Attached files
file | filename |
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EX-31.1 - Xinde Technology Co | v222164_ex31-1.htm |
EX-32.1 - Xinde Technology Co | v222164_ex32-1.htm |
EX-32.2 - Xinde Technology Co | v222164_ex32-2.htm |
EX-31.2 - Xinde Technology Co | v222164_ex31-2.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 March 31, 2011
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to __________
COMMISSION FILE NUMBER: 000-53672
XINDE TECHNOLOGY COMPANY
(Exact name of registrant as specified in its charter)
Nevada
|
20-812712
|
|
(State or other jurisdiction of
incorporation or organization)
|
(IRS Employer
Identification No.)
|
Number 363, Sheng Li West Street, Weifang, Shandong Province,
The People’s Republic of China
(Address of principal executive offices)
(011) 86-536-8322068
(Registrant’s Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer (Check one):
Large Accelerated Filer o
|
Accelerated Filer o
|
Non-Accelerated Filer o
|
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 o No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 10, 2011, the registrant had 240,000,000 shares of common stock, par value $0.001 per share, issued and outstanding.
TABLE OF CONTENTS
PAGE
|
||
PART I FINANCIAL INFORMATION
|
1
|
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ITEM 1. FINANCIAL STATEMENTS
|
1
|
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
2
|
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
20
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ITEM 4. CONTROLS AND PROCEDURES
|
20
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PART II OTHER INFORMATION
|
21
|
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ITEM 1. LEGAL PROCEEDINGS
|
21
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ITEM 1A. RISK FACTORS
|
21
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
21
|
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
|
21
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ITEM 4. (REMOVED AND RESERVED)
|
21
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ITEM 5. OTHER INFORMATION
|
21
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ITEM 6. EXHIBITS
|
22
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SIGNATURES
|
24
|
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EXHIBIT 31.1
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EXHIBIT 31.2
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EXHIBIT 32.1
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EXHIBIT 32.2
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i
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONTENTS
PAGES
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F-1-F-2
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CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2011 AND JUNE 30, 2010 (UNAUDITED)
|
||
PAGES
|
F-3
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
|
||
PAGES
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F-4-F-5
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
|
||
PAGES
|
F-6-F-25
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
|
1
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
|
||||||||
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
CURRENT ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 3,166,140 | $ | 3,399,360 | ||||
Accounts receivable, net of allowance for doubtful accounts of $204,910 and
$793,630 at March 31, 2011 and June 30, 2010, respectively
|
69,506,023 | 60,473,007 | ||||||
Inventories
|
21,210,672 | 5,584,317 | ||||||
Notes receivable, including bank acceptance notes
|
3,912,029 | 628,133 | ||||||
Prepayments for goods
|
5,705,911 | 3,822,120 | ||||||
Prepaid expenses and other receivables
|
63,494 | 26,404 | ||||||
Due from employees
|
104,342 | 131,400 | ||||||
Deferred taxes
|
- | 47,448 | ||||||
Total Current Assets
|
103,668,611 | 74,112,189 | ||||||
LONG-TERM ASSETS
|
||||||||
Plant and equipment, net
|
3,081,360 | 3,043,955 | ||||||
Land use rights, net
|
931,143 | 948,504 | ||||||
Construction in progress
|
750,451 | 685,222 | ||||||
Deposit for land use right
|
1,654,203 | 373,821 | ||||||
Deferred taxes
|
148,833 | 129,049 | ||||||
Total Long-Term Assets
|
6,565,990 | 5,180,551 | ||||||
TOTAL ASSETS
|
$ | 110,234,601 | $ | 79,292,740 |
See accompanying notes to condensed consolidated financial statements
F-1
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
CURRENT LIABILITIES
|
||||||||
Accounts payable
|
$ | 5,632,628 | $ | 4,850,579 | ||||
Short-term bank loans
|
1,526,694 | 2,878,712 | ||||||
Customer deposits
|
521,259 | 497,206 | ||||||
Notes payable, including related parties
|
1,614,590 | 1,014,987 | ||||||
Income tax payable
|
7,181,131 | 4,990,163 | ||||||
Other payables
|
1,196,398 | 1,041,766 | ||||||
Value added tax payable
|
18,080,924 | 6,931,841 | ||||||
Due to employees
|
32,332 | 98,550 | ||||||
Due to related parties
|
157,745 | 413,136 | ||||||
Accrued expenses
|
1,143,161 | 659,569 | ||||||
Deferred taxes
|
383,119 | - | ||||||
Total Current Liabilities
|
37,469,981 | 23,376,509 | ||||||
LONG-TERM LIABILITIES
|
||||||||
Notes payable to related parties
|
241,067 | 326,298 | ||||||
Total Long-Term Liabilities
|
241,067 | 326,298 | ||||||
TOTAL LIABILITIES
|
37,711,048 | 23,702,807 | ||||||
COMMITMENT AND CONTINGENCIES
|
||||||||
SHAREHOLDERS’ EQUITY
|
||||||||
Common stock, $0.001 par value; 350,000,000 shares authorized; 240,000,000 shares
issued and outstanding at March 31, 2011 and June 30, 2010, respectively
|
240,000 | 240,000 | ||||||
Additional paid-in capital
|
892,334 | 892,334 | ||||||
Retained earnings (the restricted portion is $204,069 at March 31, 2011 and June 30, 2010)
|
64,648,734 | 50,131,203 | ||||||
Accumulated other comprehensive income
|
6,742,485 | 4,326,396 | ||||||
TOTAL SHAREHOLDERS’ EQUITY
|
72,523,553 | 55,589,933 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 110,234,601 | $ | 79,292,740 |
See accompanying notes to condensed consolidated financial statements
F-2
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
March 31,
2011
|
March 31,
2010
|
March 31,
2011
|
March 31,
2010
|
|||||||||||||
REVENUES, NET
|
$ | 27,596,387 | $ | 26,836,259 | $ | 90,848,899 | $ | 100,195,028 | ||||||||
COST OF GOODS SOLD
|
(21,723,469 | ) | (21,574,659 | ) | (73,913,022 | ) | (82,232,475 | ) | ||||||||
GROSS PROFIT
|
5,872,918 | 5,261,600 | 16,935,877 | 17,962,553 | ||||||||||||
Selling and marketing
|
(693,989 | ) | (746,566 | ) | (2,445,004 | ) | (1,954,398 | ) | ||||||||
General and administrative
|
(855,401 | ) | (688,419 | ) | (1,619,965 | ) | (1,250,533 | ) | ||||||||
Bad debt recoveries
|
137,324 | - | 800,298 | 74,915 | ||||||||||||
INCOME FROM OPERATIONS
|
4,460,852 | 3,826,615 | 13,671,206 | 14,832,537 | ||||||||||||
Interest expense, net
|
(97,592 | ) | (78,009 | ) | (302,091 | ) | (254,920 | ) | ||||||||
Other income, net
|
4,587 | 15,510 | 244,868 | 14,718 | ||||||||||||
Refunded value added tax
|
- | - | 3,289,036 | - | ||||||||||||
INCOME BEFORE INCOME TAXES
|
4,367,847 | 3,764,116 | 16,903,019 | 14,592,335 | ||||||||||||
INCOME TAXES
|
(736,813 | ) | (486,401 | ) | (2,385,488 | ) | (2,175,159 | ) | ||||||||
NET INCOME
|
3,631,034 | 3,277,715 | 14,517,531 | 12,417,176 | ||||||||||||
OTHER COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign currency translation gain
|
596,072 | 8,380 | 2,416,089 | 36,429 | ||||||||||||
COMPREHENSIVE INCOME
|
$ | 4,227,106 | $ | 3,286,095 | $ | 16,933,620 | $ | 12,453,605 | ||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
240,000,000 | 240,000,000 | 240,000,000 | 192,700,730 | ||||||||||||
NET INCOME PER SHARE, BASIC AND DILUTED
|
$ | 0.02 | $ | 0.01 | $ | 0.06 | $ | 0.06 |
See accompanying notes to the condensed consolidated financial statements
F-3
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
|
||||||||
March 31,
2011
|
March 31,
2010
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income
|
$ | 14,517,531 | $ | 12,417,176 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
217,714 | 192,231 | ||||||
Provision for doubtful accounts
|
190,581 | 121,965 | ||||||
Refunded value added tax
|
(3,289,036 | ) | - | |||||
Deferred taxes
|
410,783 | (3,865 | ) | |||||
Net (gain) loss on settlement of accounts receivable and accounts payable for fixed assets and inventories
|
(7,661 | ) | 61,638 | |||||
Changes in operating assets and liabilities, net of effects of acquisition:
|
||||||||
(Increase) Decrease In:
|
||||||||
Accounts receivable
|
(9,244,595 | ) | (1,568,755 | ) | ||||
Inventories
|
(15,626,355 | ) | (10,532,965 | ) | ||||
Prepayments for goods
|
(1,883,791 | ) | 104,321 | |||||
Prepaid expenses and other receivables
|
(37,092 | ) | (3,316 | ) | ||||
Due from employees
|
27,058 | (131,637 | ) | |||||
Due from related parties
|
- | 9,991 | ||||||
Increase (Decrease) In:
|
||||||||
Accounts payable
|
797,062 | 330,994 | ||||||
Value added tax payable
|
14,438,119 | 12,156,870 | ||||||
Other payables
|
154,632 | (712,127 | ) | |||||
Taxes payable
|
2,190,968 | 2,171,594 | ||||||
Customer deposits
|
24,053 | (80,740 | ) | |||||
Due to employees
|
(66,218 | ) | (427,440 | ) | ||||
Due to related parties
|
(255,391 | ) | (341,115 | ) | ||||
Accrued expenses
|
483,592 | 567,388 | ||||||
Net cash provided by operating activities
|
3,041,954 | 14,332,208 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases of plant and equipment
|
(126,356 | ) | (116,636 | ) | ||||
Purchases of construction in progress
|
(37,551 | ) | (682,616 | ) | ||||
Reverse merger, net of cash acquired
|
- | 2,109 | ||||||
Repayment of notes receivable
|
64,613,830 | 66,817,706 | ||||||
Issuances of notes receivable
|
(67,818,675 | ) | (81,282,298 | ) | ||||
Net cash used in investing activities
|
(3,368,752 | ) | (15,261,735 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds from short-term loans
|
1,201,021 | 3,216,172 | ||||||
Repayments of short-term loans
|
(2,642,246 | ) | (2,336,110 | ) | ||||
Proceeds from notes payable
|
782,934 | (1,498,655 | ) | |||||
Repayments of notes payable
|
(315,278 | ) | 1,695,772 | |||||
Repayments of long-term debt
|
(13,599 | ) | (126,999 | ) | ||||
Dividend paid
|
- | (6,819 | ) | |||||
Net cash (used in) provided by financing activities
|
$ | (987,168 | ) | $ | 943,361 |
See accompanying notes to condensed consolidated financial statements
F-4
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
|
||||||||
March 31,
2011
|
March 31,
2010
|
|||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
$ | (1,313,966 | ) | $ | 13,834 | |||
Effect of exchange rate changes on cash
|
1,080,746 | 59,014 | ||||||
Cash and cash equivalents at beginning of period
|
3,399,360 | 127,576 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 3,166,140 | 200,424 | |||||
SUPPLEMENTARY CASH FLOW INFORMATION:
|
||||||||
Income taxes paid
|
$ | 13,863 | $ | 9,712 | ||||
Interest paid
|
$ | 185,982 | $ | 194,876 |
SUPPLEMENTAL NON-CASH DISCLOSURES:
1. During the nine months ended March 31, 2011, accounts payable with an aggregate carrying amount of $15,013 was settled by two fixed assets with an aggregate fair value of $7,352, resulting in a gain of $7,661.
