with
limited liability. On October 2, 2003, the Company set up a wholly-owned
subsidiary, Alpha Perform Technology Limited ("Alpha"), a British Virgin Islands
company, to provide services on behalf of the Company in jurisdictions outside
of Hong Kong. Effective January 1, 2004, the Company ceased the operations of
Alpha and all the related activities were consolidated with those of Atlantic.
REVENUE RECOGNITION
Product sales are recognized when products are shipped to customers, title
passes and collection is reasonably assured. Provisions for discounts to
customers, estimated returns and allowances and other price adjustments are
provided for in the same periods the related revenue is recorded which are
deducted from the gross sales.
6
CURRENCY REPORTING
Amounts reported in the accompanying condensed consolidated financial statements
and disclosures are stated in U.S. Dollars, unless stated otherwise. The
functional currency of the Company's subsidiaries, which accounted for most of
the Company's operations, is reported in Hong Kong dollars ("HKD"). Foreign
currency transactions (outside Hong Kong) during the period are translated into
HKD according to the prevailing exchange rate at the relevant transaction dates.
Assets and liabilities denominated in foreign currencies at the balance sheet
dates are translated into HKD at period-end exchange rates.
For the purpose of preparing these consolidated financial statements, the
financial statements of ACL reported in HKD have been translated into U.S.
Dollars at US$1.00=HKD7.8, a fixed exchange rate maintained between the United
States and Hong Kong Special Administrative Region, China.
2. EARNINGS (LOSS) PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings
(loss) per common share is computed by dividing net earnings (loss) available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings (loss) per common share is computed similarly to basic earnings
(loss) per common share, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. For the six months ended June 30, 2006 and 2005, the Company had
2,000,000 and 2,121,641 shares, respectively, of common stock equivalents at the
end of each reporting periods.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of June 30, 2006 and December 31, 2005, the Company had an outstanding
receivable from Mr. Yang, the President and Chairman of our Board of Directors,
totaling $87,002 and $102,936 representing advanced compensation paid. These
balances bear no interest and are payable on demand.
For the three months ended June 30, 2006 and 2005, the Company recorded and paid
$50,000 and $50,000, respectively, to Mr. Yang, and for the six months ended
June 30, 2006 and 2005, the Company recorded and paid $100,000 and $126,923,
respectively, to Mr. Yang as compensation.
During the three months ended June 30, 2006 and 2005, and six months ended June
30, 2006 and 2005, the Company paid rent of $23,077, $23,077, $46,153 and
$46,153, respectively, for Mr. Yang's personal residency as additional
compensation.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended June 30, 2006 and 2005, and six months ended June
30, 2006 and 2005, the Company sold $0, $5,528,522, $0 and $16,758,892,
respectively, of memory products to Classic Electronics Ltd. ("Classic"). During
the three months ended June 30, 2006 and 2005, and six months ended June 30,
2006 and 2005, the Company purchased Samsung memory products sourced from other
authorized distributors of $0, $2,702,305, $0 and $3,765,066, respectively, from
Classic to satisfy part of its product shortage from Samsung HK. The Company had
outstanding accounts receivable from Classic totaling $4,224,882 and $2,175,737,
respectively, as of June 30, 2006 and December 31, 2005. The Company has not
experienced any bad debt from this customer in the past. Pursuant to a written
personal guarantee agreement, Mr. Yang personally guarantees all the outstanding
accounts receivable from Classic up to $10 million.
The Company leased one of its facilities and Mr. Yang's personal residency from
Classic. Lease agreements for the facility expire on November 30, 2006 while the
lease agreement for Mr. Yang's personal residency expires on
7
March 31, 2008. Monthly lease payments for these 2 leases total $6,684. The
Company incurred and paid rent expense of ACL of $20,053, $21,028, 40,106 and
$43,143 to Classic during the three months ended June 30, 2006 and 2005 and the
six months ended June 30, 2006 and 2005, respectively.
Mr. Ben Wong, a director of the Company, is a 99.9% shareholder of Classic. The
remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH KADATCO COMPANY LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company recognized revenues of $0, $2,330,574, $0
and $2,472,194 from the sale of memory products to Kadatco Company Ltd.
("Kadatco"). There were no outstanding accounts receivable due from Kadatco as
of June 30, 2006 and December 31, 2005. The Company has not experienced any bad
debt from this customer in the past.
Mr. Yang is the sole beneficial owner of the equity interest of Kadatco.
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $0, $85, $0 and $165,225, respectively,
to Rambo Technologies Ltd. ("Rambo"). There were no outstanding accounts
receivable due from Rambo as of June 30, 2006 and December 31, 2005. The Company
has not experienced any bad debt from this customer in the past.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company purchased $0, $451,804, $0 and $557,845,
respectively, from Rambo. There were no outstanding accounts payable due to
Rambo as of June 30, 2006 and December 31, 2005.
Mr. Ben Wong, a director of the Company, is a 60% shareholder of Rambo. The
remaining 40% of Rambo is owned by a non-related party. Mr. Yang is a director
of Rambo.
