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USMART MOBILE DEVICE INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. The information contained in this Form 10-Q is intended to update the information contained in our annual report on Form 10-K for the year ended December 31, 2013, (the "Form 10-K"), filed with the Securities and Exchange Commission ("SEC"), and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operation," our consolidated financial statements and the notes thereto, and other information contained in the Form 10-K. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed consolidated financial statements and the notes thereto included elsewhere in this Form10-Q. Forward-Looking Statements Information included in this Form 10-Q may contain forward-looking statements. Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company's plans for sales growth and expectations of gross margin, expenses, new product introduction, and the Company's liquidity and capital needs. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology. In addition to the risks and uncertainties described in "Risk Factors" contained in the Form 10-K, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the U.S. and inflation. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Company Overview and Background USmart was primarily engaged in the business of distribution of memory products mainly under "Samsung" brand name which principally comprised DRAM, Graphic RAM and Flash for the Hong Kong and PRC markets ("Samsung Business"). After April 1, 2012, the Samsung Business was transferred to ATMD, a joint venture with Tomen. We indirectly own 30% equity interest in ATMD. On September 27, 2013, we sold the entire 30% equity interest of ATMD. Through the acquisition of Jussey on September 28, 2012, we have diversified our product portfolio and customer network, obtained design and manufacturing capabilities, and tapped into the blooming telecommunication industry with access to the 3G baseband licenses acquired by Jussey's subsidiaries. ACL International Holdings Limited ACL Holdings, a holding company incorporated in Hong Kong, is wholly owned by the Company. ACL Holdings owns 100% equity interest of Atlantic, and 100% equity interest of Jussey. Atlantic Components Limited Atlantic, a company incorporated in Hong Kong, is indirectly wholly owned by the Company. Atlantic was established in May 1991 by Mr. Chung-Lun Yang, the Company's Chairman, as a regional distributor of memory products of various manufacturers. In 1993, Samsung Electronics Hong Kong Co., Ltd. ("Samsung") appointed Atlantic as its authorized distributor and marketer of Samsung's memory products in Hong Kong and overseas markets. In 2001, Atlantic established a representative office in Shenzhen, China, and began concentrating its distribution and marketing efforts in Southern China. 25 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES The Company's Samsung business was formerly conducted through Atlantic. After April 1, 2012, Atlantic integrated its business relating to procurement of semiconductors and electronic parts directly from Samsung to the joint venture, ATMD, which was finally sold in November 2013. The transition of the business integration has been completed by December 31, 2012. During the transitional period, Atlantic extended its distributor agreement with Samsung to June 30, 2012. After the distributor agreement expired, Atlantic transformed its position from Samsung memory products distributor to a general memory products distributor, and continues its business by providing various brands of memory products to its customers. Aristo Technologies Limited On March 23, 2010, the Company concluded that Aristo Technologies Limited ("Aristo"), a related company solely owned by Mr. Yang, is a variable interest entity under FASB ASC 810-10-25 and is therefore subject to consolidation with the Company beginning fiscal year 2007 under the guidance applicable to variable interest entities. Atlantic used to sell Samsung memory chips to Aristo and allows long grace periods for Aristo to repay the open accounts receivable. After the establishment of ATMD, the Company will sell different brands of memory products to Aristo. Being the Company's biggest creditor, the Company does not require Aristo to pledge assets or enter into any agreements to bind Aristo to specific repayment terms. The Company does not experience any bad debt from Aristo. Hence, the Company does not provide any bad debt provision derived from Aristo. Although, the Company is not involved in Aristo's daily operation, it believes that there will not be significant additional risk derived from the trading relationship and transactions with Aristo. Aristo is engaged in the marketing, selling and servicing of computer products and accessories including semiconductors, LCD products, mass storage devices, consumer electronics, computer peripherals and electronic components for different generations of computer related products. In addition to Samsung-branded products, Aristo carries various brands of products, such as Hynix, Micron, Qimonda, Lexar, Dane-Elec, Elixir, SanDisk and Winbond. Aristo also provides value-added