Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
exchange A Rule 12b-2)
Yes ¨ No x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As
of February 29, 2008, we had 38,535,114 shares of our $0.001 par value common
stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Transitional
Small Business Disclosure Form (Check one): Yes o No x
To
simplify the language in this Form 10-KSB, Tank Sports, Inc., a California
corporation, is referred to herein as “Tank”, the "Company" or
"We."
PART
I
This
report on Form 10-KSB and documents incorporated herein by reference contain
certain “forward-looking statements” as defined by the Private Securities
Litigation Reform Act of 1995 which involve substantial risks and uncertainties.
When used in this report and in other reports filed by the Company, the
forward-looking statements are often identified by the use of such terms and
phrases as “anticipates,” “believes,” “intends,” “plans,”
“expects,” “seeks,” “scheduled,” “foreseeable future' and similar
expressions. Although the Company believes the understandings and assumptions on
which the forward-looking statements in this report are based are reasonable,
the Company's actual results, performance and achievements could differ
materially from the results in, or implied by, these forward-looking
statements. Certain factors that could cause or contribute to such differences
include those discussed in “Management's Plan of Operations” and elsewhere
herein.
ITEM
1. DESCRIPTION OF BUSINESS.
Corporate
History
Tank
Sports, Inc. was originally incorporated under the laws of the State of
California on March 5, 2001, as Bi-Tank, Inc. On June 21, 2004, the Company
changed its name to Tank Sports, Inc. and its principal place of business is
located at 10925 Schmidt Road, El Monte, California 91733.
On
January 30, 2007, the Company acquired Lowprice.com, Inc. an Arizona corporation
d/b/a Redcat Motors (“Redcat”) as it’s wholly owned subsidiary. Redcat is
engaged in the distribution of motorcycles and ATVs under the Redcat brand name
in the United States through its dealer network.
On
November 15, 2007, the Company acquired 100% stock of People’s Motor
International Co., Ltd. (“PMI”) and its subsidiaries. PMI was incorporated in
the British Virgin Islands on March 13, 2001 and has manufacturing plant in
Shanghai to produce dune buggies and a distribution company in Hong Kong to
market the products to international markets including the United States under
the “Dazon” brand name. With these two acquisitions the Company has enhanced its
distribution network in the U.S., Europe and other international markets as well
as obtained proprietary technologies in dune buggy production and related
product development abilities.
Current
Business Operations
Tank
Sports markets, sells and distributes recreational and transportation
motorcycles, all-terrain vehicles (“ATVs’), dirt bikes, scooters and dune
buggies in the United States and international markets. The Company supports
each product line with an assortment of replacement parts and accessories, which
are available at the Company’s dealerships. Our products are distributed through
a sales net work of about 000 dealers and distributors worldwide, of which over
000 dealers are in the United States. Outside the U.S., the Company sells its
products through an international network of dealers and distributors in
countries like the United Kingdom, France, Holland, Spain, Italy, Austria,
Australia, South Africa, Mexico, Ecuador and Jamaica.
The
Company offers four models of cruiser motorcycles, seven models of dirt bike
motorcycles, eight models of scooters, seven models of all-terrain vehicles and
four models of dune buggies. The engine displacements of the motorcycles range
from 50cc to 250cc, dirt bikes range from 70cc to 250cc, scooters range from
50cc to 150cc, ATVs range form 70cc to 250cc and dune buggies range from 90cc to
1100cc. The Company’s 150cc, 250cc and 1100cc dune buggies have obtained EEC
homologation certificate for on road use in EEC countries.
Our
products are manufactured in China mainly in our own plant in Shanghai and a
designated factory in Guangzhou. Our plant in Shanghai has obtained China
Compulsory Certification and is in compliance with ISO 9000 standards regarding
its production standard and quality control. The dune buggies are primarily
produced in the Shanghai plant and are manufactured according to our proprietary
designs and factory standards. The factory in Guangzhou is owned by the
principal shareholders of the Company and is primarily the production base for
motorcycles, scooters, dirt bikes and ATVs. The quality assurance function of
our Company ensures that all the products from the two plants are shipped at the
highest possible standards to our customers and backed by timely after sales
services. The Company has a warranty program according to industry standards to
further support our products. SEE CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
Industry
Background
The
Company operates in multi-billion dollar industry. Our industry is composed of
manufacturers, distributors,importers, dealers etc. The industry revolves around
Powersports equipment which is made up of but not exclusively, Motorcycles,
Scooters, Dirt Bikes, All Terrain Vehicles, Utility Vehicles, Personal Water
Crafts, Parts, and Accessories. There are 5 major markets, North America,
Central and South America, Europe, Middle East, Asia and Africa.