2. During the nine months ended March 31, 2010, accounts receivable with a carrying amount of $523,359 was settled by a fixed asset with a fair value of $95,023 and inventories with a fair value of $359,852, resulting in a loss of $68,484.
3. During the nine months ended March 31, 2010, accounts payable with a carrying amount of $36,547 was settled by a fixed asset with a fair value of $29,701, resulting in a gain of $6,846.
4. During the nine months ended March 31, 2010, $297,799 was transferred from construction in progress to plant and equipment, respectively.
See accompanying notes to condensed consolidated financial statements
F-5
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Wasatch Food Services, Inc., (“Wasatch”) was incorporated under the laws of the State of Nevada on December 20, 2006. On April 22, 2010, Wasatch Food Services, Inc. changed its name to Xinde Technology Company (“Xinde”). The principal activities of Xinde and subsidiaries (the “Company”) are the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units in the People’s Republic of China (the “PRC”) and overseas markets.
During April 2011, the Company (i) effected a 4-for-1 forward stock split of the Company's common stock; (ii) increased the number of authorized shares of common stock from 150,000,000 shares to 350,000,000 shares. As a result, all the amounts in the accompanying condensed consolidated financial statements as of March 31, 2011 and June 30, 2010 and for the three and nine months ended March 31, 2011 and 2010 have been restated to give effect to the 4-for-1 forward stock split.
Details of the Company as of March 31, 2011 are as follows:
Name
|
Place and Date
of
Establishment/
Incorporation
|
Relationships
|
Principal Activities
|
|||
Jolly Promise Ltd. (“JPL”)
|
British Virgin Island
July 2, 2008
|
Wholly-owned subsidiary of Xinde
|
Investment holding company
|
|||
H.K. Sindhi Fuel Injection Co., Ltd (“HKSIND”)
|
Hong Kong, PRC,
June 7, 2004
|
Wholly-owned subsidiary of JPL
|
Investment holding company
|
F-6
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Name
|
Place and Date
of
Establishment/
Incorporation
|
Relationship
|
Principal Activities
|
|||
Weifang Huajie Fuel Injection Co., Ltd.
(“Huajie”)
|
Shandong, PRC
October 24, 2009
|
Wholly-owned subsidiary of HKSIND
|
Investment holding company
|
|||
Weifang Xinde Fuel Injection System Co., Ltd.
(“Weifang Xinde”)
|
Shandong, PRC
October 29, 2007
|
Wholly-owned subsidiary of Huajie
|
Investment holding company
|
|||
Weifang Hengyuan Oil Pump & Oil Fitting Co., Ltd.
("Hengyuan")
|
Shandong, PRC,
December 21, 2001
|
Wholly-owned subsidiary of Weifang Xinde
|
Design, development, manufacture, and commercializing of fuel injection pump, diesel fuel injection systems and injectors
|
|||
Weifang Jinma Diesel Engine Co., Ltd. (“Jinma”)
|
Shandong, PRC
December 19, 2003
|
Wholly-owned subsidiary of Weifang Xinde
|
Manufacture and sale of multi-cylinder diesel engine and small generating units
|
|||
Weifang Huaxin Diesel Engine Co., Ltd. (“Huaxin”)
|
Shandong, PRC
October 20, 2003
|
Wholly-owned subsidiary of Weifang Xinde
|
Manufacture and sale of multi-cylinder diesel engine and small generating units
|
Inter-company accounts and transactions have been eliminated in consolidation.
F-7
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 2 – BASIS OF PRESENTATION
The Company’s unaudited condensed consolidated financial statements as of March 31, 2011 and for the three and nine months ended March 31, 2011 and 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of June 30, 2010 was derived from the audited consolidated financial statements included in Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with that Form 10-K.
NOTE 3 – USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates.
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
|
Economic and Political Risks
|
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
F-8
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b)
|
Fair Value of Financial Instruments
|
ASC 820-10, Fair Value Measurements, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
These tiers include:
• Level 1—defined as observable inputs such as quoted prices in active markets;
• Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
• Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 as of March 31, 2011 are as follows:
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||
Carrying
Value as of
March 31,
2011
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Bank acceptance notes
|
$ | 3,580,730 | $ | 3,580,730 | $ | - | $ | - | ||||||||
Long-term notes payable
|
$ | 241,067 | - | $ | 241,067 | $ | - |
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, notes receivable, prepayments for goods, short-term bank loans, accounts payable, customer deposits, short-term notes payable, due to employee, due to related parties and other payables, approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term notes payable is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term notes payable was not significantly different from the carrying value at March 31, 2011.
(c)
|
Cash and Cash Equivalents
|
For financial reporting purposes, the Company considers highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
F-9
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d)
|
Inventories
|
Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the weighted average basis and comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.
(e)
|
Prepayments
|
Prepayments represent cash paid in advance to suppliers for purchases of raw materials.
(f)
|
Plant and Equipment
|
Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated useful lives are as follows:
Buildings
|
30 years
|
Machinery
|
10 years
|
Motor vehicles
|
5 years
|
Office equipment
|
5 years
|
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.
(g)
|
Construction in Progress
|
Construction in progress represents direct costs of construction or the acquisition cost of buildings or machinery and design fees. 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 the assets are completed and ready for their intended use.
(h)
|
Land Use Rights
|
According to the laws of China, land in the PRC is owned by the government and cannot be sold to an individual or company. However, the government grants the user a “land use right” to use the land. The land use right granted to the Company is being amortized using the straight-line method over the lease term of fifty years.
F-10
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i)
|
Impairment of Long-Term Assets
|
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in ASC 360-10. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. There was no impairment for the nine months ended March 31, 2011 and 2010.
(j)
|
Revenue Recognition
|
Revenue represents the invoiced value of goods sold, recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:
-Persuasive evidence of an arrangement exists,
-Delivery has occurred or services have been rendered,
-The seller's price to the buyer is fixed or determinable, and
-Collectability is reasonably assured.
The majority of the Company’s revenue results from sales contracts with distributors and revenue are recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of collectability.
The Company offers warranties on its products for periods between six and twelve months after the sale. The Company estimates the warranty reserves based on historical records and identical or similar types on the market. Warranty expenses related to product sales are charged to the condensed consolidated statements of income and comprehensive income in the period in which sales is recognized. During the nine months ended March 31, 2011 and 2010, warranty expense was $388,994 and $112,435, respectively, and is included in cost of goods sold in the accompanying condensed consolidated statements of income and comprehensive income.
(k)
|
Retirement Benefits
|
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to expense as incurred. The retirement benefits expense for the nine months ended March 31, 2011 and 2010 are $42,729 and $21,372, respectively. All the retirement benefits expenses are included in general and administrative expenses.
F-11
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l)
|
Foreign Currency Translation
|
The accompanying condensed consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the condensed consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the quarter.
March 31,
2011
|
June 30,
2010
|
March 31,
2010
|
||||||||||
Period ended RMB: US$ exchange rate
|
6.5501 | 6.8086 | - | |||||||||
Average RMB: US$ exchange rate for three months ended
|
6.5713 | - | 6.8360 | |||||||||
Average RMB: US$ exchange rate for nine months ended
|
6.6610 | - | 6.8377 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(m)
|
Comprehensive Income
|
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain.
(n)
|
Earnings Per Share
|
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the nine months ended March 31, 2011 and 2010.
(o)
|
Segment and Geographic Reporting
|
The Company operates in one business segment, the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units mainly in the PRC. The sales of the Company outside of the PRC were insignificant for the nine months ended March 31, 2011 and 2010.
F-12
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(p)
|
Recent Accounting Pronouncements
|
There are no new accounting pronouncements that have not been adopted by the Company that would have a material effect on the condensed consolidated financial statements.
NOTE 5 – CONCENTRATIONS
(a) Customers
No customer accounted for more than 5% of total revenues or accounts receivable for the periods reported.
(b) Suppliers
The Company’s major suppliers accounted for the following percentages of total purchases and accounts payable as follows:
Purchases
|
||||||||||||||||
Nine Months Ended
|
Accounts Payable
|
|||||||||||||||
March 31,
|
March 31,
|
June 30,
|
||||||||||||||
Major Suppliers
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
Company A
|
11.2 | % | 0.2 | % | 7.8 | % | 1.7 | % | ||||||||
Company B
|
5.7 | % | 1.0 | % | 4.6 | % | 1.4 | % |
NOTE 6 – INVENTORIES
Inventories are summarized as follows:
March 31,
2011
|
June 30,
2010
|
|||||||
Raw materials
|
$ | 13,007,343 | $ | 2,798,967 | ||||
Work-in-progress
|
721,733 | 889,937 | ||||||
Finished goods
|
7,481,596 | 1,895,413 | ||||||
Total inventories
|
$ | 21,210,672 | $ | 5,584,317 |
F-13
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 7 – NOTES RECEIVABLE
Notes receivable consist of the following:
March 31,
2011
|
June 30,
2010
|
|||||||
Notes receivable from unrelated individuals:
|
||||||||
Due December 24, 2010, interest at 10% per annum
|
$ | - | $ | 2,857 | ||||
Due December 24, 2010, interest at 10% per annum
|
- | 22,031 | ||||||
Due May 16, 2011, interest at 6% per annum (Repaid in advance)
|
- | 114,560 | ||||||
Due May 1, 2011, interest free (Settled on its due date)
|
305,339 | - | ||||||
Due December 24, 2011, interest at 10% per annum
|
3,059 | - | ||||||
Due December 24, 2011, interest at 10% per annum
|
22,901 | - | ||||||
Subtotal
|
$ | 331,299 | $ | 139,448 | ||||
Bank acceptance notes (aggregated by month of maturity):
|
||||||||
Due December, 2010 (Settled on its due date)
|
- | 29,375 | ||||||
Due October, 2010 (Settled on its due date)
|
- | 29,375 | ||||||
Due November, 2010 (Settled on its due date)
|
- | 205,220 | ||||||
Due December, 2010 (Settled on its due date)
|
- | 224,715 | ||||||
Due May, 2011
|
15,267 | - | ||||||
Due June, 2011
|
1,022,885 | - | ||||||
Due July, 2011
|
816,781 | - | ||||||
Due August, 2011
|
839,682 | - | ||||||
Due September, 2011
|
886,115 | - | ||||||
Subtotal
|
3,580,730 | 488,685 | ||||||
Total
|
$ | 3,912,029 | $ | 628,133 |
Notes receivable from unrelated individuals are unsecured.