TRANSACTIONS WITH ARISTO TECHNOLOGIES LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $2,651,052, $0, $2,651,052 and $0,
respectively, to Aristo Technologies Ltd. ("Aristo"). Outstanding accounts
receivable totaled $474,109 and $0 as of June 30, 2006 and December 31, 2005
respectively. The Company has not experienced any bad debt from this customer in
the past.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company purchased $288,552, $0, $288,552 and $0,
respectively, from Aristo. Outstanding accounts payable totaled $88,493 and $0
as of June 30, 2006 and December 31, 2005 respectively. Net accounts receivable
totaled $385,616 and $0, as of June 30, 2006 and December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of Aristo.
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $0, $0, $0 and $1,652, respectively, to
Atlantic Netcom Ltd. ("Atlantic Netcom"). Outstanding accounts receivable
totaled $0 as of June 30, 2006 and December 31, 2005, respectively. The Company
has not experienced any bad debt from this customer in the past.
8
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a 60% shareholder and director of Atlantic Netcom. The remaining
40% of Atlantic Netcom is owned by a non-related party.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $0, $21,772 $0 and $55,112,
respectively, to Solution Semiconductor (China) Ltd. ("Solution"). Outstanding
accounts receivable totaled $0 as of June 30, 2006 and December 31, 2005. The
Company has not experienced any bad debt from this customer in the past.
During the three months ended June 30, 2006 and 2005 and the six months ended
June 30, 2006 and 2005, the Company purchased $0, $21,758, $0 and $22,019,
respectively, from Solution. There are no outstanding accounts payable due to
Solution as of June 30, 2006 and December 31, 2005.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of Solution. The
remaining 1% of Solution is owned by a non-related party.
TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $0, $0, $0 and $61,910, respectively,
to Systematic Information Ltd. ("Systematic"). There are no outstanding accounts
receivable due from Systematic as of June 30, 2006 and December 31, 2005.
The Company has not experienced any bad debt from this customer in the past.
On April 1, 2005, the Company entered into a lease agreement with Systematic
pursuant to which the Company leases one residential property for Mr. Yang's
personal use for a monthly lease payment of $3,205. The lease agreement for this
residency expires on March 31, 2008. The Company incurred and paid an aggregate
rent expense of $9,615 to Systematic during the three months ended June 30, 2006
and 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a director and the shareholder of Systematic with a total of 100%
interest.
TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $0, $1,167, $0 and $10,417
respectively, and received management fee $1,923, $0, 3,846 and $0,
respectively, from Global Mega Development Ltd. ("Global"). There are no
outstanding accounts receivable due from Global as of June 30, 2006 and December
31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of Global.
TRANSACTIONS WITH INTELLIGENT NETWORK TECHNOLOGY LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, we received management fee $1,923, $0, $3,846 and $0,
respectively, from Intelligent Network Technology Ltd. ("Intelligent"). There
are no outstanding accounts receivable due from Intelligent as of June 30, 2006
and December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a director and 80% shareholder of Intelligent. The remaining 20% of
Intelligent is owned by a non-related party.
9
TRANSACTIONS WITH SYSTEMATIC SEMICONDUCTOR LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, we received management fee of $3,846, $0, $7,692 and $0,
respectively, from Systematic Semiconductor Ltd. ("Systematic Semiconductor").
There are no outstanding accounts receivable due from Systematic Semiconductor
as of June 30, 2006 and December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of Systematic
Semiconductor.
TRANSACTIONS WITH TFT TECHNOLOGIES LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, we sold $0, $0, $0 and $1,460, respectively, to TFT
Technologies Ltd. ("TFT"). Outstanding accounts receivable totaled $0 as of June
30, 2006 and December 31, 2005, respectively. We have not experienced any bad
debt from this customer in the past.
Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a
director, is a director and 51% shareholder of TFT. The remaining 49% of TFT is
owned by a non-related party.
TRANSACTIONS WITH FIRST WORLD LOGISTICS LTD.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company sold $2,925,988, $0, $7,094,671 and $0,
respectively, to First World Logistics Ltd. ("First World"). Outstanding
accounts receivable totaled $3,651 and $0 as of June 30, 2006 and December 31,
2005. The Company has not experienced any bad debt from this customer in the
past.
During the three months ended June 30, 2006 and 2005, and the six months ended
June 30, 2006 and 2005, the Company purchased $775,260, $0, $825,900 and $0,
respectively, from First World.Outstanding accounts payable totaled $740,460 and
$0 as of June 30, 2006 and December 31, 2005 respectively.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of First World.
4. BANK FACILITIES
The Company has certain outstanding revolving lines of credit with Dah Sing Bank
Limited and DBS Bank (Hong Kong) Ltd.(collectively, the "Banks"). With respect
to the Company's debt and credit arrangements, the Company pledged its assets as
collateral collectively to the Banks for all current and future borrowings from
the Banks by the Company. Such borrowings are secured by:
1. a fixed cash deposit of $769,231 (HK$6,000,000) as collateral
for loans from Dah Sing Bank Limited;
2. a fixed cash deposit of $641,025 (HK$5,000,000), a security
interest on residential property located in Hong Kong owned by
Systematic, a related party, and a security interest on
residential property located in Hong Kong owned by City Royal
Limited, a related party, as collateral for loans from DBS
Bank (Hong Kong) Ltd;
10
3. a personal guarantee given by Mr. Yang for an unlimited amount
together with a key man life insurance policy on Mr. Yang for
$500,000, in each case in favor of Dah Sing Bank Limited in
respect of borrowings therefrom.
