Exceed Co Ltd. 10-Q 2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
For the quarterly period ended September 30, 2009
Commission file number 001-33799
2020 CHINACAP ACQUIRCO, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨Yes ¨ No
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filed o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes þNo o
As of September 30, 2009, 10,500,000 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
2020 CHINACAP ACQUIRCO, INC.
(a development stage company)
Table of Contents>
Item 1. Consolidated Financial Statements
2020 CHINACAP ACQUIRCO, INC.
(a development stage company)>
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements
2020 CHINACAP ACQUIRCO, INC.
(a development stage company)>
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements
2020 CHINACAP ACQUIRCO, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS>
See accompanying notes to consolidated financial statements
2020 CHINACAP ACQUIRCO, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Interim Financial Information>
The consolidated financial statements at September 30, 2009 and for the three-month and nine-month periods ended September 30, 2009 have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (consisting of normal accruals and recurring items) have been made that are necessary to present fairly the financial position of 2020 ChinaCap Acquirco, Inc. (the “Company”) and its subsidiary as of September 30, 2009 and the results of their operations and cash flows for the three-month and nine-month periods ended September 30, 2009 and 2008. Operating results presented for the interim periods are not necessarily indicative of the results to be expected for any other interim period or for the full year.
These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2009. The accounting policies used in preparing these unaudited consolidated financial statements are consistent with those described in such filing.
Note 2 – Organization, Business Operations and Summary of Significant Accounting Policies
2020 ChinaCap Acquirco, Inc. (the “Company”) was incorporated in Delaware on August 21, 2006 as a public acquisition company whose objective is to acquire an operating business that either: (1) is located in the People’s Republic of China, the Hong Kong Special Administrative Region or the Macau Special Administrative Region (collectively, “China”), (2) has its principal operations located in China, or, (3) in the view of the Board of Directors of the Company, would benefit from establishing operations in China. Upon formation, the authorized share capital was 3,000 shares of common stock with par value of $0.01 per share. According to the preorganization subscription agreement dated August 18, 2006 with the director and stockholder, the Company issued 100 shares of common stock with a par value of $0.01 per share to the stockholder at $1.00 each. On January 31, 2007, the stockholder and the director effected several changes to the Company’s corporate structure by consent in lieu of a special meeting, and amended its Certificate of Incorporation as follows:
In addition to effecting the proceeding amendments to the Company’s Certificate of Incorporation, the Company also issued an additional 1,874,900 shares of common stock with par value of $0.0001 per share for $24,900 by unanimous written consent in lieu of a special meeting of the Board of Directors dated as of January 31, 2007.
The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Offering. Although substantially all of the net proceeds of the Offering are intended to be generally applied toward consummating a business combination with an operating business that has its principal operations located in China (“Business Combination”), there is no assurance that the Company will be able to successfully affect a Business Combination. Upon closing of the Offering, $7.92 per Unit of the proceeds from the Offering, net of all applicable discounts and commissions but inclusive of $0.28 per Unit in deferred underwriting compensation and the proceeds from the sale of the Insider Warrants (as defined below) were deposited and held in a trust account for the benefit of the Company. The corpus of the Trust Account is invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act until the earlier of (i) the consummation of its first Business Combination or (ii) liquidation of the Company. The placing of funds in the Trust Account may not protect those funds from third party claims against the Company. Although the Company will seek to have all vendors, prospective target businesses or other entities it engages execute agreements with the Company waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account, there is no guarantee that they will execute such agreements.
The Company’s executive officers and Dr. Jianming Yu, one of the Company’s directors, and certain entities controlled by these executive officers and Dr. Jianming Yu have agreed that they will be personally liable under certain circumstances to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or vendors or other entities that are owed money by the Company for services rendered or contracted or for products sold to the Company. However, there can be no assurance that they will be able to satisfy those obligations. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. Additionally, up to an aggregate of $1,350,000 of interest earned on the Trust Account balance, net of taxes, may be released to the Company to fund working capital requirements, of which $1,090,902 has been released to the Company as of September 30, 2009. The Company, after signing a definitive agreement for the acquisition of a target business, is required to submit such transaction for stockholder approval. In the event that stockholders owning 30% or more of the shares sold in the Offering vote against the Business Combination and exercise their conversion rights described below, the Business Combination will not be consummated. All of the Company’s stockholders prior to the Offering, including all of the officers and directors of the Company (“Initial Stockholders”), have agreed to vote their 1,875,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company (“Public Stockholders”) with respect to any Business Combination. After consummation of a Business Combination, these voting safeguards will no longer be applicable.
With respect to a Business Combination that is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his or her shares. The per share conversion price will equal the amount in the Trust Account, calculated as of two business days prior to the consummation of the proposed Business Combination, divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding up to 29.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Account computed without regard to the shares held by Initial Stockholders.
In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Offering (assuming no value is attributed to the Warrants contained in the Units offered in the Offering discussed in Note 3).
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s Amended and Restated Certificate of Incorporation provides that if the Company is not able to complete a business combination by November 8, 2009, its corporate existence will cease, except for the process of winding up and liquidating. The Company incorporated Exceed Company Limited (“Exceed”), a wholly-owned subsidiary formed in the British Virgin Islands, on April 21, 2009 for the purpose of completing a business combination. Exceed is a limited company with 1,000 issued ordinary shares of $1 each. Later on, as more fully described under note 10, Exceed, along with the Company, has entered into an agreement to acquire a company with its principal place of business in China.
