Attached files
| file | filename |
|---|---|
| 8-K/A - ZAPNAPS, INC. | v206857_8ka.htm |
| EX-10.3 - ZAPNAPS, INC. | v206857_ex10-3.htm |
| EX-10.14 - ZAPNAPS, INC. | v206857_ex10-14.htm |
Exhibit
99.3
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Financial
Statements
For
the Years Ended December 31, 2009, and 2008
And
the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Contents
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Financial
Statements:
|
|
|
Balance
Sheets as of December 31, 2009 and 2008 and September 30, 2010
(unaudited)
|
F-2
|
|
Statements
of Operations and Other Comprehensive Income (Loss) for the years ended
December 31, 2009 and 2008 and for the nine months ended September 30,
2010 and 2009 (unaudited)
|
F-3
|
|
Statement
of Stockholders' Equity for the years ended December 31, 2009 and 2008 and
for the nine months ended September 30, 2010 (unaudited)
|
F-4
|
|
Statements
of Cash Flows for the years ended December 31, 2009 and 2008 and for the
nine months ended September 30, 2010 and 2009 (unaudited)
|
F-5
|
|
Notes
to Financial Statements
|
F-6
|
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders of
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
We have
audited the accompanying balance sheets of Dalian Heavy Mining Equipment
Manufacturing Co., Ltd. as of December 31, 2009 and 2008, and the related
statements of operations and other comprehensive income (loss), stockholders'
equity, and cash flows for the years ended December 31, 2009 and 2008. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dalian Heavy Mining Equipment
Manufacturing Co., Ltd. as of December 31, 2009 and 2008 and the results of its
operations and cash flows for the years ended December 31, 2009 and 2008, in
conformity with U.S. generally accepted accounting principles.
Goldman
Kurland Mohidin LLP
Encino,
California
November
3, 2010
F-1
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Balance
Sheets
|
September 30,
|
December 31,
|
December 31,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(unaudited)
|
||||||||||||
|
ASSETS
|
||||||||||||
|
CURRENT
ASSETS:
|
||||||||||||
|
Cash
& cash equivalents
|
$ | 1,001,213 | $ | 1,089,775 | $ | 740,109 | ||||||
|
Restricted
cash
|
56,542 | - | 461,286 | |||||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $221,542, $79,129
and $9,944
|
2,969,880 | 742,082 | 326,734 | |||||||||
|
Inventory,
net
|
3,424,052 | 5,622,810 | 2,497,466 | |||||||||
|
Other
receivables
|
718,845 | 475,128 | 875,364 | |||||||||
|
Due
from related party
|
50,289 | 96,226 | 172,433 | |||||||||
|
Advances
to suppliers
|
485,600 | 509,184 | 1,271,223 | |||||||||
|
Notes
receivable
|
386,226 | 827,388 | 14,670 | |||||||||
|
Prepaid
expenses
|
29,513 | 79,277 | 11,883 | |||||||||
|
Total
current assets
|
9,122,160 | 9,441,870 | 6,371,168 | |||||||||
|
Property
and equipment, net
|
396,483 | 330,785 | 249,084 | |||||||||
|
Retention
receivable-non current
|
568,164 | 379,608 | 200,539 | |||||||||
|
Long-term
deposit
|
598,351 | 586,360 | - | |||||||||
|
Other
assets
|
23,204 | 39,792 | 17,571 | |||||||||
|
TOTAL
ASSETS
|
$ | 10,708,362 | $ | 10,778,415 | $ | 6,838,362 | ||||||
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||||||
|
CURRENT
LIABILITIES:
|
||||||||||||
|
Accounts
payable
|
$ | 3,223,694 | $ | 2,758,750 | $ | 662,591 | ||||||
|
Other
payables
|
784,571 | 83,863 | 54,470 | |||||||||
|
Unearned
revenue
|
2,684,647 | 5,784,319 | 4,799,609 | |||||||||
|
Advances
from shareholder
|
- | 146,700 | 151,101 | |||||||||
|
Due
to related party
|
- | - | 35,660 | |||||||||
|
Short-term
loan
|
1,497,000 | - | - | |||||||||
|
Total
current liabilities
|
8,189,912 | 8,773,632 | 5,703,431 | |||||||||
|
Commitments
and contingencies
|
||||||||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||||||
|
Paid-in
capital
|
1,371,916 | 1,371,916 | 1,371,916 | |||||||||
|
Other
comprehensive income
|
128,304 | 81,199 | 80,649 | |||||||||
|
Statutory
reserve
|
173,238 | 75,307 | 14,183 | |||||||||
|
Retained
earnings (accumulated deficit)
|
844,992 | 476,361 | (331,817 | ) | ||||||||
|
Total
stockholders' equity
|
2,518,450 | 2,004,783 | 1,134,931 | |||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 10,708,362 | $ | 10,778,415 | $ | 6,838,362 | ||||||
The
accompanying notes are an integral part of these financial
statements.
