EX-99.1 10 dex991.htm AUDITED FINANCIAL STATEMENTS OF KOBRITE CORP. Audited financial statements of KoBrite Corp.

 

 

KoBrite Corporation and Subsidiary

 

Consolidated Financial Statements for the

Years Ended December 31, 2006 and 2005 and

Independent Auditors’ Report

 

 


KOBRITE CORPORATION AND SUBSIDIARY

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 

     Page

Independent auditors’ report

   1

Consolidated balance sheets at December 31, 2006 and 2005 (unaudited)

   2

Consolidated statements of operations for the year ended December 31, 2006 and 2005 (unaudited)

   3

Consolidated statements of stockholders’ equity for the year ended December 31, 2006 and 2005 (unaudited)

   4

Consolidated statements of cash flows for the year ended December 31, 2006 and 2005 (unaudited)

   5

Notes to consolidated financial statements

   6-12

 

 


INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Stockholders of

KoBrite Corporation

Taipei, Taiwan

 

We have audited the accompanying consolidated balance sheet of KoBrite Corp. and Subsidiary (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. 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 audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of China.

 

Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net loss and stockholders’ equity for the year ended December 31, 2006, to the extent summarized in Note 11.

 

/s/ Deloitte & Touche

Taipei, Taiwan

The Republic of China

 

March 17, 2008

 

 

1


KOBRITE CORPORATION AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2006 AND 2005

(In U.S. Dollars—Note 2)


 

    2006

    2005
(Unaudited)


       2006

    2005
(Unaudited)


 

ASSETS


  Amount

    %

    Amount

    %

  

LIABILITIES AND STOCKHOLDERS’
EQUITY


  Amount

    %

    Amount

    %

 

CURRENT ASSETS (Note 2)

                             CURRENT LIABILITIES (Note 2)                            

Cash (Note 3)

  $ 9,140,575     43     $ 5,127,523     34   

Accounts payable

  $ 1,491,355     7     $ 88,041     1  

Accounts receivable (Note 2)

    98,126     —         —       —     

Accounts payable—related parties (Note 9)

    314,253     1       3,391     —    

Accounts receivable—related parties (Note 9)

    1,041,896     5       —       —     

Payable for purchase of equipment

    86,670     —         510,933     3  

Other receivable (Note 9)

    32,049     —         7,015     —     

Other payable

    154,381     1       —       —    

Inventories, net (Note 4)

    1,040,462     5       67,812     1   

Accrued expenses and other current liabilities

    162,659     1       437,255     3  
                                  


 

 


 

Other current assets (Note 6)

    148,300     1       56,151     —                                   
   


 

 


 
                                
                              

Total current liabilities

    2,209,318     10       1,039,620     7  
                                  


 

 


 

Total current assets

    11,501,408     54       5,258,501     35                                 
   


 

 


 
                                
                               COMMITMENTS AND CONTINGENCIES (Note 10)                            

PROPERTY AND EQUIPMENT (Note 5)

                             STOCKHOLDERS’ EQUITY (Note 7)                            

Machinery and equipment

    8,761,572     41       3,596,996     24   

Common stock, par value $0.01 per share, 2,000,000,000 shares authorized, issued and outstanding

    20,000,000     94       13,000,000     87  

Leasehold improvements

    1,345,670     6       989,534     7           

Other equipment

    996,066     5       837,916     5           
   


 

 


 
                                
      11,103,308     52       5,424,446     36   

Additional paid-in capital

    1,500,000     7       1,500,000     10  

Accumulated depreciation

    (1,467,165 )   (7 )     (21,337 )   —     

Accumulated deficits

    (2,369,459 )   (11 )     (593,856 )   (4 )
   


 

 


 
      


 

 


 

      9,636,143     45       5,403,109     36                                 

Construction in process

    112,843     1       4,216,074     28    Total stockholders’ equity     19,130,541     90       13,906,144     93  
   


 

 


 
      


 

 


 

      9,748,986     46       9,619,183     64                                 
   


 

 


 
                                

OTHER ASSETS (Note 6)

                                                          

