CREATIVE GRACE LIMITED CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 2010 and 2009

2 INDEX TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 2010 and 2009 Page AUDITORS' REPORT 1 FINANCIAL STATEMENTS Consolidated Balance Sheet 2 Consolidated Statements of Income and Comprehensive Income 3 Consolidated Statement of Changes in Shareholders' Equity 4 Consolidated Statement of Cash Flows 5 Notes to the Audited Consolidated Financial Statements 6-19

3 Network Member firm of Porter Hétu International Professional Services Group Professional Strength Personal Service Practical Solutions AUDITORS' REPORT To the Directors of Creative Grace Limited: We have audited the consolidated balance sheets of the Creative Grace Limited as at April 30, 2010 and 2009 and the consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the years 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 Canadian generally accepted auditing standards. These standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Partners Tenny S. Lo, MA, FCGA, CA* Elizabeth A. Thompson, FCGA* Stella M. Penner, CA, MBA, FCGA* *Professional Corporation In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Creative Grace Limited as at April 30, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Tel: Fax: lph@loporterhetu.com Website: Calgary, Alberta, Canada June 28, 2010 Certified General Accountants # rd Avenue SE Calgary, Alberta Canada T2A 7W5 1

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5 CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the Years Ended April 30, 2010 and Chineses Yuan 2009 Chineses Yuan REVENUE 76,520,787 62,790,206 COST OF SALES 45,340,076 37,723,095 GROSS PROFIT 31,180,711 25,067,111 EXPENSES Sales and marketing expenses 4,252,041 3,793,097 Salary and benefits 2,680,234 2,581,208 General and adminstrative expenses 5,487,036 4,011,448 Interest expenses 1,765,277 1,569,835 Amortization expenses 1,454,268 1,157,060 15,638,856 13,112,648 INCOME FROM OPERATIONS 15,541,855 11,954,463 OTHER EXPENSES (261,691) (409,273) INCOME BEFORE INCOME TAXES 15,280,164 11,545,190 INCOME TAXES (Note 9) 2,596,364 1,788,125 NET INCOME AND COMPREHENSIVE INCOME 12,683,800 9,757,065 Earnings per share, basic and diluted (Note 10) 126,838 97,571 Shares used in calculating basic and diluted earnings per share The accompanying notes form an integral part of the audited consolidated financial statements

6 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended April 30, 2010 and 2009 Amount Additional paid-in capital Statuory Reserve Retained Earnings Year ended April 30, 2010 Chineses Yuan Balance, at at May 1, ,222,449 1,039,923 18,012,107 47,274,567 Net income ,683,800 12,683,800 Dividends (1,900,000) (1,900,000) Appropriation of earnings to Statutory Reserve (Note 11) ,995 (284,995) - Balance, as at April 30, ,222,449 1,324,918 28,510,912 58,058,367 Amount Additional paid-in capital Statuory Reserve Retained Earnings Year ended April 30, 2009 Chineses Yuan Balance, as at May 1, ,143, ,349 8,484,616 38,438,474 Deemed distribution in conection with the reorganization - (3,475,160) - - (3,475,160) Capital injection - 2,554, ,554,188 Net income ,757,065 9,757,065 Appropriation of earnings to Statutory Reserve ,574 (229,574) - Balance, as at April 30, ,222,449 1,039,923 18,012,107 47,274,567 4 The accompanying notes form an integral part of audited consolidated financial statements

7 CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended April 30, 2010 and Chineses Yuan 2009 Chineses Yuan OPERATING ACTIVITIES Net income 12,683,800 9,757,065 Items not affecting cash: Amortization of plant and equipment 1,653,976 1,157,060 Loss on disposal of equipment - 101,322 Write off of bad debt 350, ,100 14,688,301 11,420,547 Changes in non-cash working capital (Note 14) (13,550,486) (13,183,125) 1,137,815 (1,762,578) INVESTING ACTIVITIES Additions to property, plant and equipment (2,609,436) (2,546,970) Deferred capital transaction costs recovered (incurred) 179,013 (300,000) Proceeds from disposal of assets - 71,000 (2,430,423) (2,775,970) FINANCING ACTIVITIES Short term bank loan 7,000,000 11,000,000 Capital injected by shareholders - 2,554,100 Due to related parties (8,823,279) (3,798,894) (1,823,279) 9,755,206 INCREASE (DECREASE) IN CASH FLOW (3,115,887) 5,216,658 CASH - BEGINNING OF YEAR 7,695,389 2,478,731 CASH - END OF YEAR 4,579,502 7,695,389 Supplementary information Interest paid 1,761,868 1,559,342 Income taxes paid 748, ,128 5 The accompanying notes form an integral part of the audited consolidated financial statements

