Attached files
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EX-32.2 - China Tractor Holdings, Inc. | v195378_ex32-2.htm |
EX-31.1 - China Tractor Holdings, Inc. | v195378_ex31-1.htm |
EX-31.2 - China Tractor Holdings, Inc. | v195378_ex31-2.htm |
EX-32.1 - China Tractor Holdings, Inc. | v195378_ex32-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
x Quarterly report under
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
quarterly period ended June 30,
2010 or
¨ Transition report under
Section 13 or 15(d) of the Securities Exchange Act of 1934
For the
transition period from ______ to ______
000-52716
(Commission file
No.)
China
Tractor Holdings, Inc.
(Exact
name of Smaller Reporting Company as specified in its charter)
DELAWARE
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98-0445019
|
|
(State
or other jurisdiction of incorporation or
|
||
organization)
|
(I.R.S.
employer identification no.)
|
Kalun
Industrial Park, JiuTai Economic Development Zone
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(Address
of principal executive
offices)
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86-431-82561001
(Issuer’s
telephone number, including area code)
(Former
name or former address, if changed since last report)
Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). (Registrant is not yet required to provide financial
disclosure in an Interactive Data File format.) Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated filer ¨
|
Accelerated
filer ¨
|
Non-Accelerated
filer ¨
|
Smaller
reporting company 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
August 23, 2010, there were 18,340,539 shares of the Company’s common stock
outstanding.
CHINA
TRACTOR HOLDINGS, INC.
TABLE OF
CONTENTS
FORM
10-Q
For the
period ending June 30, 2010
PART
I - FINANCIAL INFORMATION
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|
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Item
1. Condensed Consolidated Financial Statements
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|
||
Condensed
Consolidated Balance Sheets (unaudited)
|
1
|
||
Condensed
Consolidated Statements of Operations and other Comprehensive Income
(Loss)
|
2
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||
Condensed
Consolidated Statements of Cash Flows (unaudited)
|
3
|
||
Notes
to the Condensed Consolidated Financial Statements
(unaudited)
|
4
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||
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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18
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||
Item
3. Quantitative and Qualitative Disclosure About Market
Risks
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24
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Item
4. Controls and Procedures
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24
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PART
II - OTHER INFORMATION
|
|
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Exhibit
31.1
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Certification
of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
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Exhibit
31.2
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Certification
of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
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Exhibit
32.1
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Certification
of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
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Exhibit
32.2
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Certification
of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
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CHINA
TRACTOR HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF JUNE 30, 2010 & DECEMBER 31, 2009
June
30, 2010
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December
31, 2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 16,758 | $ | 15,967 | ||||
Other
receivables, net of allowance for doubtful accounts
|
86,104 | 53,053 | ||||||
Taxes
recoverable
|
58,931 | 57,952 | ||||||
Assets
held for sale
|
- | 4,729,298 | ||||||
Due
from related parties
|
852,200 | 284,553 | ||||||
Total
current assets
|
1,013,993 | 5,140,823 | ||||||
Property,
plant and equipment, net
|
2,575 | 1,981 | ||||||
Intangible
assets
|
4,373 | 484,610 | ||||||
Land
use right
|
0 | 700,267 | ||||||
Long-term
equity investments
|
0 | 392,189 | ||||||
Receivable
from sale of discontinued operation
|
12,366,713 | 9,799,333 | ||||||
TOTAL
ASSETS
|
$ | 13,387,654 | $ | 16,519,203 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short-term
loans
|
$ | 734,365 | $ | 731,294 | ||||
Accounts
payable
|
460,954 | 459,026 | ||||||
Advance
from customers
|
12,004 | 11,954 | ||||||
Salary
payable
|
6,710 | 26,745 | ||||||
Accrued
expenses and other payables
|
462,680 | 380,408 | ||||||
Borrowing
from third parties
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1,321,858 | 1,316,328 | ||||||
Due
to related parties
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1,307,170 | 573,255 | ||||||
Total
current liabilities
|
4,305,741 | 3,499,010 | ||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Comon
shares, authorized, issued and outstanding;
18,310,539
shares as of June 30, 2010 and December 31,
2009,
par value $0.001 per share
|
1,834 | 1,831 | ||||||
Additional
paid-in capital
|
15,183,273 | 15,183,276 | ||||||
Accumulated
other comprehensive income
|
2,578,318 | 2,540,091 | ||||||
Accumulated
deficit
|
(8,978,200 | ) | (5,119,841 | ) | ||||
TOTAL
CHINA TRACTOR HOLDINGS, INC. SHAREHOLDERS' EQUITY
|
8,785,225 | 12,605,357 | ||||||
Noncontrolling
Interest
|
296,688 | 414,836 | ||||||
TOTAL
STOCKHOLDERS’ EQUITY
|
9,081,913 | 13,020,193 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 13,387,654 | $ | 16,519,203 |
The
accompanying notes are an integral part of these consolidated financial
statements.
1
CHINA
TRACTOR HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE
INCOME (LOSS)
FOR
THE THREE AND SIX MONTHS ENDED AS OF JUNE 30, 2010 and 2009
Six
Months Ended June 30
|
Three
Months Ended June 30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
revenue
|
$ | - | $ | 18,984 | $ | - | $ | 18,984 | ||||||||
Cost
of sales
|
(1,590 | ) | (16,933 | ) | - | (16,933 | ) | |||||||||
Gross
profit (loss)
|
(1,590 | ) | 2,051 | - | 2,051 | |||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
General and administrative expenses
|
(127,299 | ) | (152,466 | ) | (46,068 | ) | (38,976 | ) | ||||||||
Provision
for impairment of assets
|
(440,611 | ) | (43,158 | ) | (440,199 | ) | (22 | ) | ||||||||
Profit/(Loss)
from operations
|
(569,500 | ) | (193,573 | ) | (486,267 | ) | (36,947 | ) | ||||||||
Equity
in earnings in investee
|
- | (32,938 | ) | - | (5,678 | ) | ||||||||||
Interest
expense
|
(40,821 | ) | (1,930 | ) | (20,415 | ) | - | |||||||||
Other
income (expenses)
|
(103 | ) | (4,734 | ) | (81 | ) | 67 | |||||||||
- | - | |||||||||||||||
Loss
before income taxes
|
(610,424 | ) | (233,175 | ) | (506,763 | ) | (42,558 | ) | ||||||||
Loss
from continuing operations
|
(610,424 | ) | (233,175 | ) | (506,763 | ) | (42,558 | ) | ||||||||
Discontinued
operations, net of income taxes (including loss on disposal
of
$3,264,057 in year 2009)
|
(3,367,266 | ) | 500,945 | (697,382 | ) | 246,779 | ||||||||||
Net
income/(loss)
|
(3,977,690 | ) | 267,770 | (1,204,145 | ) | 204,221 | ||||||||||
Less:
Net loss/(income) attributable to noncontrolling interest
|
119,331 | (264,168 | ) | 36,125 | (130,695 | ) | ||||||||||
Net
Income/(loss) attributable to China Tractor Holdings, Inc.