Refundable deposits and other assets

    89,465     —         68,080     1                                 
   


 

 


 
                                

TOTAL

  $ 21,339,859     100     $ 14,945,764     100    TOTAL   $ 21,339,859     100     $ 14,945,764     100  
   


 

 


 
      


 

 


 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

(With Deloitte & Touche auditors’ report dated March 17, 2008)

 

 

2


KOBRITE CORPORATION AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

(In U.S. Dollars—Note 2)


 

     2006

    2005 (Unaudited)

     Amount

    %

    Amount

    %

NET SALES (Note 2)

   $ 2,586,366     100     $ —         —  

COST OF SALES (Note 8)

     3,916,027     151       —       —  
    


 

 


 

GROSS LOSS

     (1,329,661 )   (51 )     —       —  

OPERATING EXPENSES (Note 8)

     616,478     24       781,847     —  
    


 

 


 

LOSS FROM OPERATIONS

     (1,946,139 )   (75 )     (781,847 )   —  
    


 

 


 

OTHER INCOME (EXPENSE):

                          

Interest income

     141,834     5       149,141     —  

Gain on foreign currency exchange, net

     62,942     2       37,794     —  

Other income (expense), net

     (34,240 )   (1 )     3,491     —  
    


 

 


 
       170,536     7       190,426     —  
    


 

 


 

NET LOSS

   $ (1,775,603 )   (69 )   $ (591,421 )   —  
    


 

 


 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

(With Deloitte & Touche auditors’ report dated March 17, 2008)

 

 

3


KOBRITE CORPORATION AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

(In U.S. Dollars—Note 2)


 

     Common Stock (Note 7)

   Additional
Paid-In
Capital

(Note 7)

   Accumulated
Deficits

(Note 7)

       
     Shares

   Amount

        Total

 

BALANCE ON JANUARY 1, 2005 (UNAUDITED)

   800,000,000    $ 8,000,000    $ —      $ (2,435 )   $ 7,997,565  

Issuance of common stock (unaudited)

   500,000,000      5,000,000      1,500,000      —         6,500,000  

Net loss for the year ended December 31, 2005 (unaudited)

   —        —        —        (591,421 )     (591,421 )
    
  

  

  


 


BALANCE ON DECEMBER 31, 2005 (UNAUDITED)

   1,300,000,000      13,000,000      1,500,000      (593,856 )     13,906,144  

Issuance of common stock

   700,000,000      7,000,000      —        —         7,000,000  

Net loss for the year ended December 31, 2006

   —        —        —        (1,775,603 )     (1,775,603 )
    
  

  

  


 


BALANCE ON DECEMBER 31, 2006

   2,000,000,000    $ 20,000,000    $ 1,500,000    $ (2,369,459 )   $ 19,130,541  
    
  

  

  


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

(With Deloitte & Touche auditors’ report dated March 17, 2008)

 

 

4


KOBRITE CORPORATION AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR YEARS ENDED DECEMBER 31, 2006 AND 2005

(In U.S. Dollars—Note 2)


 

     2006

    2005
(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net loss

   $ (1,775,603 )   $ (591,421 )

Adjustments to reconcile net loss to net cash used in operating activities:

                

Depreciation and amortization

     1,457,524       21,807  

Change in operating assets and liabilities:

                

Accounts receivable

     (1,140,022 )     —    

Other receivables

     (25,034 )     —    

Inventories, net

     (972,650 )     (67,812 )

Other current assets

     (92,149 )     (63,166 )

Accounts payable

     1,714,176       91,432  

Accrued expense and other current liabilities

     (120,215 )     434,795  
    


 


Net cash used in operating activities

     (953,973 )     (174,365 )
    


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                

Additions to property and equipment

     (1,999,894 )     (9,129,587 )

Additions to other assets

     (33,081 )     (68,550 )
    


 


Net cash used in investing activities

     (2,032,975 )     (9,198,137 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                

Proceeds from issuance of common stock

     7,000,000       6,500,000  
    


 


NET INCREASE (DECREASE) IN CASH

     4,013,052       (2,872,502 )

CASH AT BEGINNING OF YEAR

     5,127,523       8,000,025  
    


 