5. ECONOMIC DEPENDENCE
The Company's distribution operations are dependent on the availability of an
adequate supply of electronic components under the "Samsung" brand name which
have historically been principally supplied to the Company by Samsung
Electronics H.K. Co., Ltd. ("Samsung HK"), a subsidiary of Samsung Electronics
Co., Ltd., a Korean public company. The Company purchased approximately 67% and
70% of its materials from Samsung HK for the three months ended June 30, 2006
and 2005, respectively, and 76% and 77% for the six months ended June 30, 2006
and 2005. However, there is no written supply contract between the Company and
Samsung HK and, accordingly, there is no assurance that Samsung HK will continue
to supply sufficient electronic components to the Company on terms and prices
acceptable to the Company or in volumes sufficient to meet the Company's current
and anticipated demand, nor can assurance be given that the Company would be
able to secure sufficient products from other third party supplier(s) on
acceptable terms. In addition, the Company's operations and business viability
is to a large extent dependent on the provision of management services and
financial support by Mr. Yang.
The Company is highly dependent on the product supplies from Samsung HK. If the
relationship with Samsung HK is terminated, the Company may not be able to
continue its business.
For the three months ended June 30, 2006 and 2005, and the six months ended June
30, 2006 and 2005, the Company purchased $14,258,149, 18,937,732, $35,368,944
and $42,843,512, respectively. At June 30, 2006 and December 2005, accounts
payable, net of rebates receivable due from Samsung HK, due to Samsung HK were
$2,460,092 and $2,450,508, respectively.
6. SEGMENT REPORTING
The Company's sales are generated from Hong Kong and the rest of China and
substantially all of its assets are located in Hong Kong.
7. STOCK OPTION PLAN
The Company has a 2006 Incentive Equity Stock Plan, under which the Company may
grant options to its employees for up to 5 million shares of common stock. The
exercise price of each option should not be less than the market price of the
Company's stock on the date of grant and an option's maximum term is ten years.
Except in the case of Options granted to Officers, Directors and Consultants or
as otherwise provided in the Option Agreement, Options shall become exercisable
at a rate of no less than 20% per year over five (5) years from the date the
Options are granted. The weighted average estimated fair value of stock options
granted during 2006 was $0.064 per share. On May 16, 2006, the Company granted
options to purchase an aggregate 2,000,000 shares of Common Stock of the Company
to three employees as follows: (i) options to purchase 1,000,000 shares of
Common Stock to Mr. Ben Wong, (ii) options to purchase 500,000 shares of Common
Stock to Kenneth Chan, and (iii) options to purchase 500,000 shares of Common
Stock to May Lau.These options were fully vested upon grant, have an exercise
price of $0.22 per share and are exercisable until May 16, 2016. The fair value
of these options aggregating $128,122 was expensed during the three months ended
June 30, 2006. The fair value of the options was estimated using the
Black-Scholes valuation method, assuming a dividend yield of zero, a volatility
factor of 115%, risk-free interest rates prevailing at the option grant dates
which was approximately 3.75%, and expected option life was 0.6 year. A summary
of the status of the Company's fixed stock option plan as of June 30, 2006, and
changes during the years ending on those dates is presented below:
11
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at December 31, 2005 -- $ --
Granted 2,000,000 0.22
Exercised -- --
Cancelled -- --
---------
Outstanding at June 30, 2006 2,000,000 $ 0.22
Options exercisable at
December 31, 2005 -- $ N/A
Options exercisable at
June 30, 2006 -- $ N/A
The following tables summarize information about fixed stock options
outstanding and exercisable at June 30, 2006:
Stock Options Outstanding
Weighted Average
Number of Remaining Weighted
Range of Shares Contractual Average
Exercise Prices Outstanding Life in Years Exercise Price
--------------- ----------- ------------- --------------
$0.22 2,000,000 9.8 $0.22
Stock Options Exercisable
Range of Number of Weighted
Exercise Shares Average
Prices Exercisable Exercise Price
------ ----------- --------------
$0.22 -- N/A
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB decided to move forward with the issuance of a final
FSP FAS 123R-4 Classification of Options and Similar Instruments Issued as
Employee Compensation That Allow for Cash Settlement upon the Occurrence of a
Contingent Event. The guidance in this FSP FAS 123R-4 amends paragraphs 32 and
A229 of FASB Statement No. 123R to incorporate the concept articulated in
footnote 16 of FAS 123R. That is, a cash settlement feature that can be
exercised only upon the occurrence of a contingent event that is outside the
employee's control does not meet the condition in paragraphs 32 and A229 until
it becomes probable that the event will occur. Originally under FAS 123R, a
provision in a share-based payment plan that required an entity to settle
outstanding options in cash upon the occurrence of any contingent event required
classification and accounting for the share based payment as a liability. This
caused an issue under certain awards that require or permit, at the holder's
election, cash settlement of the option or similar instrument upon (a) a change
in control or other liquidity event of the entity or (b) death or disability of
the holder. With this new FSP, these types of cash settlement features will not
require liability accounting so long as the feature can be exercised only upon
the occurrence of a contingent event that is outside the employee's control
(such as an initial public offering) until it becomes probable that event will
occur. The guidance in this FSP shall be applied upon initial adoption of
Statement 123(R). An entity that adopted Statement 123(R) prior to the issuance
of the FSP shall apply the guidance in the FSP in the first reporting period
beginning after February 2006. Early application of FSP FAS 123R-4 is permitted
in periods for which financial statements have not yet been issued. The Company
does not anticipate that this new FSP will have any material impact upon its
financial condition or results of operations.