services to its products and resells it to its customers. Aristo's 2012 and 2011 sales were around $2 million and $14 million; it was a distributor that accommodated special requirements for specific customers. Jussey Investments Limited Jussey, a holding company incorporated in British Virgin Islands, which is wholly owned by the Company, owns 100% equity interest in eVision Telecom Limited ("eVision"), a Hong Kong incorporated company, and 80% equity interest in USmart Electronic Products Limited, a Hong Kong incorporated company, which owns 100% equity interest of Dongguan Kezheng Electronics Limited, a wholly foreign-owned enterprise ("WFOE") organized under the laws of the PRC (USmart Electronic Products Limited and Dongguan Kezheng Electronics Limited are together referring as "UEP" hereafter). Hence, Jussey indirectly owns 80% of Kezheng. USmart Electronic Products Limited & Dongguan Kezheng Electronics Limited UEP was founded in 2006 and it conducts its business through either itself or Kezheng, which has a factory located in Dongguan, PRC. UEP provides Research and Development ("R&D") and both ODM (Original Design Manufacturing) and OEM (Original Equipment Manufacturing) services for the three "C" products - Computers, Communications and Consumer electronics devices, such as tablets, portable media players, digital photo frames, and smartphones. UEP has its own R&D and production teams. With the support from eVision, the business of which is described below, UEP is capable of providing its customers with total solutions from design to manufacturing. UEP holds its own brands - USmart and VSmart, which can be used on a broad spectrum of products including memory storage devices, visual and audio products such as digital flat screen television, DAB (Digital Audio Broadcasting) radios, digital photo frames, and other home electronic products. In 2010, UEP began its business development in the telecommunication industry, and successfully obtained the W-CDMA (Wideband Code Division Multiple Access is one of the third-generation ("3G") wireless standards) license from Intel Mobile Communications GmbH., which offers cellular platforms for global phone makers. W-CDMA baseband is adapted by China Unicom, one of the three major telecommunication carriers in the PRC. 26 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES eVision Telecom Limited Founded in 2011, eVision is a Hong Kong based solution house that specializes in CDMA2000 (also known as Evolution-Data Optimized or "EV-DO") platform. CDMA2000 is one of the 3G wireless standards. This standard was adapted by China Telecom, one of the three major telecommunication carriers in China. The principal function of eVision is to provide CDMA2000 solutions to UEP. In May 2011, eVision entered into an exclusive R&D servicing agreement (the "Servicing Agreement") with an independent third party in the PRC (the "R&D House"), a solution house that works closely with South China University of Technology and has a R&D team consisting of members with advanced academic qualifications. On behalf of eVision, the R&D House holds a CDMA2000 software license granted by VIA Telecom Co. Ltd. According to the Servicing Agreement, the R&D House provides R&D services relating to CDMA2000 technology exclusively to eVision, and eVision holds the sole and exclusive right, title and interest to and in the aforementioned license and any R&D results/products obtained or developed by the R&D House during the term of the Servicing Agreement. eVision will also hold all the intellectual property rights that are obtained or developed by the R&D House in the course of such research. As of June 30, 2014, USmart had decided to dispose the fully owned operating subsidiaries. Corporate Structure [[Image Removed]] 27 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES Financial Highlights The Company has decided to sell all the investment in its fully subsidiary ACL International Limited and the transaction will be completed within a year. Accordingly, the company has put aside all the assets and liabilities of ACL under the current asset held for disposal to reflect the decision. · Net sales for the three months ended June 30, 2014 ("second quarter of 2014") decreased $24.6 million, or 98.2% to $451,371 compared to the same period in 2013 ("second quarter of 2013"). · The Company's gross loss for the second quarter of 2014 increased by $254,227 or 141.7% to a gross loss of $74,854 compared to a gross profit of $179,373 in the second quarter of 2013. · Net loss for the second quarter of 2014 decreased $366,003 to a loss $282,104 compared to the net loss of $648,107 for the second quarter of 2013.