Item 1. Description of Business
Forward-looking Statements
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements so as to conform these statements to actual results.
As used in this annual report, the terms "we", "us", "our", “the Company”, and "China Wind" mean China Wind Energy Inc. and all of our subsidiaries, unless otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
Overview and Recent Business Developments
We were incorporated in Nevada on May 8, 2006. Prior to November 20, 2007 we were a shell company with nominal assets and operations. On November 20, 2007 we completed a reverse merger transaction with China Wind Energy Ltd., a Hong Kong company (“China Wind HK”). The closing of this reverse takeover transaction resulted in the acquisition of China Wind HK, and its wholly owned subsidiary XingYe Wind Energy Technology Limited (“XingYe”), becoming our wholly owned subsidiary. Xing Ye was in the business of providing management, consulting and administrative services to Harbin SQ Wind Power Ltd. (“Harbin SQ”), a manufacturer of wind turbines in China.
On December 5, 2007 we filed a certificate of change to effect a 5 for 1 forward split of our common stock. This forward split increased our issued common shares and authorized common stock, on a basis of five new common shares for every one existing common share and resulted in an increase from 7,377,450 issued and outstanding common shares to 36,887,250 issued and outstanding common shares. It also increased our authorized common stock from 80,000,000 to 400,000,000 shares.
On May 16, 2008 we entered into a share exchange agreement with Power Profit Technology Development Limited, a Hong Kong company (“Power Profit”), and Wan Yi Tse, the holder of 100% of the issued and outstanding share capital of Power Profit. The closing of this share exchange agreement on May 26, 2008 resulted in:
a)
the acquisition of 100% of the equity interests of Power Profit;
b)
the acquisition of 82.14% of the equity interests of Power Profit’s majority owned subsidiary, Harbin SQ
c)
Wan Yi Tse’s designees becoming the holders of 29% of all of our issued and outstanding common stock;
d)
Power Profit becoming our wholly owned subsidiary and Harbin SQ becoming our majority-owned subsidiary;
e)
the termination of an agreement for the provision of management, consulting and administrative services by XingYe, our subsidiary, to Harbin SQ; and
f)
the appointment of Shouquan Sun as our President, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Secretary, Treasurer, and director to replace Jian Ren who resigned from all of his positions with us.
Description of Business
Harbin SQ, our majority-owned subsidiary, focuses primarily on the production of turbine blades and combine harvesters. Our primary product is a blade for wind turbine generators which allows for variable pitch and speed. Different from other blades of the 600KW and 750KW type produced in China, our blade products provide variable speed and pitch adjustments to achieve high efficiency. We have 5 individual patents on our wind turbine blades.
Organizational Structure
Our current organizational structure is summarized by the illustration below:
Sales of Blades
We have currently generated revenue only from the sale of combine harvesters which we were previously in the business of manufacturing. We anticipate that we will begin producing and selling our wind turbine product shortly and we anticipate that we will generate revenues from sales of our wind turbine blades to customers who install turbines and other equipment in wind farms.
Factors that may affect sales volumes for our wind turbine blades include:
·
world gross domestic product growth;
·
the availability of alternative sources of energy; and
·
the growth in demand for wind powered energy.
Factors that may affect the prices for our wind turbine blades include:
·
world economic environment;
·
industry operating rate, which is based on the supply and demand; and
·
relative strength of the Chinese currency.
The Market for Wind Turbine Blades
Wind energy is considered a “green” energy that does not pollute the environment, and is attractive to many countries in the world. China has a shortage of energy resources. The Chinese wind energy industry, while in its infancy, could grow to be an important source of energy production. On the eve of the 2005 Beijing International Renewable Energy Conference, a report released by the Chinese Renewable Energy Industries Association and sponsored by Greenpeace and the European Wind Energy Association showed that China could at least double its current wind production by 2020.
Wind energy is a rapidly growing market segment for the composites industry and is a fast growing energy sector. According to researchandmarkets.com, on average, the global wind energy market has grown at a rate of 23% per year for the last ten years. According to the German Engineering Federation, worldwide, 15,200 megawatts of new wind generating capacity was installed in 2006, with about 15 billion Euros (US$19.5 billion) invested, an increase of 32 percent compared to the previous year. We are initially focusing on the domestic market in China, but will be looking to distribute our products throughout the world, with a focus on Europe.
Raw Materials
Our manufacturing facilities are located at 2 Haibin Road, Binxi Development, Heilongjiang Province, China, which is also our principal executive office. We will continue to operate at these facilities until our growth requires additional capacity and equipment. We source our raw materials from various metal smelting and electronics manufacturers in our local vicinity. Although we have not been subject to shortages of any of the components used in the fabrication of our wind turbines, we may be subject to cutbacks and price increases as we do not currently have any long term contracts with our supplies. In the even that prices do increase; we may not be able to pass these increases on to our customers.
Competition
The table below contains a description of our principal competitors in mainland China.
Competitive Advantages and Strategy
We believe that our unique technology, price points, relationships, infrastructure, proven quality control standards, and reputation represent substantial competitive advantages. We are currently able to maintain lower costs of manufacturing than competitors based in the United States and Europe. Furthermore, our competitive advantage in China is protected by our significant knowledge of government regulations, business practices, strong relationships, and patent protection.
We have been developing and plan to implement the following strategies to aide in the growth of our business:
1.