12
In February 2006, the FASB issued SFAS 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and In February
2006, the FASB issued SFAS 155 "Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140". This Statement
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets. This
Statement:
a. Permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation;
b. Clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement 133;
c. Establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation;
d. Clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and
e. Amends Statement 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument.
This Statement is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006. The fair value election provided for in paragraph 4 of this Statement
may also be applied upon adoption of this Statement for hybrid financial
instruments that had been bifurcated under paragraph 12 of Statement 133 prior
to the adoption of this Statement. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period for
that fiscal year. Provisions of this Statement may be applied to instruments
that an entity holds at the date of adoption on an instrument-by-instrument
basis. The Company is currently evaluating the impact of SFAS 155.
In March 2006, the FASB issued SFAS No. 156 ("FAS 156"), "Accounting for
Servicing of Financial Assets--An Amendment of FASB Statement No. 140." Among
other requirements, FAS 156 requires a company to recognize a servicing asset or
servicing liability when it undertakes an obligation to service a financial
asset by entering into a servicing contract under certain situations. Under FAS
156 an election can also be made for subsequent fair value measurement of
servicing assets and servicing liabilities by class, thus simplifying the
accounting and provide for income statement recognition of potential offsetting
changes in the fair value of servicing assets, servicing liabilities and related
derivative instruments. The Statement will be effect beginning the first fiscal
year that begins after September 15, 2006. The Company does not expect the
adoption of FAS 156 will have a material impact on the financial position or
results of operations.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, "Accounting for
Uncertainty in Income Taxes," the provides guidance on the accounting for
uncertainty in income taxes recognized in financial statements. The
interpretation will be adopted by us on January 1, 2007. We are currently
evaluating the impact of adopting FIN 48; however, we do not expect the adoption
of this provision to have a material effect on our financial position, results
of operations or cash flows.
In July 2006, the FASB issued FASB Staff Position (FSP) No. FAS 13-2,
"Accounting for a Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease Transaction," that
provides guidance on how a change or a potential change in the timing of cash
flows relating to income taxes generated by a leveraged lease transaction
affects the accounting by a lessor for the lease. This staff position will be
adopted by us on January 1, 2007. We are currently evaluating the impact of
adopting this FSP; however, we do not expect the adoption of this provision to
have a material effect on our financial position, results of operations or cash
flows.
9. RECLASSIFICATION
Certain reclassifications have been made to the 2005 condensed consolidated
financial statements to conform to the 2006 presentation.
10. SUBSEQUENT EVENT
On July 21, 2006, the Company purchased two properties from Classic which are
currently leased from Classic. The purchase price is based on the latest
apprised value of HK$28,500,000 (US$3,653,846). The purchase price will be used
to offset the accounts receivable due from Classic.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY HAS INCLUDED IN THIS QUARTERLY REPORT CERTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 CONCERNING THE COMPANY'S BUSINESS, OPERATIONS AND
FINANCIAL CONDITION. "FORWARD-LOOKING STATEMENTS" CONSIST OF ALL NON-HISTORICAL
INFORMATION, AND THE ANALYSIS OF HISTORICAL INFORMATION, INCLUDING THE
REFERENCES IN THIS QUARTERLY REPORT TO FUTURE REVENUE GROWTH, FUTURE EXPENSE
GROWTH, FUTURE CREDIT EXPOSURE EARNINGS BEFORE INTEREST,TAXES,DEPRECIATION AND
AMORTIZATION, FUTURE PROFITABILITY, ANTICIPATED CASH RESOURCES, ANTICIPATED
CAPITAL EXPENDITURES, CAPITAL REQUIREMENTS, AND THE COMPANY'S PLANS FOR FUTURE
PERIODS. IN ADDITION, THE WORDS "COULD", "EXPECTS", "ANTICIPATES", "OBJECTIVE",
"PLAN", "MAY AFFECT", "MAY DEPEND", "BELIEVES", "ESTIMATES", "PROJECTS" AND
SIMILAR WORDS AND PHRASES ARE ALSO INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
COMPANY'S FORWARD-LOOKING STATEMENTS DUE TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, INCLUDING, AMONG OTHER THINGS, UNANTICIPATED TECHNOLOGICAL
DIFFICULTIES, THE VOLATILE AND COMPETITIVE ENVIRONMENT FOR COMPUTER AND CONSUMER
ELECTRONIC PRODUCTS, CHANGES IN DOMESTIC AND FOREIGN ECONOMIC, MARKET AND
REGULATORY CONDITIONS, THE INHERENT UNCERTAINTY OF FINANCIAL ESTIMATES AND
PROJECTIONS, THE UNCERTAINTIES INVOLVED IN CERTAIN LEGAL PROCEEDINGS,
INSTABILITIES ARISING FROM TERRORIST ACTIONS AND RESPONSES THERETO, AND OTHER
CONSIDERATIONS DESCRIBED AS "RISK FACTORS" IN OTHER FILINGS BY THE COMPANY WITH
THE SEC INCLUDING ITS ANNUAL REPORT ON FORM 10-K. SUCH FACTORS MAY ALSO CAUSE
SUBSTANTIAL VOLATILITY IN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK. ALL
SUCH FORWARD-LOOKING STATEMENTS ARE CURRENT ONLY AS OF THE DATE ON WHICH SUCH
STATEMENTS WERE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY
UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER
THE DATE ON WHICH ANY SUCH STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
ANY REFERENCE TO "ACL", THE "COMPANY" OR THE "REGISTRANT", "WE", "OUR"
OR "US" MEANS ACL SEMICONDUCTORS INC. AND ITS SUBSIDIARIES.
