Item 1B.
Unresolved Staff Comments.
None.
As of March 31, 2010, we have an R&D headquarter in Shanghai, China and an office in Huizhou, Guangdong, China.
Our principal executive offices occupy area of 140 square meters on the 9th floor YongSheng Building, Zhongshan Xi Road, Xuhui District, Shanghai, China. The rental is US$2,000 per month. We also rent 950 square meters of office space in the QiaoXing Industry and Technology Zone, Tangquan, Huizhou, Guangdong, China. The rental is US$1,400 per month. These leased premises house the R&D and design department, product testing facilities, maintenance and administrative departments.
We are not involved in any material pending legal proceedings at this time, and management is not aware of any contemplated proceeding by any governmental authority.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
PART II.
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the Over-the-Counter Bulletin Board under the symbol “TBYH.OB”. As of May 26, 2010, there were: (i) 319 shareholders of record, without giving effect to determining the number of shareholders who hold shares in “street name” or other nominee status; (ii) no outstanding options to purchase shares of our common stock; (iii) 30,088,174 outstanding shares of our common stock, of which 9,640,186 shares are either freely tradable or eligible for sale under Rule 144 or Rule 144K, and (iv) no shares subject to registration rights.
The following table sets forth, for the fiscal quarters indicated, the high and low closing prices as reported by the Over-the-Counter Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
Sales Price
Dividend Policy
We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our Board of Directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws and our credit arrangements then impose.
Recent Sales of Unregistered Securities
During the year ended March 31, 2010, we did not issue any securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).
Item 6.
Item 6.
Selected Financial Data.
The following tables summarize the consolidated financial data of T-Bay Holdings, Inc. for the periods presented. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to these consolidated financial statements appearing elsewhere in this Form 10-K.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
The following review concerns the year ended March 31, 2010.
In the wake of the global financial crisis, our customers have become slow in their payments. The Company does not expect settlement from customers within twelve months from the date of sale of goods or services. Therefore, in the financial statements, accounts receivable relating to revenue for the year ended March 31, 2010 have been discounted based on the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments of 5%. US$1,425,000 was debited to revenue accordingly. Also, the customers changed their orders from design services to mobile phone components, to provide some relief to the financial strain that they have. This behavior has the effect of transferring part of the financing of the production of mobile phone handsets from our customers to us. This, together with the reduction in aggregate demand in the types of mobile phones to which our design services were suited, in the Mainland China market as well as the overseas market, resulted in a drastic reduction of customer orders for design services, for which the gross margin is relatively high. In addition to accounts receivable from our customers, our assets in the balance sheet as of March 31, 2010 also included other receivables which mainly represented remaining sales proceeds receivables of US$10,475,000 for disposal of 80% interest in Fujian QiaoXing. We expect to recover this amount in full by March 31, 2011, and no allowance for doubtful receivable had been made. The global financial crisis, and its consequence in various manifestations, has also caused an increase in credit risk on our receivables. We believe that we have made adequate provision for doubtful accounts in our financial statements. However, if the provision turns out to be inadequate, then our financial performance and our financial position will be adversely affected. The decline in purchases of design services and the slowness in collecting our accounts receivable pose potential risks to our financial performance. While there are limited steps that Management can take to mitigate these potential risks, we cannot be assured that our customers’ financial position will improve. Our business model has been adjusted with a view to conserve cash to allow us to get through this extended period of temporary hardship. The orderly collection of our long-outstanding accounts receivable and other receivables is necessary to the maintenance of sufficient liquidity and capital resources for our operations during the next 12 months. While we believe that adequate provisions on our accounts receivable and other receivables have been made, we cannot assure investors that their carrying amount (net of provision) will be received in full within the anticipated time frame. A failure to collect the anticipated amount within the anticipated time frame would adversely affect our liquidity and capital resources.
Overview
Our net revenue increased 2.9% from US$34,838,000 for the year ended March 31, 2009 to US$35,867,000 for year ended 31 March 2010, which was the net result of a drop in revenue from design services, and an increase in revenue from our sales of mobile phone components. Our net results for the year changed from a loss of US$8,713,000 to a loss of US$6,508,000. This reduction of loss was the net result of the decrease in gross profit on the one hand, and the decrease in general and administrative expenses, the decrease in other operating expenses, the decrease in income tax and the decrease in the loss from discontinued operations on the other hand. We recorded a loss per share of US$0.22 for the year ended March 31, 2010, and a loss per share of US$0.29 for the year ended March 31, 2009.
Net Revenue
Our net revenue was US$35,867,000 for the year ended March 31, 2010, which represented an increase of US$1,029,000, or 2.9%, from US$34,838,000 for the year ended March 31, 2009. Revenue from sales of mobile phone components was US$35,212,000 compared to US$23,614,000 in the previous fiscal year, representing a 49.1% increase. Revenue from design services decreased to US$655,000 from US$11,224,000 in previous fiscal year, representing a 94.2% decrease.
Our net revenue increase was the net result of the increase in the sales of mobile phone components and the decrease in design services. In the fiscal year ended March 31, 2010, customers did not place as many orders for design services, but placed more orders for mobile phone components. As a result, the percentage of our revenue from sales of mobile phone components increased substantially as compared with prior year.
For the year ended March 31, 2010, revenue from design services represented 1.8% of total revenue, while revenue from sales of mobile phone components was 98.2%, compared to 32.2% from design services and 67.8% from sales of mobile phone components for the year ended March 31, 2009.
Detailed information on sale of mobile phone components
Sales of mobile phone components (PCB and PCBA, the key components in the manufacture of mobile handsets) increased from US$23,614,000 to US$35,212,000, representing a 49.1% increase. The increase was largely the result of the transfer of orders from design services to mobile phone components. For customers who would like to relieve the strain on their finances, they preferred buying mobile phone components rather than design services, which requires more capital investments.
We design and manufacture PCB and provide PCBA according to our customers’ specifications. We manufactured more PCB and PCBA for our customers for the year ended March 31, 2010 when compared with the year ended March 31, 2009.
Detailed information on revenue from design services
Revenue from design services decreased from US$11,224,000 for the year ended March 31, 2009 to US$655,000 for the year ended March 31, 2010, representing a 94.2% decrease. In the year ended March 31, 2010, there was a drastic reduction of customer orders for design services compared with the previous fiscal year. We believe that as a result of the global financial crisis and its consequence in its various manifestations, and also the change in consumer preference, aggregate demand for the types of mobile phone handsets to which our design services were suited, in the Mainland China market as well as the overseas market, had been on a downward trend. The decrease in design services was to a certain extent also the result of order transfer, as customers shifted from purchasing design services to purchasing components. By purchasing components rather than design services, customers have been able to conserve cash.