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(3,858,359 | ) | 3,602 | (1,168,020 | ) | 73,525 | ||||||||||
Other
comprehensive income/(loss)
|
39,409 | 42,717 | 37,289 | 3,575 | ||||||||||||
Comprehensive
income/(loss)
|
(3,818,950 | ) | 46,319 | (1,130,731 | ) | 77,100 | ||||||||||
Comprehensive
(income) attributable to noncontrolling
interest
|
(1,182 | ) | (78,690 | ) | (1,119 | ) | (111 | ) | ||||||||
Comprehensive
income/(loss) attributable to China Tractor Holdings, Inc.
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$ | (3,820,132 | ) | $ | (32,371 | ) | $ | (1,131,850 | ) | $ | 76,989 | |||||
Basic
and diluted income/(loss) per commom share:
|
||||||||||||||||
Basic
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$ | (0.21 | ) | $ | 0.00 | $ | (0.06 | ) | $ | 0.00 | ||||||
Diluted
|
(0.21 | ) | 0.00 | (0.06 | ) | 0.00 | ||||||||||
Weighted
average common shares outstanding:
|
||||||||||||||||
Basic
|
18,310,539 | 18,310,539 | 18,310,539 | 18,310,539 | ||||||||||||
Diluted
|
18,310,539 | 18,310,539 | 18,310,539 | 18,310,539 |
The
accompanying notes are an integral part of these consolidated financial
statements.
2
CHINA
TRACTOR HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 and 2009
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income/loss
|
$ | (3,977,690 | ) | $ | 267,770 | |||
Adjustments
to reconcile net income/(loss) to cash provided (used) by operating
activities:
|
||||||||
Loss
from discontinued operations
|
3,367,266 | - | ||||||
Depreciation
and amortization
|
22,284 | 423,293 | ||||||
Reserve
for inventory obsolesce
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- | (21,770 | ) | |||||
Provision
for doubtful receivables
|
- | 142,099 | ||||||
Impairment
of long-term assets
|
440,611 | - | ||||||
Investment
income
|
- | 158,103 | ||||||
Deferred
tax assets
|
- | 438,554 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
- | (3,295,269 | ) | |||||
Inventories
|
- | (4,829,257 | ) | |||||
Advances
to suppliers
|
- | (2,171,770 | ) | |||||
Other
receivables
|
(32,702 | ) | (26,039 | ) | ||||
Receivable
from sale of discontinued operation
|
1,861 | - | ||||||
Accounts
payable
|
- | 2,492,962 | ||||||
Advance
from customers
|
- | 102,834 | ||||||
Accrued
expenses and other current liabilities
|
59,563 | (728,979 | ) | |||||
Net
cash used for operating activities
|
(118,807 | ) | (7,047,469 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Receipts
from the sale of fixed assets,intangible assets and other longterm
assets
|
- | 32,214 | ||||||
Purchase
of property and equipment and other long-term assets
|
(44,896 | ) | (819,730 | ) | ||||
Net
cash used for investing activities
|
(44,896 | ) | (787,516 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from short-term loan
|
- | 6,648,907 | ||||||
Proceeds
from (payments to) related parties - net
|
164,424 | (592,508 | ) | |||||
Repayments
of short-term loan
|
- | (73,065 | ) | |||||
Net
cash provided by financing activities
|
164,424 | 5,983,334 | ||||||
Effect
of exchange rate changes on cash
|
70 | 3,141 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
791 | (1,848,510 | ) | |||||
Cash
and cash equivalents, beginning balance
|
15,967 | 1,979,153 | ||||||
Cash
and cash equivalents, ending balance
|
$ | 16,758 | $ | 130,644 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
3
China
Tractor Holdings, Inc. ("China Tractor") was incorporated in April 2005 in Hong
Kong. In June 2005, China Tractor signed an agreement with Densen
Investment Limited (“Densen Investment”) to obtain assets from Densen
Investment. China Tractor invested $15,180,000 to establish Changchun Densen
Agriculture Machinery Manufacturing Co., Ltd. (“Changchun Densen”) on September
27, 2005. Changchun Densen is engaged in the R&D and production
of low-speed vehicles, tractors and construction machinery. According
to the revised articles of association dated January 9, 2007, Changchun Tractor
(Group) Co., Ltd. (“Changchun Tractor”) invested a trademark of $471,445 to
Changchun Densen. After this investment, Changchun Tractor obtained
3% equity in Changchun Densen. On April 23, 2007, the company name of
Changchun Densen was changed to Changchun Densen Changtuo Agriculture Machinery
Manufacturing Co., Ltd. Based on an agreement signed on November 20,
2007, Changchun Densen and State-owned Assets Supervision and Administration
Commission of Changchun (“SOASACC”) jointly invested to establish Chang Tuo
Agricultural Machinery Equipment Group Co., Ltd. (“Chang Tuo”). The
total registered capital of Chang Tuo is RMB200,000,000 ($29.3 million) which
includes RMB100,000,000 from SOASACC, RMB95,000,000 from Changchun Densen and
RMB5,000,000 from the operator, Mr. Yu Han. Chang Tuo is engaged in
the R&D and production of low-speed vehicles, tractors and construction
machineries, and sales of agricultural machinery and accessories.
Pursuant
to the Share Exchange Agreement by and among Royaltech Corp. (“Royaltech”), a
Delaware corporation, China Tractor, and the shareholders of Densen Machinery
Investment Limited ("Densen Machinery"), the parent company of Changchun Densen,
which was incorporated in April 2005 in Hong Kong. On September 9, 2008 (the
“Closing Date”), Royaltech issued 16,720,354 shares of its common stock for all
the issued and outstanding shares of China Tractor. The former
shareholders of China Tractor acquired 91.3% of the issued and outstanding
shares of Royaltech. This transaction resulted in a change in control
of Royaltech to the former shareholders of China Tractor. Immediately
after the closing of the Share Exchange and the Stock Purchase Agreements,
Royaltech had 18,310,539 shares of Common Stock issued and
outstanding. In connection with the change in control, Mr. Lau San
became Chairman of the Board of Directors and Chief Executive Officer, Mr. Lau
Jingdong became President, and Mr. Chen Guocheng became Chief Financial Officer
of Royaltech. This transaction was accounted for as a
recapitalization of China Tractor and not as a business combination.
Accordingly, no pro forma information is presented. The historical
financial statements are those of China Tractor.
The share
exchange agreement also states Royaltech’s existing shareholders assumed all the
liabilities of Royaltech at the date of merger.
On
September 19, 2008, Royaltech amended Article I of its Certificate of
Incorporation to change its corporate name from “Royaltech Corp.) to “China
Tractor Holdings, Inc.” (“China Tractor”, or “the Company”, or “We”, or
“us”)
On
December 1, 2009, We entered into a stock transfer agreement to transfer all
shares owned in Chang Tuo to SOASACC. On March 15, 2010, we signed
stock transfer agreement with SOASACC, for consideration of $12,366,713
(RMB84,200,000), including $8,157,330 (RMB55,540,000) for the transfer of all
shares owned in Chang Tuo, $3,275,270 (RMB22,300,000) for the transfer of the
phase II plant and $934,113 (RMB6,360,000) for the transfer of the trademark of
“CT”. The agreement was approved by Changchun government on April 19,
2010 with a government document numbered Changfupifu [2010] No.1. We
will dispose all shares owned in Chang Tuo accordingly. Therefore, we
report the results of operations of Chang Tuo as discontinued operations in
accordance with ASC 205-20.