NOTE 8 – DUE FROM/TO RELATED PARTIES
(I)
|
Due To Related Parties
|
March 31,
2011
|
June 30,
2010
|
|||||||||
Jin Xin
|
(a)
|
$ | 38,319 | $ | - | |||||
Liu Dianjun
|
(b)
|
75,017 | 342,994 | |||||||
Li Zengshan
|
(c)
|
44,409 | 23,612 | |||||||
Zhang Qixiu
|
(d)
|
- | 32,312 | |||||||
Jin Wei
|
(e)
|
- | 14,218 | |||||||
Total due to related parties
|
$ | 157,745 | $ | 413,136 |
F-14
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 8 - DUE FROM/TO RELATED PARTIES (CONTINUED)
(II)
|
Due From Employees
|
March 31,
2011
|
June 30,
2010
|
|||||||||
Current
|
$ | 104,342 | $ | 131,400 | ||||||
Total due from employees
|
(f)
|
$ | 104,342 | $ | 131,400 |
(III)
|
Due To Employees
|
March 31,
2011
|
June 30,
2010
|
|||||||||
Current
|
$ | 32,332 | $ | 98,550 | ||||||
Total due to employees
|
(g)
|
$ | 32,332 | $ | 98,550 |
(a)
|
Jin Xin is an officer of the Company and the chairman of Jinma, a subsidiary of the Company. The payable balance represents business related expenses paid by Jinxin on behalf of the Company, which is unsecured, interest-free and has no fixed repayment term.
|
(b)
|
Liu Dianjun is an officer of the Company and the chairman of Hengyuan, a subsidiary of the Company. The balances represent amounts advanced from Liu Dianjun, which are interest-free, unsecured and have no fixed repayment terms.
|
(c)
|
Li Zengshan is an officer of the Company and the chairman of Huaxin, a subsidiary of the Company. The balances represent business related expenses paid by Li Zengshan on behalf of the Company. The balances are interest-free, unsecured and have no fixed repayment terms.
|
(d)
|
Zhang Qixiu is the mother of Jin Xin, also see (a). The balance represented business related expenses paid by Zhang Qixiu on behalf of the Company, which was interest-free, unsecured and had no fixed repayment term.
|
(e)
|
Jin Wei is the brother of Jin Xin, also see (a). The balance represented an advance from Jin Wei, which was interest-free, unsecured and had no fixed repayment term.
|
(f)
|
Due from employees are interest-free, unsecured and have no fixed repayment terms. The Company provides these advances for business-related purposes only, including for the purchases of raw materials and business-related travel in the ordinary course of business.
|
(g)
|
Due to employees are interest-free, unsecured and have no fixed repayment terms. The amounts primarily represent business and traveling related expenses paid by sales personnel on behalf of the Company.
|
F-15
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 9 – LAND USE RIGHTS, NET
Land use rights consist of the following:
March 31,
2011
|
June 30,
2010
|
|||||||
Cost of land use rights
|
$ | 1,087,939 | $ | 1,087,939 | ||||
Less: Accumulated amortization
|
(156,796 | ) | (139,435 | ) | ||||
Land use rights, net
|
$ | 931,143 | $ | 948,504 |
Amortization expense for the nine months ended March 31, 2011 and 2010 was $17,361 and $16,906, respectively.
Amortization expense for the next five years and thereafter is as follows:
2011 (three months)
|
$ | 5,787 | ||
2012
|
23,149 | |||
2013
|
23,149 | |||
2014
|
23,149 | |||
2015
|
23,149 | |||
Thereafter
|
832,760 | |||
Total
|
$ | 931,143 |
Two land use rights with an aggregate net book value of $52,702 and $51,880 at March 31, 2011 and June 30, 2010, respectively, were registered in the names of two members of management of the Company. The Company’s local legal counsel has confirmed the ownership of these two land use rights by the Company. The Company estimates that the application for the transfer of the certificates of these two land use rights will be completed by the end of June 2011. One of the land use rights has been pledged as collateral for bank loans borrowed by Li Zengshan (officer of the Company) in the amount of $329,654. Also see Note 15.
At March 31, 2011 and June 30, 2010, the net book value of land use rights pledged as collateral for short-term bank loans was $305,339 and $514,662, respectively. Also see Note 11.
F-16
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 10 – PLANT AND EQUIPMENT, NET
Plant and equipment consist of the following:
March 31,
2011
|
June 30,
2010
|
|||||||
Buildings
|
$ | 2,931,201 | $ | 2,818,371 | ||||
Machinery and equipment
|
1,144,397 | 1,082,065 | ||||||
Office equipment
|
57,987 | 50,299 | ||||||
Motor vehicles
|
536,369 | 430,981 | ||||||
4,669,954 | 4,381,716 | |||||||
Less : Accumulated depreciation
|
||||||||
Buildings
|
(519,312 | ) | (429,115 | ) | ||||
Machinery and equipment
|
(720,949 | ) | (611,728 | ) | ||||
Office equipment
|
(41,555 | ) | (35,789 | ) | ||||
Motor vehicles
|
(306,778 | ) | (261,129 | ) | ||||
(1,588,594 | ) | (1,337,761 | ) | |||||
Plant and equipment, net
|
$ | 3,081,360 | $ | 3,043,955 |
Depreciation expense for the nine months ended March 31, 2011 and 2010 was $200,353 and $175,325, respectively.
At March 31, 2011, the legal title to five motor vehicles and two office buildings with a total net book value of $59,169 and $640,921 were registered in the names of members of management of the Company. The Company’s local legal counsel has confirmed the ownership of the motor vehicles and office buildings by the Company. The Company estimates the transfer of the legal titles of the five motor vehicles and two office buildings will be completed by the end of June 2011.
One office building was pledged as collateral for bank loans borrowed by Li Zengshan (an officer of the Company) in the amount of $329,654. Also see Note 15.
Application for ownership certificates of eleven buildings with an aggregate net book value of $1,074,887 is in progress. The Company’s local legal counsel has confirmed the ownership of the eleven buildings by the Company. The application for the certificates of the buildings is expected to be completed by the end of June 2011.
F-17
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 11 – SHORT-TERM BANK LOANS
Short-term bank loans consist of the following:
March 31,
2011
|
June 30,
2010
|
|||||||
Rural Credit Cooperative:
|
||||||||
Monthly interest only payments at 6.89% per annum, due December 1, 2010, guaranteed by Weifang Tongxin Precision Rubber Products Co., Ltd. and Weifang Dachang Energy-Saving Equipment Co., Ltd. (Repaid on its due date)
|
$ | - | $ | 88,124 | ||||
Monthly interest only payments at 7.52% per annum, due January 15, 2011, guaranteed by Weifang Jinma Diesel Engine Co., Ltd. and Weifang Dachang Energy-Saving Equipment Co., Ltd. (Repaid on its due date)
|
- | 440,619 | ||||||
Bank of Communications:
|
||||||||
Monthly interest only payments at 5.84% per annum, due July 23, 2010, secured by a land use right and guaranteed by an officer, Liu Dianjun. Also see Note 9. (Repaid on its due date)
|
- | 146,873 |
F-18
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 11 – SHORT-TERM BANK LOANS (CONTINUED)
March 31,
2011
|
June 30,
2010
|
|||||||
Weifang Bank:
|
||||||||
Monthly interest only payments at 7.43% per annum, due October 27, 2010, guaranteed by Weifang Hengyuan Oil Pump & Oil Fitting Co., Ltd. (Repaid on its due date)
|
$ | - | $ | 587,492 | ||||
Monthly interest only payments at 7.97% per annum, due October 19, 2010, guaranteed by Weifang Hengyuan Oil Pump & Oil Fitting Co., Ltd. (Repaid on its due date)
|
- | 293,746 | ||||||
Monthly interest only payments at 7.43% per annum, due April 10, 2011, guaranteed by Weifang Hengyuan Oil Pump & Oil Fitting Co., Ltd. (Repaid on its due date)
|
305,339 | 293,746 | ||||||
Monthly interest only payments at 7.43% per annum, due July 27, 2011, guaranteed by Weifang Hengyuan Oil Pump & Oil Fitting Co., Ltd.
|
610,677 | - | ||||||
Monthly interest only payments at 9.88% per annum, due January 24, 2012, guaranteed by Weifang Huaxin Diesel Engine Co., Ltd.
|
305,339 | - | ||||||
China Construction Bank:
|
||||||||
Monthly interest only payments at 5.84% per annum, due December 2, 2010, guaranteed by an officer, Liu Dianjun, and Weifang Xinde Fuel Injection System Co., Ltd. (Repaid on its due date)
|
- | 734,365 | ||||||
Monthly interest only payments at 5.84% per annum, due July 29, 2011, secured by a land use right. Also see Note 9.
|
305,339 | - | ||||||
Bank of China:
|
||||||||
Monthly interest only payments at 5.84% per annum, due February 10, 2011, guaranteed by Weifang Hengyuan Oil Pump & Oil fitting Co., Ltd. and by an officer, Li Zengshan, and his wife, Li Guimei (Repaid on its due date)
|
- | 293,747 | ||||||
Total
|
$ | 1,526,694 | $ | 2,878,712 |
Interest expense for short-term bank loans for the nine months ended March 31, 2011 and 2010 was $261,284 and $289,984, respectively.