OVERVIEW
CORPORATE BACKGROUND
The Company, through its wholly-owned subsidiaries Atlantic Components
Limited, a Hong Kong corporation ("Atlantic") is engaged primarily in the
business of distribution of memory products under "Samsung" brandname which
principally comprise DRAM and Graphic RAM, FLASH, SRAM and MASK ROM for the Hong
Kong and Southern China markets. The Company's wholly-owned subsidiary Alpha
Perform Technology Limited ("Alpha"), which previously engaged in this business,
cease activities as of January 1, 2004, when its operations were consolidated
with those of Atlantic.
As of June 30, 2006, 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
14
future expected financial relationships. Much of the cost of sales and operating
expenses reflected in our financial statements are recurring in nature.
CRITICAL ACCOUNTING POLICIES
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 company's 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, ACL's most critical
accounting policies include: inventory valuation, which affects cost of sales
and gross margin, policies for revenue recognition, and allowance for doubtful
accounts. The methods, estimates and judgments ACL use in applying these most
critical accounting policies have a significant impact on the results ACL
reports in its consolidated financial statements.
INVENTORY VALUATION.Our policy is to value inventories at the lower of
cost or market on a part-by-part basis. This policy requires us to make
estimates regarding the market value of our inventories, including an assessment
of excess or obsolete inventories. We determine excess and obsolete inventories
based on an estimate of the future demand for our products within a specified
time horizon, generally 12 months. The estimates we use for demand are also used
for near-term capacity planning and inventory purchasing and are consistent with
our revenue forecasts. If our demand forecast is greater than our actual demand
we 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 ACL's
customers to make required payments. ACL's allowance for doubtful accounts is
based on ACL's assessment of the collectibility of specific customer accounts,
the aging of accounts receivable, ACL's history of bad debts, and the general
condition of the industry. If a major customer's credit worthiness deteriorates,
or ACL's customers' actual defaults exceed ACL's historical experience, ACL's
estimates could change and impact ACL's reported results.
RELATED PARTY TRANSACTIONS
The Company conducts business with several affiliated companies. All
the related party transactions taking place during the reporting periods were
conducted during the normal course of business. The prices of products sold to
or purchased from these related entities are in the same price ranges as those
offered to other non related customers or purchased from other vendors.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of June
30, 2006 over the next five years and thereafter:
Payments by Period
---------------------------------------------------------------------------------------------------
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
------ ------ ----- ----- -----
Operating Leases 193,119 123,888 69,231 -- --
Line of credit and notes payable -
short-term 4,083,841 4,083,841 -- -- --
--------------------------------------------------------------
Total Contractual Obligations $4,276,960 $4,207,729 $ 69,231 $ -- $ --
==============================================================
15
ACCOUNTING PRINCIPLES; ANTICIPATED EFFECT OF GROWTH
Below is a brief description of basic accounting principles which the
Company has adopted in determining its recognition of sales and expenses, as
well as a brief description of the effects that the Company believes its
anticipated growth will have on the Company's sales decision and expenses in the
next 12 months.
NET SALES
Sales 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 the changes
in demand from its customers. The prices set by Samsung that the Company must
charge its customers are expected to fluctuate as a result of prevailing
economic conditions and their impact on the market. The Company's decision of
its product combination is critical for the Company's overall performance.
Overall product demand in the semiconductor business declined during the second
quarter of 2006. The Company believes such decline to have resulted in part from
the "World Cup" taking place in the second quarter, which slowed down the
overall consumer spending during the period. In reaction to the overall market
slowdown, the Company changed its sales strategy focus on sales of dual in-line
memory modules (DIMM) of both DDR and DDR 2, used in the PC market, in addition
to FLASH memory. The Company believes that its balance of sales between DIMM and
Flash sales resulted in an increase in the Company's overall gross profit by
180% compared to the same period of 2005. The Company also continues to keep its
inventories at a relatively low level which reduces its average maintenance
costs. The Company believes that an increase in variety of NAND Flash-based
storage applications and multimedia handheld gadgets hasboosted the NAND demand
in the past months. The strengthening features of 3C (computer, consumer
electronics & communications) products require larger memory density. The MP3
player market is estimated to have represented approximately 43% of the total
FLASH consumption for 2006. However, while consumer electronics giants like
Apple have been able to capture a large shares of the MP3 market, 2nd and 3rd
tier manufacturers of MP3 players in Hong Kong and South China have been
struggling to compete and gain market share. The Company believes hundreds of
factories have gone out of business or changed their production lines, as a
result of weak market demand for FLASH toward the end of the second quarter. The
price for the high-capacity 16Gb memory products peaked at US$40.50 at the
beginning of April 2006, however, its price dropped substantially during the
second quarter of 2006 to approximately US$31.40 at the end of June 2006.