8 1. ORGANIZATION, PRINCIPAL ACTIVITIES AND REORGANIZATION (a) Description of operations The accompanying consolidated financial statements include the financial statements of Creative Grace Limited (the Company ), Zhuhai Keli Electronic Co., Ltd. ( Keli ) and Zhuhai Qunhui Electronic Equipment Co., Ltd. ("Qunhui"), wholly owned subsidiaries of the Company. Before January 2009, Qunhui was a variable interest entity of the Company (the "VIE"). The Company and the subsidiaries are collectively referred to as the Group. The Group is ultimately controlled by Madam Souwa Wong and Mr. Lou Meng Cheong (the Owners ). The Group specializes in the manufacturing of electrical components and equipments, including pre-assembled mini substations, electrical controllers, pressurized and vacuumed switchgears and circuit breaker in the manufacturing. The Company was incorporated under the laws of Hong Kong in December 2008 as a company with limited liability. The Company currently conducts all of its business through Keli and Qunhui. Keli and Qunhui were incorporated in the People s Republic of China ( PRC ) in September 2002 and January 2005 respectively. (b) Reorganization In connection with a reverse takeover transaction ( RTO ) with HSF Capital Corporation, a capital pool company listed in the TSX Venture Exchange, the Group reorganized its corporate and shareholding structure (the Reorganization ). In December 2008, the Company was established by the Owners in Hong Kong in anticipation of a RTO with a CPC. Thereafter, in April 2009, the Owners transferred all of the outstanding shares of Keli to the Company, and Keli became a wholly owned subsidiary of the Company. In addition, as part of the Reorganization, on January 1, 2009, the Company, a shareholder and a family member of the shareholder (the Family Member ) entered into an Investment Transfer Agreement. In accordance with the Investment Transfer Agreement, the shareholder sold the rights and interests in connection with the ownership of Qunhui to the Company for 3,475,160, which represents the initial cost of investment made and capital contributed by a shareholder. This payment was recorded as a distribution to the shareholder and was made in May With the completion of the transaction, Qunhui became a wholly owned subsidiary of the Company. (c) Variable Interest Entity The Company completes some of its raw material purchase and processing through Qunhui, which was controlled bya member of the Owner's family. Before January 2009, Qunhui shared the same management team as Keli, and Qunhui's business was to purchase and process raw materials for Keli. Keli was Qunhui s only customer. Other than purchases and sales contractual arrangements between Keli and Qunhui, Qunhui did not transfer any other funds generated from its operations to Keli. The Group evaluated the relationships among the Company, Keli and Qunhui accordingly and concluded that Qunhui is a variable interest entity of the Company, of which the Company is the primary beneficiary. As a result, the Qunhui s results of operations, assets and liabilities have been included in the Group s consolidated financial statements. As part of the Reorganization (Note 1(b)), Qunhui became a subsidiary of the Company in January