F-2
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Statements
of Operations and Other Comprehensive Income (Loss)
|
Nine Months Ended September 30,
|
Years Ended December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Net
Revenue
|
$ | 9,877,237 | $ | 6,248,007 | $ | 9,947,893 | $ | 6,043,828 | ||||||||
|
Cost
of Revenue
|
7,724,279 | 5,046,372 | 7,817,162 | 5,269,971 | ||||||||||||
|
Gross
profit
|
2,152,958 | 1,201,635 | 2,130,731 | 773,857 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
|
174,661 | 245,359 | 382,671 | 290,617 | ||||||||||||
|
General
and administrative
|
673,279 | 520,479 | 732,735 | 564,814 | ||||||||||||
|
Total
operating expenses
|
847,940 | 765,838 | 1,115,406 | 855,431 | ||||||||||||
|
Income
(loss) from operations
|
1,305,018 | 435,797 | 1,015,325 | (81,574 | ) | |||||||||||
|
Non-operating
income (expense):
|
||||||||||||||||
|
Other
income (expense), net
|
93,627 | 83,543 | 83,086 | (2,083 | ) | |||||||||||
|
Interest
income
|
3,096 | 2,855 | 6,746 | 13,540 | ||||||||||||
|
Interest
expense
|
(95,992 | ) | (19,592 | ) | (31,223 | ) | (23,158 | ) | ||||||||
|
Total
non-operating income (expense)
|
731 | 66,806 | 58,609 | (11,701 | ) | |||||||||||
|
Income
(loss) before income tax
|
1,305,749 | 502,603 | 1,073,934 | (93,275 | ) | |||||||||||
|
Provision
for income tax
|
326,437 | 61,142 | 204,632 | - | ||||||||||||
|
Net
income (loss)
|
979,312 | 441,461 | 869,302 | (93,275 | ) | |||||||||||
|
Other
comprehensive income
|
||||||||||||||||
|
Foreign
currency translation gain
|
47,105 | 332 | 550 | 78,830 | ||||||||||||
|
Comprehensive
income (loss)
|
$ | 1,026,417 | $ | 441,793 | $ | 869,852 | $ | (14,445 | ) | |||||||
The
accompanying notes are an integral part of these financial
statements.