CASH AT END OF YEAR

   $ 9,140,575     $ 5,127,523  
    


 


SUPPLEMENTAL DISCLOSURE OF NONCASH FLOW INFORMATION

                

Cash payment for acquisition of property and equipment

                

Acquisition of property and equipment

   $ 1,575,631     $ 9,640,520  

Less: (Increase) decrease in payable for purchase of equipment

     424,263       (510,933 )
    


 


Net cash payment

   $ 1,999,894     $ 9,129,587  
    


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

(With Deloitte & Touche auditors’ report dated March 17, 2008)

 

 

5


KOBRITE CORPORATION AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In U.S. Dollars, Unless Stated Otherwise)


 

1.   ORGANIZATION

 

KoBrite Corporation was incorporated under the International Business Company Act (“IBC Act”) incorporated in the Mauritius in November 2004 as a venture among Bright LED Electronics Corporation of Taiwan (“Bright LED”), Kopin Corporation (“Kopin”) and Kopin Taiwan Corporation (“KTC”), and certain other private investors. The main activities of KoBrite Corporation are the manufacture and sale of chips for light emitting diode (“LED”) products. KoBrite Corporation’s subsidiary, KoBrite China Corporation (“KBC”), is located in the People’s Republic of China (“PRC”) and was incorporated in April 2005.

 

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The financial statements have been prepared in conformity with accounting principles generally accepted in the Republic of China (“ROC”). Under these principles, certain estimates and assumptions have been used for the allowance for doubtful accounts, allowance for loss on inventories, depreciation of property and equipment, impairment loss on property and equipment, loss on contingent liabilities, etc. Actual results may differ from these estimates.

 

Significant accounting policies are summarized as follows:

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the financial statements of KoBrite Corporation and KBC (collectively, the “Company”). All significant inter-company balances and transactions have been eliminated upon consolidation. In addition, the Company evaluates its relationships with other entities to ensure whether the entities in which the Company has a controlling interest are consolidated into the Company’s financial statements at the end of each fiscal year as defined by Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Investments,” and SFAS No. 7, “Consolidated Financial Statements.”

 

Current and Noncurrent Assets and Liabilities

 

Current assets include cash and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. All other assets such as property and equipment are classified as noncurrent. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. All other liabilities are classified as noncurrent.

 

Cash

 

Cash on hand is petty cash or cash available to draw from a bank deposit and financial assets that are expected to be converted to cash, sold, or consumed within three months from the balance sheet date.

 

Revenue Recognition, Trade Receivables and Allowance for Doubtful Accounts

 

Revenue from sales of goods is recognized when the Company has transferred to the customer the significant risks and rewards of ownership of the goods, primarily upon shipment, because the earnings process has been completed and the economic benefits associated with the transaction have been realized or are realizable. Allowances for sales returns and others are generally recorded in the year the related revenue is recognized on the basis of past experience, management’s judgment, and relevant factors.

 

Revenue is measured at the fair value of the consideration received or receivable and represents amounts agreed between the Company and the customers for goods sold in the normal course of business. For trade receivables due within one year from the balance sheet date, as the nominal value of the consideration to be

 

6


received approximates its fair value and transactions are frequent, fair value of the consideration is not determined by discounting all future receipts using an imputed rate of interest.

 

Inventories

 

Inventories are stated at lower of cost or market value. Cost is determined using the weighted-average method. Market value for raw material is based on replacement cost. Market value for work in process and finished goods is based on net realizable value.

 

Capitalized Internal Use Software Costs

 

Costs of computer software are amortized by using the straight-line method over five years.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Borrowing costs directly attributable to the acquisition or construction of property and equipment are capitalized as part of the cost of those assets. Major additions and improvements to property and equipment are capitalized, while costs of repairs and maintenance are expensed currently.

 

The useful lives of assets are summarized as follows:

Leasehold improvements: 10 years

Machinery and equipment: 5 years

Other equipment: 3-5 years

 

Property and equipment still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. The related cost, accumulated depreciation, and accumulated impairment losses of an item of and equipment are derecognized from the balance sheet upon its disposal. Any gain or loss on disposal of the asset is included in nonoperating income or losses in the year of disposal.