Cost of Revenue
For the fiscal year ended March 31, 2010, cost of revenue increased to US$34,930,000 from US$24,440,000 in the fiscal year ended March 31, 2009, representing a 42.9% increase. Cost of revenue primarily consisted of the purchase cost of raw and processed materials.
Detailed information on Cost of Revenue
The increase in cost of revenue was mainly attributable to an increase in the purchase of raw materials. As we manufactured more PCB and PCBA boards for our customers, we purchased more raw materials in the current fiscal year than in the fiscal year ended March 31, 2009. Key materials for manufacture such as chipsets and PCB blank boards accounted for a large proportion of cost of raw materials. The cost of raw material increased by US$11,152,000, or 48.6 %, from US$22,952,000 for the fiscal year ended March 31, 2009.
Gross profit
Our gross profit was US$937,000 for the fiscal year ended March 31, 2010 as compared to US$10,398,000 for the fiscal year ended March 31, 2009, representing a 91.0% decrease. The decrease in gross profit was mainly attributable to the significant decrease in revenue from design services with high profit margin.
Operating Expenses
Operating expenses consist of selling expenses and general and administrative (G&A) expenses and other operating expenses. For the fiscal year ended March 31, 2010, operating expenses were US$8,088,000, as compared to US$15,363,000 for the fiscal year ended March 31, 2009, representing a 47.4% decrease.
Detailed information of operating expenses for the years ended March 31, 2010 and 2009 is as follows:
Operating expenses during the fiscal year ended March 31, 2010 were US$8,088,000, 22.5% of revenue, compared to US$15,363,000, or 44.1% of revenue, for the fiscal year ended March 31, 2009. The decrease was mainly attributed to the decrease in G&A expenses and the decrease in other operating expenses.
Selling expenses decreased from US$245,000 to US$129,000. The decrease was mainly attributable to the closure of our sales office in Shenzhen.
G&A expenses were US$7,959,000, 22.2% of revenue, compared to US$10,043,000, or 28.8% of revenue in the last fiscal year. The decrease in G&A expenses was mainly due to the decrease of allowance for doubtful receivables from US$8,077,000 to US$6,227,000 and a decrease of salaries. Included in the G&A expenses was the charge for allowance for doubtful receivables. We increased allowance for doubtful receivables by US$6,227,000 for the year ended 31 March 2010. The allowance for doubtful receivables was US$15,429,000 as of March 31, 2010 compared to US$9,202,000 as of March 31, 2009. Allowance for doubtful receivables is maintained for all customers based on a variety of factors, including the overall economy and industry condition, length of time the receivables are past due, significant one-time events and historical experience. For the year ended March 31, 2010, particular consideration was given to the increased credit risk due to the sluggish economic climate, which was evident from the increase in the length of time the receivables were past due. With a view to halting further increases in allowance for doubtful receivables, in its decision to grant credit to its customers, the Company has been using more stringent criteria in the evaluation of their creditworthiness.
Other operating expenses for the fiscal year ended March 31,2009 represented compensation of US$5,075,000 (2010: US$nil) to two customers to compensate them for subcontracting fees and raw materials consumed for two defectively designed mobile phone PCBAs.
Loss from Operations
Loss from operations was US$7,151,000 in fiscal year ended March 31, 2010, compared to loss of US$4,965,000 in year ended March 31, 2009. This increase in loss was the net result of the decrease of revenue in design service with relatively high gross profit margin, which was not adequately made up for by the increase in the sales of mobile phone components with relatively low profit margin on the one hand, and the decrease in compensation to customers on the other hand.
Income Tax
Sunplus is subject to PRC Enterprise Income Tax. Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax in Shanghai was 25%.
For the year ended March 31, 2010, Sunplus recorded an income tax expense US$7,000, compared to US$1,900,000 in the year ended March 31, 2009. The income tax expenses of US$7,000 related to an under-provision in the prior year. No income tax expense relating to the current fiscal year was recorded for the year ended March 31, 2010 as Sunplus incurred a loss for this fiscal year.
Non-controlling Interest
Non-controlling interest represents the portion of loss of Sunplus that we do not own. In the fiscal year ended March 31, 2010, non-controlling interest was attributable to the 5% of the equity interest of Sunplus owned by Shanghai Fanna.
Loss from Discontinued Operations
For the year ended March 31, 2009, the Company reported a loss of US$2,822,000 (2010: US$nil) from discontinued operations. Loss from discontinued operations for the year ended March 31, 2009 consisted of other revenue of US$2,000, operating losses of US$90,000, loss on disposal of a subsidiary of US$2,730,000 and impairment loss on assets of discontinued operations of US$4,000. We recorded losses on discontinued operations as Sunplus disposed of its 80% interest in its subsidiary Fujian QiaoXing for US$12,230,000 (RMB84,000,000), which was US$2,730,000 less than the carrying values of Fujian QiaoXing’s net assets.
Net loss
As a result of the above items, net loss attributable to common stockholders was US$6,508,000 for the year ended March 31, 2010, as compared to net loss attributable to common stockholders of US$8,713,000 for the year ended March 31, 2009. This reduction of loss was the net result of the decrease of revenue in design service with relatively high gross profit margin, which was not adequately made up for by the increase in the sales of mobile phone components with relatively low profit margin on the one hand, and the decrease in G&A expenses, the decrease in compensation paid to customers, the decrease in income tax and the decrease in loss from discontinued operations on the other hand.
Loss per share attributable to common stockholders
We reported loss per share attributable to common stockholders of US$0.22, based on a weighted average number of shares outstanding of 30,088,174 for the year ended March 31, 2010, compared with a loss per share of US$0.29, based on the same weighted average number of shares for the year ended March 31, 2009. Our outstanding common stock was 30,088,174 shares as of March 31, 2010 and March 31, 2009. We do not have any preferred stock issued or outstanding warrants or options as of March 31, 2010 and March 31, 2009.
Assets
Cash and cash equivalents
Cash and cash equivalents were US$703,000 as of March 31, 2010. Decrease in cash and cash equivalents was mainly attributed to the negative operating cash flows arising from the paltry gross profit and the significant increase in accounts receivable.
Accounts receivable, net
As of March 31, 2010, accounts receivable amounted to US$28,493,000, an increase of US$14,132,000 compared to US$14,361,000 as of March 31, 2009. The increase was mainly the net result of an increase in the gross amount of accounts receivable and an increase in the allowance for doubtful accounts receivable. The gross amount of the accounts receivable increased by US$21,726,000 mainly because trade debtors took longer to pay in an economic environment which was deteriorating. The allowance for doubtful accounts receivable increased by an amount of US$7,594,000 for the year ended March 31, 2010. The Company evaluated credit risk on trade debtors and maintained its allowance policy of 100% provision for accounts receivable overdue more than one year. It is to reflect significant credit risk in the wake of the financial crisis, with its consequence in various manifestations. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted.