The
Powersports equipment market is often viewed as not an absolute necessity
product in many of the markets. The industry is controlled by an assortment of
government agencies to control the safety and emission standards. Domestically
the Powersports equipments are considered to be recreational.
Competition
Motorcycle
& ATV market is highly competitive. The company's American, Japanese and
European competitors have long established markets on an international scale.
They have well established retail, distribution, R&D, sales, service,
financial and marketing networks worldwide. They also have larger revenue, are
advanced in technology and production facility. The competitors have offices
both in the US and internationally. These competitors offer Powersports
equipment in a wide variety of models and specifications. The Company competes
by offering a product line that the competitors are weaker in, a line that does
not overlap their product models. Simultaneously the Company takes advantages of
manufacturing in China to provide a product that is more economical compared to
the competitors.
The
Company also has competitors that distribute Chinese made Powersports equipment
in the US and internationally. These competitors vary in company sizes and
history. They offer smaller displacement power, lower spec, very economical and
limited field of models. Many of these competitors lack the ability to
manufacture or support the products they sell. It has also been said that these
competitors often lack the viable business model and plan of support for the
market in which they operate in. Management believes the competition is unable
to keep up with the Company's vision and long term planning. Management further
believes the Company out paces these competitors in manufacturing and support by
offering better quality products and support in the market where we
operate.
Domestically,
the Company competes most heavily in the Motorcycle, Scooter and ATV market with
displacement of 50CC up to 500CC. Internationally, the Company has a 1100cc dune
buggy that can be off road use worldwide and on road use in Europe and this
product has proven to be a major sales item in the fiscal year ending February
28, 2009.
ITEM
2. DESCRIPTION OF PROPERTY
The
principal office and warehouse is located at 10925 Schmidt Road, El Monte CA
91733. On August 1, 2005, the Company entered into a lease agreement with Jing
Jing Long and Jiang Yong Ji for the facilities in which the Company operates for
a period of 60 months with monthly rental of $19,900. The landlords are also
officers, directors and majority shareholders of the Company.
The
Company’s subsidiary PMI Shanghai Co., Ltd. (“Shanghai Dazon’) has a production
facility of about 76,000 sq ft for buggy production, warehouse and management
office. The Shanghai subsidiary has two pieces of land with a totaling area of
321,000 sq.ft. Each piece of land has land use right for a period of 50 years
from date of grant. The manufacturing plant is built on one piece of land and
the other piece of land with 157,000 sq. ft is used as testing ground for the
new dune buggy before development. The Company is planning on developing this
land in the near future to add production capacity to the Shanghai
facility.
ITEM
3. LEGAL
PROCEEDINGS
The
Company is subject to lawsuits and other matters. In determining required
reserves related to these items, the Company carefully analyzes cases and
considers the likelihood of adverse judgments or outcomes, as well as the
potential range of possible loss. The required reserves are monitored on
an ongoing basis and are updated based on new developments or new information in
each matter.
On August
4, 2007, Changzhou Huaxin Company sued Shanghai Dazon to Changzhou City People's
Court, complaining that Shanghai Dazon defaulted in the payment for processing
fee of $361,574 on motorcycle frames and manufacturing molds. On September 13,
2007, the Intermediate People's Court in Changzhou ruled that Shanghai Dazon
should pay Changzhou Huaxin Company $361,574. Shanghai Dazon agreed to pay only
$148,951 before September 30, 2007 and pay the balance of $144,083 before
November 30, 2007 and Changzhou Huaxin accepted. On September 30, 2007 Shanghai
Dazon paid Changzhou Huaxin Company $148,951. On November 15, 2007,
Shanghai
Dazon and
Changzhou Huaxin Company entered into an agreement to pay the balance of the
amount outstanding. According to the agreement, Shanghai Dazon will pay $54,164
to Changzhou Huaxin Company before November 30, 2007. The balance of $89,919
would be paid before January 31, 2008. This litigation details can be
seen in "(2007) ordinary people of the early word No. 201, civil mediation
paper." On January 28, 2008, Shanghai Dazon made payment of $93,457
to Changzhou Huaxin Company to settle the debt in full. The increase in amount
of payment is because of the appreciation of the Chinese currency.