F-3
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Statement
of Stockholders' Equity
|
(Accumulated
|
||||||||||||||||||||
|
Other
|
Deficit)
|
Total
|
||||||||||||||||||
|
Paid in
|
Comprehensive
|
Statutory
|
Retained
|
Stockholders'
|
||||||||||||||||
|
Capital
|
Income
|
Reserve
|
Earnings
|
Equity
|
||||||||||||||||
|
Balance,
December 31, 2007
|
$ | 1,371,916 | $ | 1,819 | $ | 14,183 | $ | (238,542 | ) | $ | 1,149,376 | |||||||||
|
Foreign
currency translation gain
|
- | 78,830 | - | - | 78,830 | |||||||||||||||
|
Net
loss
|
- | - | - | (93,275 | ) | (93,275 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
1,371,916 | 80,649 | 14,183 | (331,817 | ) | 1,134,931 | ||||||||||||||
|
Foreign
currency translation gain
|
- | 550 | - | - | 550 | |||||||||||||||
|
Net
income
|
- | - | - | 869,302 | 869,302 | |||||||||||||||
|
Transfer
to statutory reserve
|
- | - | 61,124 | (61,124 | ) | - | ||||||||||||||
|
Balance,
December 31, 2009
|
1,371,916 | 81,199 | 75,307 | 476,361 | 2,004,783 | |||||||||||||||
|
Foreign
currency translation gain
|
- | 47,105 | - | - | 47,105 | |||||||||||||||
|
Dividend
|
- | - | - | (512,750 | ) | (512,750 | ) | |||||||||||||
|
Net
income
|
- | - | - | 979,312 | 979,312 | |||||||||||||||
|
Transfer
to statutory reserve
|
- | - | 97,931 | (97,931 | ) | - | ||||||||||||||
|
Balance,
September 30, 2010 (unuadited)
|
$ | 1,371,916 | $ | 128,304 | $ | 173,238 | $ | 844,992 | $ | 2,518,450 | ||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-4
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Statements
of Cash Flows
|
Nine Months Ended September 30,
|
Years Ended December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
|
Net
income (loss)
|
$ | 979,312 | $ | 441,461 | $ | 869,302 | $ | (93,275 | ) | |||||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||||||||||
|
Depreciation
|
63,793 | 53,712 | 74,521 | 21,328 | ||||||||||||
|
Loss
on disposal of assets
|
- | - | - | 1,125 | ||||||||||||
|
(Increase)
/ decrease in assets:
|
||||||||||||||||
|
Accounts
receivable
|
(2,174,193 | ) | 353,760 | (415,085 | ) | 1,181,718 | ||||||||||
|
Other
receivables
|
(229,937 | ) | 146,524 | 247,033 | 268,110 | |||||||||||
|
Advance
to suppliers
|
33,406 | 619,574 | 761,556 | (264,404 | ) | |||||||||||
|
Due
from related party
|
47,072 | 89,876 | 76,159 | (140,601 | ) | |||||||||||
|
Prepaid
expenses
|
50,492 | (31,304 | ) | (67,351 | ) | (11,676 | ) | |||||||||
|
Inventory
|
2,273,558 | (3,800,453 | ) | (3,123,361 | ) | (1,578,646 | ) | |||||||||
|
Notes
receivable
|
450,126 | (460,931 | ) | (812,203 | ) | (14,415 | ) | |||||||||
|
Accounts
receivable: non current
|
- | (347,053 | ) | 17,560 | (17,265 | ) | ||||||||||
|
Retention
receivable: non current
|
(177,653 | ) | (15,487 | ) | (178,956 | ) | (197,046 | ) | ||||||||
|
Long-term
deposit
|
- | - | (585,988 | ) | - | |||||||||||
|
Other
assets
|
17,100 | (39,763 | ) | (39,767 | ) | - | ||||||||||
|
Increase
/ (decrease) in current liabilities:
|
||||||||||||||||
|
Accounts
payable
|
401,433 | 1,679,298 | 2,094,830 | 236,450 | ||||||||||||
|
Unearned
revenue
|
(3,162,071 | ) | 1,726,729 | 984,085 | 1,790,409 | |||||||||||
|
Other
payables
|
733,173 | (310,280 | ) | 180,140 | (151,828 | ) | ||||||||||
|
Due
to related party
|
- | (35,633 | ) | (35,637 | ) | 35,039 | ||||||||||
|
Accrued
payroll
|
(46,321 | ) | (43,977 | ) | 2,184 | 43,244 | ||||||||||
|
Net
cash provided by (used in) operating activities
|
(740,710 | ) | 26,053 | 49,022 | 1,108,267 | |||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||||||
|
Change
in restricted cash
|
(55,560 | ) | 460,940 | 460,993 | - | |||||||||||
|
Payments
for property and equipment
|
(121,703 | ) | (135,467 | ) | (156,170 | ) | (212,057 | ) | ||||||||
|
Net
cash provided by (used in) investing activities
|
(177,263 | ) | 325,473 | 304,823 | (212,057 | ) | ||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
|
Repayment
of short-term note
|
(294,200 | ) | - | - | (435,344 | ) | ||||||||||
|
Proceeds
from short-term note
|
1,765,200 | - | - | - | ||||||||||||
|
Repayment
of advances from related party
|
(147,100 | ) | - | (4,398 | ) | - | ||||||||||
|
Dividends
paid
|
(512,750 | ) | - | - | - | |||||||||||
|
Net
cash provided by (used in) financing activities
|
811,150 | - | (4,398 | ) | (435,344 | ) | ||||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