F-19
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 12 – NOTES PAYABLE, INCLUDING RELATED PARTIES
Notes payable consist of the following:
March
31, 2011
|
June 30,
2010
|
|||||||||
Notes payable to an unrelated individual:
|
||||||||||
Due December 26, 2010, interest at 6% per annum with the principal payable at the due date
|
$ | - | $ | 84,505 | ||||||
Due December 24, 2010, interest at 10% per annum with the principal payable at the due date
|
- | 98,308 | ||||||||
Due May 4, 2011, interest at 14.36% per annum with the principal payable at the due date. (Repaid on its due date)
|
387,780 | 373,058 | ||||||||
Due May 4, 2011, interest at 12% per annum with the principal payable at the due date. (Repaid on its due date)
|
146,563 | 140,998 | ||||||||
Due June 30, 2011, interest at 10.00% per annum with the principal payable at the due date
|
32,305 | - | ||||||||
Due August 4, 2011, interest at 14.40% per annum with the principal payable at the due date
|
381,674 | - | ||||||||
Due October 1, 2011, interest free with the principal payable at the due date
|
50,217 | - | ||||||||
Due November 1, 2011, interest at 10% per annum with the principal payable at the due date
|
24,091 | - | ||||||||
Due December 25, 2011, interest at 10.00% per annum with the principal payable at the due date
|
98,624 | |||||||||
Due December 31, 2011, interest at 10.00% per annum with the principal payable at the due date
|
36,404 | - | ||||||||
Subtotal
|
1,157,658 | 696,869 | ||||||||
Notes payable to related individuals:
|
||||||||||
Due July 1, 2010, interest at 7.28% per annum
(Settled on its due date)
|
(b)
|
- | 77,843 | |||||||
Due December 24, 2010, interest at 10% per annum (Settled in advance)
|
(b)
|
- | 95,467 | |||||||
Due May 2, 2011, interest at 6% per annum with the principal payable at the due date. (Repaid on its due date)
|
(b)
|
32,473 | 31,240 | |||||||
Due June 30, 2011, interest at 10% per annum with the principal payable at the due date
|
(b)
|
83,968 | 80,930 | |||||||
Due June 30, 2011, interest at 5.76% per annum (Settled in advance)
|
(a)
|
- | 32,638 | |||||||
Due November 27, 2011, interest at 10% per annum with the principal payable at the due date
|
(c)
|
152,669 | ||||||||
Due December 24, 2011, interest at 10% per annum with the principal payable at the due date
|
(b)
|
99,235 | - | |||||||
Due March 31, 2012, interest at 6.91% per annum with the principal payable at the due date
|
(b)
|
88,587 | - | |||||||
Subtotal
|
456,932 | 318,118 | ||||||||
Total
|
$ | 1,614,590 | $ | 1,014,987 |
F-20
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 12 – NOTES PAYABLE, INCLUDING RELATED PARTIES (CONTINUED)
(a)
|
The note was due to Mr. Liu Dianjun, an officer of the Company. The amount represented a loan to the Company which was unsecured.
|
(b)
|
The notes are or were due to Mr. Li Zengshan, an officer of the Company. The current balances represent loans to the Company which are unsecured.
|
(c)
|
This note is due to Ms. Zhang Qixiu, the mother of Mr. Jin Xin (also see Note 8a), an officer of the Company. The current balance represents a loan to the Company which is unsecured.
|
Notes payable to an unrelated individual are unsecured.
NOTE 13 – LONG -TERM NOTES PAYABLE TO RELATED PARTIES
Long-term notes payable to related parties consist of the following:
March 31,
2011
|
June 30,
2010
|
|||||||||
Notes payable to related individuals:
|
||||||||||
Due May 12, 2012, monthly interest payment is 5.76% per annum. Principal is repaid every month in 108 equal installments from May 15, 2003. (Repaid in advance)
|
(a)
|
- | 29,918 | |||||||
Due August 4, 2014, monthly interest payment is 6.91% per annum. Principal is repaid every month in 60 equal installments from August 4, 2009.
|
(b)
|
241,067 | 296,380 | |||||||
Total
|
$ | 241,067 | $ | 326,298 |
(a)
|
The current note was due to Mr. Liu Dianjun, an officer of the Company. The note represented a loan to the Company to support business operations.
|
(b)
|
This note is due to Mr. Li Zengshan, an officer of the Company. The current balance represents a loan to the Company to support business operations.
|
Notes payable to related individuals are unsecured.
F-21
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 14 – TAXES
(a)
|
Corporation Income Tax (“CIT”)
|
On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “new CIT law”), which went into effective on January 1, 2008. In accordance with the relevant tax laws and regulations of PRC, the applicable corporate income tax rate for Hengyuan is 25%. In 2010 and 2009, Jinma and Huaxin were defined by the local tax bureau as tax payers subject to the “Verification Collection” method, according to which the amount of income taxes paid is determined by the local tax bureau based on certain criteria instead of applying the CIT rate of 25%. Therefore, the amount of income tax assessed for Jinma and Huaxin under this Verification Collection method differed from the normal computation by applying the CIT rate of 25%.
The Company received written authorization from the local Chinese government to extend the payment of its current income tax due of approximately $7.1 million.
Effective January 1, 2007, the Company adopted ASC 740-10, Accounting for Uncertainty in Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of March 31, 2011, the Company does not have a liability for unrecognized tax benefits.
The Company’s income tax expense for the nine months ended March 31, 2011 and 2010 are summarized as follows:
March 31,
2011
|
March 31,
2010
|
|||||||
Current:
|
||||||||
Provision for CIT
|
$ | 1,974,705 | $ | 2,179,024 | ||||
Deferred:
|
||||||||
Provision for CIT
|
410,783 | (3,865 | ) | |||||
Income tax expense
|
$ | 2,385,488 | $ | 2,175,159 |
F-22
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 14 – TAXES (CONTINUED)
The Company’s income tax expense differs from the “expected” tax expense for the nine months ended March 31, 2011 and 2010 (computed by applying the CIT rate of 25% percent to income before income taxes) as follows:
March 31,
2011
|
March 31,
2010
|
|||||||
Computed “expected” expense
|
$ | 4,225,754 | $ | 3,648,084 | ||||
Permanent differences
|
(844,079 | ) | (52,394 | ) | ||||
Favourable tax rates
|
(996,187 | ) | (1,420,531 | ) | ||||
Income tax expense
|
$ | 2,385,488 | $ | 2,175,159 |
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of March 31, 2011 and June 30, 2010 are as follows:
March 31,
2011
|
June 30,
2010
|
|||||||
Deferred tax assets:
|
||||||||
Current portion:
|
||||||||
Bad debt provision
|
$ | 24,807 | $ | 24,174 | ||||
Other expenses
|
51,458 | 76,720 | ||||||
Subtotal
|
$ | 76,265 | $ | 100,894 | ||||
Deferred tax liabilities:
|
||||||||
Current portion:
|
||||||||
Sales cut-off
|
$ | (433,290 | ) | $ | (31,596 | ) | ||
Others
|
(26,094 | ) | (21,850 | ) | ||||
Subtotal
|
(459,384 | ) | (53,446 | ) | ||||
Net deferred tax (liabilities) assets - current portion
|
$ | (383,119 | ) | $ | 47,448 | |||
Deferred tax assets:
|
||||||||
Non-current portion:
|
||||||||
Depreciation
|
$ | 136,871 | $ | 118,448 | ||||
Amortization
|
11,962 | 10,601 | ||||||
Subtotal
|
148,833 | 129,049 | ||||||
Net deferred tax assets - non-current portion
|
148,833 | 129,049 | ||||||
Total net deferred tax (liabilities) assets
|
$ | (234,286 | ) | $ | 176,497 |
F-23
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 14 – TAXES (CONTINUED)
(b)
|
Tax Holiday Effect
|
For the nine months ended March 31, 2011 and 2010 the PRC corporate income tax rate was 25%. Certain subsidiaries of the Company are entitled to favorable tax rates for the periods ended March 31, 2011 and 2010.
The pro forma combined effects of the favorable tax rates available to the Company for the nine months ended March 31, 2011 and 2010 are as follows:
For The Nine Months Ended
March 31,
|
||||||||
2011
|
2010
|
|||||||
Tax holiday effect
|
$ | 996,187 | $ | 1,420,531 | ||||
Basic net income per share effect
|
$ | (0.00 | ) | $ | (0.01 | ) |
(c)
|
Value Added Tax (“VAT”)
|
Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with Chinese Laws. The value added tax standard rate is 17% of the gross sale price, and the Company records its revenue net of VAT. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
In the nine months ended March 31, 2011, output VAT payable of $3,289,036 was exempted by the local tax bureau to honor the Company’s continuous contribution to the local economy and its achievement of becoming a United States public reporting company, resulting in other income of $3,289,036 which was reflected in the accompanying condensed consolidated statements of income and comprehensive income for the nine months ended March 31, 2011.
The VAT payable was $18,080,924 and $6,931,841 at March 31, 2011 and June 30, 2010, respectively. The Company received written authorization from the local tax authorities to defer the payment of its current VAT payable in anticipation of additional future exemptions from the local tax bureau.
F-24
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
NOTE 15 – CONTINGENCIES
On August 4, 2009, Hengyuan entered into a guarantee contract to serve as guarantor for bank loans borrowed by Mr. Li Zengshan, an officer of the Company, from the Industrial and Commercial Bank of China with a guarantee amount of $329,654. Under this guarantee contract, a land use right and an office building of Hengyuan were pledged for the bank loans. (Also see Notes 9 and 10)
NOTE 16 – COMMITMENT
The Company has a capital commitment of $562,506 for the construction of a new plant for Huaxin, a subsidiary of the Company, for production of diesel engines. The related construction is in progress and the accumulated cost incurred was recorded as construction in progress in the accompanying condensed consolidated balance sheet as of March 31, 2011 and June 30, 2010.
F-25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
The following discussion of the financial condition and results of operations of Xinde Technology Company, a Nevada corporation and its subsidiaries (f/k/a Wasatch Food Services, Inc., the “Company” or “Xinde”) is based upon and should be read in conjunction with our unaudited condensed consolidated financial statements and their related notes included in this quarterly report. This report may contain forward-looking statements. Generally, the words “believes”, “anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
Notable Corporate Actions
On April 22, 2010, the Company held a special meeting of its stockholders. At the special meeting, the Company’s stockholders approved, by the requisite number of votes, to change the Company’s name from “Wasatch Food Services, Inc.” to “Xinde Technology Company”.
On April 7, 2011 the Company held a special meeting of its stockholders. At the special meeting, the Company’s stockholders approved, by the requisite member of votes, to increase the amount of the Company’s authorized common stock from 150,000,000 to 350,000,000 shares and to effect a 4-for-1 forward split of the Company’s outstanding common stock, resulting in 240,000,000 shares outstanding (effective as of April 14, 2011). As a result, each reference herein to shares of common stock as well as the financial information included herein is presented as giving effect to the 4-for-1 forward stock split.