On
August18, 2007, Luoyang North Industry Company (Luoyang North) sued Shanghai
Dazon to People’s Court of Luoyang Jianxi District (District Court), complaining
that Shanghai Dazon defaulted in the payment of $372,376 fee according to the
cooperation agreement and supplementary cooperation agreement that the two
parties signed in June 13, 2002 and July 30, 2002. On October 16, 2007, the
District Court ruled on the judgment that Shanghai Dazon should pay Luoyang
North $372,376 within 10 days, together with the accrued interest at popular
bank interest rate by August 30, 2007. On November 19, 2007, Shanghai Dazon
filed appeal to Luoyang City Intermediate People’s Court (City Court) that
Shanghai Dazon should pay the 2005 and 2006 contract fee total $236,967 by
installments, while the contract payment of 2007 of $135,409 is not due until
the end of 2007. In April 2008, Shanghai Dazon took another approach and appeal
the claim of Luoyang North to the City Court on the ground that the basis of the
contract fee is invalid. The City Court re-examined the case to review the
merits of Shanghai Dazon’s appeal and informed Luoyang North and Shanghai Dazon
on May 26, 2008 that the case will be set for re-trial. As of the date of this
report the time for re-trial has not been set. As of February 29, 2008, Shanghai
Dazon has provided $410,463 in its accounts covering the amount of litigation
and accrued fees for the two months ended February 29, 2008.
Product
Liability Matters:
Additionally,
the Company is involved in product liability suits related to the operation of
its business. The Company accrues for claim exposures that are probable of
occurrence and can be reasonably estimated. The Company also maintains
insurance coverage for product liability exposures. The Company believes
that its accruals and insurance coverage are adequate and that product liability
will not have a material adverse effect on the Company’s consolidated financial
statements.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Principal
Market or Markets
Our
common stock is currently listed on the Over-the-Counter Bulletin
Board by NASDAQ. The 10 day average trading volume as of Feb 28, 2007 is
39,080 shares.
Approximate
Number of Common Stock Holders
As of
February 29, 2008, the Company had 200 shareholders of record. We have 1,750,000
outstanding warrants to purchase our securities and a stock buy back agreement
with Hexagon Financial LLC for 264,350 shares of the common stock of the Company
at $1.05 a share. The initial buy back agreement was signed on August 16, 2007
and the Company paid $114,049 to buy back 108,618 shares in November 2007, and a
subsequent agreement was reached on May 30, 2008 under which the Company paid
$144,552 to purchase 130,151 shares as treasury stock. The total number of
shares bought back was lower than the number in the agreement since Hexagon has
sold some shares to the market. As of the date of this report, all the shares
repurchase commitment with Hexagon was completed. Please also refer to Footnote
18 of the financial statements.
On
November 15, 2007 the Company entered into a Stock Acquisition Agreement with
the shareholders of People’s Motor International Company Limited (“PMI”) to
acquire 100% of the equity of PMI by the issuance of 4,000,000 common shares and
granting of 1,500,000 warrants exercisable in 30 months at 64 cents a share. On
November 20, 2007 the Company issued 2,400,000 common shares and granted
1,500,000 warrants to the PMI shareholders pursuant to such Agreement. On May
20, 2008, the Company issued 1,600,000 common shares to complete its acquisition
of PMI. Please refer to Recent Sales of Unregistered Securities for further
details.
Dividend
Policy
The
Company has not declared any dividends or paid any cash dividends on its common
stock. The Directors anticipate that future earnings will be retained for
expansion of the Company.