On May 11, 2009, the Company issued a press release announcing that it and Exceed had entered into a definitive share purchase agreement dated May 8, 2009 (the “Purchase Agreement”) with Windrace International Company Limited (“Windrace”). Windrace is one of the largest branded sportswear companies in China that is engaged in the design, manufacturing, trading and distribution of sporting goods, including footwear, apparel and accessories, in China. As a result of the transaction, Exceed will merge with the Company with Exceed as the surviving entity and Windrace will become a wholly-owned subsidiary of Exceed.
Windrace’s current management team will remain in place to run the business following consummation of the acquisition.
Summary of Significant Accounting Policies
Development stage company:
The Company complies with the reporting requirements of Statements of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.”
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiary, referred to collectively as "the Group." All significant intercompany accounts and transactions have been eliminated in consolidation.
Net (loss) profit per common share:
The Company complies with accounting and disclosure requirements of SFAS No. 128, “Earnings Per Share.” Net (loss) profit per common share is computed by dividing net (loss) profit by the weighted average number of common shares outstanding for the period. Except where the result would be antidilutive, net (loss) profit per share of common stock, assuming dilution, reflects the maximum potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and would then share in the net (loss) profit of the Company.
Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts and cash held in trust fund in a financial institution, which at September 30, 2009 had a total balance of $84,393 and $68,095,252, respectively. Although the balances in aggregate exceeded the Federal Depository Insurance Coverage of $250,000 through September 30, 2009, the management believes the Company is not exposed to significant risks on such accounts as the Company has never experienced any loss on the account to date..Moreover, the funds were placed in a financial institution of high credit quality and were invested in U.S. government securities.
Fair value of financial instruments:
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under SFAS No. 107, “Disclosure About Fair Value of Financial Instruments,” approximates the carrying amounts represented in the balance sheet.
Use of estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
During the quarter ended March 31, 2009, the Company corrected the redemption obligation of common stock, subject to possible redemption and additional paid-in capital in accordance to the terms thereof. (See footnote 9 for additional information.) Under Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the quantitative and qualitative aspects of the adjustment and determined the correction was not material. There was no impact on the cash held in trust fund as of December 31, 2008, or the Company’s results of operations or cash flow statements for the fiscal year ended December 31, 2008.
The Company complies with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Effective January 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). There were no unrecognized tax benefits as of January 1, 2007 and as of December 31, 2007, December 31, 2008 and September 30, 2009. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at December 31, 2008 or September 30, 2009. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position. The adoption of the provisions of FIN 48 did not have a material impact on the Company’s financial position, results of operations and cash flows. The Company currently files income tax returns in the United States, and is subject to tax examinations by tax authorities for tax years since inception in 2006.
Recently issued accounting standards:
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for fiscal years beginning after November 15, 2007, and for interim periods within those years. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and enhances disclosures about fair value measurements. SFAS No. 157 applies when other accounting pronouncements require fair value measurements; it does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which defers the effective date of SFAS No. 157 for non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually), until fiscal years and interim periods beginning after November 15, 2008. The Company adopted FSP No. FAS 157-2 as of January 1, 2008 which deferred the application of FAS 157 for the non financial assets and liabilities to January 1, 2009.
In December 2007, FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS No. 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration and certain acquired contingencies. SFAS No. 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. This Statement shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted this Statement for its fiscal year ending December 31, 2009.
In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (“ARB”) No. 51. SFAS No. 160 requires that accounting and reporting for minority interests will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management is currently evaluating the impact of the adoption of this statement; however, it is not expected to have a material impact on our financial position, results of operation or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for the company beginning January 1, 2009. The Company adopted SFAS No.161 on January 1, 2009 and it is not expected to have a material impact on the Company’s financial position, results of operation or cash flows.
As a result of the recent credit crisis, on October 10, 2008, the FASB issued SFAS No. 157-3, “Determining the Fair Value of a Financial Asset in a Market That is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market that is not active. The FSP addresses how management should consider measuring fair value when relevant observable data does not exist. The FSP also provides guidance on how observable market information in a market that is not active should be considered when measuring fair value, as well as how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. This FSP is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate in accordance with SFAS No. 154, “Accounting Changes and Error Corrections.” Adoption of this standard had no effect on our results of operations, cash flows or financial position.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes 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. The Company evaluated subsequent events after the balance sheet date of September 30, 2009 through the filing of this report with the SEC on October 16, 2009.
In June 2009, FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS 166 is applied to financial asset transfers on or after the effective date, which is January 1, 2010 for the Company’s financial statements. SFAS 166 limits the circumstances in which a financial asset may be de-recognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by SFAS 166. The Company expects that adoption of SFAS 166 will not have a material effect on its financial position or results of operations.
In June 2009, FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which deals with accounting for variable interest entities and is effective for reporting periods beginning after November 15, 2009. The amendments change the process for how an enterprise determines which party consolidates a variable interest entity (VIE) to a primarily qualitative analysis. SFAS 167 defines the party that consolidates the VIE (the primary beneficiary) as the party with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Upon adoption of SFAS 167, reporting enterprises must reconsider their conclusions on whether an entity should be consolidated and should a change result, the effect on net assets will be recorded as a cumulative effect adjustment to retained earnings. The Company expects that adoption of SFAS 167 will not have a material effect on its financial position or results of operations.