 

Impairment of Assets

 

If the recoverable amount of an asset (mainly property and equipment) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is charged to earnings.

 

If an impairment loss subsequently reverses, the carrying amount of the asset is increased accordingly, but the increased carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized in earnings.

 

Retirement Plan

 

In accordance with local regulations in the PRC, KBC has made a monthly cash contribution of a statutory percentage of salaries and wages to the local government and recognized such contribution as a current expense. The total amount of pension expense for the Company is $9,610 in 2006.

 

Income Tax

 

According to the Mauritius Tax Law, corporations registered under the IBC Act are exempted from Mauritius income tax.

 

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and tax credit carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount more likely than not to be recovered.

 

7


Foreign Currency Transactions

 

The Company’s functional currency is the US dollar. The majority of the sales revenue was derived from foreign sales priced at the US dollar. As a result, the functional currency and reporting currency are denominated in the US dollars. KoBrite Corporation and KBC record transactions in their respective local currency. The translation from the applicable foreign currency assets and liabilities to the US dollar amounts is performed using exchange rates in effect at the balance sheet date except for non-monetary assets and stockholders’ equity, which are translated at historical exchange rates. Revenue and expense accounts are translated using average exchange rates during the year. Gains and losses resulting from such translations are recognized as nonoperating income or losses.

 

Foreign currency transactions are translated at the rates prevailing on the transaction dates. On the balance sheet, foreign currency receivables and payables are translated at the approximate market rate of exchange prevailing on that date. Gains or losses resulting from settlement or translation are recognized as nonoperating income or losses.

 

3.   CASH

 

Cash at December 31, 2006 and 2005 consisted of the following:

 

     December 31

     2006

   2005
(Unaudited)


Cash on hand

   $ 22,074    $ 9,590

Demand deposits

     3,094,306      3,117,933

Time deposits

     6,024,195      2,000,000
    

  

     $ 9,140,575    $ 5,127,523
    

  

 

4.   INVENTORIES

 

Inventories as of December 31, 2006 and 2005 consisted of the following:

 

     December 31

 
     2006

    2005
(Unaudited)


 

Finished goods

   $ 327,099     $ —    

Work in process

     425,816       31,575  

Raw materials

     325,966       45,531  
    


 


       1,078,881       77,106  

Less: Allowance for inventory obsolescence

     (38,419 )     (9,294 )
    


 


     $ 1,040,462     $ 67,812  
    


 


 

5.   PROPERTY AND EQUIPMENT

 

The Company breaks down the accumulated depreciation of property and equipment as follows:

 

     December 31

     2006

   2005
(Unaudited)


Machinery and equipment

   $ 1,163,593    $ —  

Leasehold improvement

     130,485      7,286

Other equipment

     173,087      14,051
    

  

     $ 1,467,165    $ 21,337
    

  

 

8


6.   INCOME TAXES

 

KoBrite Corporation is not subject to income or other taxes in Mauritius and KBC is subject to taxes of the jurisdiction where it is located. Pursuant to the PRC income tax laws prior to January 1, 2008, KBC was generally subject to Enterprise Income Taxes (“EIT”) at a statutory rate of 27%, which comprises 24% national income tax and 3% local income tax.

 

In March 2007, PRC government published Enterprise Income Tax Law, which unified the enacted income tax rate for domestic and foreign enterprises and was effective January 1, 2008. According to the new tax law, KBC will be forced into its first tax holiday starting 2008 regardless of its profit level, and the tax rate will change from the present EIT rate of 27% to the unified EIT rate of 25% unless KBC can obtain official approval for other tax credit.

 

In accordance with the tax legislations applicable to foreign investment enterprises, KBC is entitled to an exemption from PRC income tax for two years commencing from 2008 and a 50% relief from PRC income tax for the next three years. The tax holiday granted to the KBC is expected to expire in 2012.