· Operating expenses for the second quarter of 2014 decreased by $0.8 million, or 77.8% to $227,098 compared to the second quarter of 2013. Results of Operations Three Months Ended Six Months Ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net sales $ 451,371 $ 25,007,918 $ 1,013,241 $ 39,468,146 Cost of sales 526,225 24,828,545 1,113,533 39,387,288 Gross profit (loss) (74,854 ) 179,373 (100,292 ) 80,858 Operating expenses Sales and marketing expenses 30,990 37,058 118,365 69,719 General and administrative expenses 196,108 986,758 409,106 2,073,614 Profit (Loss) from operations (301,952 ) (844,443) (627,763 ) (2,062,475 ) Other (income) expenses (19,848 ) (196,336 ) (53,084 ) (2,302,702 ) (Loss) Income before income taxes provision (282,104 ) (648,107 ) (574,679 ) 240,227 Income taxes provision 0 0 0 0 Net income (loss) (282,104 ) (648,107 ) (574,679 ) 240,227 Dividend paid 0 0 0 0 $ (282,104 ) $ (648,107 ) $ (574,679 ) 240,227 Earnings (Loss) per share - basic and diluted $ (0.01 ) $ (0.02 ) $ (0.01 ) 0.01 28 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES Unaudited Comparisons for Three and Six Months Ended June 30, 2014 to the Three and Six Months Ended June 30, 2013 Net sales Net sales consist of product sales, net of returns and allowances and any recoveries from sales of previously written down inventories. Net sales are recognized upon the transfer of legal title of the products to the customers. The quantity of products the Company sells fluctuates with changes in demand from its customers. As the Company decided to sell the operating subsidiaries resulted for the major factors contributed to the significant reduction in the Company's net sales, down 98.2% to $451,371 for the three months ended June 30, 2014 from $25.0 million for the three months ended June 30, 2013. For the six months ended June 30, 2013, net sales decreased by $38.5 million or 97.4%, from $39.5 million for the six months ended June 30, 2013 to $1.0 million. Cost of sales Cost of sales is comprised of costs of goods purchased from our supplier, costs of manufacturing, assembly and testing of our products, and associated costs related to manufacturing support and quality assurance personnel, as well as provision for excess and obsolete inventories. The Company's cost of sales, as a percentage of net sales, amounted to approximately 116.6% for the three months ended June 30, 2014 and approximately 99.3% for the three months ended June 30, 2013. Cost of sales decreased by $24.3 million or 97.9%, to $526,225 for the three months ended June 30, 2014 from $24.8 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, cost of sales decreased by $38.3 million or 97.2%, to $1.1 million for the six months ended June 30, 2014 from $39.4 million for the six months ended June 30, 2013. This decrease was mainly due to decrease in sales volume. Gross Profit Gross profit is net sales less cost of sales and is affected by a number of factors, including competitive pricing, product mix, foundry pricing, costing of test and assembly services, manufacturing yields and provision for excess and obsolete inventories. The Company's gross profit for the three months ended June 30, 2014 was recorded as a gross loss of $74,854, representing a reduction of $254,227 or 141.7% over a gross profit of $179,373, for the three months ended June 30, 2013. For the six months ended June 30, 2014, gross profit decreased by $181,150 or 224.0%, from $80,858 for the six months ended June 30, 2013 to a gross loss of $100,292 for the six months ended June 30, 2014. This result is a consequence of the reduction in sales volume as well as the company's decision to the disposal of the operating subsidiaries in the next quarter. Sales and Marketing Expenses Sales and marketing expenses consists primarily of associated costs for sales and marketing, commissions, promotional activities, freight shipments, and marine insurance. Sales and marketing expenses decreased by $6,068 or 16.4%, to $30,990 for the three months ended June 30, 2014 from $37,058 for the three months ended June 30, 2013. For the six months ended June 30, 2014, sales and marketing expenses increased by $48,646 or 69.8%, from $69,719 for the six months ended June 30, 2013 to $118,365 for the six months ended June 30, 2014. Such changes were directly attributable to the increase in salaries and compensation paid to the lay-off of employees in the first quarter of 2014.General and Administrative Expenses General and administrative expenses consists primarily of compensation (including stock-based compensation) and associated costs for administrative personnel, professional fees including audit and other business registration fee, and director and officer insurance. General and administrative expenses decreased by $790,650 or 80.1%, to $196,108 for the three months ended June 30, 2014 from $986,758 for the same quarter of 2013. For the six months ended June 30, 2014, general and administrative expenses decreased by $1.7 million or 80.3%, from $2.1 million for the six months ended June 30, 2013 to $409,106 for the six months ended June 30, 2014. The decrease was directly attributable to the decision for disposal of operating subsidiaries in the coming quarter. Income (Loss) from Operations Loss from operations for the three months ended June 30, 2014 decreased by $542,491 or 64.2% to $301,952, from a loss of $844,443 for the three months ended June 30, 2013. For the six months ended June 30, 2014, loss from operations decreased by $1.4 million or 69.6%, to loss of $617,763, from a loss of $2.1 million for the six months ended June 30, 2013. This decrease in loss from operations was mainly due to the decision for disposal of operating subsidiaries in the coming quarter. 