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
Note 3 – Public Offering
On November 15, 2007, the Company consummated the sale of 7,500,000 units (“Units”) at a price of $8.00 per Unit in the Offering. Each Unit consists of one share of the Company’s common stock, $0.0001 par value, and one redeemable common stock purchase warrant (“Warrants”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.25 commencing on the later of (i) November 8, 2008 or (ii) the completion of a Business Combination with a target business, and expires on November 8, 2011. The Warrants are redeemable at a price of $0.01 per Warrant upon 30 days prior notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $11.50 per share for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given. In accordance with the warrant agreement relating to the Warrants sold and issued in the Offering, the Company is only required to use its best efforts to maintain the effectiveness of the registration statement covering the Warrants. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such Warrants shall not be entitled to exercise such Warrants and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the warrant exercise. Consequently, the Warrants may expire unexercised and unredeemed.
On November 26, 2007, the underwriters of the Offering exercised their over-allotment option to the extent of 1,125,000 Units. The 8,625,000 Units sold in the Offering, including the 1,125,000 Units subject to the over-allotment option, were sold at an offering price of $8.00 per Unit, generating gross proceeds of $69,000,000. $68,090,685, including $2,265,000 of proceeds from the previously-announced private placement of the warrants issued to entities affiliated with the management team, has been placed in the Trust Account.
The Company paid the underwriters in the Offering an underwriting discount of 3.5% of the gross proceeds of the Offering. The underwriters have agreed that an additional 3.5% of the underwriting discount will not be payable unless and until the Company completes a Business Combination and have waived their right to receive such payment upon the Company’s liquidation if it is unable to complete a Business Combination. The Company has also issued a unit purchase option for $100 to Morgan Joseph to purchase 550,000 Units at an exercise price of $10.00 per Unit. The Units issuable upon exercise of this option are identical to the Units offered in the Offering. The Company accounted for the fair value of the unit purchase option, inclusive of the receipt of the $100 cash payment, as an expense of the Offering resulting in a charge directly to stockholders’ equity. The Company estimates that the fair value of this unit purchase option is approximately $1,657,226 ($3.01 per Unit) using a Black-Scholes option-pricing model. The fair value of the unit purchase option granted to the underwriters is estimated as of the date of grant using the following assumptions: (1) expected volatility of 45.46%, (2) risk-free interest rate of 3.67%, and (3) expected life of 5 years. The unit purchase option may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the unit purchase option (the difference between the exercise prices of the unit purchase option and the underlying Warrants and the market price of the Units and underlying securities) to exercise the unit purchase option without the payment of any cash. The Company will have no obligation to net cash settle the exercise of the unit purchase option or the Warrants underlying the unit purchase option. If the holder is unable to exercise the unit purchase option or underlying Warrants, the unit purchase option or Warrants, as applicable, will expire worthless.
Note 4 – Deferred and Accrued Offering Costs>
Deferred and accrued offering costs consist principally of legal fees, underwriting fees and other costs incurred through the balance sheet date that are directly related to the Offering described in Note 3 and that were charged to stockholders’ equity upon the receipt of the capital raised.
The Company’s legal counsel agreed to cap legal fees due by the Company at the closing of the Offering to $350,000, provided that any excess fees shall be paid by the Company upon the completion of a Business Combination. Total legal fees payable included in accrued offering costs directly related to the Offering were $409,908 as of September 30, 2009 and December 31, 2008.
Upon completion of the Offering of 8,625,000 Units (including 1,125,000 Units pursuant to the underwriters’ over-allotment option sold on November 26, 2007) at a price of $8 per unit, the Company received net proceeds of approximately $68,240,685 from the Offering, after deducting offering expenses of approximately $5,439,315 which included underwriting discounts of $4,830,000. This amount includes $2,415,000 of the underwriting discounts and commissions due (deferred underwriters’ fees) which the underwriters have agreed will not be payable unless and until the Company consummates a Business Combination.
Note 5 – Notes Payable to Stockholders
In December 2006, the Company issued a $50,000 unsecured promissory note to one of its Initial Stockholders, who is also an officer and director of the Company. Under the terms of the note, as amended, the Company could reduce the amount of the note payable by offsetting any funds advanced by the Company to third parties at the direction of the lender. The amount of the note payable was reduced in this manner to $47,291 as of December 31, 2007. The note payable was non-interest bearing and was initially payable on the earlier of December 17, 2007 or the consummation of the Offering. On November 15, 2007, the holders of the $50,000 unsecured promissory note and the Company agreed to extend the repayment date of the unsecured promissory note to March 31, 2008. Due to the short-term nature of the note, the fair value of the note approximates its carrying amount.
In April 2007, the Company issued an $80,000 unsecured promissory note to 2020 International Capital Group Limited, the beneficial owner of a majority of the outstanding shares of stock of the Company at the time such promissory note was issued. The note payable was non-interest bearing and was payable on the earlier of April 5, 2008 or the consummation of the Offering. On November 15, 2007, the holders of the $80,000 unsecured promissory note and the Company agreed to change the repayment date of the unsecured promissory note to March 31, 2008.
Both notes were repaid in full by the Company on March 31, 2008.