The PC market on the other hand was quite stable during the most part of the
second quarter in 2006. In regards with the Graphic Ram, there were some
shortages on the 16x16 Graphic DDR targeting mainly for entry-level and
mid-range VGA card, while 16x32 Graphic DDR has a more advanced application
coverage from Notebook to high-end game console, which is mainly used in Sony
and Microsoft products. The price for Graphic Ram tends to be more stable than
that of PC DRAM. The Company expects to continue evaluate the market to ensure a
healthy product portfolio.
Sales for PC memory modules (DIMM) are expected to be higher in the third
quarter due to increased demand for computer products during the summer and
back-to-school seasons. The demand for DDR 2 modules is expected to increase
gradually as both AMD and Intel reduced the prices for their CPU at the end of
July 2006 which the Company expects will boost the DDR 2 demand.
The Company expects demand for FLASH memory products, after a weak second
quarter, to increase in anticipation of the holiday season, with Apple and Sony
having the largest demand which may cause a shortage of the Flash memory in the
market during the second half of the year. Sony is planning to launch the new
version of PSP2 and PMP with 8Gb and 10Gb Flash memory. It is predicted that
Apple and Sony will capture
16
approximately 41% of the total NAND Flash sales. The market is expected to focus
on the launch of the new products from Apple and Sony which will become a key
factor determining the Flash prices in the coming months.
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
Company's 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 Company's procurement operations are supported by Samsung HK,
although there is no written long-term supply agreement in place between
Atlantic and Samsung HK.
OPERATING EXPENSES
The Company's operating expenses for the three months and six months
ended June 30, 2006 and 2005 comprised of selling and general and administrative
expenses.
Selling expenses consisted primarily of and external commissions paid
to external sales personnel and costs associated with advertising and marketing
activities.
General and administrative expenses include cost for the corporate and
administrative functions that serve to support the Company's current and future
operations and provide an infrastructure to support future growth. Major items
in this category include management and staff salaries, rent, professional
services, and travel and entertainment. The Company expects these expenses to
increase as a result of the 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.
Interest expense, including finance charges, relates primarily to
Atlantic's short-term and long-term bank borrowings, which the Company intends
to reduce, and amortization of discount on the convertible debenture.
17
RESULTS OF OPERATIONS
The following table sets forth unaudited statements of operations data
for the three months and six months ended June 30, 2006 and 2005 and should be
read in conjunction with the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company's financial statements and
the related notes appearing elsewhere in this document.
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
(Unaudited)
Net Sales 100% 100% 100% 100%
Cost of sales 96.60% 99.05% 96.39% 97.80%
Gross Profit 3.40% 0.95% 3.61% 2.20%
Operating expenses:
Selling 0.71% 0.38% 0.79% 0.45%
General and administrative 2.42% 1.68% 2.10% 1.74%
Total operating expenses 3.13% 2.06% 2.89% 2.19%
Income (loss) from operations 0.27% -1.11% 0.72% 0.01%
Other expenses:
Interest expenses -0.67% -0.21% -0.64% -0.18%
Miscellaneous 0.11% -0.01% 0.10% -0.01%
Income (loss) before income taxes -0.29% -1.33% 0.18% -0.18%
Income taxes expenses (benefits) 0.09% -0.21% 0.11% 0.02%
Net income (loss) -.038% -1.12% 0.07% -0.20%
UNAUDITED THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2005
NET SALES
Sales decreased by $5,456,751 or 20.6% from $26,500,614 in the three
months ended June 30, 2005 to $21,043,863 in the three months ended June 30,
2006. The decrease was mainly due to drop in demand and shortage of supplies of
Samsung products while there was the "World Cup" effect slowing down the whole
consumer spending during the second quarter of 2006.
COST OF SALES
Cost of sales decreased by $5,922,036, or 22.6%, from $26,250,016 for
the three months ended June 30, 2005 to $20,327,980 for the three months ended
June 30, 2006. The decrease in cost of sales is comparable to the decrease of
sales. As a percentage of sales, cost of sales decreased slightly to 96.60% of
sales in the three months ended June 30, 2006 from 99.05% of sales in the three
months ended June 30, 2005.
GROSS PROFIT
Gross profit increased by $465,285 or 185.7%, from $250,598 for the
three months ended June 30, 2005 to $715,883 for the three months ended June 30,
2006. The Company's gross profit increased slightly to 3.4% of sales in the
three months ended June 30, 2006 compared to 1% of sales in the three months
ended June 30, 2005, as a result of shortage of supplies of Samsung products for
the second quarter of 2006.