Due to the financial crisis, the Company does not expect settlement from customers in the next twelve months, therefore, accounts receivables relating to revenue for the year ended March 31, 2010 have been discounted based on the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments of 5%. US$1,425,000 was debited to revenue accordingly.
Detailed information on accounts receivables, net
Prepayments, deposits and other receivables, net
Prepayments, deposits and other receivable mainly represented remaining sales proceeds receivables of US$10,475,000 (2009: US$11,928,000) for disposal of 80% interest in Fujian QiaoXing. An allowance of US$1,153,000 (2009: US$2,520,000) was made against long-outstanding other receivables.
Pursuant to the agreement signed between Sunplus and Qiaoxing Telecom in respect of the disposal of Fujian QiaoXing to Qiaoxing Telecom in March 2009, Qiaoxing Telecom was to settle this outstanding balance by June 2009. However, Qiaoxing Telecom was unable to obtain approval from the local governmental bureau in Zhangzhou to develop the land held by Fujian QiaoXing. This was due to the delay in development by Fujian QiaoXing. When the Zhangzhou local government granted the land use right to Fujian QiaoXing in 2006, Fujian QiaoXing was required to develop the land within three years. However, the land had not been developed prior to the disposal to Qiaoxing Telecom and the local authorities have refused to approve the development plans submitted by Qiaoxing Telecom.
Recently, the Company has actively liaised with the Zhangzhou local governmental bureau to apply for an extension of the land development. Based on this contact, the Company, in conjunction with its legal counsel, has made its initial assessment of the situation and concluded that it is more likely than not that the Zhangzhou local government bureau will provide an extension for developing the land and Qiaoxing Telecom can honor the agreement and settle the balance due to Sunplus. Accordingly, no allowance has been made in respect of the sales proceeds receivable from QiaoXing Telecom of US$10,475,000.
Property, Plant and Equipment
As of March 31, 2010, our property, plant and equipment amounted to US$1,591,000.
The detailed information on property, plant and equipment is as follows:
Liabilities
Our total liabilities as of March 31, 2010 were US$6,249,000, which consisted of US$1,994,000 in current liabilities and US$4,255,000 in long-term liabilities.
Long-term liabilities amounted to US$4,255,000 as of March 31, 2010, all of which were liabilities due to shareholders.
Liquidity and Capital Resources
For the fiscal year ended March 31, 2010, we principally engaged in provision of design solutions of wireless communication devices and sales of mobile phone components. We did not declare or pay dividends in the fiscal year ended March 31, 2010.
Cash and cash equivalents decreased from US$20,493,000 to US$703,000 as of March 31, 2010.
For the year ended March 31 2010, US$19,949,000 was used in operating activities and US$14,000 was provided by investing activities and US$142,000 was provided by financing activities. Cash and cash equivalents decreased by US$19,790,000 to US$703,000 as of March 31, 2010 from US$20,493,000 as of March 31, 2009.
We used US$19, 949,000 in operating activities for the year ended March 31, 2010, as compared to US$3,987,000 for the last fiscal year. Net cash used in operating activities for the year ended March 31, 2010 related to net loss adjusted for items not involving movement of cash for the period, augmented mainly by the increase in accounts receivable of US$21,691,000.
In arriving at the net loss, we made an allowance of US$6,227,000 for doubtful receivables for the year ended March 31, 2010, which did not involve any outflow of cash.
Net cash provided by investing activities amounted to US$14,000 for the year ended March 31, 2010, compared to net cash used of US$1,000 for the last fiscal year. Cash provided by investing activities for the year ended March 31, 2010 was mainly proceeds from the sale of property, plant and equipment.
For the year ended March 31, 2010, net cash provided by financing activities was approximately US$142,000, compared to net cash provided of US$78,000 for the last fiscal year. For the year ended March 31, 2010, net cash flow provided by financing activities related primarily to the increase in advances from a shareholder.
As of March 31, 2010, we had capital commitments of US$38,000 in relation to acquisition of intangible assets.
We believe that proceeds from the collection of our long-outstanding accounts and other receivables are necessary to support our operations and capital commitments, as well as to meet our working capital needs for the next twelve months. While we believe that adequate provisions on our accounts receivable and other receivables have been made, we cannot assure investors that their carrying amount (net of provision) will be received in full within the anticipated time frame. A failure to collect the anticipated amount within the anticipated time frame would adversely affect our liquidity and capital resources.
Critical Accounting Policies
The financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition
Our revenues are mainly derived from design fees of mobile handset design services and sales of mobile phone components. We earn our revenue mainly through NRE fees, royalties, and sales of products.
NRE fee. NRE fees stands for Non Refundable Engineering fees, a fixed one-off fee after an agreement has been signed by both the customer and the Company. The NRE fees are no less than the total expenses of project design which normally includes the cost of market study, product concept identification, hardware designs, software designs, engineer expenses, mechanical engineering designs, testing and quality assurance, pilot production and production support. The NRE fees are recognized when payments are received.
Royalty. In addition to NRE fees, we also charge royalties to our customers. Royalty is calculated at an agreed rate for each unit manufactured or sold by our customers. The rate is variable based on volume of mobile handsets manufactured or sold. Royalty income is recognized when confirmation of manufacturing or selling volume is obtained from customers.
Component sales. Revenue from sales of components including but not limited to PCBAs, PCBs and wireless modules is recognized when title passes to the customers, which is generally when products are delivered to them.
Allowance for doubtful receivables
The Group recognizes an allowance for doubtful receivables to ensure accounts and other receivable are not overstated due to uncollectibility. Allowance for doubtful receivables is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional allowance for individual accounts is recorded when the Group becomes aware of a customer’s or other debtor’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s or other debtor’s operating results or financial position. If circumstances related to customers or debtors change, estimates of the recoverability of receivables would be further adjusted.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
T-Bay Holdings, Inc.