In August 2008, December 2008, January 2009 and April 2009 the Company issued unsecured promissory notes of $150,000, $150,000, $200,000 and $200,000, respectively, to 2020 International Capital Group Limited, a company controlled by certain directors and executive officers of the Company. The notes payable are non-interest bearing and are due in August and December 2009, and January and April 2010, respectively, or at such time 2020 International Capital Group Limited demands full or partial payment of any balance outstanding. The proceeds from the notes have been used by the Company for working capital purposes.
On August 6, 2009, the Company reached an agreement with 2020 International Capital Group Limited to extend the due date of the first $150,000 of the above-mentioned promissory notes from August 1, 2009 to December 31, 2009.
Note 6 – Related Party Transactions
Lease from Related Party
The Company presently occupies office space provided by a company owned by the Company’s Chairman of the Board, Chief Executive Officer and President. Such entity has agreed that, until the Company consummates a Business Combination, it will make such office space, as well as utilities, administrative, technology and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such entity $7,500 per month for such services commencing on November 8, 2007. The Company has incurred $67,500 for each of the nine months ended September 30, 2009 and 2008, respectively, and $172,500 from August 21, 2006 (date of inception) to September 30, 2009.
Note 7 – Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2009, no preferred stock is issued or outstanding. The agreement with the underwriters prohibits the Company, prior to a Business Combination, from issuing preferred stock that participates in the proceeds of the Trust Account or that votes as a class with the Common Stock on a Business Combination.
Note 8 – Income Tax
The components of the provision for income taxes are as follows:
The total provision for income taxes differs from the amount that would be computed by applying the U.S. Federal income tax rate to income before provision for income taxes as follow:
As of September 30, 2009, unused net operating losses equal to approximately $2,219,000 are available to offset federal taxable income for future years through 2028. SFAS 109 requires that the tax benefit of such net operating losses be recorded using current tax rates as an asset to the extent management assesses the utilization of such net operating losses to be more likely than not. Based on the Company’s current status as a special purpose acquisition company, the Company provided a full valuation allowance against the deferred tax asset at September 30, 2009.
Note 9 – Amount of Equity Subject to Possible Redemption
The Company is required to obtain shareholder approval for any business combination of a target business. In the event that public stockholders owning 30% or more of the shares sold in the Offering vote against a Business Combination, the Company will not proceed with a Business Combination if the public stockholders exercise their redemption rights. That is, the Company can still affect a Business Combination if the public stockholders owning up to approximately 29.99% of the shares sold in the Offering exercise their redemption rights.
This redemption obligation with respect to up to 29.99% of the shares sold in the Offering will exist regardless of how a Business Combination is structured. That is, the Company would be required to redeem up to an amount equal to the product of approximately 29.99% of the 8,625,000 ordinary shares sold in the Offering (or 2,586,638 ordinary shares) multiplied by an initial cash per-share redemption price of $7.92, per share, which amount represents $7.64 per share from the proceeds of the offering and $0.28 per unit of deferred underwriters’ fees. The actual per-share redemption price will be equal to the quotient of the amount in the Trust Account plus all accrued interest not previously released to the Company, as of two business days prior to the proposed consummation of the Business Combination, divided by 8,625,000 shares of common stock. However, the ability of stockholders to receive $7.92 per unit is subject to any valid claims by the Company’s creditors which are not covered by amounts held in the Trust Account or the indemnities provided by the Company’s officers and directors. The expected redemption price per share is greater than each stockholder’s initial pro rata share of the Trust Account of approximately $7.64 per share. Of the excess redemption price, approximately $0.28 per share represents a portion of the underwriters’ contingent fee, which they have agreed to forego for each share that is redeemed. Accordingly, the total deferred underwriting compensation payable to the underwriters in the event of a business combination will be reduced by approximately $0.28 for each share that is redeemed. The balance will be paid from proceeds held in the Trust Account, which are payable to the Company upon consummation of a business combination. Even if less than 30% of the stockholders exercise their redemption rights, the Company may be unable to consummate a business combination if such redemption leaves the Company with funds insufficient to acquire or merge with a business with a fair market value greater than 80% of the Company’s net assets at the time of such acquisition, which would be in violation of a condition to the consummation of the Company’s initial business combination, and as a consequence, the Company may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate.
Accordingly, under the provision of EITF D-98, Classification and Measurement of Redeemable Securities, the Company has classified 29.99% of the net proceeds from the Offering, or $19,761,913, outside permanent equity.
During the quarter ended March 31, 2009, the Company corrected the overstatement of the Company’s redemption obligation of the common stock, subject to possible redemption and additional paid-in capital in accordance to the terms thereof. The overstatement amounted to approximately $724,000, which represents $0.28 per share of the 2,586,638 ordinary shares sold in the Offering. As a result, the Company’s redemption obligation was reduced by approximately $724,000, and additional paid-in capital was increased by the same amount. Under Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the quantitative and qualitative aspects of the adjustment and determined the correction was not material. There was no impact on the cash held in trust fund as of December 31, 2008, and the Company’s results of operations or cash flow statements for the fiscal year ended December 31, 2008. The effect of this change was to increase additional paid-in capital and decrease the redemption obligation by $724,000 as of December 31, 2008 in the accompanying balance sheet.