4
NOTE 2- BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of China
Tractor, its 100%-owned subsidiary, Densen machinery, its 97%-owned subsidiary
Changchun Densen and its 47.5%-owned subsidiary Chang Tuo for the six months
ended June 30, 2010 and 2009. All significant inter-company accounts
and transactions were eliminated in consolidation.
Basis of
Presentation
The
consolidated financial statements of the Company were prepared in accordance
with accounting principles generally accepted in the United States of America
(“US GAAP”), assuming the Company will continue as a going concern. Under that
assumption, it is expected assets will be realized and liabilities will be
satisfied in the normal course of business. On March 15, 2010, the
Company signed a stock transfer agreement to transfer all shares owned by the
Company in Chang Tuo to SOASACC, and the agreement was approved by Changchun
government on April 19, 2010. As discussed in Note 16 to the
financial statements, Chang Tuo was reported as discontinued operation as the
Company lost its control before the end of 2009. After the completion
of the transaction, the Company will have no substantial business operations
until it enters a new industry through merger or acquires other operational
entities. As a result of the incident, the Company has experienced
significant operating losses for the six months ended June 30,
2010. The discontinued operation and the ensuing operating losses
raise substantial doubt as to the Company's ability to continue as a going
concern. Management is attempting to evaluate other potential
industries to enter.
Use of
Estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the amount
of revenues and expenses during the reporting periods. Management
makes these estimates using the best information available at the time the
estimates are made. However, actual results could differ materially
from those results.
Risks and
Uncertainties
The
Company is subject to substantial risks from, among other things, limited
operating history, foreign currency exchange rates and the volatility of public
markets.
Comprehensive
Income
The
Company adopted the provisions of ASC 220 “Reporting Comprehensive Income”,
previously SFAS No. 130, establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set of
general purpose financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities.
5
Foreign Currency
Transactions
The
reporting currency of the Company is the US $. The functional
currency of PRC subsidiaries is RMB. The financial statements of PRC
subsidiaries are translated into US dollars using quarter-end exchange rates as
to assets and liabilities and average exchange rates as to revenues, expenses
and cash flows. Capital accounts are translated at their historical
exchange rates when the capital transaction occurred. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statement of shareholders’
equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
The
balance sheet amounts with the exception of equity at June 30, 2010 were
translated 6.8086 RMB to $1.00 compared to 6.8372 RMB at December 31,
2009. The equity accounts were stated at their historical exchange
rate. The average translation rates applied to the income and cash
flow statement amounts for the six months ended June 30, 2010 and 2009 were
6.83476 RMB and 6.84323 RMB to $1.00 respectively. The average
translation rates applied to the income and cash flow statement amounts for the
three months ended June 30, 2010 and 2009 were 6.83350 RMB and 6.83998 RMB to
$1.00 respectively.
Translations
adjustments resulting from this process are included in accumulated other
comprehensive loss in the consolidated statement of stockholders’ equity and
were $2,578,318 and $2,540,091 as of June 30, 2010 and December 31, 2009,
respectively.
Cash and Cash
Equivalents
For
Statement of Cash Flows purposes, the Company considers all cash on hand and in
banks, including accounts in book overdraft positions, certificates of deposit
and other highly-liquid investments with maturities of three months or less,
when purchased, to be cash and cash equivalents. The Company
maintains cash with various banks and trust companies located in
China. Cash accounts are not insured or otherwise
protected. Should any bank or trust company holding cash deposits
become insolvent, or if the Company is otherwise unable to withdraw funds, the
Company would lose the cash on deposit with that particular bank or trust
company.
Accounts
Receivable
The
Company’s policy is to maintain 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 changes in customer payment patterns to
evaluate the adequacy of these reserves. Accounts are written off
against the allowance when it becomes evident collection will not
occur.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable
condition. In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels. Our reserve requirements generally
increase as our projected demand requirements; or decrease due to market
conditions and product life cycle changes. The Company estimates the
demand requirements based on market conditions, forecasts prepared by its
customers, sales contracts and orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company
writes down inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and their estimated
market value based upon assumptions about future demand and market
conditions.
6
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the year of disposal. All
ordinary repair and maintenance costs are expensed as
incurred. Expenditures for maintenance and repairs are expensed as
incurred. Major renewals and betterments are charged to the property
accounts while replacements, maintenance and repairs, which do not improve or
extend the lives of the respective assets, are expensed in the current
period.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as set out below.
Estimated Useful Life
|
|
Plant
and Building
|
30-40
years
|
Machinery
and Equipment
|
10
years
|
Office
Furniture and Equipment
|
5
years
|
Transportation
Equipment
|
5
years
|
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the
construction in progress is transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until on item
is completed and ready for intended use.
Capitalized
Interest
Interest
associated with major development and construction projects is capitalized and
included in the cost of the project. When no debt is incurred
specifically for a project, interest is capitalized on amounts expended on the
project using weighted-average cost of the Company’s outstanding
borrowings. Capitalization of interest ceases when the project is
substantially complete or development activity is suspended for more than a
brief period.
Land Use
Rights
Land use
right is stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the designated terms of the
lease of 50 years obtained from the relevant PRC land authority.
Other Intangible
Assets
Other
intangible assets include non-patent techniques, trademarks and capitalized
accounting software. The cost of intangible assets is stated at cost
less accumulated amortization. Amortization is provided using the
straight-line method over estimated useful lives.
Long-Term
Investment
The
Company accounted for its 5% investment in Zhongji North Machinery Co., Ltd,
(Zhongji North) using the cost method, under which the share of Zhongji North’
net income is recognized in the period in which it is earned.
7
Impairment of Long-Lived
Assets
In
accordance with ASC 360, “Property, Plant and Equipment”, previously SFAS No.
144, the Company reviews the carrying values of long-lived assets, including
property, plant and equipment, land use right and other intangible assets,
whenever facts and circumstances indicate the assets may be
impaired. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. If an asset is considered
impaired, the impairment is measured by the amount by which the carrying amount
the asset exceeds the fair value. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less costs of
disposal.
The
Company reviews its investments to identify and evaluate investments that have
an indication of possible impairment. Factors considered in
determining whether a loss is temporary include the length of time and extent to
which fair value has been less than the cost basis, the financial condition and
near-term prospects of the investee, and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in market value. Credit losses and other-than-temporary impairments
declines in fair value that are not expected to recover are
expensed.