 

The components of deferred income tax assets were as follows:

 

     December 31

 
     2006

    2005
(Unaudited)


 

Deferred income tax assets, net

                

Net operating loss carryforwards

   $ 66,317     $ 4,001  

Depreciation

     149,131       —    

Spoilage

     80,080       —    

Startup cost

     29,602       48,751  

Inventory obsolescence

     10,373       2,509  

Sales recognition

     (813 )     (806 )

Overhead allocated to inventories

     (50,108 )     —    
    


 


       284,582       54,455  

Valuation allowance

     (284,582 )     (54,455 )
    


 


Deferred tax assets, net

   $ —       $ —    
    


 


 

7.   SHAREHOLDERS’ EQUITY

 

Common Stock and Capital Increase

 

In November 2004, Bright LED Electronics Corporation of Taiwan (“Bright LED”), Kopin Corporation (“Kopin”) and Kopin Taiwan Corporation (“KTC”) entered into a joint venture agreement to form KoBrite Corporation. Under the terms of the joint venture agreement, Bright LED, Kopin and KTC would subscribe to 300,000,000, 300,000,000 and 200,000,000 shares of the KoBrite Corporation’s common stock, respectively, for $0.01 per share. In 2005, KoBrite Corporation issued additional 500,000,000 shares of its common stock for $0.013 per share, resulting in an additional paid-in capital of $1,500,000.

 

Based on a resolution of the annual stockholders’ meeting on May 10, 2006, KoBrite Corporation increased its authorized common stock to $20,000,000. On July 31, 2006, the board of directors resolved to issue 700,000,000 new shares at $0.01 per share. The registration procedures related to these issuances have been completed.

 

9


Distribution of Earnings

 

According to the articles of incorporation, the distribution of residual earnings, net of accumulated losses from prior years, should be determined by a resolution of the directors.

 

8.   PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES

 

Personnel depreciation and amortization expenses for the year ended December 31, 2006 and 2005 were as follows:

 

     December 31, 2006

     Cost of Sales

   Operating
Expense


   Total

Personnel expenses

                    

Salaries and wages

   $ 231,020    $ 322,634    $ 553,654

Labor and health insurance

     —        3,834      3,834

Pension expense

     —        9,610      9,610

Other

     358      4,367      4,725
    

  

  

     $ 231,378    $ 340,445    $ 571,823
    

  

  

Depreciation

   $ 1,400,650    $ 45,178    $ 1,445,828
    

  

  

Amortization

   $ —      $ 11,696    $ 11,696
    

  

  

     December 31, 2005 (Unaudited)

     Cost of Sales

   Operating
Expense


   Total

Personnel expenses

                    

Salaries and wages

   $ —      $ 245,923    $ 245,923

Labor and health insurance

     —        4,438      4,438

Pension expense

     —        1,371      1,371

Other

     —        8,482      8,482
    

  

  

     $ —      $ 260,214    $ 260,214
    

  

  

Depreciation

   $ —      $ 21,337    $ 21,337
    

  

  

Amortization

   $ —      $ 470    $ 470
    

  

  

 

9.   RELATED-PARTY TRANSACTIONS

 

Names of the related parties and relationships:

 

Related Party


  

Relationship to the KoBrite Corporation


Kopin

  

Stockholder with 1 director position.

Bright LED

  

Stockholder with 1 director position.

KTC

  

Stockholder with 1 director position.

MainBright Enterprises Ltd. (“MainBright”)

  

A subsidiary of Bright LED.

Brite LED Corporation Dongguan (“Brite LED Dongguan”)

  

A subsidiary of Bright LED.

 

Summary of significant transactions with related parties:

 

In accordance with an agreement between KoBrite Corporation and KTC, certain equipment having a net book value of $1,717,063 as of December 31, 2006 was held and used on consignment by KTC. Under the

 

10


agreement, KTC manufactures products which and then sell to KoBrite Corporation as part of its raw material inventory.