Current Operations of the Company
The Company operates in one business segment, the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units primarily in the PRC. However, our products compete in the following three primary product segments: (1) fuel injection system products, (2) diesel engine products and (3) generator products. We believe our broad range of products (including non-vehicle diesel engines, diesel generators, injection pumps, injectors and three-coupling components, and agricultural machinery and construction machinery) increases our competitiveness.
The Company is based in China’s Shandong Province in the city of Weifang where many large and medium-sized diesel engine enterprises and related products and components manufacturers are located. Weifang is also an important traffic center on the east coast in northern China. We believe our location makes the purchase of raw materials and sales of our products very convenient and reduces the costs associated with sales while reducing freight costs. No single supplier accounted for more than 10% of the Company’s purchases and accounts payable for the years ended June 30, 2010 and 2009, or for the nine months ended March 31, 2011, except that one single supplier accounted for 11.2% of purchases for the nine months ended March 31, 2011, and no single customer accounted for more than 10% of the Company’s total revenue or accounts receivable for the years ended June 30, 2010 and 2009, or for the nine months ended March 31, 2011.
We have developed fuel injection system products that we believe will meet the Euro III Emissions Standard, which will become most relevant in light of China’s initiative to implement the Euro III Emissions Standard. Furthermore, we believe that we are China’s only company with exclusive intellectual property rights for fuel injection systems meeting such Euro III Emissions Standard which could lead to broad market appeal. Due to our strict technical standards and quality control in production process, our products have become well-known brands in their markets throughout China. Our Company has always placed quality control first and we received our ISO9001 certification in 2005.
2
Our products feature a cost and price advantage arising from our independently owned intellectual property. For example, our integrated electromechanical electronically-controlled high-pressure fuel injection system with common rail sells for RMB7,000 (US$1,029) per set as compared with products produced by some of our largest competitors (BOSCH and DENSO) which offer comparable products for RMB15,000 (US$2,011) per set. As a result, we believe such products will gain market share and be instrumental in improving our competitive position and brand influence.
We also have a long-term relationship with Tianjin University’s Combustion Laboratory of Combustion Engines, a national key laboratory located in Tianjin, China, which contributes to our growing expertise and reputation in the field of integrated electromechanical electronically-controlled high-pressure fuel injection systems with common rail in China. In addition, we have an experienced team of in-house technicians which contributes to our product’s technical content and ultimately, our core competitiveness.
Through independent development, cooperation and introduction, we have developed a variety of diesel engine injector assemblies for Sitair, 170, 190 and 105 models as well as multi-cylinder No. 1, BX, BXD, IIW and DT12/24-10X (electronic regulator) injection pump assemblies and oil transfer pumps. In addition, we have fully acquired the production process and technology for EGR (Exhaust Gas Recirculation) diesel engines and gas power generators that are in growing demand in the marketplace.
Each of our Subsidiaries has its own marketing network. The Company’s goal is to utilize each of such networks to create a countrywide network. The Company has made its after-sales service a priority, setting up a special after-sales service management department to provide users with after-sales services.
We have established nationwide marketing and after-sale service networks in China. We have established more than 20 branches throughout China, including Fu’an, Guangzhou, Dongguan, Jiangdu, Chengdu, Chongqing, Kunming, Taiyuan, Shenyang, Changsha and Urumchi. The Company employs agents throughout China, who receive commissions on the amount of products that they help the Company to sell. Agreements with such agents are generally formed during national trade fairs or other types of trade exhibitions. We pay for transportation expenses and the products are generally delivered via road vehicles. Mobile technicians operate our after-sales network. Each is assigned to a different geographical area.
Our principal offices are located at Number 363, Sheng Li West Street, Weifang, Shandong Province, The People’s Republic of China, Telephone: (86) 536-8322068, Facsimile: (86) 852-28450504. The Company has also launched a new company website in English at www.chinaxinde.cn. The Company’s common stock is currently quoted on the OTCQB under the symbol “WTFS”.
Prior Operations of the Company
Xinde was incorporated as “Wasatch Food Services, Inc.” in Nevada in December 2006 to engage as a franchisee of BAJIO® Mexican Grill restaurants in the State of Idaho. In January 2007, the Company was assigned certain rights under an area development agreement with Bajio, LLC (the franchisor) that granted the Company the right to develop four BAJIO® restaurant locations in Southern Idaho through December 31, 2009. In October 2007, the Company entered into its first franchise agreement in Boise, Idaho and thereafter entered into a lease, furnished and equipped the space and opened for business in November 2007. The Company failed to open any additional BAJIO® restaurants within the time periods set forth in the area development agreement and lost its right to develop such additional restaurants. During this time and up to December 28, 2009, the Company conducted its operations solely through its wholly-owned subsidiary, Bajio.
The Company executed a purchase agreement to sell Bajio following the consummation of the share exchange transaction described in the section below. The Company has never initiated any bankruptcy, receivership or similar proceedings.
3
The December 2009 Share Exchange Transaction and Corporate Structure
On December 28, 2009, the Company entered into a share exchange agreement (the “Exchange”) with Jolly Promise Limited, an investment holding company organized under the laws of the British Virgin Islands (“Jolly”) and the stockholder of Jolly, Welldone Pacific Limited, a limited company organized under the laws of the British Virgin Islands (“Welldone”). As a result of the Exchange, the Company acquired all of the issued and outstanding securities of Jolly from Welldone in exchange for 42,000,000 newly-issued shares of the Company’s common stock, par value $0.001 per share (“Common Stock”). Immediately following the Exchange, the Stockholder owned 70% of the 60,000,000 issued and outstanding shares of voting capital stock of the Company. As a result of the Exchange, Jolly became a wholly-owned subsidiary of the Company.
Following the Exchange, the corporate structure of the Company consisted of Jolly, a wholly-owned subsidiary of the Company, Jolly’s wholly-owned subsidiary, Hong Kong Sindhi Fuel Injection Company Limited, a Hong Kong company (“HKSind”), HKSind’s wholly-owned subsidiary, Weifang Huajie Fuel Injection Company Limited (“Huajie”), a company organized under the laws of The People’s Republic of China (“PRC”), Huajie’s wholly-owned subsidiary, Weifang Xinde Fuel Injection System Company Limited, a PRC company (“Weifang”) and Weifang’s wholly-owned subsidiaries, Huaxin Diesel Engine Co., Ltd., a PRC company (“Huaxin”), Hengyuan Oil Pump and Oil Fitting Co., Ltd., a PRC company (“Hengyuan”) and Jinma Diesel Engine Co., Ltd., a PRC company (“Jinma” and together with Jolly, HKSind, Huajie, Weifang, Huaxin and Hengyuan, the “Subsidiaries”).
The above described corporate structure of the Company and the Subsidiaries is illustrated below:
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
4
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
Economic and Political Risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Fair Value of Financial Instruments
ASC 820-10, Fair Value Measurements, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
These tiers include:
• Level 1—defined as observable inputs such as quoted prices in active markets;
• Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
• Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 as of March 31, 2011 are as follows:
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||
Carrying
Value as of
March 31,
2011
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Bank acceptance notes
|
$ | 3,580,730 | $ | 3,580,730 | $ | - | $ | - | ||||||||
Long-term notes payable
|
$ | 241,067 | $ | - | $ | 241,067 | $ | - |
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, notes receivable, prepayments for goods, short-term bank loans, accounts payable, customer deposits, short-term notes payable, due to employee, due to related parties and other payables, approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term notes payable is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term notes payable was not significantly different from the carrying value at March 31, 2011.
5
Cash and Cash Equivalents
For financial reporting purposes, the Company considers highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the weighted average basis and comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.
Plant and Equipment
Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated useful lives are as follows:
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.
Land Use Rights
According to the laws of China, land in the PRC is owned by the government and cannot be sold to an individual or company. However, the government grants the user a “land use right” to use the land. The land use right granted to the Company is being amortized using the straight-line method over the lease term of fifty years.
Impairment of Long-Term Assets
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in ASC 360-10. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. There was no impairment for the nine months ended March 31, 2011 and 2010.
Revenue Recognition
Revenue represents the invoiced value of goods sold, recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists,
- Delivery has occurred or services have been rendered,
- The seller's price to the buyer is fixed or determinable, and
- Collectability is reasonably assured.
The majority of the Company’s revenue results from sales contracts with distributors and revenue are recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of collectability.
6
The Company offers warranties on its products for periods between nine and twelve months after the sale. The Company estimates the warranty reserves based on historical records and identical or similar types on the market. Warranty expenses related to product sales are charged to the condensed consolidated statements of income and comprehensive income in the period in which sales is recognized. During the nine months ended March 31, 2011 and 2010, warranty expense was $388,994 and $112,435, respectively, and is included in selling and marketing expenses in the accompanying condensed consolidated statements of income and comprehensive income.
Foreign Currency Translation
The accompanying condensed consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the condensed consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the quarter.
March 31,
2011
|
June 30,
2010
|
March 31,
2010
|
||||||||||
Period ended RMB: US$ exchange rate
|
6.5501 | 6.8086 | - | |||||||||
Average RMB: US$ exchange rate for three months ended
|
6.5713 | - | 6.8367 | |||||||||
Average RMB: US$ exchange rate for nine months ended
|
6.6610 | - | 6.8404 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the nine months ended March 31, 2011 and 2010.
Segment and Geographic Reporting
The Company operates in one business segment, the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units mainly in the PRC. The sales of the Company outside of the PRC were insignificant for the nine months ended March 31, 2011 and 2010.
Recent Accounting Pronouncements
There are no new accounting pronouncements that have not been adopted by the Company that would have a material effect on the condensed consolidated financial statements.