18
OPERATING EXPENSES
Selling expenses increased by $49,300 or 49.2%, from $100,177 for the
three months ended June 30, 2005 to $149,477 for the three months ended June 30,
2006. This increase was principally attributable to sales commission expenses
incurred in the second quarter of 2006. As a percentage of sales, sales and
marketing expenses increased to 0.71% of sales for the three months ended June
30, 2006 as compared to 0.38% of sales for the three months ended June 30, 2005.
General and administrative expenses increased $52,722 or 11.5% from
$456,764 in the three months ended June 30, 2005 to $509,486 in the three months
ended June 30, 2006. Except for fair value of the options granted to certain
employees in the amount of $128,122, general and administrative expenses for
such periodsdecreased by $75,400 which was principally attributable to a
decrease in certain expenses, such as insurance, entertainment and bad debts
INCOME (LOSS) FROM OPERATIONS
Income from operations for the Company was $56,920 for the three months
ended June 30, 2006 compared to a loss of $306,343 for the three months ended
June 30, 2005, an increase of income by $363,263 or 118.6%. This increase was
the result of increase of gross profit and decrease of general and
administrative expenses during the second quarter of 2006.
OTHER INCOME (EXPENSES)
Interest expense increased by $94,301, or 204.9%, from $46,022 in the
three months ended June 30, 2005, to $140,323 in the three months ended June 30,
2006. This increase is mainly due to increase of the use of the short-term
borrowings from the bank and increase in interest rate. We expect our interest
expense continue to increase in 2006 because of increase of interest rate.
INCOME TAX
Income tax increased by $76,555 or 134.7% from tax benefit $56,815 for
the three months ended June 30, 2005 to an income tax $19,740 for the three
months ended June 30, 2006, due to an increase of income before taxes increase
for the three months ended June 30, 2006.
NET LOSS
The Company's net loss decreased by $218,243 or 73.4% from loss
$297,365 the three months ended June 30, 2005 to $79,122 for the three months
ended June 30, 2006 primarily due to increase of profit margin and decrease of
general and administrative expenses.
UNAUDITED SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 2005
NET SALES
Net sales decreased by $8,927,351 or 16.2% from $55,146,867 in the six
months ended June 30, 2005 to $46,219,516 in the six months ended June 30, 2006.
This decrease resulted primarily due to drop in demand and shortage of supplies
of Samsung products while there was additionally the "World Cup" effect slowing
down the consumer spending for the first half year of 2006.
COST OF SALES
Cost of sales decreased by $9,380,692 or 17.4% from $53,933,388 in the
six months ended June 30, 2005 to $44,552,696 in the six months ended June 30,
2006. The cost of sales decreased in proportion to the decrease of net sales.
19
GROSS PROFIT
Gross profit increased by $453,341 or 37.4% from $1,213,479 in the six
months ended June 30, 2005 to $1,666,820 in the six months ended June 30, 2006.
The gross profit % increased by 1.41% from 2.2% in the six months ended June 30,
2005 to 3.61% in the six months ended June 30, 2006. The increase in gross
profit % was primarily attributable to the shortage of supplies of Samsung
products for the first half year of 2006. We expect the gross profit be at this
level in the coming months, but will improve if the Company can successfully
diversify its businesses and products.
OPERATING EXPENSES
Selling expenses increased by $114,845 or 46.2% from $248,832 in the
six months ended June 30, 2005 to $363,677 in the six months ended June 30,
2006. The increase was primarily attributable to the sales commission expenses
incurred for the first half year of 2006.
General and administrative expenses increased by $10,599 or 1.1% from
$957,974 in the six months ended June 30, 2005 to $968,573 in the six months
June 30, 2006. This increase was principally attributable to the fair value of
options granted to certain employees during the six months ended June 30, 2006.
ACL expects the general and administrative expenses in the second of half of
2006 be at the same approximate level of the first half in the year of 2006.
INCOME (LOSS) FROM OPERATIONS
Income from operations increased by $327,897 or 4,914% from $6,673 in
the six months ended June 30, 2005 to $334,570 in the six months ended June 30,
2006. The increase was mainly due to an increase in gross profit which as
mentioned above increase by $453,341.
OTHER INCOME (EXPENSES)
Interest expenses increased by $195,101 or 195% from $100,054 in the
six months ended June 30, 2005 to $295,155 in the six months ended June 30,
2006. This increase is mainly due to increase of the use of the short-term
borrowings from the bank and increase in interest rate. We expect our interest
expense continue to increase in 2006 because of increased interest rates.
INCOME TAX
Income tax increased by $42,134 or 443.5% from $9,500 in the six months
ended June 30, 2005 to $51,634 in the six months ended June 30, 2006 due to an
increase of profit for the six months ended June 30, 2006.
NET INCOME (LOSS)
Net income increase by $141,130 or 132.6% from a loss of $106,473 in
the six months ended June 30, 2005 to a profit of $34,657 in the six months
ended June 30, 2006. It is mainly due to increase in gross profit together with
reduction of general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have historically been
cash provided by operations, bank lines of credit and credit terms from
suppliers. The Company's principal uses of cash have been for operations and
working capital. The Company anticipates these uses continue be its principal
uses of cash in the future.