 

The following is a summary of related party transactions as of and for the years ended December 31, 2006 and 2005:

 

     For Year Ended
December 31, 2006

   December 31, 2006

Related Party


   Sales

   Purchases

   Receivables

   Payables

MainBright

   $ 2,425,894    $ —      $ 1,041,896    $ —  

KTC

     —        314,253      —        314,253

Brite LED Dongguan

     —        —        26,730      —  
     For Year Ended
December 31, 2005
(Unaudited)


   December 31, 2005
(Unaudited)


Related Party


   Sales

   Purchases

   Receivables

   Payables

MainBright

   $ —      $ —      $ —      $ —  

KTC

     —        3,391      —        3,391

Brite LED Dongguan

     —        —        —        —  

 

The terms of sales to and purchases from related parties were not significantly different from those to or from third parties.

 

10.   COMMITMENTS AND CONTINGENCIES

 

KBC leases facilities in Guang Dong Province, China under a non-cancellable lease through January 2010. The following is a schedule of future minimum lease payments as of December 31, 2006:

 

Year


   Amount

2007

   $ 169,042

2008

     169,042

2009

     169,042

2010

     70,434

Thereafter

     —  
    

     $ 577,560
    

 

11.   RECONCILIATION OF REPUBLIC OF CHINA GAAP TO UNITED STATES GAAP

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China (“ROC GAAP”), which differ in the following respects from accounting principles generally accepted in the United States of America (“US GAAP”):

 

  a.   Purchase price allocation

 

In December 2004, the Company entered into an Equipment Purchase Agreement under which the Company paid $7,500,000 to Kopin for certain equipment and the performance of research and training activities. The Company ascribed the entire $7,500,000 to the value of the equipment. Under US GAAP, a portion of the purchase price would have been ascribed to the research and training activities. The Company estimated that $1,500,000 of the purchase price would have been considered payment of research and training activities and based upon the period the research and training activities occurred, the Company would have recognized $650,000 of expense in the year ended December 31, 2005 and $850,000 in the year ended December 31, 2006 under US GAAP. As a result of the allocation of $1,500,000 of the purchase price to the research and training activities, the amount

 

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allocated to equipment would have decreased and, accordingly, depreciation expense would have been less under US GAAP.

 

  b.   Rent expense

 

The Company entered into a five year facilities lease under which the Company paid no rent for the first four months. Under US GAAP, this “free” rent period would be amortized over the entire lease period. Accordingly, the Company would have had more rent expense in the year ended December 31, 2005 and less in the year ended December 31, 2006.

 

The Company has incurred losses since inception and based upon the criteria established under US GAAP it could not recognize a deferred tax asset for its net operating loss carryforwards, accordingly, no tax benefit was recorded for the increase in the net loss of the Company under US GAAP.

 

The following reconciles consolidated net loss and stockholders’ equity under ROC GAAP as reported in the consolidated financial statements to the consolidated net loss and stockholders’ equity determined under US GAAP, giving effect to the differences listed above.

 

Net loss

        

Net loss based on ROC GAAP

   $ (1,775,603 )

Adjustments which decrease the reported net loss

        

A. Purchase price allocation

        

1. Depreciation

     257,501  

2. Allocation of purchase price to research and training activities

     (850,000 )

B. Rent expense

     11,050  
    


Net adjustments

     (581,449 )
    


Net loss based on US GAAP

   $ (2,357,052 )
    


Stockholders’ equity

        

Stockholders’ equity based on ROC GAAP

   $ 19,130,541  

A. Purchase price allocation

        

1. Depreciation

     257,501  

2. Allocation of purchase price to research and training activities

     (1,500,000 )

B. Rent expense

     20,909  
    


Stockholders’ equity based on US GAAP

   $ 17,908,951  
    


 

The Company applies ROC SFAS No. 17, “Statement of Cash Flows.” Its objectives and principles are similar to those set out in US SFAS No. 95, “Statement of Cash Flows.” The principal differences between the two standards relate to classification to the consolidated statement of cash flows. Summarized cash flow data by operating, investing and financing activities in accordance with US SFAS No. 95 are as follows:

 

Cash flows as presented under US GAAP

        

Cash flows from operating activities

   $ (1,803,973 )

Cash flows from investing activities

     (1,182,975 )

Cash flows from financing activities

     7,000,000  
    


Net increase in cash

   $ 4,013,052  
    


 

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