7
RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the three months ended March 31, 2011 and 2010:
Three Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Amount
|
% of
Revenues
|
Amount
|
% of
Revenues
|
Change in
Amount
|
Change
in %
|
|||||||||||||||||||
REVENUES, NET
|
27,596,387 | 100 | % | 26,836,259 | 100 | % | 760,128 | 3 | % | |||||||||||||||
COST OF GOODS SOLD
|
(21,723,469 | ) | (79 | )% | (21,574,659 | ) | (80 | )% | (148,810 | ) | 1 | % | ||||||||||||
GROSS PROFIT
|
5,872,918 | 21 | % | 5,261,600 | 20 | % | 611,318 | 12 | % | |||||||||||||||
Selling and marketing
|
(693,989 | ) | (3 | )% | (746,566 | ) | (3 | )% | 52,577 | (7 | )% | |||||||||||||
General and administrative
|
(855,401 | ) | (3 | )% | (688,419 | ) | (3 | )% | (166,982 | ) | 24 | % | ||||||||||||
Bad debt recoveries
|
137,324 | - | - | - | 137,324 | - | ||||||||||||||||||
INCOME FROM OPERATIONS
|
4,460,852 | 16 | % | 3,826,615 | 14 | % | 634,237 | 17 | % | |||||||||||||||
Interest expense, net
|
(97,592 | ) | (0.4 | )% | (78,009 | ) | (0.3 | )% | (19,583 | ) | 25 | % | ||||||||||||
Other income (expense), net
|
4,587 | 0.02 | % | 15,510 | 0.06 | % | (10,923 | ) | (70 | )% | ||||||||||||||
INCOME BEFORE INCOME TAXES
|
4,367,847 | 16 | % | 3,764,116 | 14 | % | 603,731 | 16 | % | |||||||||||||||
INCOME TAXES
|
(736,813 | ) | (3 | )% | (486,401 | ) | (2 | )% | (250,412 | ) | 51 | % | ||||||||||||
NET INCOME
|
3,631,034 | 13 | % | 3,277,715 | 12 | % | 353,319 | 11 | % | |||||||||||||||
Foreign currency translation gain
|
596,072 | 2 | % | 8,380 | - | 587,692 | 7,013 | % | ||||||||||||||||
OTHER COMPREHENSIVE INCOME
|
596,072 | 2 | % | 8,380 | - | 587,692 | 7,013 | % | ||||||||||||||||
COMPREHENSIVE INCOME
|
4,227,106 | 15 | % | 3,286,095 | 12 | % | 941,011 | 29 | % |
Revenues
Our revenues are derived from the design, development, manufacture and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units in The People’s Republic of China (the “PRC”) and, to an insignificant extent, overseas. The table below sets forth a breakdown of our revenues by product for the three months indicated:
8
Three Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Amount
|
% of
Revenues
|
Amount
|
% of
Revenues
|
Change in
Amount
|
Change
in %
|
|||||||||||||||||||
|
$
|
$
|
$
|
|||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Electricity pumps
|
3,043,425 | 11 | % | 2,132,727 | 8 | % | 910,698 | 43 | % | |||||||||||||||
Multi-cylinder pumps
|
7,684,442 | 28 | % | 6,812,829 | 25 | % | 871,613 | 13 | % | |||||||||||||||
Single-cylinder pumps
|
525,174 | 2 | % | 354,403 | 1 | % | 170,771 | 48 | % | |||||||||||||||
Fuel muzzles
|
2,204,576 | 8 | % | 1,211,848 | 5 | % | 992,728 | 82 | % | |||||||||||||||
Parts
|
460,889 | 2 | % | 71,413 | 0.3 | % | 389,476 | 545 | % | |||||||||||||||
Diesel engines
|
11,392,990 | 41 | % | 8,930,298 | 33 | % | 2,462,692 | 28 | % | |||||||||||||||
Generator sets
|
2,261,918 | 8 | % | 6,927,096 | 26 | % | (4,665,178 | ) | (67 | )% | ||||||||||||||
Accessories
|
32,142 | 0.1 | % | 401,481 | 1 | % | (369,339 | ) | (92 | )% | ||||||||||||||
Less: sales tax
|
(9,169 | ) | - | (5,836 | ) | - | (3,333 | ) | 57 | % | ||||||||||||||
Total
|
27,596,387 | 100 | % | 26,836,259 | 100 | % | 760,128 | 3 | % |
Our revenues increased by 3%, to $27,596,387 for the three months ended March 31, 2011 from $26,836,259 for the three months ended March 31, 2010. This increase was primarily attributable to an increase in the sales of diesel engines, which increased by 28% and accounted for 41% of our total revenue for the three months ended March 31, 2011, which was partially offset by the decrease in the sales of generator sets by 67% and accounted for 8% of our total revenue for the three months ended March 31, 2011. The main reason for this increase was attributable to the fact that high-end products with greater power are becoming the focus products of the diesel engine industry in the PRC. The Company has adjusted its product structure to introduce more products with greater engine power to accommodate this new trend.
Cost of Goods Sold
The principal components of our cost of goods sold are costs of direct materials. The following table sets forth a breakdown of our cost of goods sold by product for the three months indicated:
9
Three Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Amount
|
% of Cost of
Goods Sold
|
Amount
|
% of Cost of
Goods Sold
|
Change in
Amount
|
Change
in %
|
|||||||||||||||||||
|
$
|
$
|
$
|
|||||||||||||||||||||
Cost of Goods Sold:
|
||||||||||||||||||||||||
Electricity pumps
|
2,504,323 | 11.5 | % | 1,420,004 | 7 | % | 1,084,319 | 76 | % | |||||||||||||||
Multi-cylinder pumps
|
5,119,009 | 24 | % | 5,057,967 | 23 | % | 61,042 | 1 | % | |||||||||||||||
Single-cylinder pumps
|
477,229 | 2 | % | 283,033 | 1 | % | 194,196 | 69 | % | |||||||||||||||
Fuel muzzles
|
1,907,840 | 9 | % | 981,953 | 5 | % | 925,887 | 94 | % | |||||||||||||||
Parts
|
423,310 | 2 | % | 50,494 | 0.2 | % | 372,816 | 738 | % | |||||||||||||||
Diesel engines
|
9,433,179 | 43 | % | 7,691,270 | 35.6 | % | 1,741,909 | 23 | % | |||||||||||||||
Generator sets
|
1,721,816 | 8 | % | 5,747,070 | 27 | % | (4,025,254 | ) | (70 | )% | ||||||||||||||
Warranty expense
|
106,641 | 0.4 | % | 38,174 | 0.2 | % | 68,467 | 179 | % | |||||||||||||||
Accessories
|
30,122 | 0.1 | % | 304,694 | 1 | % | (274,572 | ) | (90 | )% | ||||||||||||||
Total
|
21,723,469 | 100 | % | 21,574,659 | 100 | % | 148,810 | 1 | % |
Our cost of goods sold was relatively stable, which only increased by 1% to $21,723,469 for the three months ended March 31, 2011 from $21,574,659 for the three months ended March 31, 2010. This increase mainly resulted from the Company reducing the production and sales for products of older style diesel engines and generator sets and started to produce products with lower costs and higher margins.
Gross Profit and Gross Margin
Gross profit is equal to revenues less cost of goods sold. Gross margin is equal to gross profit divided by revenues. The table below sets forth a breakdown of our gross profit and gross margin by product for the years indicated:
10
Three Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Gross Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
Change
in
Amount
|
Change in
Gross
Margin
|
|||||||||||||||||||
|
$
|
$
|
$
|
|||||||||||||||||||||
Gross Profit and Gross Margin:
|
||||||||||||||||||||||||
Electricity pumps
|
539,102 | 18 | % | 712,723 | 33 | % | (173,621 | ) | (15 | )% | ||||||||||||||
Multi-cylinder pumps
|
2,565,433 | 33 | % | 1,754,862 | 26 | % | 810,571 | 7 | % | |||||||||||||||
Single-cylinder pumps
|
47,945 | 9 | % | 71,370 | 20 | % | (23,425 | ) | (11 | )% | ||||||||||||||
Fuel muzzles
|
296,736 | 13 | % | 229,895 | 19 | % | 66,841 | (6 | )% | |||||||||||||||
Parts
|
37,579 | 8 | % | 20,919 | 29 | % | 16,660 | (21 | )% | |||||||||||||||
Diesel engines
|
1,959,811 | 17 | % | 1,239,028 | 14 | % | 720,783 | 3 | % | |||||||||||||||
Generator sets
|
540,102 | 24 | % | 1,180,026 | 17 | % | (639,924 | ) | 7 | % | ||||||||||||||
Accessories
|
2,020 | 6 | % | 96,787 | 24 | % | (94,767 | ) | (18 | )% | ||||||||||||||
Less: warranty expense
|
(106,641 | ) | - | (38,174 | ) | - | (68,467 | ) | - | |||||||||||||||
Less: sales tax
|
(9,169 | ) | - | (5,836 | ) | - | (3,333 | ) | - | |||||||||||||||
Total
|
5,872,918 | 21 | % | 5,261,600 | 20 | % | 611,318 | 1 | % |
Our gross profit increased by $611,318, to $5,872,918 for the three months ended March 31, 2011 as compared to $5,261,600 for the three months ended March 31, 2010, our gross margin for the three months ended March 31, 2011 increased by 1% from the three months ended March 31, 2010. This was mainly due to the Company’s efforts to adjust its product mix by introducing more products with higher gross margins and reducing the production and sales for products of older style diesel engines and generator sets with lower gross margins since July, 2010.
Selling and Marketing Expenses
Our selling and marketing expenses primarily include sales commission, payroll, travel costs and freight fees. Our selling and marketing expenses accounted for 3% of our revenues for the three months ended March 31, 2011. Selling and marketing expenses decreased by 7%, or $52,577, to $693,989 for the three months ended March 31, 2011 from $746,566 for the three months ended March 31, 2010. This decrease was primarily due to the decrease in sales commission of $60,388.
General and Administrative Expenses
Our general and administrative expenses consist primarily of payroll, consulting fees, plant and equipment depreciation, entertainment fees, office general expenses, labor insurance fees, travel costs, welfare fees, land use rights amortization and etc.
Our general and administrative expense increased by 24%, or $166,982, to $ 855,401 for the three months ended March 31, 2011 from $ 688,419 for the three months ended March 31, 2010. This increase was primarily due to the increase in payroll and welfare fees of $114,383 in total. Our general and administrative expenses were approximately 3% of revenues, which has remained stable from the three months ended March 31, 2010.
11
Interest Expense, Net
For the three months ended March 31, 2011 and 2010, interest expense was $97,592 and $78,009, or 0.4% and 0.3% of our revenues, respectively. Interest expense increased by 25%, or $19,583, to $97,592 for the three months ended March 31, 2011 from $78,009 for the three months ended March 31, 2010. The increase in interest expense was primarily attributable to the increase of $599,603 in notes payable bearing interest.
Other Income, Net
Other income was $4,587 for the three months ended March 31, 2011 compared to other income of $15,510 for the three months ended March 31, 2010. This was primarily due to a decrease of $10,923 from quality compensation from suppliers for the three months ended March 31, 2011.
Income Taxes
Our income tax expenses increased by 51%, or $250,412, to $736,813 for the three months ended March 31, 2011 from $486,401 for the three months ended March 31, 2010.
In accordance with the relevant tax laws and regulations of the PRC, the applicable corporate income tax rate for Hengyuan is 25%. In 2011 and 2010, Jinma and Huaxin were defined by the local tax bureau as tax payers subject to the “Verification Collection” method, according to which the amount of income taxes paid is determined by the local tax bureau based on certain criteria instead of applying the CIT rate of 25%. Therefore, the amount of income tax assessed for Jinma and Huaxin under this Verification Collection method differed from the normal computation by applying the CIT rate of 25%. Our effective tax rate was 17% and 13% for the three months ended March 31, 2011 and 2010, respectively.