29 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES Other Expenses (Income) Other expenses (income) consists primarily of rental income, management and service income, interest income, interest expenses, and profit on disposals of assets. The Company has recorded other income of $19,847 for the three months ended June 30, 2014 decreased by $176,489, from $196,336 for the three months ended June 30, 2013. For the six months ended June 30, 2014, other income decreased by $2.2 million to an income of $53,084, from an income of $2.3 million for the six months ended June 30, 2013. This decrease in other income was mainly due to a net income from disposing of fixed assets of $1,872,724 in the first quarter of 2013, and due to the decision for disposal of operating subsidiaries in the coming quarter. Interest Expense Interest expense, including finance charges, relates primarily to our bank borrowings. Interest expense decreased $204,035 or 100%, to $Nil for the three months ended June 30, 2014, from $204,035 for the three months ended June 30, 2013. For the six months ended June 30, 2014, interest expenses decreased by $425,505 or 100% to Nil, from $425, 505 for the six months ended June 30, 2013. This change was mainly due to the decision for disposal of operating subsidiaries in the coming quarter. Income Tax Provision There are no tax provision made due to no profit being earned by the Company during the period of three months and six months ended June 30, 2014. Net Income (Loss) As a result of the foregoing, the Company recorded a net loss $282,104 for the three months ended June 30, 2014, a decrease of $366,003 or 56.5%, from a net loss of $648,107 for the three months ended June 30, 2013. The result was due to the decision for disposal of operating subsidiaries in the coming quarter. For the six months ended June 30, 2014, net loss increased by $814,906 or 339.2%, to a loss of $574,679, from an income of $240,227 for the six months ended June 30, 2013. This was due to income from disposing of fixed assets in 2013. Critical Accounting Policies The U.S. Securities and Exchange Commission ("SEC") recently issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include: inventory valuation, which affects cost of sales and gross margin; policies for revenue recognition, allowance for doubtful accounts, and stock-based compensation. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. Revenue Recognition The Company derives revenues from resale of computer memory products. The Company recognizes revenue in accordance with the ASC 605 "Revenue Recognition". Under ASC 605, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services are rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates, and returns, which historically were not material. 30 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES Impairment of Long-Lived Assets We account for impairment of property, plant and equipment in accordance with FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting years, there was no impairment loss incurred. Competitive pricing pressure and changes in interest rates, could materially and adversely affect our estimates of future net cash flows to be generated byour long-lived assets. Inventory Valuation Our policy is to value inventories at the lower of cost or market on a part-by-part basis. In addition, we write down unproven, excess and obsolete inventories to net realizable value. This policy requires us to make a number of estimates and assumptions including market and economic conditions, product lifecycles and forecast demand for our product to value our inventory. To the extent actual results differ from these estimates and assumptions, the balances of reported inventory and cost of products sold will change accordingly. Since Aristo supplies different generations of computer related products, older generation products will sell more slowly owing to lower market demand. According to the management experience and estimation of the actual market situation, old generation products carrying on hand for ten years will have no re-sell value. Therefore, these inventories on hand over ten years will be written off by Aristo immediately. Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer's credit worthiness deteriorates, or our customers' actual defaults exceed our historical experience, our estimates could change and impact our reported results. Liquidity and Capital Resources Our principal sources of liquidity are cash from operations, bank lines of credit and credit terms from suppliers. Our principal uses of cash have been for operations and working capital. We anticipate these uses will continue to be our principal uses of cash in the future. Our ability to draw down under our various credit and loan facilities is, in each case, subject to the prior consent of the relevant lending institution to make advances at the time of the requested advance and each facility (other than with respect to certain long term mortgage loans) is payable within 90 days of drawdown. Accordingly, on a case by case basis, we may elect to terminate or not renew several of our credit facilities if significant reduction in our available short term borrowings that we do not