Note 10 – Agreement to acquire Windrace International Company Limited
On May 11, 2009, the Company issued a press release announcing that it and its wholly-owned subsidiary Exceed, had entered into a definitive share purchase agreement dated May 8, 2009 with Windrace (the “Purchase Agreement”). Windrace is one of the largest branded sportswear companies in China that is engaged in the design, manufacturing, trading and distribution of sporting goods, including footwear, apparel and accessories, in China. As a result of the transaction, Exceed will merge with the Company with Exceed as the surviving entity and Windrace will become a wholly-owned subsidiary of Exceed. Windrace’s current management team will remain in place to run the business following consummation of the acquisition.
Windrace designs, develops and engages in wholesale of footwear, apparel and accessories under its own brand, XIDELONG, in China. It is one of the leading China sports and leisurewear brands in China in terms of market share by sales revenue. Since operations began in 2002, Windrace has experienced significant growth in the mass market concentrated in the second and third tier cities in China and has established a market leading position as one of the top five China sportswear brands. Windrace has three principal categories of products: (i) footwear, which comprises running, leisure, basketball, skateboarding and canvas footwear, (ii) apparel, which mainly comprises sports tops, pants, jackets, track suits and coats, and (iii) accessories, which mainly comprise bags, socks, hats and caps. Windrace’s primary footwear offering is running footwear, which represented over 23% of total revenue in 2008, the market for which has been rapidly growing in China due to the increasing demand for lifestyle and leisure products and heightened interest in health consciousness among Chinese customers. Windrace’s footwear is primarily manufactured at its own production facility in Jinjiang, Fujian province, China. Products are sold through independent distributors who operate, directly or indirectly via third parties, retail stores and outlets.
A summary of the material items of acquisition was also set forth in the Form S-4 filed with the Securities and Exchange Commission, as amended, containing a prospectus for the transactions contemplated by the merger agreement and a proxy for the special meeting of the Company’s stockholders to vote on the proposed business combination.
On July 27, 2009, Windrace entered into an Investment Agreement (the “Investment Agreement”) and an Escrow Agreement (the “Escrow Agreement”) with Wisetech Holdings Limited (“Wisetech”), Windtech Holdings Limited (“Windtech” and, collectively with Wisetech, the “Investors”) and Shuipan Lin, the CEO and a principal stockholder of Windrace (“Lin”). Pursuant to the terms of the Investment Agreement, the Investors will invest an aggregate of $30,000,000 in Windrace in two installments:
The Closing of the Investment Agreement is conditioned upon the satisfaction of the conditions for closing the transactions contemplated by the Purchase Agreement. Upon the Closing, Windrace will transfer the Warrants to the Investors, and, upon the closing of transactions contemplated by the Purchase Agreement, Exceed shall issue to the Investors that number of Exceed ordinary shares equal to the aggregate investment made by the Investors less the amount spent by Windrace to acquire the Warrants divided by $7.58 per share. The maximum amount of Exceed ordinary shares issuable to the Investors assuming no purchase of Warrants by Windrace is 3,957,784 shares ($30,000,000/$7.58).
On July 27, 2009, the Company, Exceed, Windrace and the Sellers entered into a Supplemental Agreement to Agreement for Sale and Purchase of Windrace (the “Supplemental Agreement”) amending the Purchase Agreement in two respects:
The Supplemental Agreement limits the maximum number of New Investor Shares (as defined below) issuable under the Purchase Agreement to approximately 3,957,784 shares, which number was not capped in the original Purchase Agreement. The Purchase Agreement provided that if, subsequent to the execution of the Purchase Agreement, Windrace sells to third parties, and has received consideration for, any of its ordinary shares, at closing Exceed will issue to such third parties Exceed ordinary shares (the “New Investor Shares”). The amount of shares to be issued to such new shareholders will be equal to the aggregate amount paid for shares of Windrace divided by the lowest of the closing price of the Company on each of the last trading days of March, April and May 2009, which is $7.58 per share.
The Supplemental Agreement also provides that the Sellers, who will control Exceed upon the consummation of the transactions contemplated by the Purchase Agreement, will cause Exceed to promptly register for resale under the federal securities laws all outstanding ordinary shares of Exceed excluding the shares that will be held in escrow at closing.
On September 9, 2009, the Company, Exceed, Windrace, and the Sellers entered into a letter agreement (the “Letter Agreement”) further amending the Purchase Agreement. Under the Letter Agreement, the parties extended the deadline for meeting the conditions of the Purchase Agreement until November 7, 2009 and agreed that the shares of Exceed following the contemplated transactions could be listed on the Nasdaq Capital Market, subject to the approval of Nasdaq.