9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation Those consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) and reflect the significant accounting policies outlined below. With respect to the Reorganization described in Note 1, because the Company, Keli and Qunhui were all under common control before and after the Reorganization, the financial statements of the Company, Keli and Qunhui have been combined to disclose the result of operation for the Group as if they were a consolidated entity prior to January Accordingly the accompanying consolidated financial statements of the Group include the assets and liabilities of Qunhui at their historical carrying amounts. In addition, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. (b) Principles of The consolidated financial statements include the financial statements of the Company and its controlled operating entities including the subsidiaries and the variable interest entities. All inter-company balances and transactions within the Group have been eliminated on consolidation. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power, or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast majority of votes at the meeting of directors. Variable interest entities are those entities in which the Company, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with, ownership of the entities, and therefore the Company is the primary beneficiary of these entities. Entity Zhuhai Keli Electronic Co., Ltd. ( Keli ) Zhuhai Qunhui Electronic Equipment Co., Ltd. (Qunhui) Location Ownership Status PRC 100% Consolidated PRC 100% Consolidated (c) Cash and cash equivalents Cash and cash equivalents represent cash on hand, demand deposits and highly liquid investments placed with banks, which have original maturities of three months or less. (d) Use of estimates The preparation of the consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affected the reported amounts of the assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenue and expenses during the reported periods. Actual results could differ from these estimates. Significant accounting estimates reflected in the Group's consolidated financial statements mainly include the valuation of accounts receivable and inventories, allocation of costs to productions, and useful life and recoverability of property, plant and equipment. (Continued ) 7

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (e) Accounts receivable, net An allowance for doubtful debts is provided based on an ageing analysis of accounts receivable balances, historical bad debt rates, repayment patterns, customer credit worthiness and industry trend analysis. Bad debts are written off when identified. The Group also makes a specific allowance if there is strong evidence showing that a specific receivable is likely to be unrecoverable. Allowances for doubtful accounts charged to the statement of operations were Rmb 350,525 and Rmb 405,100 for the years ended April 30, 2010 and 2009, respectively. Accounts receivable are reported net of such provisions. (f) Inventories Inventories are valued at the lower of cost and net realizable value. Cost includes cost of materials computed using the weighted average method and, in the case of work in progress and finished goods, direct labor and an appropriate proportion of production overhead. Net realizable value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date or to management estimates based on prevailing market conditions. In establishing the appropriate provision for inventory obsolescence, management estimates the likelihood that inventory carrying values will be affected bychanges in market demand, technology and design, which would make inventory on hand obsolete. Write-downs of inventory to net realizable value are reversed if the value subsequently recovers. (g) Property plant and equipment, net (i) Construction-in-progress Construction-in-progress ( CIP ) represents buildings, plant and equipment under construction, and is stated at cost less accumulated impairment losses. Costs include construction and acquisition costs. No provision for depreciation is made on construction-in-progress until such time as the assets are completed and ready for use. When the asset being constructed becomes available for use, the CIP is transferred to the appropriate category of property, plant and equipment. (ii) Buildings and land use right Buildings and land use right, held by the Group are stated at cost less accumulated depreciation and accumulated impairment losses, and are depreciated over their expected useful lives. (iii) Other plant and equipment Other plant and equipment comprise production equipment, office furniture, motor vehicles and others. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable at the time the costs are incurred that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred. (iv) Depreciation: Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their costs or revalued amounts less their residual values over their estimated useful lives, as follows: Land use right 50 years straight-line method Buildings 20 years straight-line method Production equipment 10 years straight-line method Office equipment and 5 years straight-line method Vehicles 5-10 years straight-line method (Continued ) 8

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (Note 2(h)). (v) Gain or loss on disposal of property, plant or equipment Gains or losses on disposal of a property, plant or equipment are determined by comparing the net sales proceeds with the carrying amounts, and are recognized in the statement of income. (h) Impairment of long-lived assets Long-lived assets are reviewed for impairment whenever events or changes in the circumstances indicate that the carrying value of an asset may not be recoverable. The Group assesses the recoverability of the long-lived assets by comparing the carrying amount to the estimated future undiscounted cash flows associated with the related assets. The Group recognizes impairment of long-lived assets in the event that the book value of such assets exceeds the estimated future discounted cash flows attributable to such assets. No impairment of long-lived assets was recognized for any of the periods presented. (i) Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost and any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the statement of income over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. (j) Revenue recognition Revenue from the sales of goods is recognized upon transfer to the customers of the significant risks and rewards of ownership of the goods which occurs when persuasive evidence of an arrangement exist, delivery has occurred under the term of the arrangement, the price is fixed or determinable and collectability is reasonably assured. Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduce for estimated customer returns, rebates and other similar allowances. Customer prepayments are recorded as advances from customers. Revenue is not recognized until criteria for revenue recognition have all been met, including shipment of goods. (k) Income taxes The group follows the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized. Under the Enterprise Income Tax Law (the New EIT Law ) effective from January 1, 2008, dividends from earnings made after January 1, 2008, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. Hong Kong, where the Company is incorporated, has such tax treaty with the People's Republic of China ("PRC"), of which the withholding tax rate is 5%. (Continued ) 9