Recent
Sales of Unregistered Securities
On
November15, 2007，Tank Sports，Inc. acquired 100%
of the equity of People’s Motor International Co., Ltd (“PMI”) and its
subsidiaries. PMI is a British Virgin Islands company with a subsidiary in
Shanghai engaged in buggy production, a subsidiary in Arizona for distribution
in the US and Canadian market and a trading company in Hong Kong for
distribution into EEC countries and other primarily English speaking affluent
markets. The costs of acquisition are 4,000,000 common shares of Tank Sports,
Inc. and 1,500,000 warrants exercisable in 30 months at a price of 64 cents
each. The common shares, which are subject to the restrictions of Rule 144, are
payable in two portions, the first portion of 2,400,000 shares and 1,500,000
warrants were issued and given on November 20, 2007 and the final portion of
1,600,000 shares were issued and given on May 20, 2008. The shareholders of PMI
consist of foreign nationals, US citizens and foreign business entities. The
valuation of shares and warrants in this acquisition at November 15, 2007 was
$4,683,661. Please refer to Notes 20 to 22 in the financial
statements.
There was
no cash proceeds for the issuance of shares in connection with to this
acquisition transaction.
We relied
upon Regulation S of the Securities Act of 1933, as amended (the ˇ°Actˇ) and
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
hereunder. Our officers and directors
determined the sophistication of our investors. In addition, we complied with
the applicable requirements of Rules 902 and 903 of the Act.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion is intended to provide an analysis of the Company’s Plan of
Operation and financial condition after its acquisition of Lowprice.com, Inc.
and PMI. Matters discussed in this section that is not historical or current
facts are potential developments of the Company. The Company’s actual results
could differ materially from the results discussed in the forward looking
statements. Factors that could cause or contribute to such differences include
those described below.
Plan
of Operation
Since
inception, the Company commenced the sale and distribution of motorcycles and
ATVs under the brand name of TANK During late 2006, the Company started its plan
to acquire a US motorcycle distributor with well established dealership network
and sales history. In January 2007, the Company acquired Lowprice.com, Inc
(Redcat) with a view to bring in their 300 dealers, $15 million annual sales,
advanced ordering system and ATV product lines. The purchase of Redcat was at a
decent price. The Company issued stocks, cash and gave commitment to take over
certain debts, leases and contracts.
After the
completion of the acquisition of Redcat, the Company targeted PMI to start its
next acquisition because PMI has a well known DAZON brand name, established
distributorship network in Europe and in the US, advanced technology in dune
buggy production and a facility in Shanghai with 76,000 sq..ft. of floor space
and 321,000 sq. ft in land. The acquisition of PMI started from negotiation in
August 2007 and finalization of agreement on November 15, 2007. The PMI
acquisition did not involve in cash payment to the shareholders of PMI but the
Company has to take over the entire operation of PMI and all of its debts. After
completion of these two acquisitions, the Company is able to sell products under
the brand names of Redcat and DAZON to international markets in additional to
the domestic market.
Consolidation
and Integration after Acquisition
The
consolidation and integration measures that have been taken by the Company to
further strengthen its market position included, but not limited to,
restructuring of management and operation team, consolidation of regional
warehouse facility, ERP system integration, inventory control, development of
marketing promotion and sales plan, improvement of customer service
infrastructure, access to international markets with new products that are not
previously available form the OEM manufacturing resources in China and the use
of a world recognized brand name “Dazon”. In the beginning of 2008, the Company
has pull the vendor resources of all the units and through combining those
resources we are able to get better terms and rates in services such as shipping
rates. In May 2008 we closed down an unnecessary warehouse facility in Phoenix
by subleasing the space. Our plan is to eliminate the entire operation in
Phoenix and move all the staff back to the L.A, facility. Excessive manpower is
being eliminated and as a result several managers left the Company either by
will or by termination in April and May of 2008. To
consolidate
the work
force in the Company we have trained the current crews in L.A. to enable them to
take on multiple tasks to
become a
small but very productive and efficient team. The next phase of the plan is to
review critically the warehouse spaces and shut down certain warehouses to
eliminate the needs for huge capital in inventory built up, interests, rental
and other overhead. With limited warehouse space, the Company has to plan our
product procurements better to generate a high inventory turnover. With all the
steps taken, the Company believes that it will significantly increase Tank
Sports’ overall productivity and revenues, reduce duplicate costs and expenses
and improve the profitability and cash flow in the years to come.