Revenue
Recognition
The
Company recognizes sales in accordance with United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements” and SAB No. 104, “Revenue
Recognition.” The Company recognizes revenue when the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services were rendered, (iii) the price to the customer
is fixed or determinable and (iv) collection of the resulting receivable is
reasonably assured. After the customers of the Company taking the
goods and signing on the shipping order, the Company considers the signed
shipping order as customer acceptance and the risk of goods is transferred, as
the price in invoice or sales contract with customers is fixed, the Company
recognize revenue accordingly. Revenue is not recognized until title
and risk of loss is transferred to the customer, which occurs upon delivery of
goods, and objective evidence exists that customer acceptance provisions have
were met. Provisions for discounts and returns are provided for at
the time the sale is recorded, and are recorded as a reduction of
sales. The Company bases its estimates on historical experience
taking into consideration the type of products sold, the type of customer, and
the type of specific transaction in each arrangement. Revenues
represent the invoiced value of goods, net of value added tax
(“VAT”).
The
Company provides a product warranty to customers; meanwhile, as an assembling
company, all parts are purchased from related suppliers, suppliers provide a
same terms warranty to the Company as that the Company provides to
customers. In case customers claim problem products to the Company,
the Company will claim the related parts to suppliers
accordingly. Further more, the labor costs and overheads related to
the problem products are not material compared to the parts cost, so the company
do not accrue any warranty liabilities in financial statements.
The
Company does not offer promotional payments, customer coupons, rebates or other
cash redemption offers to its customers. Deposits or advance payments
from customers prior to delivery of goods and passage of title of goods are
recorded as advanced from customers.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income Taxes”,
previously SFAS No. 109. Under this method, deferred income taxes are
recognized for the estimated tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts and each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized when, in management’s
opinion; it is more likely than not that some portion of the deferred tax assets
will not be realized. The provision for income taxes represents
current taxes payable net of the change during the period in deferred tax assets
and liabilities.
8
The
Company reports earnings per share in accordance with the provisions of ASC 260
“Earnings Per Share”, previously SFAS No. 128. ASC 260 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average common
shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common
stock using the treasury method.
Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company’s net income (loss) position at the calculation
dates.
Fair Value of Financial
Instruments
ASC 820
“Fair Value Measurements and Disclosures”, previously FAS 157, adopted January
1, 2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The carrying amounts reported in the balance
sheets for current receivables and payables qualify as financial
instruments. Management concluded the carrying values are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their stated interest rate approximates current rates
available. The three levels are defined as follows:
· Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
· Level
2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
· Level
3 inputs to the valuation methodology are unobservable and
significant to the fair value.
The
assets measured at fair value on a recurring basis subject to the disclosure
requirements of ASC 820 as of June 30, 2010 are as follows:
The
Company's financial instruments include cash and cash equivalents, other
receivables, and accounts payable. Cash and cash equivalents consist
primarily of high rated money market funds at a variety of well-known
institutions with original maturities of three months or
less. Management estimates that the carrying amounts of the non
related party financial instruments approximate their fair values due to their
short-term nature.
Fair
Value Measurements at Reporting Date Using Quoted Prices in
Carrying value As
of June 30 |
Active markets for
identical assets |
Significant other
observable inputs |
Significant
unobservable inputs |
|||||||||||||
2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Cash
and cash equivalents
|
$ | 16,758 | $ | 16,758 | - | - |
9
Concentration of
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents. As
of June 30, 2010, substantially all of the Company’s cash and cash equivalents
were held by major financial institutions located in the PRC, which management
believes are of high credit quality. The Company generally does not
require collateral for trade receivables and maintains an allowance for doubtful
accounts of accounts receivables.
Noncontrolling
Interests
Effective
January 1, 2009, the Company adopted the provisions of ASC 810, previously SFAS
No. 160 “Noncontrolling Interests in Consolidated Financial Statements-reported
in equity” for reporting noncontrolling interest (“NCI”) in a
subsidiary. As a result, the Company reported NCI as a separate
component of Stockholders’ Equity in the Condensed Consolidated Balance Sheet.
Additionally, the Company reported the portion of net income and comprehensive
income (loss) attributed to the Company and NCI separately in the Condensed
Consolidated Statement of Operations. The Company also included a
separate column for NCI in the Consolidated Statement of Changes in
Equity. All related disclosures were adjusted
accordingly. Prior year amounts associated with NCI in the financial
statements and accompanied footnotes were retrospectively adjusted to conform to
the adoption.
Statement of Cash
Flows
In
accordance with ASC 230, “Statement of Cash Flows”, previously SFAS No. 95, cash
flows from the Company's operations are calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Recent Accounting
Pronouncements
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an
SEC filer to disclose a date through which subsequent events have been evaluated
in both issued and revised financial statements. Revised financial
statements include financial statements revised as a result of either correction
of an error or retrospective application of US GAAP. The FASB
believes these amendments remove potential conflicts with the SEC’s
literature. The adoption of this ASU did not have a material impact
on the Company’s consolidated financial statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU
clarifies the guidance within the derivative literature that exempts certain
credit related features from analysis as potential embedded derivatives
requiring separate accounting. The ASU specifies that an embedded
credit derivative feature related to the transfer of credit risk that is only in
the form of subordination of one financial instrument to another is not subject
to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging
— Embedded Derivatives — Recognition. All other embedded credit
derivative features should be analyzed to determine whether their economic
characteristics and risks are “clearly and closely related” to the economic
characteristics and risks of the host contract and whether bifurcation is
required. The ASU is effective for the Company on July 1,
2010. Early adoption is permitted. The adoption of this
ASU did not have a material impact on the Company’s consolidated financial
statements.
10
In April
2010, the FASB (Financial Accounting Standards Board) issued Accounting
Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method
(Topic 605): Milestone Method of Revenue Recognition. The amendments
in this Update are effective on a prospective basis for milestones achieved in
fiscal years, and interim periods within those years, beginning on or after June
15, 2010. Early adoption is permitted. If a vendor elects early
adoption and the period of adoption is not the beginning of the entity’s fiscal
year, the entity should apply the amendments retrospectively from the beginning
of the year of adoption. The Company did not expect the provisions of
ASU 2010-17 to have a material effect on the financial position, results of
operations or cash flows of the Company.
NOTE
3 INVENTORIES
Inventories,
by major categories, as of June 30, 2010 and December 31, 2009 were as
follows:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Raw
materials
|
$ | 141,591 | $ | 140,998 | ||||
Low
value consumables
|
463 | 461 | ||||||
Materials
on consignment for further processing
|
740 | 737 | ||||||
142,794 | 142,196 | |||||||
Less:
Allowance for obsolete inventories
|
(142,794 | ) | (142,196 | ) | ||||
Inventories,
net
|
$ | - | $ | - |
NOTE
4 TAXES RECOVERABLE
As of
June 30, 2010 and December 31, 2009, tax recoverable comprised the
following:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Input
VAT
|
$ | 1,857,929 | $ | 1,788,216 | ||||
Output
VAT
|
(1,814,004 | ) | (1,806,416 | ) | ||||
VAT
Paid
|
14,874 | 14,811 | ||||||
Offset
input VAT of FA
|
- | 61,067 | ||||||
Other
|
132 | 274 | ||||||
Total
|
$ | 58,931 | $ | 57,952 |
Changchun
Densen is subject to value-added tax at 13% and 17% for its tractor sales and
raw materials sales respectively.