Net Income
Primarily as a result of the foregoing, our net income increased by 11%, or $353,319, to $3,631,034 for the three months ended March 31, 2011 from $3,277,715 for the three months ended March 31, 2010.
12
RESULTS OF OPERATIONS COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2011 AND 2010
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the nine months ended March 31, 2011 and 2010:
Nine Months Ended March 31
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Amount
|
% of
Revenues
|
Amount
|
% of
Revenues
|
Change in
Amount
|
Change
in %
|
|||||||||||||||||||
$
|
$
|
|||||||||||||||||||||||
REVENUES, NET
|
90,848,899 | 100 | % | 100,195,028 | 100 | % | (9,346,129 | ) | (9 | )% | ||||||||||||||
COST OF GOODS SOLD
|
(73,913,022 | ) | (81 | )% | (82,232,475 | ) | (82 | )% | 8,319,453 | (10 | )% | |||||||||||||
GROSS PROFIT
|
16,935,877 | 19 | % | 17,962,553 | 18 | % | (1,026,676 | ) | (6 | )% | ||||||||||||||
Selling and marketing
|
(2,445,004 | ) | (3 | )% | (1,954,398 | ) | (2 | )% | (490,606 | ) | 25 | % | ||||||||||||
General and administrative
|
(1,619,965 | ) | (2 | )% | (1,250,533 | ) | (1 | )% | (369,432 | ) | 30 | % | ||||||||||||
Bad debt recoveries
|
800,298 | 1 | % | 74,915 | 0.1 | % | 725,383 | 968 | % | |||||||||||||||
INCOME FROM OPERATIONS
|
13,671,206 | 15 | % | 14,832,537 | 15 | % | (1,161,331 | ) | (8 | )% | ||||||||||||||
Interest expense, net
|
(302,091 | ) | (0.33 | )% | (254,920 | ) | (0.25 | )% | (47,171 | ) | 19 | % | ||||||||||||
Other income, net
|
244,868 | 0.3 | % | 14,718 | - | 230,150 | 1,564 | % | ||||||||||||||||
Refundable value added tax
|
3,289,036 | 4 | % | - | - | - | - | |||||||||||||||||
INCOME BEFORE INCOME TAXES
|
16,903,019 | 19 | % | 14,592,335 | 15 | % | 2,310,684 | 16 | % | |||||||||||||||
INCOME TAXES
|
(2,385,488 | ) | (3 | )% | (2,175,159 | ) | (2 | )% | (210,329 | ) | 10 | % | ||||||||||||
NET INCOME
|
14,517,531 | 16 | % | 12,417,176 | 12 | % | 2,100,355 | 17 | % | |||||||||||||||
Foreign currency translation gain
|
2,416,089 | 3 | % | 36,429 | - | 2,379,660 | 6,532 | % | ||||||||||||||||
OTHER COMPREHENSIVE INCOME
|
2,416,089 | 3 | % | 36,429 | - | 2,379,660 | 6,532 | % | ||||||||||||||||
COMPREHENSIVE INCOME
|
16,933,620 | 19 | % | 12,453,605 | 12 | % | 4,480,015 | 36 | % |
Revenues
Our revenues is derived from design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units for the PRC and overseas markets. The table below sets forth a breakdown of our revenues by product for the nine months indicated:
13
Nine Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Amount
|
% of
Revenues
|
Amount
|
% of
Revenues
|
Change in
Amount
|
Change
in %
|
|||||||||||||||||||
|
$
|
$
|
$
|
|||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Electricity pumps
|
8,617,713 | 9 | % | 6,708,168 | 7 | % | 1,909,545 | 28 | % | |||||||||||||||
Multi-cylinder pumps
|
26,168,143 | 29 | % | 21,232,260 | 21 | % | 4,935,883 | 23 | % | |||||||||||||||
Single-cylinder pumps
|
1,612,929 | 2 | % | 1,756,760 | 2 | % | (143,831 | ) | (8 | )% | ||||||||||||||
Fuel muzzles
|
5,477,690 | 6 | % | 4,695,020 | 5 | % | 782,670 | 17 | % | |||||||||||||||
Parts
|
830,213 | 1 | % | 488,412 | 0 | % | 341,801 | 70 | % | |||||||||||||||
Diesel engines
|
34,486,451 | 37 | % | 39,162,336 | 39 | % | (4,675,885 | ) | (12 | )% | ||||||||||||||
Generator sets
|
12,296,631 | 14 | % | 25,632,056 | 26 | % | (13,335,425 | ) | (52 | )% | ||||||||||||||
Accessories
|
1,384,749 | 2 | % | 539,859 | - | 844,890 | 157 | % | ||||||||||||||||
Less: sales tax
|
(25,620 | ) | - | (19,843 | ) | - | (5,777 | ) | 29 | % | ||||||||||||||
Total
|
90,848,899 | 100 | % | 100,195,028 | 100 | % | (9,346,129 | ) | (9 | )% |
Our revenues decreased by 9%, to $90,848,899 for the nine months ended March 31, 2011 from $100,195,028 for the nine months ended March 31, 2010. This decrease was primarily attributable to a decrease in the sales of generator sets, which was decreased by 52% and accounted for 14% of our total revenue for the nine months ended March 31, 2011. The main reason for this decline was attributable to the fact that high-end products with greater power are becoming the focus products of the diesel engine industry in the PRC. The Company is also trying to adjust its products mix by introducing more products with greater engine power to accommodate this new trend. Therefore, the Company reduced the production and sales of older style diesel engines and generator sets with lower gross margins since July, 2010 as an adjustment to its product mix.
Cost of Goods Sold
The principal components of our cost of goods sold are costs of direct materials. The following table sets forth a breakdown of our cost of goods sold by product for the nine months indicated:
14
Nine Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Amount
|
% of
Cost of
Goods
Sold
|
Amount
|
% of
Cost of
Goods
Sold
|
Change in
Amount
|
Change
in %
|
|||||||||||||||||||
|
$
|
$
|
$
|
|||||||||||||||||||||
Cost of Goods Sold:
|
||||||||||||||||||||||||
Electricity pumps
|
6,622,255 | 9 | % | 4,662,735 | 6 | % | 1,959,520 | 42 | % | |||||||||||||||
Multi-cylinder pumps
|
18,190,058 | 24.5 | % | 14,446,453 | 17.9 | % | 3,743,605 | 26 | % | |||||||||||||||
Single-cylinder pumps
|
1,332,455 | 2 | % | 1,656,750 | 2 | % | (324,295 | ) | (20 | )% | ||||||||||||||
Fuel muzzles
|
4,815,771 | 6.5 | % | 3,760,536 | 5 | % | 1,055,235 | 28 | % | |||||||||||||||
Parts
|
813,175 | 1 | % | 444,033 | 1 | % | 369,142 | 83 | % | |||||||||||||||
Diesel engines
|
30,358,148 | 41 | % | 34,311,579 | 41 | % | (3,953,431 | ) | (12 | )% | ||||||||||||||
Generator sets
|
10,330,498 | 14 | % | 22,412,155 | 26 | % | (12,081,657 | ) | (54 | )% | ||||||||||||||
Warranty expense
|
388,994 | 1 | % | 112,435 | 0.1 | % | 276,559 | 246 | % | |||||||||||||||
Accessories
|
1,061,668 | 1 | % | 425,799 | 1 | % | 635,869 | 149 | % | |||||||||||||||
Total
|
73,913,022 | 100 | % | 82,232,475 | 100 | % | (8,319,453 | ) | (10 | )% |
Our cost of goods sold decreased by 10%, or $8,319,453, to $73,913,022 for the nine months ended March 31, 2011 from $82,232,475 for the nine months ended March 31, 2010. This decrease was in line with the decrease in product sales during the same period.
Gross Profit and Gross Margin
Gross profit is equal to revenues less cost of goods sold. Gross margin is equal to gross profit divided by revenues. The table below sets forth a breakdown of our gross profit and gross margin by product for the years indicated:
15
Nine Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
Comparisons
|
||||||||||||||||||||||
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
Change in
Amount
|
Change in
Gross
Margin
|
|||||||||||||||||||
|
$
|
$
|
$
|
|||||||||||||||||||||
Gross Profit and Gross Margin:
|
||||||||||||||||||||||||
Electricity pumps
|
1,995,458 | 23 | % | 2,045,433 | 30 | % | (49,975 | ) | (7 | )% | ||||||||||||||
Multi-cylinder pumps
|
7,978,085 | 30 | % | 6,785,807 | 32 | % | 1,192,278 | (2 | )% | |||||||||||||||
Single-cylinder pumps
|
280,474 | 17 | % | 100,010 | 6 | % | 180,464 | 11 | % | |||||||||||||||
Fuel muzzles
|
661,919 | 12 | % | 934,484 | 20 | % | (272,565 | ) | (8 | )% | ||||||||||||||
Parts
|
17,038 | 2 | % | 44,379 | 9 | % | (27,341 | ) | (7 | )% | ||||||||||||||
Diesel engines
|
4,128,302 | 12 | % | 4,850,756 | 12 | % | (722,454 | ) | (0.4 | )% | ||||||||||||||
Generator sets
|
1,966,133 | 16 | % | 3,219,901 | 13 | % | (1,253,768 | ) | 3 | % | ||||||||||||||
Accessories
|
323,081 | 23 | % | 114,060 | 21 | % | 209,021 | 2 | % | |||||||||||||||
Less: warranty expense
|
(388,994 | ) | - | (112,435 | ) | - | (276,559 | ) | - | |||||||||||||||
Less: sales tax
|
(25,619 | ) | - | (19,842 | ) | - | (5,777 | ) | - | |||||||||||||||
Total
|
16,935,877 | 19 | % | 17,962,553 | 18 | % | (1,026,676 | ) | 1 | % |
Although our gross profit decreased by $1,026,676, to $16,935,877 for the nine months ended March 31, 2011 as compared with $17,962,553 for the nine months ended March 31, 2010. Our margin for the nine months ended March 31, 2011 increased by 1% from the nine months ended March 31, 2010. This was mainly due to the Company’s adjusted product mix by introducing more products with higher gross margins and reducing the production and sales scale for products of older style diesel engines and generator sets with lower gross margins since July, 2010.