The
successful acquisition of Redcat and PMI, as described above, has strengthen the
dealership network of the Company in both the US and Europe. As of February 29,
2008, the Company has a network of 100 exclusive dealers in the US that sell
only Tank/Redcat/Dazon brand products. In Europe and other countries we used
distributors to sell our products ranging from 50cc scooters to 1100cc dune
buggies.
Tank's
Operational Model
The
Company conducts its business by integrating R&D, manufacturing through both
its wholly owned factory subsidiary and OEM sources, and distributing products
through dealership and chain store sales and service network
globally.
For
further expansion of our sales network worldwide and capacity of manufacturing
of a variety product lines, the Company has been actively seeking for strategic
investment, business partners and alliances through agreement relationship and
merger and acquisition. We also plan to expand our market to the areas of South
America, Middle East, and Africa. For example, we have reached exclusive sales
agreement with XingYue Corporation, a well known motorcycle/ATV
manufacturer in China, for 150cc and 260cc Scooters in the US market. With
acquisition of PMI, we have been reinforced by the capacity of R&D and
manufacturing of higher engine displacement up to 1100cc of go karts and dune
buggies.
Tank's
Operational and Sales Goal in 2008-2009
We plan
to achieve a total number of 900 dealerships, which includes 100 exclusive
dealers (dealers that only sell Tank products) with a sales objective of each
dealer in the amount of $250,000 - $500,000. Currently, we have a total number
of 620 dealers in the US market.
By partnering
with leading manufacturers and suppliers, and with out joint R&D effort to
develop new generation products, we intend to enhance our dealership
standardization by adding more product lines to our dealers.
We have
reduced the redundancy to achieve a cost effective operation. So far, we have
lowered our total number of US based employees from 24 to 14 through the
execution of the plan in the US operation. We seek to achieve a goal ratio of
$1.5 million or more in sales per employee in the US operation. An analysis of
our basic operational expenses done by the company has found that the current
level of staffing in the U.S. can still keep overall expenses under $4.30
million annually. This level of expense can support the company's U.S. revenue
up to between $23 and $30 million.
This plan
hopefully will result in increased gross profit and net income. PMI has 145
employees currently and there are plans to reduce this number to eliminate
redundancy. On May 15, 2008, the CEO of PMI retired from the Company. On April
1, 2008, the vice president of finance of the Company resigned and on May 15,
2008 the CFO of PMI also resigned from the Company. The former vice president of
finance and the former CFO of PMI will serve as consultants of the Company on a
fee basis when there is a need for their services. The full effect in savings
resulting from the departure of these executives will reflect in the second
quarter ending August 31, 2008.Further consolidation of PMI and Tank is being
undertaken and. the results will be disclosed in a follow up
report.
|
1.
|
Generate Dealer Interest and
Recruit Dealers. We have used our power sports vehicles to create
awareness within the power sports industry. We have also displayed these
vehicles at trade shows and events to generate dealer interest in TANK and
Redcat products. We intend to continue our promotional efforts through
public relations program, attending and displaying our products at dealer
trade shows, direct mail efforts and direct solicitations of prospective
customers. We believe our dealer qualification criteria are strict and
they include experience, reputation, ability to serve the geographic
territory and financial strength.
|
|
2.
|
Generate Consumer Interest and
Develop the TANK, Redcat and DAZON Brand Awareness. To
date, our products have appeared in over 10 publications. We believe this
publicity is critical to creating awareness of the TANK, Redcat and DAZON
brands. We intend to continue our public relations efforts to create
additional consumer interest and to support our dealers in targeted
advertising and marketing efforts in their geographic territories. We also
plan to continue to attend trade shows and events targeted to consumers to
provide them with opportunities to see, and in some cases ride, our
products. We believe these efforts, as well as mailing information to
persons who have inquired about our products, will generate the customer
awareness we believe is necessary to sell our products, and to develop the
TANK, RedCat and DAZON brands.
|
|
3.
|
Continue to Merge and Acquire
More Industry Entities in Both US and China Market. The
Company’s management has realized that the business expansion
has to be achieved by both organic growth and M&A. With the first two
merger transactions done with the Lowprice.com, Inc and PMI, the company
has gained skills and knowledge to take the Company to the next level
through M&A.
|
|
4.
|
Penetration into European
market. The newly acquired subsidiary, PMI, has secured numerous
orders from European customers. Its Dunne Buggies are approved for on road
use with EEC Homologation
certificates.
|
Our focus
in the next 12 months has been to seek necessary working capital, and to further
execute our marketing plan to increase our sales. Our marketing plan focuses on
dealers and the retail market, through comprehensive print advertising,
participation in trade shows and other direct marketing efforts. Our marketing
strategy is based on a reliable product, consistent quality, parts and service
availability, and the delivery of a unique name and image.