deem it is commercially reasonable. The Company is seeking to raise $30 million funding in order to pursue certain business expansion. We currently have no commitment for this. As of June 30, 2014, the Company has total net current liabilities of $13,082,384.This raises substantial doubt about the Company's ability to continue as a going concern. We will continue to seek additional sources of available financing on acceptable terms; however, there can be no assurance that we will be able to obtain the necessary additional capital on a timely basis or on acceptable terms, if at all. In addition, if the results are negatively impacted and delayed as a result of political and economic factors beyond management's control, our capital requirements may increase. The short-term borrowings from banks to finance the cash flow required to finance the purchase of products from our suppliers must be made a day in advance of the release of goods from suppliers' warehouse before receiving payments from customers upon physical delivery of such goods in Hong Kong which, in most instances, take approximately two days from the date of such delivery. The following factors, among others, could have negative impacts on our results of operations and financial position: the termination or change in terms of the banking facilities; pricing pressures in the industry; a continued downturn in the economy in general or in the memory products sector; an unexpected decrease in demand for certain memory products; our ability to attract new customers; an increase in competition in the related markets; and the ability of some of our customers to obtain financing. 31 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to confirm them to actual results or to make changes in our expectations. Net Cash Provided by (Used for) Operating Activities For the six months ended June 30, 2014, net cash provided by operating activities was $1,615,830 while for the six months ended June 30, 2013, net cash provided by operating activities was $385,913, an increase in net cash provided by operating activities of approximately $1.2 million. This increase was primarily due to changes in current assets held for disposal resulted by the decision for disposal of operating subsidiaries as of June 30, 2014. Net Cash Provided by (Used for) Investing Activities For the six months ended June 30, 2014, net cash provided by investing activities was $11,738,454 while for the six months ended June 30, 2013 was $3,053,496, an increase of the amount of approximately $8.7 million. This increase was primarily due to changes in fixed assets assigned to current assets hold for disposal resulted by the decision for disposal of operating subsidiaries as of June 30, 2014. Net Cash Provided by (Used for) Financing Activities For the six months ended June 30, 2014, net cash used for financing activities was $13,585,403 while for the six months ended June 30, 2013 was $3,172,737, an increase amount of cash used of approximately $10.4 million. This increase was due to the decision for disposal of operating subsidiaries which resulted in the repayment of bank lines of credit and loans payable usage of June 30, 2014.New Accounting Pronouncements The FASB has issued Accounting Standards Update (ASU) No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The guidance addresses the consolidation of lessors in certain common control leasing arrangements and is based on a consensus reached by the Private Company Council (PCC). Under current U.S. GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The assessment of controlling financial interest is performed under either: (a) a voting interest model; or (b) a variable interest entity model. In a variable interest entity model, the company has a controlling financial interest when it has: (a) the power to direct the activities that most significantly affect the economic performance of the entity; and (b) the obligation to absorb losses or the right to receive benefits of the entity that could be potentially significant to the entity. To determine which model applies, a company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated for consolidation and whether that entity is a variable interest entity. The new guidance allows a private company to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement. Under the amendments in this ASU, a private company lessee could elect an alternative not to apply variable interest entity guidance to a lessor when: -The private company lessee and the lessor are under common control; -The private company lessee has a leasing arrangement with the lessor; -Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between those two companies, and -If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor. If elected, the accounting alternative should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance. 32 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES The FASB has issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization's results from continuing operations. The amendments in this ASU enhance convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted. 33 PART I - FINANCIAL INFORMATION USMART MOBILE DEVICE INC. AND SUBSIDIARIES |