We have audited the accompanying consolidated balance sheets of T-Bay Holdings, Inc. and subsidiaries (the “Company”) as of March 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income, changes in equity, and cash flows for each of the two years in the period ended March 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2010 and 2009 and the results of its operations and cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Moore Stephens
Certified Public Accountants
Hong Kong
June 29, 2010
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2010 and 2009
(In thousands of United States dollars)
The accompanying notes are an integral part of these consolidated financial statements.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the years ended March 31, 2010 and 2009
(In thousands of United States dollars, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended March 31, 2010 and 2009
(In thousands of United States dollars)
The accompanying notes are an integral part of these consolidated financial statements.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2010 and 2009
(In thousands of United States dollars)
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the years ended March 31, 2010 and 2009
(In thousands of United States dollars)
The accompanying notes are an integral part of these consolidated financial statements.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010 and 2009
1. The Company and Subsidiaries
T-Bay Holdings, Inc. (the “Company” or T-Bay) was incorporated under the laws of the State of Utah on August 8, 1984 as “Sharus Corporation” with authorized common stock of 50,000,000 shares with a par value of US$0.001. On June 13, 1989, the domicile of the Company was changed to the state of Nevada in connection with a name change to “Golden Quest, Inc.”. On January 7, 2002, the name was changed to “T-Bay Holdings, Inc.” as part of a reverse stock split of 400 shares of outstanding stock for one share and on November 23, 2004, the Company increased the authorized common stock to 100,000,000 shares with a par value of US$0.001 as part of a reverse stock split of 20 outstanding shares for one share.
On August 16, 2005, pursuant to an Agreement and Plan of Reorganization, T-Bay issued 18,550,000 shares of its common stock for all of Amber Link International Limited’s (“Amber Link”) and Wise Target International Limited’s (“Wise Target”) outstanding shares of common stock (the “Merger”). Amber Link and Wise Target were two of the owners of Shanghai Sunplus Communication Technology Co., Ltd. (“Sunplus”). Wise Target owned a 75% interest and Amber Link owned a 20% interest in Sunplus. After the Merger, T-Bay indirectly owned a 95% interest in Sunplus. In March 2009, Wise Target transferred all its holdings (75%) in Sunplus to Amber Link for US$2,885,000 (HK$22,500,000). As a result of this transaction, Amber Link directly owned 95% of Sunplus and this transaction had no impact on the Company’s effective holdings of Sunplus. Shanghai Fanna Industrial Design Co., Ltd. owned the remaining 5% interest in Sunplus. On November 25, 2009, the Company transferred all its holdings (100%) in Amber Link to Wise Target for US$2,600. As a result of the transaction, the Company indirectly holds Amber Link and this transaction had no impact on the Company’s effective holdings of Amber Link and Sunplus.
Wise Target was incorporated on April 24, 2002 under the International Business Companies Act in the British Virgin Islands.
Amber Link was incorporated on May 10, 2002 under the International Business Companies Act in the British Virgin Islands. During the year ended March 31, 2007, Amber Link commenced the sales of mobile phones and components.
Sunplus was established on October 17, 2002 under the laws of the People’s Republic of China (“PRC”) as a Sino-foreign joint venture specialized in the development, production and sales of electronic telecommunication devices. Sunplus commenced operations on May 1, 2003. At March 31, 2010, Sunplus has approximately 80 staff, mostly engineers and software programmers.
On February 12, 2007, Sunplus established a wholly-owned subsidiary, Zhangzhou JiaXun Communication Facility Co., Ltd. (“Zhangzhou JiaXun”) under the laws of the PRC. Zhangzhou JiaXun is an investment holding company.
On March 19, 2007, Sunplus and Zhangzhou JiaXun acquired 80% and 20%, respectively, of Fujian Qiaoxing Industry Co., Ltd. (“Fujian Qiaoxing”).
On March 20, 2009, Sunplus disposed of its 80% interest in Fujian Qiaoxing to Qiaoxing Telecommunication Industry Company Limited (“QiaoXing Telecom”), a third party, at a consideration of US$12,230,000 (RMB84,000,000) (See Note 12).
On April 9, 2009, Sunplus disposed of Zhangzhou JiaXun to QiaoXing Telecom at a consideration of US$731,000 (RMB5,000,000) (See Note 12).
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
1. The Company and Subsidiaries (continued)
As of March 31, 2010, the Group structure is as follows:-
2. Summary of Significant Accounting Policies
(a) Basis of Preparation
The consolidated financial statements for the two years ended March 31, 2010 and 2009 included the financial statements of T-Bay and its subsidiaries (hereinafter, referred to collectively as the “Group”) and are prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP). All significant inter-company balances and transactions have been eliminated on consolidation.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
2. Summary of Significant Accounting Policies (continued)
(b) Basis of Consolidation
The consolidated balance sheet as of March 31, 2010 included T-Bay, Wise Target, Amber Link and Sunplus. The consolidated balance sheet as of March 31, 2009 also included Zhangzhou JiaXun. As mentioned in Note 1, Zhangzhou JiaXun was disposed of on April 9, 2009; therefore, the financial position of Zhangzhou JiaXun has been presented as assets of discontinued operations as of March 31, 2009.
The consolidated statement of operations for the year ended March 31, 2010 included T-Bay, Wise Target, Amber Link and Sunplus. The consolidated statement of operations for the year ended March 31, 2009 also included Fujian Qiaoxing and Zhangzhou JiaXun.
(c) Use of Estimates
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Significant estimates include useful lives of depreciable and amortizable assets and allowance for doubtful receivables. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
The Group considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2010 and 2009, the Group did not have any cash equivalents.
(e) Allowance for Doubtful Receivables
The Group recognizes an allowance for doubtful receivables to ensure accounts and other receivable are not overstated due to uncollectibility. Allowance for doubtful receivables is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional allowance for individual accounts is recorded when the Group becomes aware of a customer’s or other debtor’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s or other debtor’s operating results or financial position. If circumstances related to customers or debtors change, estimates of the recoverability of receivables would be further adjusted (See Note 3).
(f) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided principally by use of the straight-line method over the estimated useful lives of the related assets. Expenditure for maintenance and repairs, which does not improve or extend the expected useful life of the assets, is expensed to operations while major repairs are capitalized.
Management estimates that property, plant and equipment have a 10% residual value. The estimated useful lives are as follows:
The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is recognized in the statement of operations and comprehensive income.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
2. Summary of Significant Accounting Policies (continued)
(g) Intangible Assets
Intangible assets consist of software and patents and are amortized using the straight-line method over their estimated useful life of 5 years.
(h) Impairment of Long-Lived Assets
In accordance with Statement of Auditing Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, which is now codified as Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 360-10-35, the Group evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized. For the year ended March 31, 2009, an impairment loss of US$4,000 has been recognized. No Impairment loss was recognized in 2010.
(i) Income Taxes
The Group accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes”, which is now codified as FASB ASC No. 740. Under FASB ASC No. 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC No. 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Group reviews the differences between the tax bases under PRC tax laws and financial reporting under US GAAP. As of March 31, 2010 and 2009, no material differences were found; therefore, there were no material deferred tax assets or liabilities arising from the operations of the subsidiaries in the PRC.
FASB ASC No 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and measurement attributable for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB ASC No. 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions. Interest and penalties from tax assessments, if any, are included in general and administrative expenses in the consolidated statements of operations and comprehensive income.