FOR
THE FISCAL YEAR ENDED FEBRUARY 29, 2008
General
Overview
Towards
the late 2007 and most of the early 2008, because of the slow down of the
general economy in the US attributable to the sub prime lending and falling
property prices, it triggered a landslide effect on the Powersports industry. As
Powersports equipment is considered recreational and non essential, many
consumers found themselves better off building their saving than spending money
on Powersports products. Sales were down by as much as 30% in some markets as
compared to 2006.
The
impact to Chinese products isn’t just an economic issue. Compounded by the
issues of quality and safety, importers of Chinese products saw another drop in
their sales as the main stream media issued reports on unsafe toys that
adversely affected the toy industry and eventually affected the Chinese
powersports industry. Many competitors in the industry have to lower their
prices to sell inventory to generate cash and the Company has little choice but
to offer big discounts to sell off its older models in the last quarter of
2007.
The
slowdown in the industry has made it difficult for the Company to raise
additional capital in the market and accordingly the Company has to tighten all
its spending and use the existing resources to grow its sales. The management is
anticipating that after realizing all the savings from the integration measures,
the Company can report a better result in the second quarter ending August 31,
2008.
Sales
and gross profit
For the
fiscal year ended February 29, 2008 the Company recorded a turnover of
$11,610,750 which represented an increase of 26% as compared to $9,588,238 for
the fiscal year ended February 28, 2007. The gross profit for the year was
$2,009,475 as compared to $2,784,916 for the previous year. High purchase cost
of products due to the appreciation of RMB, the Chinese currency, and discounts
for certain out-dated models attributable to the lower gross profit in the
current fiscal year.
Our net
loss for fiscal year ended February 29, 2008 was $5,744,719 as compared to a net
loss of $249,325 for fiscal year ended February 28, 2007. The increase of our
net loss is primarily attributable to the consolidation of Redcat and PMI where
expenses like payroll, legal and accounting fees, rental of warehouses and
office, product liability insurance, depreciation, consulting fees and
transaction services fees increased significantly during the year.
Operating
Expenses
The
Company and its subsidiaries incurred $6,591,774 in operating expenses in the
current fiscal year as compared to $3,197,979 last year. Operating expenses in
the current year consisted of selling expenses of $1,084,024 administrative
expenses of $3,892,034, and goodwill impairment of $1,615,716. In the fiscal
year ended February 28, 2007, operating expenses consisted of selling expenses
of $1,040,481 and administrative expenses of $2,157,498.
Interest
and Financial Expenses
The
Company and its subsidiaries recorded an interest expense of $402,867 in the
current fiscal year as compared to $93,806 in the last year. The increase of
interest bearing debts to finance the sales growth and acquisitions were the
major reason for the increase in interest expenses.
Other non
operating items
The
Company recorded net other expense of $66,404 during the current fiscal year. In
the previous fiscal year, the Company had other income of $203,143 arising from
service fees for opening letter of credit on behalf of an affiliated
company.
Net cash
flow used in operating activities were $8,422,082 and $385,751 during the fiscal
years ended February 29, 2008 and February 28, 2007, respectively.
Net cash
flow used in investing activities were $1,866,927 and $15,914 during the fiscal
years ended February 29, 2008 and February 28, 2007, respectively.
Net cash
flow provided by financing activities were $10,022,357 and $3,049,147 during the
fiscal years ended February 29, 2008 and February 28, 2007,
respectively.