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Statutory Reserves Keli and the VIE of the Group are required to make appropriations to reserves, comprising the statutory surplus reserve, statutory public welfare reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People s Republic of China (the PRC GAAP ). (m) Foreign Currency Translation The group's reporting currency is Chinese Yuan ("RMB", "Yuan" or " "). The functional currency of the Company, Keli and the VIE is RMB. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People's Bank of China prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the People's Bank of China at the balance sheet dates. All such exchange gains and losses are included in the consolidated statements of operations. (n) Comprehensive income Comprehensive income is the change in equity of an enterprise during a period arising from transactions and other events and circumstances from non-owner resources. It includes items that would normally not be included in net earnings such as changes in the foreign currency translation adjustment relating to self-sustaining foreign operations and unrealized gains or losses on available-for-sale financial instruments. (o) Earnings per share The Group presents basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. Ordinary share equivalents are excluded from the computation in loss periods as their effects would be anti-dilutive. (p) Financial instruments The Corporation initially measures all its financial instruments at fair value. Subsequent measurement and treatment of any gain or loss is recorded as follows: i) Held-for-trading financial assets are measured at fair value at the balance sheet date with any gain or loss recognized immediately in net income. Interest and dividends earned from held-for-trading assets are included in income for the period. ii) Loans and receivables are measured at amortized cost using the effective interest method. Any gains or losses are recognized in net income for the period. iii) Other financial instruments are measured at amortized cost using the effective interest method. iv) Transaction costs that are directly attributable to the issuance of financial assets or liabilities are accounted for as part of the carrying value at inception (except for transaction costs related to financial instruments related to held-for-trading instruments which are expensed as incurred), and are recognized over the term of the assets or liabilities using the effective interest rate method. Any gains or losses are recognized in net income for the period. (Continued ) 10

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The following is a summary of the accounting model the Corporation has elected to apply to each of its significant categories of financial instruments outstanding as at April 30, 2010: Cash and cash equivalents Accounts receivable Accounts payable and accrued liabilities Short term debt Held-for-trading Loans and receivables Other financial liabilities Other financial liabilities (q) Segment reporting The Group operates and manages its business as a single segment. As the Group generates all of its revenues from customers in the PRC, no geographical segments are presented. 3. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (a) Changes in accounting policies During the year ended April 30, 2010, the Company adopted the following new or revised Canadian accounting standards. Prior periods have not been restated. The adoption of these policies had no impact on opening deficit. i) General Standards of Financial Statement Presentation (CICA Handbook Section 1400) On January 1, 2008, the Group adopted the new recommendations of Canadian Institute of Chartered Accountants (CICA) Handbook Section 1400, General Standards of Financial Statement Presentation. This new Handbook section includes a requirement that management make an assessment of an entity's ability to continue as a going concern when preparing financial statements. The adoption of these standards did not impact the Corporation's consolidated financial statements. ii) Capital Disclosures (CICA Handbook Section 1535) On January 1, 2008, the Group adopted the new recommendations of CICA Handbook Section 1535, Capital Disclosures. This new Handbook section establishes disclosure of information about an entity's objectives, polices and processes disclosure requirements about an entity's capital and how it is managed. It requires the disclosure of information about an entity's objectives, policies and processes for managing capital. iii) Financial instruments - Section 3862 Financial Instruments - Disclosure and Section 3863 Financial Instruments - Presentation replace Section 3861 Financial Instruments - Disclosure and presentation. These new sections revise and enhance disclosure requirements and carrying forward unchanged presentation requirements. Increased emphasis is placed on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. The adoption of these changes had no significant effect on the financial statements. iv) Inventory (CICA Handbook Section 3031) On January 1, 2008, the Group adopted the new recommendations of CICA Handbook Section 3031 Inventories, which replaces CICA Handbook Section 3030, Inventories. The new standard requires inventory to be measured at the lower of cost or net realizable value and requires any write-downs to be reversed if the value subsequently recovers, it also provides expanded guidance on the determination of cost, including the allocation of overhead and expands disclosures. The adoption of this new standard did not affect the Group's consolidated financial statements. (Continued ) 11