In order to ensure that the Acquisition is approved by the shareholders of the Company, the Company, Windrace, Exceed and/or such entity’s respective affiliates, may enter into transactions to purchase or facilitate the purchase of shares sold in the Company’s November 2007 initial public offering (“Public Shares”), or other securities of the Company from shareholders who have indicated their intention to vote against the Acquisition and seek redemption of their shares for cash. Such transactions may be entered into prior to the meeting of shareholders to approve the Acquisition, but would not be completed until immediately after the Acquisition was consummated. Such transactions could also include loan arrangements, the granting of put options, and the transfer to holders of Public Shares of shares or warrants owned by the Company’s affiliates for nominal value. The purpose of such arrangements would be to increase the likelihood of satisfaction of the requirements that holders of a majority of the Public Shares present and entitled to vote on the Acquisition Proposal and the Redomestication Proposal vote in favor of the proposals and that holders of fewer than 30% of the Public Shares vote against the Acquisition Proposal and the Redomestication Proposal and demand redemption of their Public Shares for cash. Accordingly, to secure approval of the Acquisition Proposal and the Redomestication Proposal, it may be necessary to acquire or repurchase as much as an additional approximately 70% of the Public Shares. Any arrangements that are entered into may involve any or all of payment of significant fees, interest payments, and the issuance of additional Exceed shares to the persons providing the financial or other assistance in the transactions. The impact of any such arrangements on the financial statements of the combined companies will depend on the ultimate structure of the arrangements. However, without regard to the foregoing, the Company intends to redeem for cash all shares that are properly presented for redemption at closing. Purchases pursuant to such arrangements ultimately paid for with funds in the Company’s trust account would diminish the funds available to Exceed after the Acquisition and Redomestication for debt repayment, working capital and general corporate purposes. No such arrangements or agreements with respect to such transactions have occurred or been entered into.
The Acquisition will be accounted for as a reverse recapitalization since, immediately following completion of the transaction, the shareholders of Windrace and investors in Windrace immediately prior to the Acquisition will have effective control of 2020 through (1) their shareholder interest comprising the largest control block of shares in the combined entity, in either scenario, assuming no share redemptions and maximum share redemptions and excluding the Escrowed Shares and the Earn-Out Shares, (2) significant representation on the Board of Directors (initially two out of three members), with the third board member being independent, and (3) being named to all of the senior executive positions. For accounting purposes, Windrace will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of Windrace, i.e., a capital transaction involving the issuance of stock by 2020 for the stock of Windrace. Accordingly, the combined assets, liabilities and results of operations of Windrace will become the historical financial statements of 2020 at the closing of the transaction, and 2020’s assets (primarily cash and cash equivalents), liabilities and results of operations will be consolidated with Windrace beginning on the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction. All direct costs of the transaction will be charged to operations in the period that such costs are incurred.
The Acquisition is subject to substantial risks, contingencies and uncertainties, including, among others, approval by the Company's stockholders of the proposals necessary to approve the Company’s acquisition of Windrace and the Company’s redomestication from Delaware to the British Virgin Islands, which must be accomplished by November 8, 2009, compliance with federal securities laws and regulations in the United States, compliance with various laws and regulations in the China, and the availability of sufficient funds. Accordingly, there can be no assurances that such transaction ultimately will occur.
The Company’s common stock, units and warrants were quoted on the NYSE Amex under the symbols TTY, TTY.U and TTY.WS, respectively. The Company transferred the listing of its common stock, units and warrants to the NASDAQ Capital Market under the symbols TTY, TTYUU and TTYWW, respectively, on October 13, 2009. The Company's common stock, warrants and units continued to trade on the NYSE Amex under the symbols TTY, TTY.WS and TTY.U, respectively, through the end of the trading day on October 12, 2009. The transfer of the Company's listing was taking place in connection with the proposed redomestication of the Company in the British Virgin Islands through a merger with Exceed and subsequent proposed acquisition by Exceed of Windrace, each of which is subject to approval by the stockholders of the Company. Exceed has applied to list its securities on the Nasdaq Stock Market upon the consummation of the redomestication and acquisition.
On October 2, 2009, the Form S-4 Registration Statement was declared effective by the United States Securities and Exchange Commission – and the Special Meeting of Shareholders to vote on the proposed business combination was scheduled for October 19, 2009.
Note 11 – Commitments
The Company presently occupies office space provided by a company owned by the Company’s Chairman of the Board, Chief Executive Officer and President. Such entity has agreed that, until the Company consummates a Business Combination, it will make such office space, as well as utilities, administrative, technology and secretarial services, available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such entity $7,500 per month for such services commencing on November 8, 2007.
Pursuant to letter agreements between each of the Initial Stockholders, the Company and Morgan Joseph, the Initial Stockholders have waived their rights to receive distributions with respect to the 1,875,000 founding shares in the event the Company is liquidated on November 8, 2009 in accordance with its Articles of Incorporation.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our Consolidated Financial Statements and footnotes thereto contained in this report.
Forward Looking Statements
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us, Windrace or our management, identify forward looking statements. Such forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward looking statements as a result of certain factors detailed in our filings with the Securities and Exchange Commission. All subsequent written or oral forward looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.
We are a public acquisition company, formed on August 21, 2006, to complete a business combination with an operating business that either: (1) is located in China, (2) has its principal operations located in China, or, (3) in the view of the Board of Directors of the Company, would benefit from establishing operations in China. Our efforts to identify a prospective target business will not be limited to a particular industry. We intend to effect a business combination using cash from the proceeds of our initial public offering and the private placements of the sponsors’ warrants, our capital stock, debt or a combination of cash, stock and debt. On November 15, 2007, we completed our initial public offering of 8,625,000 Units (including 1,125,000 Units pursuant to the underwriters’ over-allotment option sold on November 26, 2007) at a price of $8 per unit. We received net proceeds of approximately $68.2 million from our Offering.
