China Electric Motor (PINK:CELM)

On June 3, 2011, Mr. Tony Shen submitted his resignation from our Board of Directors, effective immediately. Mr. Shen was an independent director and chairman of our Audit Committee. In his resignation, Mr. Shen stated that he did not agree with the approach taken by the Company’s management in addressing the allegation made by our former independent auditors, Malone Bailey, and the subsequent SEC and Nasdaq inquiries.

On June 1, 2011, China Electric Motor, Inc. (the “Company”) received a notice of resignation dated May 31, 2011 from MaloneBailey (“Resignation Letter”) indicating that it is terminating its engagement with the Company, effective immediately. MaloneBailey informed the Company that the resignation was due to, as described in the Resignation Letter, discrepancies noted in the Company’s bank records during MaloneBailey’s 2010 audit, the dismissal of PricewaterhouseCoopers’ forensic audit, and the accompanying dissolution of the Special Committee of the Company’s Board of Directors and the resignation of at least one member of the Board of Directors. The Resignation Letter indicated that MaloneBailey believed that the bank discrepancies may be an indication that the accounting records of the Company have been falsified, which would constitute an illegal act. MaloneBailey indicated that the Company’s management has not provided it with a satisfactory explanation of the discrepancies.

As previously reported, the China Electric Motor, Inc. (the “Company”) Board of Directors (the “Board”) formed a Special Committee on March 31, 2011 to investigate possible discrepancies concerning the Company’s banking statements identified by the Company’s auditors. On May 24, 2011, all of the members of the Special Committee (James M. Lee, Tony Shen and Liang Tang) informed the Board that each such member had resigned, effective immediately, from the Special Committee. The Special Committee was allowed to and did conduct a preliminary investigation, which included being allowed to obtain official bank statements directly from the bank where the Company keeps its account, to conduct, through counsel, preliminary interviews with certain key executives and employees, who made themselves available for the preliminary interviews, and to retain forensic consultants. However, Messrs. Lee, Shen and Tang disagreed with certain Company officers and directors as to the appropriate scope of the investigation going forward (those officers viewing the scope as too wide and the estimated fees as too high), and this disagreement was the reason for their resignations from the Special Committee. As of May 26, 2011, each of Messrs. Lee, Shen, and Tang remain on the Company’s Board of Directors.

During the three months ended March 31, 2010, we incorrectly transferred approximately $1.3 million to an account controlled by Jianrong Li (the “Transfer”). Ms. Li is our former director, the wife of the Company’s Chairman of the Board, the mother of its Chief Executive Officer, a director and officer of several of our subsidiaries and the President of Attainment and Luck Loyal. These funds were transferred to Ms. Li to facilitate a deposit payment related to a contemplated acquisition by the Company. The acquisition was abandoned and in April 2010 the full balance of these funds was returned to the Company. In addition to the Transfer, there were several unrelated transfers to and from Ms. Li. Prior to the Transfer, the outstanding balance to Ms. Li was an accounts receivable of Ms. Li. After the Transfer, the balance became an accounts payable to Ms. Li. Management subsequently evaluated these transactions and determined that the transfers violated Section 402 of the Sarbanes-Oxley Act of 2002. No further transfers, loans, advances or similar arrangements will be made by the Company or any of its subsidiaries to Ms. Li or any of our officers or directors or any of their family members. As a result of the transfers by us to Ms. Li, we and/or our Chief Executive Officer and Chairman of the Board could become subject to sanctions, penalties, investigations or other proceedings.

On March 31, 2011, China Electric Motor, Inc. issued a press release announcing the filing of a Form 12b-25 with the Securities and Exchange Commission to extend the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The Company is unable to file its Annual Report on Form 10-K for the year ended December 31, 2010, within the prescribed time period due to possible discrepancies concerning the Company’s banking statements that were very recently identified by the Company’s auditors in the course of their audit of the Company’s consolidated financial statements for the fiscal year ended December 31, 2010. The Company and its advisors are working expeditiously to resolve the issues discovered during the audit. The Company, at this time, is unable to determine when it will file its Annual Report on Form 10-K for the year ended December 31, 2010.

CELM is no longer a GeoBargain because of mismatched SAIC filings. See GeoAlert.