Selling and Marketing Expenses
Our selling and marketing expenses primarily include sales commission, promotional fees, payroll, travel cost and freight fees. Our selling and marketing expenses accounted for 3% of our revenues for the nine months ended March 31, 2011. Selling and marketing expenses increased by 25%, or $490,606, to $2,445,004 for the nine months ended March 31, 2011 from $1,954,398 for the nine months ended March 31, 2010. This increase was primarily due to an increase of $475,807 in promotional fees in connection with sales activities.
General and Administrative Expenses
Our general and administrative expenses consist primarily of bad debt provision, payroll, consulting fees, plant and equipment depreciation, entertainment fees, office general expenses, labor insurance fees, travel costs, land usage taxes, welfare fees and land use rights amortization.
Our general and administrative expenses increased by 30%, or $369,432, to $1,619,965 for the nine months ended March 31, 2011 from $1,250,533 for the nine months ended March 31, 2010. This increase was primarily due to the increase of $206,347 in total in financial consulting fees, payroll and welfare fees in connection with being a publicly traded Company. Our general and administrative expenses were approximately 2% of revenues for the nine months ended March 31, 2011.
16
Interest Expense, Net
For the nine months ended March 31, 2011 and 2010, interest expense was $302,091 and $254,920, or 0.33% and 0.25% of our revenues, respectively. Interest expense increased by 19%, or $47,171, to $302,091 for the nine months ended March 31, 2011 from $254,920 for the nine months ended March 31, 2010. The increase in interest expense was primarily attributable to an increase of $34,334 in bank charges.
Other Income, Net
Other income was $244,868 for the nine months ended March 31, 2011 compared to $14,718 for the nine months ended March 31, 2010. This was primarily due to a subsidy for the nine months ended March 31, 2011 of $77,926 and a loss of $61,638 on settlement of accounts receivable for the nine months ended March 31, 2010.
Refunded Value Added Tax
To honor the Company’s on-going contributions to the local economy and its achievement of becoming a public in the U.S., the local tax bureau exempted the Company’s output VAT payable of $3,289,036, which was recorded as refunded value added tax in the accompanying condensed consolidated statements of income and comprehensive income for the nine months ended March 31, 2011.
Income Taxes
Our income tax expenses increased by 10%, or $ 210,329, to $2,385,488 for the nine months ended March 31, 2011 from $ 2,175,159 for the nine months ended March 31, 2010.
In accordance with the relevant tax laws and regulations of the PRC, the applicable corporate income tax rate for Hengyuan is 25%. In 2011 and 2010, Jinma and Huaxin were defined by the local tax bureau as tax payers subject to the “Verification Collection” method, according to which the amount of income taxes paid is determined by the local tax bureau based on certain criteria instead of applying the CIT rate of 25%. Therefore, the amount of income tax assessed for Jinma and Huaxin under this Verification Collection method differed from the normal computation by applying the CIT rate of 25%. Our effective tax rate was 14% and 15% for the nine months ended March 31, 2011 and 2010, respectively.
Net Income
Primarily as a result of the foregoing, our net income increased by 17%, or $2,100,355, to $14,517,531 for the nine months ended March 31, 2011 from $12,417,176 for the nine months ended March 31, 2010.
Liquidity and Capital Resources
We generally finance our operations through our operating profit and borrowings from banks. During the reporting periods, we arranged a number of bank loans to satisfy our financing needs. As of the date of this report, we have not experienced any difficulty in raising funds through bank loans, and we have not experienced any liquidity problems in settling our payables in the normal course of business and repaying our bank loans when they are due. We believe that the Company has adequate funds and capital with respect to conducting its business over the next twelve months.
The following table sets forth a summary of our cash flows for the periods indicated:
Nine Months Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
$
|
$
|
|||||||
Net cash provided by operating activities
|
3,041,954 | 14,332,208 | ||||||
Net cash (used in) investing activities
|
(3,368,752 | ) | (15,261,735 | ) | ||||
Net cash (used in) provided by financing activities
|
(987,168 | ) | 943,361 | |||||
Net (decrease) increase in cash and cash equivalents
|
(1,313,966 | ) | 13,834 | |||||
Effect of exchange rate changes on cash
|
1,080,746 | 59,014 | ||||||
Cash and cash equivalents at beginning of period
|
3,399,360 | 127,576 | ||||||
Cash and cash equivalents at end of period
|
3,166,140 | 200,424 |
17
We believe that the level of financial resources available to the Company is a significant factor for our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financing to strengthen the Company’s financial position, to expand our facilities and to provide us with additional flexibility to take advantage of business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable to us.
Liquidity
Operating Activities
Net cash provided by operating activities primarily consists of net income, as adjusted by provision for doubtful accounts, depreciation and amortization, refunded value added tax, deferred taxes, gain or loss on settlement of accounts receivable and accounts payable for fixed assets, and changes in operating assets and liabilities such as accounts receivable, prepayments, deposits and other receivables, due from employees and related parties, inventories, account payable, customer deposits, other payables, accrued liabilities and taxes payable.
Net cash provided by operating activities was $3,041,954 for the nine months ended March 31, 2011, which was primarily attributable to our net income of $14,517,531, adjusted by an increase in value added tax payable of $14,438,119, increase in taxes payable of $2,190,968, offset by increase in accounts receivable of $9,244,595, increase in inventories of $15,626,355, increase in refunded value added tax of 3,289,036 and decrease in prepayments for goods of $1,883,791. The local tax bureau deferred the payment of our current value added tax and income tax due.
Investing Activities
Net cash used in investing activities primarily consists of purchases of plant and equipment, purchases of construction in progress, reverse merger and notes receivable.
Net cash used in investing activities was $3,368,752 for the nine months ended March 31, 2011, which is primarily attributable to issuance of notes receivable of $67,818,675, offset by repayment of notes receivable of $64,613,830.
Financing Activities
Net cash used in/provided by financing activities primarily consists of proceeds from short-term loans, repayments of short-term loans, repayments of notes payable, proceeds from notes payable and repayment of long-term debt.
Net cash used in financing activities was $987,168 for the nine months ended March 31, 2011, which is primarily attributable to repayments of short-term loans of $2,642,246, offset by proceeds from short-term loans of $1,201,021.
Working Capital
Working capital is that the current liabilities deducted from current assets.
Our working capital was $66,198,630 for the nine months ended March 31, 2011, as compared with $50,735,680 for the year ended June 30, 2010, which is primarily attributable to increase in accounts receivable of $9,033,016, increase in inventories of $15,626,355, increase in notes receivable of $3,283,896, increase in prepayments for goods of $1,883,791 and increase in accounts payable of $782,049, offset by increase in income tax payable of $2,190,968 and increase in value added tax payable of $11,149,083.
18
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of March 31, 2011, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
Payments Due by Period
|
||||||||||||
|
Total
|
Less than
1 year
|
Over 1 year
|
|||||||||
Contractual Obligations:
|
||||||||||||
Bank Indebtedness
|
$ | 1,526,694 | $ | 1,526,694 | $ | - | ||||||
Notes payable
|
1,855,657 | 1,614,590 | 241,067 | |||||||||
Construction In Processing
|
562,506 | 562,506 | - | |||||||||
Total Contractual Obligations:
|
$ | 3,944,857 | $ | 3,703,790 | $ | 241,067 |
Bank indebtedness consists of secured and unsecured borrowings from Weifang Bank and China Construction Bank.
Notes payable includes loan from an unrelated individual and related individuals.
The Company has a capital commitment of $562,506 for the construction of a new plant for Huaxin, a subsidiary of the Company, for production of diesel engines as of March 31, 2011.
On August 4, 2009, Hengyuan entered into a guarantee contract to serve as guarantor for bank loans borrowed by Mr. Li Zengshan, an officer of the Company, from the Industrial and Commercial Bank of China with a guarantee amount of $329,654. Under this guarantee contract, a land use right and an office building of Hengyuan were pledged for the bank loans.
Off-Balance Sheet Commitments and Arrangements
Other than the arrangement described above, as of March 31, 2011, we do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions of foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is Subject to Special Considerations do to its Operations in the PRC
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. At the conclusion of the period ended March 31, 2011 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2011, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, we are named as defendant in lawsuits in which claims are asserted against us. In our opinion, the liabilities, if any, which may ultimately result from such lawsuits, are not expected to have a material adverse effect on our financial position, results of operations or cash flows. As of March 31, 2011, there were no pending or outstanding material proceedings involving the Company or its subsidiaries, or any of their properties.
ITEM 1A. RISK FACTORS
Not required for a “smaller reporting company”.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2011, the Company had no unregistered sales of equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a)Exhibits
EXHIBIT
NO.
|
|
DESCRIPTION
|
|
LOCATION
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2.1
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Share Exchange Agreement, dated December 28, 2009, by and between the Company, Jolly Promise Limited and Welldone Pacific Limited
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Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
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||
3.1
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Articles of Incorporation of the Company
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Incorporated by reference to Exhibit 3.1 to the Company’s General Form for Registration of Securities on Form 10 as filed with the SEC on May 15, 2009
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||
3.2
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Amended and Restated Bylaws of the Company
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Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
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||
3.3
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Memorandum and Articles of Association of Jolly Promise Limited, dated July 2, 2008
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Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
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||
3.4
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Certificate of Incorporation of Jolly Promise Limited
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Incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
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||
10.1
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Stock Purchase Agreement between Shaun Carter and the company dated December 28, 2009
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Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
|
||
14.1
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Code of Business Conduct and Ethics
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Incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
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||
16.1
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Letter Regarding Change in Certifying Accountant
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Incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K as filed with the SEC on February 9, 2010
|
||
21
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List of Subsidiaries of the Company
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Incorporated by reference to Exhibit 21 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
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22
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Published Report Regarding Matter Submitted to Vote of Security Holders Regarding Name Change of the Company
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Incorporated by reference to the Company’s Current Report on Form 8-K as field with the SEC on April 28, 2010
|
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31.1
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Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Provided herewith
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31.2
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Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Provided herewith
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||
32.1
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Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
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Provided herewith
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22
32.2
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Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
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Provided herewith
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||
99.1
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Audit Committee Charter
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Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
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99.2
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Compensation Committee Charter
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Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
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99.3
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Corporate Governance and Nominating Committee Charter
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Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
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99.4
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Related Person Transaction Policy
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Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
|
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99.5
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Written Disclosure Policy
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Incorporated by reference to Exhibit 99.5 to the Company’s Annual Report on Form 10-K as filed with the SEC on September 28, 2010
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 13, 2011
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By:
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/s/ Dianjun Liu
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Name: Dianjun Liu
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Its: President, Chief Executive
Officer and Principal Executive
Officer
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|||
Date: May 13, 2011
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By:
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/s/ Chenglin Wang
|
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Name: Chenglin Wang
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|||
Its: Chief Financial Officer, and Principal
Financial and Accounting Officer
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24