14 3. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued) v) Harmonizing of Canadian and International Standards The Accounting Standards Board (AcSB) establishes financial accounting and reporting standards for use by Canadian companies. It also participates in the development of internationally accepted accounting standards. The AcSB is accountable to the Accounting Standards Oversight Council, an independent body established in September 2000 by the CICA. On February 13, 2008, the AcSB announced the use of the International Financial Reporting Standards (IFRS) will be required for fiscal years beginning on or after January 1, 2011 for publicly accountable profit-oriented enterprises including listed companies. IFRS will replace Canada's current GAAP. Companies will be required to provide comparative IFRS information for the previous fiscal year. The Group is considering the impact of the adoption of IFRS on future financial periods. vi) Business combinations and non-controlling interests In January 2009, the AcSB issued Section 1582 Business Combinations, Section 1601 Consolidations and Section 1602 Noncontrolling interests. Section 1582 replaces Section 1581 Business Combinations and provides the Canadian equivalent to IFRS 3 Business Combinations. Section 1601 and Section 1602 replace Section 1600 Consolidated Financial Statements. Section 1602 provides the Canadian equivalent to International Accounting Standard ("IAS") 27 Consolidated and Separate Financial Statements, for non-controlling interests. These standards are effective January 1, The Group is considering the impact on the adoption for future financial periods in light of the potential RTO transactions referred to in Note 1(b). 4. FINANCIAL RISK MANAGEMENT This section provides disclosures relating to the nature and extent of the Company's exposure to risks arising from financial instruments, including credit risk, liquidity risk and interest rate risk as well as to how the Company manages those risks. (a) Concentration There are no customers whose revenues individually represent greater than 10% of the total revenues for the years ended April 30, 2009 and The Group holds various forms of financial instruments which include cash and cash equivalents, accounts receivable, taxes recoverable, due from related parties, bank indebtedness, and accounts payable and accrued liabilities. The carrying value of the Group's financial current assets and liabilities approximate their fair values as at April 30, The Group manages its exposure to this risk by operating in a manner that minimizes its risk exposure to the extent practical. (b) Credit risk Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The Group places its cash and cash equivalents with financial institutions that management believes are of high-credit ratings and quality. The extent of the Group s credit exposure is mainly represented by the fair value of accounts receivable for services. The Group extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursing past due accounts. The Group assesses the credit quality of and sets credit limits on all its customers by taking into account their financial position, the availability of guarantees from third parties, their credit history and other factors such as current market conditions. The Group has not experienced significant losses from uncollectible accounts. The Group will continue to evaluate its collection experiences and will provide for an allowance for doubtful accounts as appropriate. (Continued ) 12