The Group recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government. However, the Group cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC government officials.
Based on all known facts and circumstances and current tax law, the Group believes that the total amount of unrecognized tax benefits as of March 31, 2010 and 2009 is not material to its results of operations, financial condition or cash flows. The Group also believes that the total amount of unrecognized tax benefits as of March 31, 2010 and 2009, if recognized, would not have a material effect on its effective tax rate. The Group further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Group’s results of operations, financial condition or cash flows.
Under current PRC tax laws, no tax is imposed in respect to distributions paid to owners except individual income tax.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
2. Summary of Significant Accounting Policies (continued)
(j) Revenue Recognition
Revenue from goods sold is recognized when title has passed to the purchaser, which generally is at the time of delivery. Revenue from design services is recognized when earned on the basis of the terms specified in the underlying contractual agreements.
(k) Research and Development Costs
Research and development costs consist of expenditure incurred during the course of planned research and investigation aimed at discovery of new knowledge which will be useful for developing new products or significantly enhancing existing products, and the implementation of such through design and testing of product alternatives. All expenses incurred in connection with the Group’s research and development activities are charged to current income. During the two years ended March 31, 2010 and 2009, research and development costs amounting to nil and US$17,000, respectively, were charged to the statement of operation and are included in cost of revenue.
(l) Foreign Currency Translation and Transactions
The functional currencies of the Group are U.S. dollars, Hong Kong dollars and Renminbi, and its reporting currency is U.S. dollars. The Group’s balance sheet accounts are translated into U.S. dollars at the year-end exchange rates and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the consolidated statement of operations as incurred.
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Group because it has not engaged in any significant transactions that are subject to the restrictions.
(m) Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Values of Financial Instruments”, which is now codified as FASB ASC No. 825, requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts, notes and other receivables, accounts payable, accruals and other payables, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations.
The long-term accounts receivable are discounted based on the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments of 5%. US$1,425,000 was debited to revenue accordingly.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
2. Summary of Significant Accounting Policies (continued)
(m) Fair Value of Financial Instruments (continued)
The Group complies with FASB ASC No. 820 “Fair Value Measurements and Disclosures”. FASB ASC No. 820 clarifies the definition of fair value, prescribes methods for measuring fair value and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The Group currently does not have any balance sheet components deemed financial assets, and we do not have any nonfinancial assets or liabilities of our continuing operations that have been marked to fair value, however, our financial statements in the future may be impacted by this standard.
(n) Loss Per Share
Basic loss per share is computed by dividing the loss for the year by the weighted average number of common shares outstanding for the year.
(o) Profit Appropriation
In accordance with PRC regulations, the PRC subsidiaries are required to make appropriations to the statutory surplus reserve, based on after-tax net income determined in accordance with PRC GAAP. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations to the statutory public welfare fund and discretionary surplus reserve fund are made on the same basis as statutory surplus fund, normally at 5%-10% or higher rates and are generally optional at the discretion of the Board of Directors. Statutory surplus reserve is non-distributable other than in liquidation.
(p) Preferred Stock
No shares of preferred stock have been issued or are outstanding. Dividends, voting rights and other terms, rights and preferences of the preferred shares have not been designated but may be designated by our board of directors from time to time.
3. Allowance for Doubtful Receivables
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
4. Property, Plant and Equipment, Net
Depreciation expense for each of years ended March 31, 2010 and 2009 was approximately US$874,000 and US$975,000, respectively.
5. Intangible Assets, Net
Changes in the carrying amount of intangible assets for the years ended March 31, 2010 and 2009 were as follows:
The estimated amortization expense for the five years ending March 31, 2011, 2012, 2013, 2014 and 2015 amounts to approximately US$22,000, US$18,000, US$2,000, US$ nil and US$ nil, respectively.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
6. Income Taxes
Amber Link and Wise Target are not subject to income taxes in any tax jurisdiction.
No provision for current income tax for T-Bay has been made as it incurred a loss for each of the years ended March 31, 2010 and 2009, respectively.
Sunplus is subject to PRC Income Tax. Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25%.
Zhangzhou JiaXun and Fujian Qiaoxing were inactive during the year ended March 31, 2009 up to date of disposal.
A reconciliation between taxes computed at the PRC statutory rate of 25% and the Group’s effective tax rate is as follows:-
As of March 31, 2010, T-Bay had accumulated net operating loss carryforwards for United States federal tax purposes of approximately US$649,000, that are available to offset future taxable income. As of March 31, 2010, Sunplus had net operating loss carryforwards of approximately US$2,949,000 that are available to offset future taxable income up to 2015. Realization of the net operating loss carryforwards is dependent upon future profitable operations. In addition, the carryforwards may be limited upon a change of control in accordance with Internal Revenue Code Section 382, as amended. Accordingly, management has recorded a valuation allowance to reduce deferred tax assets associated with the net operating loss carryforwards to zero at March 31, 2010. T-Bay’s net operating loss carryforwards expire in years 2012 through 2030.
As of March 31, 2010, deferred tax assets consist of:-
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
7. Concentrations and Credit Risk
The Group operates principally in the PRC (including Hong Kong) and grants credit to its customers in this geographic region. Although the PRC is economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Group’s operations.
Financial instruments that potentially subject the Group to a concentration of credit risk consist of cash, accounts and other receivables.
As of March 31, 2010 and 2009, the Group had credit risk exposure of uninsured cash in banks of approximately US$703,000 and US$20,494,000, respectively.
As of March 31, 2010 and 2009, the Group had credit risk exposure of sales proceeds receivable from Qiaoxing Telecom of approximately US$10,475,000 and US$11,928,000, respectively. (See Note 1)
Pursuant to the agreement signed between Sunplus and Qiaoxing Telecom in respect of the disposal of Fujian Qiaoxing to Qiaoxing Telecom in March 2009, Qiaoxing Telecom was to settle this outstanding balance by June 2009. However, Qiaoxing Telecom was unable to obtain approval from the local governmental bureau in Zhangzhou to develop the land held by Fujian Qiaoxing. This was due to the delay in development by Fujian Qiaoxing. When the Zhangzhou local government granted the land use right to Fujian Qiaoxing in 2006, Fujian Qiaoxing was required to develop the land within three years. However, the land had not been developed prior to the disposal to Qiaoxing Telecom and the local authorities have refused to approve the development plans submitted by Qiaoxing Telecom.
Recently, the Company has actively liaised with the Zhangzhou local governmental bureau to apply for an extension of the land development. Based on this contact, the Company, in conjunction with its legal counsel, has made its initial assessment of the situation and concluded that it is more likely than not that the Zhangzhou local government bureau will provide an extension for developing the land and Qiaoxing Telecom can honor the agreement and settle the balance due to Sunplus. Accordingly, no allowance has been made in respect of the sales proceeds receivable from QiaoXing Telecom of US$10,475,000.