18,261 | 263 | 219 | 25,907 | ||||||||||||
|
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
(88,562 | ) | 351,789 | 349,666 | 486,773 | |||||||||||
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
1,089,775 | 740,109 | 740,109 | 253,336 | ||||||||||||
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 1,001,213 | $ | 1,091,898 | $ | 1,089,775 | $ | 740,109 | ||||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||||||||||
|
Interest
paid
|
$ | 64,871 | $ | - | $ | - | $ | - | ||||||||
|
Income
taxes paid
|
$ | 211,728 | $ | 81,217 | $ | 96,836 | $ | 76,096 | ||||||||
F-5
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
Note
1 - Organization and Basis of Presentation
Organization and Line of
Business
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd. (the “Company”) was incorporated
in the Liaoning Province of the Peoples Republic of China (“PRC”) on December
18, 1992. The Company designs and manufactures clean technology
(“CleanTech”) industrial machinery used in coking, a critical but highly
pollutive step in crude steel production. The Company’s products are sold to
large and medium size steel mills and coke plants in China which use or are
planning to use the coke dry quenching (“CDQ”) method of coking, a more
environmentally friendly and energy conservative method of coking as compared to
the traditional coke wet quenching method.
The
Company currently designs and manufactures CDQ transport cars used in complete
CDQ systems and CleanTech coke oven machineries such as coke oven elevators,
smoke transfer machines, and coal cleaning machines. These CleanTech coke oven
machineries are used for maintaining coke ovens and reducing the amount of
pollution they emit. The Company also designs and manufactures core coke
oven products such as coke drums, coke drum carriers, wet quenching cars, coal
freight cars, coke guide cars, and coke pushers. These core coke oven products
are necessary components for all coke oven systems.
Basis of
Presentation
The
accompanying financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America (“US
GAAP”). The Company’s functional currency is the Chinese Yuan
Renminbi (RMB); however the accompanying financial statements were translated
and presented in United States Dollars (“$” or “USD”).
Foreign Currency
Translation
The
accounts of the Company were maintained in RMB and were translated into USD in
accordance with Accounting Standards Codification (“ASC”) Topic 830 “Foreign
Currency Matters,” with the RMB as the functional currency for the Company.
According to Topic 830, all assets and liabilities were translated at the
exchange rate on the balance sheet dates, stockholders’ equity is translated at
the historical rates and statement of operations items are translated at the
weighted average exchange rate for the period. The resulting translation
adjustments are reported under other comprehensive income in accordance with ASC
Topic 220, “Comprehensive Income.”
Interim Financial
Statements
The
unaudited financial information furnished herein reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management, are necessary to fairly state the Company’s financial position, the
results of its operations, and cash flows for the periods presented. The results
of operations for the nine months ended September 30, 2010 are not necessarily
indicative of the results for the year ending December 31, 2010. The
accompanying unaudited financial statements are presented in accordance with the
requirements for Form 10-Q. Accordingly, they do not include all the disclosures
normally required by US GAAP.
Note 2 – Summary of Significant
Accounting Policies
Use of
Estimates
The
preparation of 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 date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Areas that require estimates and assumptions include
valuation of accounts receivable and inventory, determination of useful lives of
property and equipment, estimation of certain liabilities and sales
returns.
F-6
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
Cash and Cash
Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Restricted
Cash
Restricted
cash consists of monies deposited by certain customers related to product
warranties which are to be held by the Company until the warranty period
expires.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of the reserve.