Pursuant to a warrant purchase agreement dated November 8, 2007, certain of the Initial Stockholders and their affiliates have purchased from the Company, in the aggregate, 2,265,000 Insider Warrants for $2,265,000. The purchase and issuance of the Insider Warrants in a private placement occurred simultaneously with the consummation of the Offering. All of the proceeds we received from these purchases were placed in the Trust Account.
For a description of the proceeds generated in our initial public offering and a discussion of the use of such proceeds, we refer you to Note 3 of the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
On May 11, 2009, the Company issued a press release announcing that it and its wholly-owned subsidiary, Exceed, had entered into a definitive share purchase agreement with Windrace. Windrace is one of the largest branded sportswear companies in China that is engaged in the design, manufacturing, trading and distribution of sporting goods, including footwear, apparel and accessories, in China. As a result of the transaction, Exceed will merge with the Company with Exceed as the surviving entity and Windrace will become a wholly-owned subsidiary of Exceed.
If shareholder approval is obtained, Exceed will acquire all of the ordinary shares of Windrace pursuant to the Purchase Agreement, dated May 8, 2009, as amended. Following the Closing, Windrace will become a wholly owned subsidiary of Exceed, and Exceed will merge with the Company with Exceed as the surviving company. Under the terms of the Purchase Agreement, Exceed will acquire Windrace in an all-stock transaction which includes 17,008,633 ordinary shares of Exceed stock, excluding additional contingent shares. Pursuant to the Purchase Agreement, 2,750,000 shares will be issued to Windrace shareholders upon Closing. Up to 14,258,633 shares of the 17,008,633 shares noted above will be placed in escrow and will be released to Windrace shareholders when, on a consolidated basis, the surviving company achieves or exceeds after-tax net profits in the following fiscal years of:
If any earnings target is not met between 2009 and 2010, all shares for that period will be deferred until the next annual audit. If the earnings target of $64,333,821 were achieved in 2011, all 17,008,633 shares would be released. Furthermore, the shareholders of Windrace and their designees will be issued, on an all or none basis, an additional 2,212,789 ordinary shares of Exceed, when, on a consolidated basis, the surviving company achieves or exceeds after-tax net profits in the fiscal year ended December 31, 2011 of $64,333,821. The Purchase Agreement also provides for Windrace to seek independent third party investment prior to Closing and allows for the issuance of, ordinary shares of Exceed at Closing to new investors making investments in Windrace between the time of the execution of the Purchase Agreement and the closing of the acquisition of Windrace (“New Windrace Investors”), As provided in the Supplemental Agreement, the maximum number of New Investors Shares is approximately 3,957,784 shares at $7.58 per share.
The after-tax net profits will be determined following the completion of an audit in accordance with International Financial Reporting Standards (IFRS), excluding certain adjustments related to, among other things, the transactions contemplated in the Purchase Agreement. The transaction is subject to customary closing conditions, including completion of the IFRS audit, completion of all necessary documentation, an effective registration statement and approval of the shareholders of the Company.
On July 27, 2009, the parties to the Purchase Agreement entered into a Supplemental Agreement amending the Purchase Agreement and setting the maximum number of Exceed ordinary shares that can be issued to New Windrace Investors at closing to approximately 3,957,784 shares and, consistent with the formula set forth in the Purchase Agreement, set the price at which the Exceed ordinary shares would be issued to New Windrace Investors at $7.58 per share.
Windrace designs, develops and engages in wholesale of footwear, apparel and accessories under its own brand, XIDELONG, in China. It is one of the leading China sports and leisurewear brands in China in terms of market share by sales revenue. Since operations began in 2002, Windrace has experienced significant growth in the mass market concentrated in the second and third tier cities in China and has established a market leading position as one of the top five China sportswear brands. Windrace has three principal categories of products: (i) footwear, which comprises running, leisure, basketball, skateboarding and canvas footwear, (ii) apparel, which mainly comprises sports tops, pants, jackets, track suits and coats, and (iii) accessories, which mainly comprise bags, socks, hats and caps. Windrace’s primary footwear offering is running footwear, which represented over 23% of total revenue in 2008, the market for which has been a rapidly growing market in China due to the increasing demand for lifestyle and leisure products and heightened interest in health consciousness among Chinese customers. Windrace’s footwear is primarily manufactured at its own production facility in Jinjiang, Fujian province, China. Products are sold through independent distributors who operate, directly or indirectly via third parties, retail stores and outlets.
A summary of the material items of acquisition was also set forth in the Form S-4 filed with the Securities and Exchange Commission, as amended, containing a prospectus for the transactions contemplated by the merger agreement and a proxy for the special meeting of the Company’s stockholders to vote on the proposed business combination. The Form S-4 was declared effective on October 2, 2009 and the special stockholders meeting to consider the business combination was scheduled for October 19, 2009.
Results of Operations and Known Trends or Future Events
For the three months ended September 30, 2009 and 2008, interest earned on the Trust Account was $6 and $295,474, respectively; resulting in net losses of $1,163,793 and net profit of $14,955, respectively.
For the nine months ended September 30, 2009 and 2008, interest earned on the Trust Account was $665 and $983,734, respectively; resulting in a net loss of $1,949,409 and a net profit of $131,057, respectively. The continued low interest environment has had a significant impact on the Company’s interest income. Management of the Company believes the current trend of low interest will continue in the foreseeable future.