11
NOTE
5 OTHER RECEIVABLES
As of
June 30, 2010 and December 31, 2009, other receivables comprised the
following:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Advance
to employees for business purposes
|
$ | 13,577 | $ | 3,372 | ||||
Prepayment
|
17,596 | 5,803 | ||||||
Payment
on behalf of third party
|
10,869 | - | ||||||
Others
|
44,062 | 43,878 | ||||||
Total
other receivables
|
$ | 86,104 | $ | 53,053 |
NOTE
6 PROPERTY, PLANT AND EQUIPMENT
As of
June 30, 2010 and December 31, 2009, property, plant and equipment consisted of
the following:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Cost:
|
||||||||
Office
Furniture and Equipment
|
$ | 5,164 | $ | 4,141 | ||||
Accumulated
depreciation
|
(2,589 | ) | (2,160 | ) | ||||
Total
property, plant and equipment, net
|
$ | 2,575 | $ | 1,981 |
Depreciation
expense for the six months ended June 30, 2010 and 2009 was $418 and $354,726
respectively.
Depreciation
expense for the three months ended June 30, 2010 and 2009 was $232 and $177,166
respectively.
NOTE
7 RECEIVABLE FROM SALE OF DISCONTINUED
OPERATION
The
Company signed an agreement with SOASACC to transfer all shares owned by the
Company in Chang Tuo and construction of phase II plant of the
Company. For details refer to Note 1.
NOTE
8 LAND USE RIGHTS
As
of June 30, 2010 and December 31, 2009, land use rights were as
follows:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Cost
of land use right
|
$ | - | $ | 712,382 | ||||
Accumulated
amortization
|
- | (12,115 | ) | |||||
Land
use rights, net
|
$ | - | $ | 700,267 |
12
The
Company obtained the right from the relevant PRC land authority for forty nine
years to use the land on which the office premises, production facilities and
warehouse of the Company are situated.
Land use
right was transferred to SOASACC according to the stock transfer agreement
signed on March 15, 2010, please refer to Note 1 for detail.
NOTE
9 OTHER INTANGIBLE ASSETS
As of
June 30, 2010 and December 31, 2009, the Company’s intangible assets were
summarized as follows:
Useful Life
|
June 30, 2010
|
December 31, 2009
|
||||||||
(Unaudited)
|
||||||||||
Cost:
|
||||||||||
Trademark
|
10
years
|
$ | - | $ | 539,695 | |||||
Capitalized
accounting software
|
10
years
|
6,904 | 6,875 | |||||||
Non-patent
techniques
|
10
years
|
88,124 | 87,755 | |||||||
Total
at cost:
|
95,028 | 634,325 | ||||||||
Accumulated
amortization
|
(42,187 | ) | (149,715 | ) | ||||||
Total
after amortization
|
52,841 | 484,610 | ||||||||
Impairment
loss for non-patent techniques
|
(48,468 | ) | - | |||||||
Other
intangible assets, net
|
$ | 4,373 | $ | 484,610 |
Trademark
was transferred to SOASACC according to the stock transfer agreement signed on
March 15, 2010, please refer to Note 1 for detail.
As of
June 30, 2010, the Company recorded impairment loss of $48,468 for non-patent
techniques, which were technical drawings, due to the discontinued
operations.
Other
intangible assets are stated at cost less accumulated
amortization. The amortization of other intangible assets for the six
months ended June 30, 2010 and 2009 was $18,230 and $32,280
respectively. The amortization of other intangible assets for the
three months ended June 30, 2010 and 2009 was $2,369 and $16,260
respectively.
The
estimated amortization expense for the next five years as of June 30, 2010 and
thereafter is expected to be as follows by years:
2011
|
$ | 688 | ||
2012
|
688 | |||
2013
|
688 | |||
2014
|
688 | |||
2015
|
688 | |||
Thereafter
|
933 | |||
Total
|
$ | 4,373 |
13
NOTE
10 LONG-TERM EQUITY INVESTMENTS
As of
June 30, 2010 and December 31, 2009, the Company’s investment consisted
of:
June 30, 2010
|
December 31, 2009
|
|||||||||||
(Unaudited)
|
||||||||||||
Zhongji
North Machinery Co., Ltd.
|
5 | % | $ | 393,836 | $ | 392,189 | ||||||
Less:
Provision for long-term investment impairment
|
(393,836 | ) | - | |||||||||
Long-term
investment, net
|
$ | - | $ | 392,189 |
Zhongji
North was established on November 22, 2007 and the total registered capital is
RMB50,000,000.
Zhongji
North’s principal activities are development, manufacturing, sale and foreign
trading of agricultural machineries and other machineries, manufacturing and
sale of parts and accessories of agricultural machineries and other
machineries.
As of
June 30, 2010, the Company wrote off its investment in Zhongji North Machinery
Co., Ltd. due to impairment.
NOTE
11 SHORT-TERM LOANS
Short-term
loans are due to various financial institutions which are normally due within
one year. As of June 30, 2010 and December 31, 2009, the Company’s
short term loans consisted of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
From
Jilin Jiutai Rural Commercial Bank Chengqu-Branch, due from March 27, 2009
to March 24, 2010, with interest at 11.16%, secured by the
Company’s land use right.
|
$ | 734,365 | $ | 731,294 |
Short-term
loan is overdue since March 24, 2010. The Company will repay it when
the stock transfer transaction with SOASACC is completed.
NOTE
12 ACCRUED EXPENSES AND OTHER PAYABLES
As of
June 30, 2010 and December 31, 2009, the accrued expenses and other liabilities
of the Company were as follows:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Accrued
expenses
|
$ | 328,159 | $ | 195,756 | ||||
Acquisition
of assets
|
94,528 | 94,133 | ||||||
Warrant
deposit
|
21,378 | 21,289 | ||||||
Other
|
18,615 | 69,230 | ||||||
Total
accrued expenses and other payables
|
$ | 462,680 | $ | 380,408 |
14
The
security deposit is from clients for the maintenance of tractors.
NOTE
13 BORROWINGS FROM THIRD PARTIES
As of
June 30, 2010 and December 31, 2009, the borrowings from third parties was
as follows:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Zheng
Yin
|
$ | 146,873 | $ | 146,258 | ||||
Shanghai
Sibo Education Co., Ltd.
|
1,174,985 | 1,170,070 | ||||||
Total
borrowing from third parties
|
$ | 1,321,858 | $ | 1,316,328 |
The
borrowing from third parties has no repayment term and bore no
interest. Borrowed for operational use, they will be repaid in the
near future.
NOTE
14 RELATED PARTY BALANCE AND TRANSCATIONS
Due from related
parties
As
of June 30, 2010 and December 31, 2009, due from related parties was
summarized as follows:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Lau
San
|
- | $ | 284,553 | |||||
Mudanjiang
Binjiang Garden City (MBGC)
|
852,200 | - | ||||||
Total
due from related parties
|
$ | 852,200 | $ | 284,553 |
A
director of the Company, Mr. Lau San, borrowed money from the
Company. These amounts are interest-free, unsecured and repayable on
demand.