15 4. FINANCIAL RISK MANAGEMENT (Continued) (c) Liquidity risk Liquidity risk is the risk that the Group may encounter difficulties in meeting obligations associated with financial liabilities. As at April 30, 2010, the Group was holding cash and cash equivalents of RMB 4,579,502. The Group maintains adequate cash balances and credit facilities in order to meet short term business requirements, after taking into account cash flows from operations; the Group's management believes that these sources will be sufficient to cover its likely short term and long term cash requirements. The contractual obligations of the Company as at April 30, 2010, were composed of short term bank loans, accounts payable and accrued expenses and other liabilities in the amount of RMB 66,847,074. The Group is not fully funded to meet its financial obligations. Additional funds will have to be generated through new sales and/or additional financing. Working capital, defined as current assets less current liabilities, was RMB 31,309,230. (d) Foreign currency risk A majority of the Group s operating transactions are denominated in RMB and a significant portion of the Group s assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. The value of the RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign exchange transactions are required bylaw to be transacted only byauthorized financial institutions at exchange rates set by the People's Bank of China ("PBOC"). Remittances in currencies other than RMB by the Group in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to process the remittance. (e) Currency risk Currency risk is the risk to the Group's earnings that arise from fluctuations of foreign exchange rates and the degree of volatility of these rates. The Group is exposed to foreign currency exchange risk as it has Chinese currency, the fluctuation of exchange rates of RMB may have positive or negative impacts on the results of operations of the Group. (f) Interest rate risk The Group is exposed to interest rate risk as its subsidiary has borrowed RMB 38,000,000 to finance the construction of additional buildings and production assets. The current interest rate is relatively low and management does not expect any significant changes in interest rate in the near future and is of the opinion that the effect of interest rate fluctuations on the company s operation will not be material. 13

16 5. INVENTORY For the years ended April 30, 2010 and 2009, the amount of inventories recognized as expenses were RMB 45,340,076 and RMB 37,723,095 respectively. There was no write-down of inventory recognized as an expense, nor any reversal of writedowns previously recognized as a reduction in the amount of inventory recognized as an expense Raw material 41,791,844 43,817,256 Work in process 9,883,057 5,176,680 Finished goods 279, ,046 Total 51,954,317 49,776,982 Included in raw materials is approximately RMB 35 million of inventories stored at various offsite locations not under the direct control of the Group. The materials are held in the custody of third parties on behalf of the Group. This exposes the Group to the potential of inventory loss that it cannot control directly. See Note 15(b). 6. PROPERTY, PLANT AND EQUIPMENT Cost 2010 Accumulated Amortization Net Book Value Land use right 2,675, ,503 2,302,054 Building 22,181,638 2,370,073 19,811,565 Production equipment 2,803,309 1,490,532 1,312,777 Office equipment and furniture 2,832,271 1,454,658 1,377,613 Vehicles 1,993,943 1,047, ,754 Construction-in-progress 277, ,387 Total 32,764,105 6,735,955 26,028,150 Cost 2009 Accumulated Amortization Net Book Value Land use right 2,675, ,991 2,355,566 Building 20,925,113 1,439,689 19,485,424 Production equipment 2,501,509 1,446,141 1,055,368 Office equipment and furniture 2,197,930 1,049,000 1,148,930 Vehicles 1,626, , ,243 Construction-in-progress 228, ,159 Total 30,154,669 5,081,979 25,072,690 The depreciation expenses for property and equipment were 1,653,975 and 1,157,060 for the years ended April 30, 2010 and 2009, respectively. 14

17 7. DEFERRED CAPITAL TRANSACTION COSTS These amounts were deferred changes. The Company has engaged Canadian consulting firms to assist in its application for listing of its shares on the TSX Venture Exchange. In this process, all expenses related to the listing application and professional fees are recorded as deferred charges. These charges will be recorded as capital transaction costs in the event the application for listing is successful, and if unsuccessful, will be expensed in the period when the application ceases to proceed. 8. SHORT TERM BANK LOANS RMB denominated bank loans at fixed interest rate of 5.31% (2009: range from 5.31% to 7.47%) per annum with maturity through April 30, 2011 (2009: maturity through April 30, 2010) with no fixed terms of repayment ,000,000 31,000,000 These loans are secured by pledging of land use rights and buildings owned by the Group and the owners. 9. INCOME TAXES Although the company was incorporated in Hong Kong, all of its operations occur in the PRC. Its income is subject only to PRC tax rates, with the exception of a withholding tax on dividends that may be paid by Keli to the Company in the future. Taxes are estimated based on PRC tax rates. Components of income before income taxes are as follows: Income Before Taxes 15,541,855 11,245,190 Less income from Hong Kong operations Income from PRC operation 15,541,855 11,245,587 Income tax applicable to the PRC operations 2,596,364 1,788,125 Effective tax rate, as based on PRC operations 16.5% 15.5% Total taxes payable owed by the Company as of April 30, 2010 and 2009 is 4,520,012 and 2,895,908, respectively. Hong Kong Under the current Hong Kong Inland Revenue Ordinance, the Company is subject to 16.5% income tax on its taxable income generated from operations in Hong Kong. The Company has no operations in Hong Kong since its inception. China Prior to January 1, 2008, pursuant to the Income Tax Law of the People s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws ( the previous income tax laws and rules ), the income taxes were generally assessed at a statutory rate of 33%, which includes 30% national income tax and 3% local income tax. Under the previous income tax laws and rules, an enterprise established in the Zhuhai Special Economic Zone ( ZHSEZ ) was entitled to a preferential tax rate of 15% and the local income tax was exempted. In addition, such enterprises were further entitled to a five-year holiday, including two-year income tax exemption followed by three years of a 50% tax reduction, when certain criteria could be met, commencing from the first cumulative profit-making year net of losses carried forward. Keli and Qunhui were both established in ZHSEZ. The five-year tax holiday ended on December 31, 2007 for Keli and on December 31, 2009 for Qunhui. (Continued ) 15