Reasons
for Increase of Expenses for 2008 Fiscal Year
The
following factors have contributed to the increase of expenses for the 2008
fiscal year:
|
(1)
|
Increase
in overhead expenses for auditing and filing reporting as
a OTCBB company;
|
||
|
(2)
|
Adjustment
of dealership structure (drop in dealership number due to standardization
of dealership selection criteria).
|
||
|
(3)
|
Fees
and requirements of applying for new models' entry to the
market.
|
||
|
(4)
|
Increased
premium of insurance coverage.
|
||
|
(5)
|
Overpaid
dealership incentive and commission package, due to increase of covered
items.
|
||
|
(6)
|
Expenses
to cutting employee redundancy to streamline operation
efficiency.
|
||
|
(7)
|
Additional
expenses for warehouse/sales facility consolidation.
|
||
|
(8)
|
Organization
restructuring cost and severance pay for post Redcat
acquisition.
|
||
|
(9)
|
Other
acquisition related expenses.
|
||
Liquidity
and Financial Resources
As at
February 29, 2008, the Company had net current liabilities of about $19.1
million, total assets of $18.7 million and shareholders equity of about $0.8
million. As at February 29, 2008, the cash balance of the Company was
approximately of $2.9 million and included $2.5 million being pledged as
security for banking facilities.
The
Company and its subsidiaries’ total bank borrowings as at February 29, 2008 were
approximately $7.9 million. These banking facilities were secured by the land
and building of the Shanghai subsidiary and certain personal properties of the
directors and officers.
Capital
Structure
During
the fiscal year ended February 29, 2008, the Company issued 2,107,000 shares for
cash and 2,400,000 shares at $.95 each to acquire PMI.. The common stock capital
and additional paid in capital increased by $3,294,033 during the
year.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
no off-balance sheet arrangements.
MATERIAL
COMMITMENTS
We have
no material commitments as at the date of this registration statement, other
than certain lease commitments arising from the normal course of business, and
are described in Note 24 of the financial statements.
PURCHASE
OF SIGNIFICANT EQUIPMENT
We have
no purchase of significant equipment.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
In March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows.
FASB
Statement No. 161 achieves these improvements by requiring disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entity’s liquidity by
requiring disclosure of derivative features that are credit risk–related.
Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important. Based on current conditions, the Company
does not expect the adoption of SFAS 161 to have a significant impact on its
results of operations or financial position.
In May 0f
2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted Accounting
Principles. The pronouncement mandates the GAAP hierarchy reside in
the accounting literature as opposed to the audit literature. This
has the practical impact of elevating FASB Statements of Financial Accounting
Concepts in the GAAP hierarchy. This pronouncement will become
effective 60 days following SEC approval. The company does not
believe this pronouncement will impact its financial statements.
In May of
2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60. The scope of
the statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning
after December 31, 2008. The company does not believe this
pronouncement will impact its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. This statement applies
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
does not expect the adoption of SFAS 160 to have a significant impact on its
results of operations or financial position.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Our
significant accounting policies are identified and described in Note 2 to the
financial statements. The preparation of our financial statements in conformity
with U.S. generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ
materially from those estimates. Tank continually evaluates its critical
accounting policies and estimation procedures. Estimates are often based on
historical experience and on assumptions that are believed to be reasonable
under the circumstances, but which could change in the future. Some of Tank's
accounting policies and estimation procedures require the use of substantial
judgment, and actual results could differ materially from the estimates
underlying the amounts reported in the consolidated financial statements. A
summary of our significant accounting policies is included in Note 2 to our
financial statements which are included in PART I. FINANCIAL STATEMENTS of this
Form 10 - KSB.
In
applying these policies, estimates and judgments affect the amounts at which
accounts receivable, inventory, and certain liabilities are recorded and the
useful lives of property and equipment. We apply our accounting policies on a
consistent basis. Changes in circumstances are considered in our estimates and
judgments. Future changes in circumstances could result in changes in
amounts at which assets and liabilities are recorded. Future changes could also
affect the estimated useful levels of property and equipment, which could result
in changes in depreciation expense or write, offs or writes downs of such
assets.