The
amount due from MBGC was a short term loan. Mudanjiang Binjiang
Garden City was controlled by Mr.Lau San, the director of the
Company. The borrowing bore no interest, and had no formal repayment
terms.
15
Due to related
parties
As
of June 30, 2010 and December 31, 2009, due to related parties was
summarized as follows:
June 30, 2010
|
December 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Changchun
Junming Machinery Co., Ltd. (“CJMCL”)
|
$ | - | $ | 149,105 | ||||
Shenzhen
Junsheng Property Management Co., Ltd. (“SJPMCL”)
|
14,687 | 14,626 | ||||||
Chang
Tuo
|
881,238 | - | ||||||
Zhongji
North Machinery Co., Ltd. (“Zhongji North”)
|
411,245 | 409,524 | ||||||
Total
due to related parties
|
$ | 1,307,170 | $ | 573,255 |
The
Company borrowed from CJMCL, which is controlled by Mr. Lau San, a director of
the Company for use in operations. The loan bore no interest and the
principal is due upon demand.
The
Company borrowed from SJPMCL, which is controlled by Ms. Yang, Fengyan, Mr. Lau
San’s wife, for use in operations. The loan bore no interest and the
principal is due upon demand.
The
Company borrowed money from Chang Tou. The borrowings bear no
interest is due upon demand.
The
Company, as noncontrolling shareholder of Zhongji North, borrowed from Zhongji
North, to fund the Company’s operations. These amounts are
interest-free, unsecured and the principal is due upon demand.
NOTE
15 DISCONTINUED OPERATION
On
December 1, 2009, we entered into a stock transfer agreement to transfer all
shares owned in Chang Tuo to SOASACC. On March 15, 2010, we signed
stock transfer agreement with SOASACC, the total consideration of this transfer
is $12,366,713 (RMB84,200,000), including $8,157,330 (RMB55,540,000) for the
transfer of all shares owned in Chang Tuo, $3,275,270 (RMB22,300,000) for the
transfer of the phase II plant and $934,113 (RMB6,360,000) for the transfer of
the trademark of “CT”. The agreement was approved by Changchun
government on April 19, 2010 with a government document numbered Changfupifu
[2010] No.1. We will dispose all shares owned in Chang Tuo
accordingly. Therefore, we report the results of operations of Chang
Tuo as discontinued operations in accordance with ASC 205-20.
NOTE
16 INCOME TAX
Changchun
Densen is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements after appropriated tax
adjustments.
Changchun
Densen is exempt from income tax in PRC for two years starting from the 1st
profitable year or 2008, whichever is earlier, and subject to 50% discount on
normal income tax rate for the following three years.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate (unaudited) for the six months ended June 30, 2010 and
2009:
2010
|
2009
|
|||||||
US
statutory rates
|
(34.0 | )% | (34.0 | )% | ||||
Tax
rate difference
|
9.0 | % | 9.0 | % | ||||
Valuation
allowance
|
(25.0 | )% | (25.0 | )% | ||||
Tax
per financial statements
|
0.0 | % | 0.0 | % |
16
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate (unaudited) for the three months ended June 30, 2010 and
2009:
2010
|
2009
|
|||||||
US
statutory rates
|
(34.0 | )% | (34.0 | )% | ||||
Tax
rate difference
|
9.0 | % | 9.0 | % | ||||
Valuation
allowance
|
(25.0 | ) | (25.0 | )% | ||||
Tax
per financial statements
|
0.0 | % | 0.0 | % |
NOTE
17 OPERATING RISK
(a)
|
Exchange
risk
|
The
Company can not guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on
changes in the political and economic environments without notice.
(b)
|
Political
risk
|
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently
allows a Chinese corporation to be owned by a United States
corporation. If the laws or regulations relating to ownership of a
Chinese corporation are changed by the PRC government, the Company's ability to
operate the PRC subsidiaries could be affected.
(c)
|
Interest
risk
|
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense
will fluctuate in line with any change in borrowing rates. The
Company does not have any derivative financial instruments as of June 30, 2010
and 2009 and believes its exposure to interest rate risk is not
material.
17
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this
report.
Note on Forward Looking
Statements
This
quarterly report on Form 10-Q includes and incorporates by reference
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934
with respect to our financial condition, results of operations, plans,
objectives, future performance and business, which are usually identified by the
use of words such as “will,” “may,” “anticipates,” “believes,” “estimates,”
“expects,” “projects,” “plans,” “predicts,” “continues,” “intends,” “should,”
“would,” or similar expressions. We intend these forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and include
this statement to comply with these safe harbor provisions.
These
forward-looking statements reflect our current views and expectations about our
plans, strategies and prospects, which are based on the information currently
available and on current assumptions.
We cannot
give any guarantee that these plans, intentions or expectations will be
achieved. Investors are cautioned that all forward-looking statements involve
risks and uncertainties, and actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including those Risk Factors set forth in our Form 8-K filed with the SEC on
September 15, 2008. Listed below and discussed elsewhere in this yearly report
are some important risks, uncertainties and contingencies that could cause our
actual results, performances or achievements to be materially different from the
forward-looking statements included in this yearly report. These risks,
uncertainties and contingencies include, but are not limited to, the
following:
You
should read this document with the understanding that our actual future results
may be materially different from what we expect. We may not update these
forward-looking statements, even though our situation may change in the future.
We qualify all of our forward-looking statements by these cautionary
statements.
History
We are a
Delaware Corporation incorporated on April 13, 2004 under the name Royaltech
Corp. From inception to September 2008, we were a developmental stage company
focused on developing and manufacturing clinical diagnostic kits in the People’s
Republic of China (“PRC”). From inception to September 2008, we had not
manufactured or sold any products, and had limited operating
history.
On
September 9, 2008, we entered into a share exchange agreement with by Densen
Equipment Ltd. (“DEL”), which resulted in a change of control.
For
acquiring all the assets of DEL, the former shareholders of DEL acquired over
90% of the issued and outstanding shares of our common stock. The former
officers and directors of DEL were also appointed to serve as our officers and
directors. Following the acquisition of these assets, we changed our corporate
name to China Tractor Holdings Inc. and our business is focused on the research,
production, and sales of low-speed vehicles, tractors and construction machinery
in the PRC, through our wholly owned subsidiary, Densen Machinery Investment
Limited, incorporated in Hong Kong in April 2005 ("Densen Machinery"). For
further details regarding the share exchange transaction with DEL, please see
our Current Report on Form 8-K, filed with the SEC on September 15,
2008.
18
Our
corporate structure is summarized in the chart below and the accompanying
summary:
On
December 1, 2009, we entered into a stock transfer agreement to transfer all
shares owned in Chang Tuo to State-owned Assets Supervision and Administration
Commission of Changchun (SOASACC). On March 15, 2010, we
signed stock transfer agreement with SOASACC for $12,366,713 (RMB84,200,000),
including $8,157,330 (RMB55,540,000) for the transfer of all shares owned in
Chang Tuo, $3,275,270 (RMB22,300,000) for the transfer of the phase II plant and
$934,113 (RMB6,360,000) for the transfer of the trademark of
“CT”. The agreement was approved by Changchun government on April 19,
2010 with a government document numbered Changfupifu [2010] No.1. We
will dispose all shares owned in Chang Tuo accordingly. Therefore, we
report the results of operations of Chang Tuo as discontinued operations in
accordance with ASC 205-20.