18 9. INCOME TAXES (Continued) On January 1, 2008, the New Enterprise Income Tax Law, the "New EIT Law", which unifies the statutory income tax rate of enterprises in China to 25%, became effective. In accordance with the New EIT Law, there is a transition period for enterprises, which currently receive preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the New EIT Law. During the transition period, the preferential tax rates for operations within ZHSEZ are 18%, 20%, 22%, 24% and 25% for the years ending December 31, 2008, 2009, 2010, 2011 and 2012, respectively. In addition, the tax holiday grandfathering provision allows enterprises to continue to enjoy their unexpired tax holiday under the previous income tax laws and rules. Qunhui continues to enjoy a 50% tax reduction from the preferential tax rate if certain criteria can be met for the years ending December 31, 2008 and Thereafter, Qunhui s tax rate will transition from the preferential rates to the new uniform tax rate of 25% for 2011 to The tax rates for Qunhui were 9% and 10% for the years ending December 31, 2008 and 2009, respectively. In 2009, Keli was considered a high and new technology enterprise and enjoys a preferential tax rate of 15%. Under the New EIT Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. Hong Kong, where the Company is incorporated, has such tax treaty with the PRC, under which the withholding tax rate is 5%. This new 5% withholding tax imposed on the dividend income received from the Group s PRC subsidiary reduced the Group s net income. On February 22, 2008, the Ministry of Finance and State Tax Bureau jointly issued a circular which stated that for foreign invested enterprises, all profits accumulated up to December 31, 2007 are exempted from withholding tax when they are distributed to foreign investors. Accordingly, the Group accrued 5% withholding tax, amounted to RMB 53,471, on net income attributable to the Company, the foreign investor of Keli, which arose in 2008 that will not be indefinitely reinvested. No withholding taxes were accrued for the profits accumulated up to December 31, Reconciliation of the difference between statutory tax rate and the effective tax rate for the PRC operation for the periods: Statutory income tax rate 25.0% 25.0% Effect of preferential tax rate for operations in ZHSEZ -0.7% -6.4% Effect of preferential tax rate for high and new technology enterprise -9.4% - Effect of tax holiday -1.3% -0.7% Effect of withholding income tax in relation to net income attributable to foreign holding company of the PRC operation 0.5% 0.5% Permanent book-tax differences 2.4% -2.9% Effective tax rate 16.5% 15.5% The aggregate amount and per share effect of the tax holiday are as follows: The aggregate dollar effect 204,757 85,879 Per share effect, basic and diluted 2,