Our entire activity from August 21, 2006 (inception) through November 15, 2007 had been to prepare for our initial public offering. Following our initial public offering, we began actively searching for a suitable business target to complete a business combination.
Liquidity and Capital Resources
At September 30, 2009, we had cash outside of the trust account of $84,393, cash held in the trust account of $68,095,252 and total liabilities of $5,092,370. We intend to use substantially all of the net proceeds of our initial public offering, including the funds held in the trust account (excluding deferred underwriting discounts and commissions), to complete a business combination with a target business and to pay our expenses relating thereto. The funds used to pay the representative of the underwriters will not be available to us to use in connection with or following the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, as is the case with the Acquisition, the remaining proceeds held in the trust account as well as any other net proceeds not expended will be used as working capital to finance the operations of the target business. Such working capital funds could be used in a variety of ways including continuing or expanding the target business’ operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders’ fees which we had incurred prior to the completion of our business combination if the funds available to us outside of the trust account were insufficient to cover such expenses.
We believe that the funds available to us outside of the trust account, including the interest income to be distributed to us, will be sufficient to allow us to operate until November 8, 2009, assuming that a business combination is not consummated during that time. We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We would only consummate such a fund raising simultaneously with the consummation of a business combination.
Included in our total liabilities are deferred and accrued offering costs consisting principally of legal fees incurred that are directly related to the initial public offering of our securities which was consummated on November 15, 2007 (“Offering”) and that were charged to stockholders’ equity upon the receipt of the capital raised. Total legal fees payable included in accrued offering costs directly related to the Offering as of September 30, 2009 were $413,066 of which $409,908 was payable to Seyfarth Shaw and $3,158 was payable to Deacons.
Accrued expenses consist of mainly legal fees related to various projects under review and corporate matters, audit fee, consultancy fee and printing fee. As of September 30, 2009, accrued expenses included legal fees of $911,381 payable to Seyfarth Shaw, legal fees of $487,930 payable to Deacons, legal fee of $20,804 payable to Maples and Calder, printing fees of $73,074 payable to Vintage Filings, audit fee and tax consultancy fee of $54,500 payable to Crowe Horwath, taxes payable of $8,500, and sundry expenses of $8,115.
Our executive officers namely Mr. George Lu, Mr. Louis Koo and Mr. Yuxiao Zhang, one of our directors, Jianming Yu (“Dr. Yu”), and certain entities controlled by our executive officers and Dr. Yu have agreed to indemnify us, jointly and severally for any loss, liability, claim, damage and expense to the extent necessary to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. None of our creditors, except for Seyfarth Shaw with respect to the $409,908 in legal fees included in deferred offering expenses, have waived any claims against the trust account.
If we are not able to consummate a business combination by November 8, 2009 and we are required to liquidate, the adjusted accrued expenses and accrued offering cost as of September 30, 2009 was $1,567,462 after deducting the portion of the legal fees payable to Seyfarth Shaw included in the deferred offering costs, which they have agreed would be payable only in the event of the consummation of a business combination. As at September 30, 2009, our bank balance was $84,393 which can cover part of the adjusted accrued expenses whereas the unsettled balance will be indemnified by our executive directors and Dr. Yu as mentioned above. If we consummate the Acquisition before November 8, 2009, all the accrued expenses and accrued offering costs will be paid by the combined company after closing of the Acquisition.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements.
Other than the $7,500 per month fee for office space and general and administrative services, the accrued offering costs of $413,066 and the $2,415,000 deferred underwriting discounts as described in our Annual Report Form 10-K for the year ended December 31, 2008, the Company does not have any other long-term debt, capital lease obligations, operating lease obligations or long-term liabilities.
Critical Accounting Policies
The Company’s significant accounting policies are more fully described in Note 2 to the consolidated financial statements. However certain accounting policies are particularly important to the portrayal of financial position and results of operations and require the application of significant judgments by management. As a result, the consolidated financial statements are subject to an inherent degree of uncertainty. In applying those policies, management used its judgment to determine the appropriate assumptions to be used in determination of certain estimates. These estimates are based on the Company’s historical experience, terms of existing contracts, observance of trends in the industry and information available from outside sources, as appropriate.
Cash Held in Trust Fund
As stated in Note 2 – Organization, Business Operations and Summary of Significant Accounting Policies, net proceeds from the Offering were deposited and held in the Trust account, which were invested in United States “government securities”.
On October 15, 2008, in consideration of the current market conditions, the Company directed LaSalle Global Trust Services, to transfer the funds held in trust from a money market fund which invests in U.S. Government obligations into the Dreyfus Treasury Prime Cash Management Fund which invests solely in U.S. treasuries. The balance in the Trust Account as of September 30, 2009 was $68,095,252.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
ITEM 4. Controls and Procedures.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial and accounting officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.
There were no changes in our internal controls over financial reporting in connection with the evaluation required by Rule 13-a(15(d) under the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our principal executive officer and our principal financial officer have concluded that these controls and procedures are effective at the reasonable assurance level.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
ITEM 1A. Risk Factors.
Factors that could cause our actual results to differ materially from those in this report are any of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC. Any of the factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ITEM 3. Defaults Upon Senior Securities.
ITEM 4. Submission of Matters to a Vote of Security Holders.
ITEM 5. Other Information.
ITEM 6. Exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
2020 ChinaCap Acquirco, Inc.