Inventories
Inventory
costs include materials, labor and overhead, stated at the lower of cost or
market. The Company compares the cost of inventories with the market value and
allowance is made for writing down the inventories to their market value, if
lower. Additionally, the Company determines cost of work in process and finished
products using the specific identification method based on actual costs
accumulated under a job-order cost system.
Advances to
Suppliers
The
Company makes advances to certain vendors to purchase its material. The advances
are interest free and unsecured.
Notes
Receivable
Notes
receivable consist of bank notes received from customers as payment on their
accounts receivable balance. The notes are guaranteed by a bank and bear no
interest. The notes are generally due within six months from the date of
issuance.
Retention
Receivable
The
Company had retention receivable from customers for product quality assurance of
$568,164, $379,608 and $200,539 as of September 30, 2010, December 31, 2009 and
2008, respectively. The retention rate generally was 10% of the sales price with
a term of 12 to 18 months, but no later than the termination of the warranty
period.
Property and
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
expensed as incurred; additions, renewals and betterments are capitalized. When
vehicles and equipment are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of vehicles and equipment
is provided using the straight-line method for substantially all assets with
estimated lives as follows:
|
Equipment
|
5
years
|
|
Vehicles
|
5
years
|
|
Office
equipment
|
5
years
|
F-7
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
Long-Lived
Assets
The
Company applies the provisions of ASC Topic 360, “Property, Plant, and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC 360 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair value of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the
cost of disposal. Based on its review, the Company believes that as of December
31, 2009 and 2008, and as of September 30, 2010 (unaudited) there was no
significant impairment of its long-lived assets.
Fair Value of Financial
Instruments
Certain
of the Company’s financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, advances to suppliers, accounts payable,
accrued liabilities and short-term loans and notes payable, have carrying
amounts that approximate their fair values due to their short
maturities.
ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported
in the consolidated balance sheets for receivables and current liabilities each
qualify as financial instruments and are a reasonable estimate of their fair
values because of the short period of time between the origination of such
instruments and their expected realization and their current market rate of
interest. The three levels of valuation hierarchy are defined as
follows:
|
|
·
|
Level 1 inputs to the valuation
methodology are quoted prices 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 asset or liability,
either directly or indirectly, for substantially the full term of the
financial instrument.
|
|
|
·
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
The Company did not
identify any assets and liabilities that are required to be presented on the
balance sheet at fair value.
Concentration of Credit
Risk
Cash
includes cash on hand and demand deposits in accounts maintained within China.
Certain financial instruments, which subject the Company to concentration
of credit risk, consist of cash. Balances at financial institutions within China
are not covered by insurance. The Company has not experienced any
losses in such accounts.
The
following table shows the customers and vendors which accounted for more than
10% of sales and purchases for the respective period:
F-8
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
|
Nine Months Ended September 30,
|
Years Ended December 31,
|
|||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
Customer
A
|
38 | % | 44 | % | 32 | % | 58 | % | ||||||||
|
Customer
B
|
28 | % | 37 | % | 28 | % | 10 | % | ||||||||
|
Customer
C
|
22 | % | - | - | - | |||||||||||
|
Vendor
A
|
- | - | - | 22 | % | |||||||||||
|
Vendor
B
|
- | - | - | 12 | % | |||||||||||
As of
September 30, 2010, Company A has 52.3% of accounts receivable and 6.6% of
retentions receivable; Company B has 26.8% of accounts receivable and 9.0% of
retentions receivable; Company C has 0.2% of accounts receivable and 21.1% of
retentions receivable. For all other periods presented, there was 0%
in accounts receivable and 0% in accounts payable for major customers and
suppliers.
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC and by the general state
of the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in
ASC Topic 605). Sales revenue, including the final 10% of the
purchase price, is recognized after delivery is complete, customer acceptance of
the product occurs and collectability is reasonably assured. Customer acceptance
occurs after the Company ships the product, assembles the product on customer’s
site, and customer agrees to the acceptance of the product. Payments
received before satisfaction of all relevant criteria for revenue recognition
are recorded as unearned revenue. The Company also provides a product warranty
to its customers, which is typically a negotiated term between 12 and 18 months
from the acceptance date.