After the
completion of the transaction, the Company will have no substantial business
operations until it enters a new industry through merger or acquires other
operational entities. As a result of the incident, the Company
has experienced significant operating losses for the six months ended June 30,
2010. The discontinued operation and ensuing operating losses raise
substantial doubt as to the Company's ability to continue as a going
concern. Management is evaluating other potential industries to
enter.
Overview
Changchun
Densen Agricultural Machinery Equipment Co., Ltd. (“Changchun Densen”) was
established by Densen Machinery on September 2005. Changchun Densen is licensed
to engage in the research, development and production of low-speed vehicles,
tractors and construction machinery.
Chang Tuo
is a joint venture of Changchun Densen and SOASACC established in November 2007.
As of September 30, 2008, the total registered capital of Chang Tuo was
RMB200,000,000 ($29.3 million) and was engaged in the research, development,
production, and sale of low-speed vehicles, tractors and construction
machineries, and sales of agricultural machineries and accessories.
Densen
Machinery was a recipient of subsidies and tax incentives from the Chinese
government as part of its plan to promote the development of agriculture in the
northeast regions of China. The major markets for our products were located
mainly in the provinces of Jilin, Liaoning, Heilongjiang and Shandong. Ownership
in Chang Tuo will be transferred soon; we’ve reported Chang Tuo as discontinued
operation in our financial statement for the period ended June 30,
2010.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States (“US GAAP”) requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements, we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments: allowance for doubtful accounts; income taxes; and
asset impairment.
19
Income
taxes
We
account for income taxes in accordance with ASC 740 “Income Taxes”, previously
SFAS No. 109, which prescribes the use of the liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. We then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we establish a valuation
allowance. To the extent we establish a valuation allowance, or increase or
decrease this allowance in a period, we increase or decrease our income tax
provision in our statement of operations. If any of our estimates of our prior
period taxable income or loss prove to be incorrect, material differences could
impact the amount and timing of income tax benefits or payments for any period.
In addition, as a result of the significant change in the Company’s ownership,
the Company's future use of its existing net operating losses may be
limited.
We are
subject to numerous domestic and foreign tax jurisdictions and tax agreements
and treaties among the various taxing authorities. Our operations in these
jurisdictions are taxed on various bases: income before taxes, deemed profits
and withholding taxes based on revenue. The calculation of our tax liabilities
involves consideration of uncertainties in the application and interpretation of
complex tax regulations in a multitude of jurisdictions across our global
operations.
We
recognize potential liabilities and record tax liabilities for anticipated tax
audit issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional taxes will be due. The tax
liabilities are reflected net of realized tax loss carry forwards. We adjust
these reserves upon specific events; however, due to the complexity of some of
these uncertainties, the ultimate resolution may result in a payment that is
different from our current estimate of the tax liabilities. If our estimate of
tax liabilities proves to be less than the ultimate assessment, an additional
charge to expense would result. If payment of these amounts ultimately proves to
be less than the recorded amounts, the reversal of the liabilities would result
in tax benefits being recognized in the period when the contingency has been
resolved and the liabilities are no longer necessary.
Changes
in tax laws, regulations, agreements and treaties, foreign currency exchange
restrictions or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we
provide during any given year.
Asset
Impairment
We
periodically evaluate the carrying value of other long-lived assets, including,
but not limited to, property and equipment and intangible assets, when events
and circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flows from
such asset 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 value of the
long-lived asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Significant
estimates are utilized to calculate expected future cash flows utilized in
impairment analyses. We also utilize judgment to determine other factors within
fair value analyses, including the applicable discount rate.
20
Results
of Operations for the six months ended June 30, 2010 and 2009
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE GAINS/LOSS
2010
|
2009
|
Change
|
||||||||||||||
Amount
|
%
|
|||||||||||||||
Net
revenue
|
$ | $ | 18,984 | $ | (18,984 | ) | (100 | )% | ||||||||
Cost
of sales
|
(1,590 | ) | (16,933 | ) | 15,343 | (91 | )% | |||||||||
Gross
profit/(loss)
|
(1,590 | ) | 2,051 | (3,641 | ) | (178 | )% | |||||||||
Operating
expenses:
|
||||||||||||||||
Selling
and general and administrative expenses
|
(127,299 | ) |
(152,466)
|
25,167 | (17 | )% | ||||||||||
Provision
for impairment of assets
|
(440,611 | ) | (43,158 | ) | (397,453 | ) | 921 | % | ||||||||
Profit
/ (Loss) from operations
|
(569,500 | ) | (193,573 | ) | (375,927 | ) | 194 | % | ||||||||
Equity
in earnings in investee
|
(32,938 | ) | 32,938 | (100 | )% | |||||||||||
Interest
expense
|
(40,821 | ) | (1,930 | ) | (38,891 | ) |
NM
|
|||||||||
Other
income (expense)
|
(103 | ) | (4,734 | ) | 4,631 | (98 | )% | |||||||||
Income/(loss)
before income taxes
|
(610,424 | ) | (233,175 | ) | (377,249 | ) | 162 | % | ||||||||
Discontinued
operations, net of tax
|
(3,367,266 | ) | 500,945 | (3,868,211 | ) |
NM
|
||||||||||
Net
income/(loss)
|
(3,977,690 | ) | 267,770 | (4,245,460 | ) |
NM
|
||||||||||
Net
(income)/loss attributable to noncontrolling interest
|
119,331 | (264,168 | ) | 383,449 | (145 | )% | ||||||||||
Net
Income/(loss) attributable to China Tractor Holdings, Inc.
|
(3,858,359 | ) | 3,602 | (3,861,961 | ) |
NM
|
||||||||||
Other
comprehensive income/(loss)
|
39,409 | 42,717 | 3,307 | (8 | )% | |||||||||||
Comprehensive
income/(loss)
|
(3,818,949 | ) | (46,319 | ) | (3,865,268 | ) |
NM
|
|||||||||
Comprehensive
(income) attributable to noncontrolling
interest
|
(1,182 | ) | (78,690 | ) | 77,507 | (98 | )% | |||||||||
Net
profit/(loss) attributable to stockholders
|
$ | (3,820,132 | ) | $ | (32,371 | ) | (3,787,761 | ) |
NM
|
NM: Not
meaningful.
Revenue
There was
no revenue for the six months ended June 30, 2010 compared to $18,984 for the
comparable period of 2009 due to there being no operating activities in first
six months of 2010.
Cost
of sales
Cost of
sales for the six months ended June 30, 2010 decreased to $1,590 from $16,933
for the same period of 2009, a decrease of $15,343. The decrease of
cost of sales was caused by no revenue for the period and cost of sales for the
six months ended June 30, 2010 resulted from the impairment loss of raw
materials.