Revenue
Recognition. The Company's revenue recognition policies are in compliance with
Staff Accounting Bulletin (SAB) 104. Sales revenue is recognized when the
delivery to customers (independent dealers and distributors) is completed and
ownership is transferred, the price is fixed and determinable, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received prior to completing all aforementioned criteria are
recorded as unearned revenue. The Company's dealers enter into an annual
renewable contract and are required to maintain status as an authorize dealer in
order to continue selling company's products. Dealers are required to assemble
and prep the vehicles before its sold, inform customer on warranties information
and to repair and service the vehicles. The Company sets a fixed pricing
structure each year. All dealers must follow the pricing structure or no more
than 12% above or below the MSRP. Any additional discounts will need approval
from the Company. The Company offers a limited and parts only warranties to all
its dealers, distributors and retail customers. Tank requires its customer to be
responsible for a 15% restocking fee for all unused return and shipping fees are
non refundable. Used merchant cannot be returned without reason and the
defective merchandise must be repaired. Tank has not historically recorded any
significant sales return allowances because it has not been required to
repurchase a significant number of units. However, should there be an adverse
change in retail sales could cause this situation to change.
Allowance
for Doubtful Accounts. The Company maintains reserves for potential credit
losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and change in customer payment
patterns to evaluate the adequacy of these reserves. Reserves are recorded
primarily on a specific identification basis.
Inventory.
Inventories are valued at the lower of cost (determined on a weighted average
basis) or market.
Property,
Plant and Equipment. Property, plant and equipment are stated at cost or
evaluated market value at the date of acquisition. Expenditures for maintenance
and repairs are charged to earnings as incurred; additions, renewals and
betterments are capitalized. Straight line method is used to depreciate the
assets according to their respective economic useful lives.
Land Use
Rights. Land use rights are stated at evaluated market value at the date of
acquisition. Straight line method is used to amortize the land use right
according to the life of the land use right.
Income
taxes. The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax 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.
Product
warranties and insurance. Tank provides a limited warranty for parts only for a
period of twelve months for its ATVs, Dirt bikes, Go Karts, and Scooters with a
50cc engine, for a period of three years for its cruiser motorcycles with
Trademark "VISION" and Scooters with 150cc and 250 cc engines. Tank's standard
warranties require the Company or its dealers to repair or replace defective
products during such warranty periods at no cost to the consumer.
Major cost incurred in connection with warranty obligations is the cost of
new parts replacing the damage/defective parts. We have not recorded a liability
for warranty obligations because they were immaterial for the periods presented;
and we have recorded expenses when the costs were actually incurred. Tank
insures its product liability claims with ACORD Jordan and Jordan Insurance
Agency, LLC. The product liability coverage are up to $1,000,000 limit per
occurrence, $50,000 limits on damage to rented premises, $1,000,000 to personal
injury, $2,000,000 to general aggregate and $2,000,000 limit to products comp/or
aggregate. Historically, the Company has not experienced any threatened
litigation or product liability claim. The Company believes that based on its
historical product liability claim experience, the product liability insurance
will be sufficient to cover any such claim.
Dazon
Arizona has similar product warranty program.
ITEM
7. Financial Statements
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TANK
SPORTS, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE
SHEET
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AS
OF FEBRUARY 29, 2008
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ASSETS
|
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CURRENT
ASSETS
|
|
|||
|
Cash
and cash equivalents
|
$
|
2,889,820
|
||
|
Accounts
receivable, net
|
134,863
|
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|
Prepaid
expenses and other assets
|
68,184
|
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|
Purchase
advances
|
1,248,606
|
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|
Loan
receivable
|
-
|
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|
Due
from related parties
|
1,938,153
|
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Inventory
|
3,999,891
|
|||
|
Total
Current Assets
|
10,279,517
|
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PROPERTY
AND EQUIPMENT, NET
|
1,929,197
|
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DEPOSIT
|
25,616
|
|||
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INVESTMENT
IN EQUITY
|
55,096
|
|||
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ASSETS
HELD FOR SALE
|
139,279
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INTANGIBLE
ASSETS
|
||||
|
Trademark,
net
|
2,812
|
|||
|
Licenses
and permits
|
1,184,090
|
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|
Land
right, net
|
3,870,978
|
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|
Goodwill
|
1,178,492
|
|||
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Total
Intangible Assets
|
6,236,372
|
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|
TOTAL
ASSETS
|
$
|
18,665,077
|
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|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
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|
CURRENT
LIABILITIES
|
||||
|
Accounts
payable and accrued expenses
|
$
|
2,610,576
|
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|
Notes
payable
|
2,000,740
|
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