The
Company’s warranty is provided to all customers and is not considered an
additional service; rather it is an integral part of the product sale. The
Company believes the existence of the product warranty in a sales contract does
not constitute a deliverable in the arrangement and thus there is no need to
apply FASB ASC TOPIC 605-25 separation and allocation model for a multiple
deliverable arrangement. FASB ASC Topic 450 specifically addresses the
accounting for standard warranties and neither SAB 104 nor FASB ASC TOPIC 605-25
supersedes FASB ASC TOPIC 450. During 2009, the Company introduced a
new product, coke oven elevator, for which it incurred additional one time
warranty expense. No material expenses were incurred for the coke
oven elevator in 2010.
Unearned
Revenue
Unearned
revenue consists of payments received from customers prior to customer
acceptance of the products. Generally the sales contracts with customers
provide that approximately 30% of the purchase price is due upon the placement
of an order, 30% when the manufacturing process is substantially complete, and
30% upon customer acceptance of the product. As a common practice in the
manufacturing business in China, payment of the final 10% of the purchase price
is due no later than the termination date of our warranty period, which is
typically a negotiated term between 12 and 18 months from the acceptance date.
The Company accounts for payments received from customers prior to customer
acceptance of the product as unearned revenue.
Warranties
The Company offers a warranty to its
customers on its products depending on the contract terms negotiated with the
customers. Warranty terms are typically between 12 to 18 months. The Company
records warranty costs as incurred, which are included in the Company's selling
expenses. Warranties expenses are associated with parts, labor, and travel
expenses associated with repairing products post sale and within the warranty
period. The majority of the warranty costs are incurred within a short period of
time after the final installation and acceptance of the Company’s products by
its customers. The Company’s warranty costs were $59,240 (unaudited), $101,151
(unaudited), $194,947 and $74,703 for the nine months ended September 30, 2010
and 2009 and for the years ended December 31, 2009 and 2008,
respectively.
F-9
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
Advertising
Costs
The
Company expenses advertising as incurred or, as appropriate, the first time the
advertising takes place. Advertising costs for the years ended
December 31, 2009 and 2008 and for the nine months ended September 30, 2010 and
2009 were not significant.
Research
and Development Costs
Research
and development costs are charged to operations when incurred and are included
in operating expenses. The Company’s research and development costs were
$162,185 (unaudited), $101,804 (unaudited), $140,700 and $88,604 for the nine
months ended September 30, 2010 and 2009 and for the years ended December 31,
2009 and 2008, respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.
Foreign Currency
Transactions and Comprehensive Income
US GAAP
requires that recognized revenue, expenses, gains and losses be included in net
income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation,
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive
income. Translation gains of $81,199, $80,649 and $128,304 at
December 31, 2009 and 2008 and September 30, 2010, respectively, are classified
as an item of other comprehensive income in the stockholders’ equity section of
the balance sheets.
Statement of Cash
Flows
In
accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
F-10
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
Segment
Reporting
ASC Topic
280 “Segment Reporting” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company. Management determined
that all of the Company’s product lines – coke oven elevators, smoke transfer
machines, coal cleaning machines, coke drums, coke drum carriers, wet quenching
cars, coal freight cars, coke guide cars, and coke pushers – constituted a
single reportable segment in accordance with ASC 280. The Company currently
operates exclusively in one business: the design and manufacture of customized
and motorized equipments used in the coking and steelmaking process. We
manufacture all of our products by welding together large steel plates into
various components. We also integrate motors and electronic controls into all of
our products. The components are shipped to the job sites and subsequently field
assembled. Our customers are some of the largest coking and steelmakers in
China. Individual customers have in the past bought our entire suite of
products. We do not have customers outside of these two
industries. All of our products are sold by our in-house sales and
marketing personnel and are shipped via outsourced third party logistic firms.
The design and manufacturing processes for each of our products make use of the
same pool of engineering and production workers.