19 10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the periods indicated: Income attributable to holders of ordinary shareholders (numerator) 12,683,800 9,757,065 Weighted average ordinary shares outstanding used in computing basic and diluted earnings per share (denominator) Earnings per share - basic and diluted 126,838 97, STATUTORY RESERVES (a) China contribution plan Full-time employees of the Group are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a PRC government mandated multi-employer defined contribution plan. The Group is required to accrue for these benefits based on certain percentages of the employees salaries. The Group is required to make contributions to the plans out of the amounts accrued. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees and the Group s obligations are limited to the amounts contributed. The total contribution for such employee benefits were not material for the periods presented. (b) Profit appropriation statutory reserves Keli and the VIE are required to make appropriations to reserves, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the PRC GAAP ). Appropriations to the statutory surplus reserve should be at least 10% of the after-tax net income determined in accordance with the legal requirements in the PRC until the reserve is equal to 50% of the entities registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory surplus reserve and discretionary surplus reserve are established for the purpose of offsetting accumulated losses, expending productions or increasing share capital. The Group had appropriated RMB 284,995 and RMB 229,574 to the statutory surplus reserve for the years ended April 30, 2010 and 2009 in accordance with the PRC GAAP. Total accumulated statutory reserves as of April 30, 2010 and 2009 were RMB 1,324,918 and RMB 1,039,923 respectively. 12. RELATED PARTY TRANSACTIONS The Group borrows various loans from the shareholders or other individuals on behalf of the shareholders. The amounts are unsecured, non-interest bearing, and have no fixed terms of repayment. These amounts due to the shareholders are as follows: Due to shareholders 4,002,005 7,735,284 Individuals on behalf of the shareholders (240,000) 4,850,000 Total 3,762,005 12,585,284 17

20 13. CAPITAL DISCLOSURE As of December 31, 2008, the Company's capital is composed of 100 ordinary shares, which is also the total authorized shares, with paid-in capital of 88, and additional paid in capital of 28,222,449. The Company's primary use of capital is to finance capital expenditures and operating working capital. There were no changes to the Company's approach to capital management during the years ended April 30, 2010 and The Company is not subject to externally imposed capital requirements. 14. CHANGES IN NON-CASH WORKING CAPITAL Accounts receivable (11,234,917) (1,042,956) Other receivable (4,448,401) - Inventory (2,177,335) (1,237,700) Prepaid expenses (882,381) 2,530,164 Accounts payable 1,203,588 (13,267,143) Customer advance 2,418,327 2,258,863 Taxes payable (Note 9) 1,570,633 (2,424,353) (13,550,486) (13,183,125) 15. COMMITMENTS AND CONTINGENCIES (a) Commitment The Group did not have any significant operating, capital and other commitments, long-term obligations, or guarantees as of April 30, (b) Contingencies As described in Note 5, raw materials of approximately RMB 35 million are stored at various offsite locations that are not under the direct control of the Group In this situation, there is a potential for loss of inventory. However, an estimate of the amount of contingent loss cannot reasonably be determined as at the financial statement date. To date, the Group has experienced no losses of material from these offsite locations. 18

21 16. SUBSEQUENT EVENTS (a) On May 5, 2010, HSF Capital Corporation, ("HSF"), completed the Qualifying Transaction by acquiring all of the issued and outstanding common shares in the capital of the Company by issuing 14,454,545 common shares in the capital of HSF (the Shares ) and 47,545,455 special warrants of HSF (the Special Warrants ) to the shareholders of the Company. Each Special Warrant may be converted into a Share for no additional consideration. Immediately following the acquisition, HSF completed a concurrent financing by issuing 17,508,673 common shares at Cdn$ 0.30, with total proceeds of Cdn$ 5,252,602. As at the opening of the market on May 5, 2010, HSF graduated from being a Capital Pool Company on the NEX Board of TSXV, and commenced trading on the TSXV under its new name China Keli Electric Company Ltd (the ZKL ) as a Tier 2 manufacturing issuer. The new trading symbol of the HSF is ZKL. Upon the completion of the Qualifying Transaction, the shareholders of the Company became the controlling shareholders of the eventual reporting issuer. (b) On May 11, 2010, ZKL granted an aggregate 3,216,331 stock options to directors, officers and employees of the Company. Each option is exercisable at Cdn$ 0.43 per common share at any time until May 11, The options vest immediately upon grant. On May 13, 2010, ZKL further granted an aggregate of 454,490 stock options to directors and officers of the Company exercisable at Cdn$ 0.43 per common share at any time until May 13, The options vest immediately upon grant. 19