21
Gross
profit (loss)
The gross
loss for the six months ended June 30, 2010 was $1,590, a decrease of $3,641
compared to gross profit of $2,051 for the six months ended June 30,
2009. The loss is due to no operating activities in
2010. The cost of sales for the six months ended June 30, 2010 is
from impairment loss of inventory.
Selling,
general and administrative expenses
Selling,
general and administrative expenses decreased to $127,299 in the six months
ended June 30, 2010 from $152,466 in the six months ended June 30, 2009, a
decrease of $25,167or 17%.
Provision
for impairment of assets
The
provision for impairment of assets in the six months ended June 30, 2010 was
$440,611, an increase of $397,453 compared to $43,158 in the comparable period
of 2009. The increase resulted from the provision for impairment of assets which
includes intangible asset of $ 48,283 and long term investment of $392,328 in a
company which seized operations, for six months ended June 30,
2010.
Interest
expenses
The
interest expense in the six months ended June 30, 2010 was $40,821, an increase
of $38,891 compared to $1,930 in the comparable period of 2009. The increase in
interest expenses is due to the interest on short-term loan of $730,480,
capitalized in the six months ended June 30, 2009 and included in the interest
expense in the six months ended June 30,2010.
Other
income/ (expenses)
Other
expenses has decreased to $103 for the six months ended June 30, 2010 compared
to $4,734 to the six months ended June 30, 2009, a decrease of
$4,631.
Other
comprehensive income
Other
comprehensive income in the six months ended June 30, 2010 was $39,409 compared
to $42,717 in the comparable period of 2009. It represents foreign currency
translation income resulted from appreciation of RMB against the US
dollar.
Net
income/(loss)
Net loss
in the six months ended June 30, 2010 was $3,977,690; compared to net gain of
$267,770 in the six months ended June 30, 2009, a decrease $4,245,460, which
resulting from discontinued operations of Chang Tuo.
Liquidity
and Capital Resources
China
Tractor generally finances its operations from short-term loans from domestic
banks. As of June 30, 2010 we had cash and cash equivalents of $16,758 which
represented an increase of $791 from $15,967 as December 31,
2009.
Operating
Activities
The net
cash used in operating activities in the six months ended June 30, 2010 was
$118,807 compared to $7,047,469 in the six months ended June 30, 2009. The
decline of $6,928,662 mainly resulted from the lack of operating activities
during January to June 2010.
22
Investing
Activities
Net cash
used for investing activities was $44,896 in the six months ended June 30,
2010. Net cash used for investing activities was $787,516 in the six
months ended June 30, 2009. The decrease of $742,620 mainly resulted
from less purchase of property and equipment and other long term assets during
2010.
Financing
Activities
Net cash
provided by financing activities was $164,424 in the six months ended June 30,
2010 which was due to a net inflow from related party borrowings of $164,424.
Net cash provided by financing activities was $5,983,334 in the six months ended
June, 2009, due to a net inflow from short-term loans of
$6,648,907.
Going
forward, over the next 12 months, China Tractor intends to continue to rely on
short-term loans to fund its operational cash needs.
Inflation
In the
opinion of management, inflation has not had a material effect on the Company's
financial condition or results of its operations.
Trends
and uncertainties
The
consolidated financial statements of the Company were prepared in accordance
with US GAAP assuming the Company will continue as a going concern. Under that
assumption, it is expected that assets will be realized and liabilities will be
satisfied in the normal course of business. On December 1, 2009, the Company
entered into a stock transfer agreement to transfer all shares owned in Chang
Tuo to SOASACC. On March 15, 2010, we signed stock transfer agreement with
SOASACC, for $12,366,713 (RMB84,200,000), including $8,157,330 (RMB55,540,000)
for the transfer of all shares owned in Chang Tuo, $3,275,270 (RMB22,300,000)
for the transfer of the phase II plant and $934,113 (RMB6,360,000) for the
transfer of the trademark of “CT”. The agreement was approved by
Changchun government on April 19, 2010 with a government document numbered
Changfupifu [2010] No.1.
After the
completion of the transaction, the Company will have no substantial business
operations until it enters a new industry through merger or acquisition of other
operating entities. As a result of this transfer of ownership, the
Company has experienced significant operating losses for the six months ended
June 30, 2010. The discontinued operation and the ensuing operating losses
raise substantial doubt as to the Company's ability to continue as a going
concern. Management is attempting to evaluate other potential
industries to enter.
Off-Balance
Sheet Arrangements
We had no
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on the Company’s financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources, that are material to investors during
the six months and three months ended June 30,2010 and 2009.
23
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
A smaller
reporting company, as defined by Rule 229.10(f)(1), is
not required to provide the information required by this Item.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Quarterly Report, the Company’s management,
with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer (“the Certifying Officers”), conducted evaluations of the
Company’s disclosure controls and procedures. As defined under Sections
13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), the term “disclosure controls and procedures” means controls
and other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms. Disclosure
controls and procedures include without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer’s management, included the Certifying Officers, to
allow timely decisions regarding required disclosures.
Based on
this evaluation, the Certifying Officers have concluded that the Company’s
disclosure controls and procedures were not effective to ensure that material
information is recorded, processed, summarized and reported by management of the
Company on a timely basis in order to comply with the Company’s disclosure
obligations under the Exchange Act and the rules and regulations promulgated
thereunder.
The Company’s disclosure controls and
procedures were not effective due to insufficient human
resources. The Company currently does not have any full-time
employees with sufficient knowledge of U.S. GAAP and disclosure control
procedure, and relies exclusively on outside consultants. Further,
the Company requires additional personnel and protocols to ensure that material
information is recorded, processed, summarized by the Company and by its outside
consultants in a timely matter and meet financial reporting
requirements.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the Company’s second fiscal quarter of 2010 that materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Limitations
on the Effectiveness of Internal Controls
Readers
are cautioned that our management does not expect that our disclosure controls
and procedures or our internal control over financial reporting will necessarily
prevent all fraud and material error. An internal control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any control design will succeed in
achieving its stated goals under all potential future conditions. Over time,
control may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.
24
PART
II - OTHER INFORMATION
Item 1
|
Legal
Proceedings
|
None.
Item 2
|
Unregistered Sales of Securities
and Use of Proceeds
|
None.
Item 3
|
Defaults Upon Senior
Securities
|
None.
Item 4
|
Reserved
|
None.
Item 5
|
Other
Information
|
None.
Item 6
|
Exhibits
|
31.1
|
Certification of Principal
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
Certification of Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification of Principal
Executive Officer pursuant to 18 U.S.C. Section
1350
|
|
|
32.2
|
Certification of Principal
Financial Officer pursuant to 18 U.S.C. Section
1350.
|
25
In
accordance with the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CHINA
TRACTOR HOLDINGS, INC.
|
||
Dated:
August 26, 2010
|
By:
|
/s/ Lau San
|
Lau
San
|
||
Chief
Executive Officer and Chairman
|
||
By:
|
/s/ Chen Guochen
|
|
Chen
Guochen
|
||
Chief
Financial Officer and
Director
|
26