Recent
Pronouncements
In
October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU
2009-15") regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. This
ASU requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or
other financing, the shares issued shall be measured at fair value and be
recognized as an issuance cost, with an offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share
calculation. This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The adoption
of this ASU did not have a significant impact on the Company’s financial
statements.
On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting. The adoption of this ASU did not have a material impact on
the Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-17 Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. This ASU is effective for fiscal years beginning on or
after November 15, 2009, and interim periods within those fiscal years. The
adoption of this ASU did not have a material impact on the Company’s financial
statements.
In March
2010, FASB issued ASU No. 2010-10 Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s financial statements.
F-11
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
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 U.S. 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 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 was 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 financial statements.
In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. This Update provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company does not expect the adoption of ASU 2010-17 to have a
significant impact on its financial statements.
Note
3 – Inventory
Inventory
consists of the following at September 30, 2010, December 31, 2009 and
2008:
|
September 30,
|
December 31,
|
December 31,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Raw
Materials
|
$ | 386,586 | $ | 685,275 | $ | 394,001 | ||||||
|
Work
in Process
|
3,037,466 | 4,937,535 | 2,160,395 | |||||||||
|
Inventory
Reserve
|
- | - | (56,930 | ) | ||||||||
|
|
$ | 3,424,052 | $ | 5,622,810 | $ | 2,497,466 | ||||||
Note
4 – Property and Equipment
Property
and equipment consist of the following at September 30, 2010 (unaudited),
December 31, 2009 and 2008:
F-12
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
|
September 30,
|
December 31,
|
December 31,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Equipment
|
$ | 63,067 | $ | 41,518 | $ | 17,031 | ||||||
|
Vehicles
|
421,619 | 325,150 | 237,141 | |||||||||
|
Office
Equipment
|
129,780 | 114,112 | 70,339 | |||||||||
| 614,466 | 480,780 | 324,511 | ||||||||||
|
Less:
Accumulated Depreciation
|
(217,983 | ) | (149,995 | ) | (75,427 | ) | ||||||
|
Property
and equipment, net
|
$ | 396,483 | $ | 330,785 | $ | 249,084 | ||||||
The
Company recorded depreciation of $63,793 and $53,712 for the nine months ended
September 30, 2010 and 2009, respectively, and $74,521 and $21,328 for the years
ended December 31, 2009 and 2008, respectively.
Note
5 - Employee Welfare Plan
The total
expense for the employee common welfare was $10,653 and $3,612 for the nine
months ended September 30, 2010 and 2009, respectively, and $6,879 and $7,551
for the years ended December 31, 2009 and 2008. The Chinese
government abolished the 14% welfare plan policy during 2007. The
Company is not required to establish welfare and common welfare
reserves.
Note
6 - Statutory Reserve and Development Fund
As
stipulated by the Company Law of the PRC, net income after tax can only be
distributed as dividends after appropriation has been made for the
following:
|
|
i.
|
Making up cumulative prior years’
losses, if any;
|
|
|
ii.
|
Allocations to the “Statutory
surplus reserve” of at least 10% of income after tax, as determined under
PRC accounting rules and regulations, until the fund amounts to 50% of the
Company’s registered
capital;
|
|
|
iii.
|
Allocations of 5-10% of income
after tax, as determined under PRC accounting rules and regulations, to
the Company’s “Statutory common welfare fund” (“SCWF”), which is
established for the purpose of providing employee facilities and other
collective benefits to the Company’s employees;
and
|
|
|
iv.
|
Allocations to the discretionary
surplus reserve, if approved in the stockholders’ general
meeting. The Company allocates 5% of income after tax as
development fund. The fund is for enlarging its business and increasing
capital.
|
Pursuant
to the new Corporate Law effective on January 1, 2006, there is now only one
"Statutory surplus reserve" requirement. The reserve is 10 percent of income
after tax, not to exceed 50 percent of registered capital.
The
Company appropriated $61,124, $0 and $97,931 as a reserve for the statutory
surplus reserve for the years ended December 31, 2009 and 2008, and for the nine
months ended September 30, 2010, respectively.