20
The Company may require additional financing in order to finance our
growing business and implement its business plan. In order to meet anticipated
demand for Samsung's memory products in the Southern China market over the next
12 months, the Company anticipates an additional need of working capital of at
least $2.0 million through short-term borrowings from the banks in order to
finance the purchase of Samsung memory products from Samsung HK and credits
given to its customers. As the anticipated cash generated by the Company's
operations are insufficient to fund its growth, the Company needs to continue
borrowing or raising additional working capital. There is 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. The Company's business growth and
prospects would be materially and adversely affected. As a result of any such
financing, if it is an equity financing, the holders of the Company's common
stock may experience substantial dilution. In addition, as our operating results
may be negatively impacted and thus delayed as a result of political and
economic factors beyond the management's control, the Company's capital
requirements may increase.
The following factors, among others, could cause actual results to
differ from those expected caused by: pricing pressures in the industry; a
downturn in the economy in general or in the memory products sector; an
unexpected decrease in demand for Samsung's memory products; a decrease in our
ability to attract new customers; an increase in competition in the memory
products market; and the ability of our customers to obtain financing. These
factors or additional risks and uncertainties not known to ACL or that currently
deems immaterial may impair business operations and may cause ACL's actual
results to differ materially from any forward-looking statement.
Although we believe our expectations of future growth are reasonable,
ACL cannot guarantee future results, levels of activity, performance or
achievements. ACL is under no duty to update our expectation after the date of
this report to conform them to actual results or to make changes in our
expectations.
In the six months ended June 30, 2006, net cash used for operating
activities was $1,858,803 while in the six months ended June 30, 2005, net cash
provided by operating activities was $413,504, an increase in net cash used for
operating activities of $2,272,307. This increase was primarily due to increase
of inventories value and accounts receivable from related parties at June 30,
2006.
In the six months ended June 30, 2006, net cash used for investing
activities was $631,316 while in the six months ended June 30, 2005, ACL used
$389,069 in investing activities, an increase in cash used of $242,247. Increase
was primarily due to the increase of restricted cash deposited with the bank as
part of the terms for its bank borrowings during the six months ended June 30,
2006.
In the six months ended June 30, 2006, net cash provided by financing
activities was $1,241,556 while in the six months ended June 30, 2005, net cash
provided by financing activities was $291,751, an increase of $949,805. Increase
was primarily due to increase of borrowings on the lines of credit and loan
facilities.
An essential element of the Company's growth in the future will be to
obtain adequate additional working capital to meet anticipated market demand
from PC users (business and personal) in the southern part of China and to
diversify its businesses and products in the near future.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ACL is exposed to market risk for changes in interest rates as its bank
borrowings accrue interest at floating rates of 0.5% to 1.0% over the Best
Lending Rate (currently at the range of 8.0 to 8.25% per annum) prevailing in
Hong Kong. For the six months ended June 30, 2006 and the six months ended June
30, 2005, ACL did not generate any material interest income or incur significant
interest expenses. Due to the increase in the line of credit and notes payables
in 2006, ACL believes that changes in interest rates may have a material effect
on its liquidity, financial condition or results of operations.
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IMPACT OF INFLATION
ACL believes that its results of operations are not significantly
impacted by moderate changes in inflation rates as it expects it will be able to
pass these costs by component price increases to its customers.
SEASONALITY
ACL has not experienced any material seasonality in sales fluctuations
over the past 2 years in the memory products markets; however, it does
anticipate an increase in sales of DIMM memory products as a result of a
seasonal "back-to-school" increase in PC sales in the third quarter of 2006.
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to
ensure that material information relating to the Company, including Atlantic, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.
(a) Based on their evaluation as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. Although there were no significant deficiencies or material
weaknesses, there were some areas where room for improvement was noted and
management has committed to improving in these areas. The Company has adopted
many of the formal and informal suggestions of our auditors, Stonefield
Josephson, Inc., and are implementing weekly and monthly checks to assure that
these disclosure controls and internal controls stay in place.
The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002
require an assessment of the effectiveness of the Company's internal controls
over financial reporting beginning with our Annual Report on Form 10-K for the
fiscal year ending on or after July 15, 2007. The Company's independent auditors
will be required to confirm in writing whether management's assessment of the
effectiveness of the internal controls over financial reporting is fairly stated
in all material respects, and separately report on whether they believe
management maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007.
As part of the assessment of our internal controls in connection with the
process required by Section 404 of the Sarbanes-Oxley Act of 2002, management
intends to continue to review, evaluate and strengthen our controls and
processes. Management cannot state that material weaknesses in internal controls
will not be determined. Management also cannot state that the process of
evaluation and the auditor's attestation will be completed on time. If a
material weakness is discovered, corrective action may be time consuming, costly
and further divert the attention of management. The disclosure of a material
weakness, even if quickly remedied, could reduce the market's confidence in the
Company's financial statements and harm the Company's stock price, especially if
a restatement of financial statements for past periods is required.
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PART II
ITEM 6. 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.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACL SEMICONDUCTORS INC.
Date: August 14, 2006 By: /s/ Chung-Lun Yang
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Chung-Lun Yang
Chief Executive Officer
Date: August 14, 2006 By: /s/ Kenneth Lap-Yin Chan
-------------------------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer (Principal
Accounting Officer)
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