A substantial portion of revenue was generated from one group of customers for the years ended March 31, 2010 and 2009.
The net sales to customers representing at least 10% of net total sales are as follows:-
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
7. Concentrations and Credit Risk (continued)
The following customers had balances greater than 10% of the total accounts receivable as of March 31, 2010 and March 31, 2009:
At March 31, 2010 and March 31, 2009, this group of customers accounted for 20% and 15%, respectively, of accounts receivable.
The accounts receivable that have repayment terms of more than twelve months have been discounted (See Note 2(m)).
The Group does not require collateral to support financial instruments that are subject to credit risk.
8. Retirement and Welfare Benefits
The full-time employees of the PRC subsidiaries are entitled to staff welfare benefits including medical care, casualty, housing benefits, education benefits, unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined contribution plan. The PRC subsidiaries are required to accrue the employer-portion for these benefits based on certain percentages of the employees’ salaries. The total provision for such employee benefits was US$164,000 and US$189,000 for the years ended March 31, 2010 and 2009, respectively. The PRC subsidiaries are required to make contributions to the plans out of the amounts accrued for all staff welfare benefits except for education benefits. The PRC government is responsible for the staff welfare benefits including medical care, casualty, housing benefits, unemployment insurance and pension benefits to be paid to these employees.
9. Related Party Transactions
The Group engages in business transactions with the following related parties:
a. Li Xiaofeng, a director and stockholder of T-Bay.
b. Li Meilian, a stockholder of T-Bay.
The Group has the following transactions and balances with related parties:-
The balances have no stated terms for repayment, are not interest bearing, and are the result of cash advances from related parties and the repayment thereof. Those payables to Li Meilian and Li Xiaofeng which are classified as long-term liabilities are not repayable within the next twelve months.
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
10. Other Operating Expenses
Other operating expenses for the year ended March 31, 2009 represented compensation of US$5,075,000 (2010: US$nil) to two customers to compensate them for subcontracting fees and raw materials consumed for two defectively designed mobile phone printed circuit board accessories.
11. Commitments and Contingencies
Rental expenses for the years ended March 31, 2010 and 2009 amounted to US$ 91,000 and US$ 246,000 respectively, and are included in general and administrative expenses in the consolidated statements of operations and comprehensive income.
The future minimum lease payments under the above-mentioned leases as of March 31, 2010 are as follows:-
12. Discontinued Operations
On December 31, 2008, Sunplus entered into an agreement with Huizhou Liyin Electronics Co., Ltd. (“Huizhou Liyin”) to dispose of, among other things, its 100% interest in Zhangzhou JiaXun for RMB5,000,000 (US$733,000). However, on March 10, 2009, pursuant to a supplemental agreement between Sunplus and Huizhou Liyin, Huizhou Liyin and Sunplus rescinded the original agreement. On the same date, Sunplus entered into another agreement with Qiaoxing Telecom to dispose of, among other things, its interest in Zhangzhou JiaXun at a consideration of RMB5,000,000 (US$724,000). As of March 31, 2009, the net assets of discontinued operations amounted to US$728,000. An impairment loss of US$4,000 was recognized.
On March 20, 2009, Sunplus disposed of its 80% interest in its subsidiary Fujian QiaoXing to Qiaoxing Telecom for a consideration of RMB84,000,000 (US$12,230,000). (See Note 1)
The following table summarises the result of these discontinued operations, net of income taxes for the year ended March 31, 2009.
a) Discontinued Operations (Fujian Qiaoxing and Zhangzhou Jiaxun)
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
12. Discontinued Operations (continued)
a) Discontinued Operations (Fujian Qiaoxing and Zhangzhou JiaXun)
The carrying values of the assets of Zhangzhou JiaXun classified as held for sale as at March 31, 2009 were as follows:
b) Disposal of a subsidiary
On April 9, 2009, Sunplus disposed of its 100% interest in Zhangzhou JiaXun to Qiaoxing Telecom at a consideration of US$731,000 (RMB5,000,000) (See Note 1).
An analysis of the net inflow of cash and cash equivalents in respect of the disposal of Zhangzhou JiaXun is as follows:-
T-BAY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2010 and 2009
13. New Accounting Pronouncements
In June 2009, the FASB issued ASC No. 105 (Prior authoritative guidance: SFAS No. 168 “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”), which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. FASB ASC No. 105 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. ASC No. 105 is effective for the current year. Adoption of FASB ASC No. 105 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”), which is now codified as FASB ASC No. 815. FASB ASC No. 815 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. FASB ASC No. 815 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Accordingly, minority interest has been renamed noncontrolling interest, net loss is reported at amounts that include the amounts attributable to both noncontrolling interests and common stockholders for all period presented. In addition, noncontrolling interest has been reported as a component of equity in the consolidated balance sheets and consolidated statements of changes in equity for all periods presented. The Company has retrospectively applied the presentation to its prior year balances in the consolidated financial statements.
In December 2007, the FASB issued ASC No. 815 (Prior authoritative guidance: FASB issued SFAS 141 (revised 2007), Business Combinations (ASC 815). ASC No. 815 amends and clarifies the accounting guidance for the acquirer’s recognition and measurement of assets acquired, liabilities assumed and noncontrolling interests of an acquiree in a business combination. The adoption of ASC No. 815 had no material effect on the Company’s consolidated financial statements.
In April 2008, the FASB issued ASC No. 350-30-35-1 (Prior authoritative guidance: FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets”). ASC No. 350-30-35-1 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC No. 350-30-35-1, Goodwill and Other Intangible Assets. ASC No. 350-30-35-1 is intended to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure the fair value of the asset under other applicable accounting literature. ASC No. 350-30-35-1 is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of ASC No. 350-30-35-1 had no material effect on the Company’s consolidated financial statements.
In May 2009, the FASB issued FASB ASC No. 855-10 (Prior authoritative guidance: SFAS No. 165, “Subsequent Events”), which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC No. 855-10 is effective after June 15, 2009. The adoption of ASC No. 855-10 had no material effect on the Company’s financial statements. Effective February 24, 2010, the Company adopted FASB ASU No. 2010-09, “Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. The adoption of this ASU had no effect on the Company’s consolidated financial position or results of operations.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T).
Item 9A(T).
Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” pursuant to Exchange Act Rule 13a-15(b). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting. In making this evaluation, our management considered the material weaknesses in our internal control over financial reporting and the status of remediation as discussed below. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of March 31, 2010. However, giving full consideration to the material weaknesses described below, we performed adequate analyses and procedures, including among other things, transaction reviews and account reconciliations, in order to provide assurance that our consolidated financial statements included in this annual report were prepared in accordance with generally accepted accounting principles (“GAAP”) and present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Our management performed an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2010, utilizing the criteria described in the “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The objective of this assessment was to determine whether our internal control over financial reporting was effective as of March 31, 2010. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of March 31, 2010, we identified the following material weaknesses, which have not been fully remedied and continue to exist:
•
There was a lack of 1) effective communication of the importance of internal controls over financial reporting throughout the structure of the Company and 2) an adequate tone set by management around control consciousness.
•
We do not have sufficient in-house capacity to review and supervise the accounting operations. Our policies and procedures with respect to the review, supervision and monitoring of accounting operations were not operating in a fully effective manner. Timely review of vouchers, general ledger and sub-ledger was not sufficient.
•
Our accounting staff were not familiar with U.S. GAAP and SEC reporting requirements. In addition, we did not maintain effective controls over the preparation and review of the period-end closing procedures to ensure the completeness and accuracy of the consolidated financial statements and that balances and disclosures reported in the consolidated financial statements reconciled to the underlying supporting schedules and accounting records.
•
There was a lack of an effective anti-fraud program designed to detect and prevent fraud relating to an effective whistle-blower program, consistent background checks of personnel in positions of responsibility and an ongoing program to manage identified fraud risks.
•
We did not maintain an effective risk assessment and management mechanism. Specifically, we do not have sufficient internal mechanisms to prevent management override in a fully effective manner.
•
Our internal audit function was not sufficient. Specifically, there were no personnel with an appropriate level of experience, training and there were no lines of reporting to allow an internal audit group to function effectively in determining the adequacy of our internal control over financial reporting and monitoring the ongoing effectiveness thereof.
On September 2, 2009, the two independent directors who composed the audit committee resigned from their positions as independent directors of the Company effective September 2, 2009. There is no audit committee since that date.
In light of these material weaknesses management concluded that our internal control over financial reporting was not effective as of March 31, 2010.
However, giving full consideration to the material weaknesses described above, we performed adequate analyses and procedures, including among other things, transaction reviews and account reconciliations, in order to provide assurance that our consolidated financial statements included in this annual report were prepared in accordance with generally accepted accounting principles (“GAAP”) and present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
None.
PART III.
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and officers, as of March 31, 2010, are set forth below. The directors hold office for their respective term and until their successors are duly elected and qualified. Vacancies in the existing Board are filled by a majority vote of the remaining directors. The officers serve at the will of the Board of Directors.
The following is a brief summary of the business experience of our management.
Mr. Xiaofeng Li, Director and Chief Executive Officer.
Mr. Li holds a Bachelor Degree from Shanghai University, Industrial Design Department. From August 1998 to February 2001, Mr. Li was employed by Inventec Appliances Corp. where he was an Industrial Designer. From 2001 to March 2002, Mr. Li was employed by Shanghai Fanna Industrial Product Design Co., Ltd. as executive director and general manager. Since April 2002, Mr. Li has been Chairman of the Board of Shanghai Sunplus Communication Technology Co., Ltd.
Mr. Xiaofeng Li was first appointed Chief Executive Officer of the Company in August 2005, resigned from the office of Chief Executive Officer in June 2008 and was re-appointed Chief Executive Officer in April 2009.
Mr. Xiangning Qin, Director and Chief Executive Officer
Mr. Qin currently serves as the Chief Financial Officer of the Company. From 2000 to 2006, Mr. Qin was employed by Guangxi Liugong Machinery Co., Ltd. (SZSE: 000528), a Top 500 enterprise in China, serving as the Accounting Manager, Accounting Director and Internal Auditor during the six years with Guangxi. Before his appointment as the Chief Financial Officer of the Company on April 1, 2009, Mr. Qin was Director of Shanghai Sunplus Communication Technology Co., Ltd., which is a subsidiary of the Company. Mr. Qin holds a Bachelors Degree of Accounting from Zhongnana University of Economics and Law. Mr. Qin also holds a Certificate of Assistant Auditor and Certificate of Medium Level Accountant.
Mr Zhaohui Xu, Independent Director
Mr. Xu holds a Master’s degree of accounting. From 1994 to 2005, Mr. Xu served as accountant and manager of financial department with Jiangxi Coal Mining Machinery Co., Ltd successively. From 2005 to the present, Mr. Xu serves as CFO of Shenzhen Xianxun Technology Co., Ltd.
(a) Significant Employees
Other than our officers, there are no employees who are expected to make a significant contribution to our corporation.
(b) Family Relationships
There are no family relationships among any of our directors and executive officers. There are no family relationships among our officers, directors, or persons nominated for such positions.
LEGAL PROCEEDINGS
No officer, director, or persons nominated for these positions, and no promoter or significant employee of our corporation has been involved in legal proceedings that would be material to an evaluation of our management.
AUDIT COMMITTEE
The Board of Directors adopted an Audit Committee Charter authorizing the establishment of an Audit Committee as noted on the Form 8-K filed with the Commission on August 15, 2008. On September 2, 2009, the two independent directors who composed the audit committee resigned from their positions as independent directors of the Company effective September 2, 2009. There is no audit committee since that date.
CODE OF ETHICS
As noted on the Form 8-K filed with the Commission on August 15, 2008, on August 15, 2008, the Board of Directors approved a Business Code of Conduct and a Financial Code of Conduct (collectively the “Codes”). Our Codes define the standard of conduct expected by our officers, directors and employees. The Codes were filed as Exhibits 14.1 and 14.2 to our Form 8-K filed with the Commission on August 15, 2008 and are incorporated herein by reference.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the Commission initial reports of ownership and reports of changes in ownership of our equity securities on Forms 3, 4 and 5. Based on the copies of filings received by the Company during the most recent fiscal year the directors, officers, and beneficial owners of more than ten percent of the equity securities of the Company registered pursuant to Section 12 of the Exchange Act have filed on a timely basis all required Forms 3, 4, and 5 and any amendments thereto.
Background and Compensation Philosophy
There are altogether three (3) persons acting individually either as a director or an executive officer or both in our Company: (1) Mr. Xiaofeng Li, our Chief Executive Officer and director, and beneficial owner of 6.64 % of our common stock; (2) Mr. Xiangning Qin, our Chief Financial Officer and director, and (3) Mr. Zhaohui Xu, an independent director. Our board of directors have historically determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized companies and contributions made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by the board of directors, or the compensation committee when it is established, on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our board of directors have not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. Mr. Li and Mr. Qin have been and may continue to be involved when our board of directors deliberate compensation issues related to their own compensation.
As our executive leadership and board of directors grow, our board of directors may decide to form a compensation committee charged with the oversight of executive compensation plans, policies and programs.