Note 7 - Taxes
Local PRC
Income Tax
Pursuant
to the tax laws of China, general enterprises are subject to income tax at an
effective rate of 25%. A reconciliation of tax at US federal statutory rate to
the provision for income tax recorded in the financial statements for years
ended December 31, 2009 and 2008 and for the nine months ended September 30,
2010 and 2009 is as follows:
F-13
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
|
September 30,
|
September 30,
|
December 31,
|
December 31,
|
|||||||||||||
|
2010
|
2009
|
2009
|
2008
|
|||||||||||||
|
Tax
provision at statutory rate
|
34 | % | 34 | % | 34 | % | 34 | % | ||||||||
|
Foreign
tax rate difference
|
-9 | % | -9 | % | -9 | % | -9 | % | ||||||||
|
Utilization
of NOL
|
- | -13 | % | -6 | % | 0 | % | |||||||||
|
Current
operating losses not utilized
|
- | - | - | -25 | % | |||||||||||
| 25 | % | 12 | % | 19 | % | 0 | % | |||||||||
Note
8 - Related Party Transactions
Due from related
party
Due from
related party is due on demand from a company that is 40% owned by the son of a
shareholder of the Company and was $50,289, $96,226 and $172,433 at September
30, 2010 and December 31, 2009 and 2008, respectively. All amounts due to
Dalian from Dalian Yujiu have been paid as of November 2, 2010.
Advances from
shareholder
Advances
from shareholder were advanced to the Company for working
capital. The advances do not bear interest and are payable upon
demand. Advances from shareholder were $0, $146,700 and $151,101 at
September 30, 2010 and December 31, 2009 and 2008, respectively.
Due to related
party
Due to
related party represents amounts due to a company whose CEO is also the CEO of
the Company and was $0, $0 and $35,660 at September 30, 2010 and December 31,
2009 and 2008, respectively.
Note
9 – Short-term Loan
On
January 12, 2010, the Company received a short-term note of RMB 12,000,000
(approximately $1,765,200) from Shanghai Pudong Development Bank. The
note is due January 11, 2011 and bears interest at 5.841%. On August
19, 2010, the Company repaid RMB 2,000,000 ($294,200). The loan
is guaranteed by Dalian Union-Chuangye Bonding Company (“Dalian
Union”). To guarantee the loan, Dalian Union required (1) the
Company pay an RMB 1,200,000 (approximately $180,000) deposit, (2) pledge 17
private homes belonging to the Company’s staff, (3) Dalian's CEO and his
wife pledge their ownership interests in Dalian, (4) Dalian’s CEO and his
wife guarantee the debt with joint liability and (5) a third
party guarantees the debt as a joint liability
counter-guarantor. The pledge of Dalian's CEO and his
wife's ownership interests was subsequently canceled on September 10, 2010.
The balance outstanding at September 30, 2010 was
$1,497,000. Interest expense on the short-term note for the nine
months ended September 30, 2010 was $65,000
F-14
Dalian
Heavy Mining Equipment Manufacturing Co., Ltd.
Notes
to Financial Statements
December
31, 2009 and 2008
And
September 30, 2010 and 2009 (unaudited)
Note 10 – Commitments and
Contingencies
The
Company has entered into non-cancelable leases for four buildings in Liaoning
Province, China which include the Company’s office headquarters and three
separate manufacturing facilities. The leases expire on February 1,
2011, August 10, 2012, January 1, 2013, and October 31, 2013. The
Company recorded rent expense of $121,093 and $121,965 for the for the nine
months ended September 30, 2010 and 2009, respectively, and $164,933 and $83,936
for the years ended December 31, 2009 and 2008, respectively.
The
future minimum lease payments under these leases are as follows:
|
Years Ending
|
||||
|
December 31,
|
Amount
|
|||
|
2010
|
$
|
193,750
|
||
|
2011
|
212,132
|
|||
|
2012
|
172,059
|
|||
|
2013
|
56,373
|
|||
|
Total
|
$
|
634,314
|
||
F-15