Elements of Compensation
We provide our executive officers solely with a base salary to compensate them for services rendered during the year. Our policy of compensating our executives with a cash salary has served us well. Because of our history of attracting and retaining executive talent, we do not believe it is necessary at this time to provide our executives discretionary bonuses, equity incentives, or other benefits in order for us to continue to be successful.
Base Salary
The yearly base salary of Mr. Xiaofeng Li for the fiscal years ended March 31, 2010 and 2009 was US$66,000 and US$61,000 respectively. Mr. Xiangning Qin received US$15,000 and US$11,000 for the fiscal years ended March 31, 2010 and 2009 respectively; he was appointed as CFO on April 1, 2009. Mr. Zhaohui Xu received US$Nil during the fiscal year ended March 31, 2010; he was appointed as an Independent Director in September 2009. Mr. Jie Shi received US$Nil during the fiscal year ended March 31, 2009; he was appointed as the CEO in June 2008 and resigned in March 2009. Mr. Wai Chiu Albert Leung received US$26,000 for the fiscal years ended March 31, 2009; he served as CFO from October, 2008 to March 2009. Mr. Murry Zuhe Xiao received US$23,000 for the fiscal years ended March 31, 2009, he served as CFO from August, 2005 to September 2009.
Discretionary Bonus
We have not provided our executive officers with any discretionary bonuses at the moment but our board of directors may consider the necessity of bonuses in the future based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized companies and contributions made by the officers’ to our success.
Equity Incentives
We have not established equity based incentive program and have not granted stock based awards as a component of compensation. In the future, we may adopt and establish an equity incentive plan pursuant to which awards may be granted if our board of directors determines that it is in the best interests of our stockholders and the Company to do so.
Retirement Benefits
Two of our executive officers in Shanghai participated in the government -mandated multi-employer defined contribution retirement plan.
Perquisites
We have not provided our executive with any material perquisites and other personal benefits and, therefore, we do not view perquisites as a significant or necessary element of our executive’s compensation.
Deferred Compensation
We do not provide our executives the opportunity to defer receipt of annual compensation.
The following table sets forth information for the period indicated with respect to the persons who served as our CEO, CFO and other most highly compensated executive officers who served on our board of directors.
SUMMARY COMPENSATION TABLE
SERVICE AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
We will bear all travelling and travel-related expenses, entertainment expenses and other out-of-pocket expenses reasonably incurred by Mr. Li or Mr. Qin in the process of discharging their respective duties on our behalf.
Except as disclosed herein, we have no other existing or proposed agreements with any of our officers and directors.
BONUSES AND DEFERRED COMPENSATION
We do not have an incentive bonus plan at this time.
We do not have any deferred compensation or retirement plans. We do not have a compensation committee; all decisions regarding compensation are determined by our entire board of directors.
OPTION GRANTS IN THE LAST FISCAL YEAR
We did not grant any options or stock appreciation rights to our named executive officers or directors in the fiscal year ended March 31, 2010. As of March 31, 2010, Mr. Xiaofeng Li, Chief Executive Officer and Director, owned 1,998,237 shares of common stock in our Company, which represented 6.64% of the total number of shares issued and outstanding.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our bylaws provide for the indemnification of our present and prior directors and officers or any person who may have served at our request as a director or officer of another corporation in which we own shares of capital stock or of which we are a creditor, against expenses actually and necessarily incurred by them in connection with the defense of any actions, suits or proceedings in which they, or any of them, are made parties, or a party, by reason of being or having been director(s) or officer(s) of us or of such other corporation, in the absence of negligence or misconduct in the performance of their duties. This indemnification policy could result in substantial expenditure by us, which we may be unable to recoup.
Insofar as indemnification by us for liabilities arising under the Securities Exchange Act of 1934 may be permitted to our directors, officers and controlling persons pursuant to provisions of the Amended Articles of Incorporation and Bylaws, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification by such director, officer or controlling person of us is in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.
Compensation of Directors
Our Board of Directors receive no compensation.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership - Certain Beneficial Owners
Beneficial ownership is shown as of June 28, 2010, for shares held by (i) each person or entity known to us to be the beneficial owner of more than 5% of our issued and outstanding shares of common stock based solely upon a review of filings made with the Commission and our knowledge of the issuances by us, (ii) each of our directors, (iii) our Chief Executive Officer and our three other most highly compensated officers whose compensation exceeded US$100,000 during the fiscal year ended March 31, 2010, or the Named Executive Officers, and (iv) all of our current directors and executive officers as a group. Unless otherwise indicated, the persons listed below have sole voting and investment power with respect to the shares and may be reached at 9th Floor, YongSheng Building, ZhongShan Xi Road, Xuhui District, Shanghai, China.
Security Ownership - Certain Beneficial Owners
Security Ownership - Management
Notes:
(1)
(D) stands for direct ownership; (I) stands for indirect ownership
(2)
Officer
(3)
Director
Changes in Control
There are no arrangements, known to the Registrant, including any pledge by any person of securities of the Registrant which may at a subsequent date result in a change in control of the Registrant.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
None.
Director Independence
As of March 31, 2010, the Board of Directors consisted of three (3) members: Mr. Xiaofeng Li, Mr. Xiangning Qin and Mr. Zhaohui Xu. Mr.Zhaohui Xu meets the requirement to be considered “independent” as defined by the governance rules of the NASDAQ Global Market.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The following is a summary of the fees billed to us by Moore Stephens for professional services rendered for the years ended March 31, 2010 and 2009:
Audit fees consist of the aggregate fees billed for services rendered for the audit of our annual financial statements, the reviews of the financial statements included in our Forms 10-Q and for any other services that are normally provided by our independent auditors in connection with our statutory and regulatory filings or engagements.
Audit related fees consist of the aggregate fees billed for professional services rendered for assurance and related services that reasonably related to the performance of the audit or review of our financial statements that were not otherwise included in Audit Fees.
Tax fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
All other fees consist of the aggregate fees billed for products and services provided by our independent auditors and not otherwise included in Audit Fees, Audit Related fees or Tax Fees.
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The financial statements and notes are listed in the Index to Financial Statements on page of this Report.
(a)(2) Exhibits
(a)(3) Financial Statement Schedules
Financial statement schedules not filed herein have been omitted as they are not applicable or the required information or equivalent information has been included in the financial statements or the notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
T-BAY HOLDINGS, INC.
/s/ Xiaofeng Li
Xiaofeng Li, Chief Executive Officer
Dated: June 29, 2010
(Principal executive officer)
/s/ Xiangning Qin
Xiangning Qin, Chief Financial Officer
Dated: June 29, 2010
(Principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on June 29, 2010.
Each person whose signature appears below constitutes and appoints Xiaofeng Li and Xiangning Qin as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.