Management and Innovation Strategies
We have implemented a scientific approach to blade manufacture which relies on innovation. We also have a rigorous quality control program in place.
2.
Broaden Development Strategies
We have improved the reputation of our products by developing and implementing a marketing plan which will allow us to increase the value of our brand.
3.
Optimize Work Environment
We have implemented standardized safety procedures for our employees. Together with our quality control program, we hope this will result in high quality products for our customers.
4.
Cost Strategies
We plan to implement cost control measures in order to be more competitive in our domestic markets.
5.
Grow Capacity
We anticipate growing demand and have prepared to increase our production capacity in our current facility as well considered offsite manufacturing possibilities.
6.
Widen Sales Channels
We are actively seeking distribution contracts and increased sales through international channels.
Intellectual Property
We have received five patents in the wind energy industry from the China Patent and Trademark Office:
1. ZL200620021590.7 - This patent relates to a belt drive accelerator which is fitted to wind power electricity equipment. This patent was obtained in 2006 and expires in 2016. The belt drive accelerator is especially important to us because it speeds up the blades in a dynamotor. This patent lowers the cost and increases the useful life of our blades.
2. ZL200520020555.9 - This patent relates to a frame structure tower for wind energy equipment. The patent was obtained in 2005 and expires in 2015.
3. ZL200220020019.9 - This patent relates to an integer-stand wind energy dynamotor. This patent was obtained in 2002 and expires in 2012.
4. ZL200220020018.4 - This patent relates to a super-high-binding and auto-rising tower crane for the wind energy dynamotor. This patent was obtained in 2002 and expires in 2012.
5. ZL200520020020.1 - This patent relates to equipment for motional wind energy blade production. This patent was obtained in 2005 and expires in 2015.
Customers
For the year ending July 31, 2009, we generated revenues of $82,308. These revenues resulted from the sales of combine harvesters as our wind turbine products are not yet ready for sale. We plan to distribute our products to various customers including private companies as well as government backed entities. As of October 29, 2009 we have not sold any of our wind turbines.
A significant percentage of our revenues for the year ending July 31, 2009 came from a small number of customers and we anticipate this will continue as we begin to produce and sell our wind turbine products due to the cost and nature of the product.
Employees
As of October 29, 2009 we had 140 employees all employed full time, one of which is Shouquan Sun, our President, Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer, and director. Mr. Sun provides us with services in the areas of management, administration and business development. We also engage consultants in the areas of business development consulting, legal and accounting.
Government Regulations
We are subject to environmental regulation by both the Chinese central government and by provincial or local government agencies in China. Since our inception we have been in compliance with all applicable regulations.
Our manufacturing processes generate noise, wastewater, gaseous and other industrial wastes, and we use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our operations. As a result, we are required to comply with all national and local regulations regarding protection of the environment. Our operations are subject to regulations promulgated by China’s Environmental Protection Administration, as well as local pollution regulations. We are also subject to periodic monitoring by local environmental protection authorities in Harbin. We believe that our manufacturing facilities and equipment are in substantial compliance with all applicable environmental regulations. Based on the requirements of present law, additional measures to maintain compliance are not expected to materially affect our capital expenditures, competitive position, financial position or results of operations.
The Chinese government has expressed concern about pollution and other environmental hazards. Although we believe that we comply with current national and local government regulations, if it is determined that we are in violation of these regulations, we can be subject to financial penalties as well as the loss of our business license, in which event we would be unable to continue in business. Further, if the national or local government adopts more stringent regulations, we may incur significant costs in complying with such regulations. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions of our business operations.
Regulations Governing Electrical Equipment
Our products are subject to regulations that pertain to electrical equipment, which may materially adversely affect our business. These regulations influence the design, components or operation of our products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these regulations may restrict our ability to sell our products in China. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on our revenues, gross profit margins and results of operations and increase the volatility of our financial results.
Business License
We, and all of our subsidiaries, have been issued business licenses with the appropriate municipal and provincial governments which specifically authorize the companies to operate their respective businesses. All of these business licenses, which are subject to annual review by the issuing agencies, are current as of the date of this report.
Beneficial Regulations
In its current 5-Year Plan (covering 2006-2011) and in the National Science Mid to Long-Term Development Plan (2006-2020), the Chinese government identified wind power as a viable “green” energy technology that will reduce emissions while increasing the energy supply. The central government’s official recognition of the value of wind power has created substantial interest in the market.
Reports to Security Holders
We intend to furnish our shareholders annual reports containing financial statements audited by our independent auditors and to make available quarterly reports containing unaudited financial statements for each of the first three quarters of each year.
The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
Item 1A.
Item 1A. Risk Factors
Not Applicable.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our principal executive offices are located at 2 Haibin Road, Binxi Development, Harbin, Heilongjiang Province, China, where we carry out the management of our manufacturing factory. We own this property through our majority owned subsidiary: Harbin SQ. The property consists of a factory of 63,638 square meters (approximately 208,787 square feet) and an office building of 20,000 square meters (approximately 65,616 square feet). Harbin SQ carries out the manufacturing of our wind turbine blades at this location.
Item 3.
Item 3. Legal Proceedings
Our majority owned subsidiary, Harbin SQ, was named as a defendant in a lawsuit in which the plaintiffs alleged that illegal transfers and misleading promotion of Harbin SQ’s shares to the public occurred through securities brokers. The plaintiffs, 51 current stockholders representing 1,018,000 outstanding shares, acquired Harbin SQ’s shares through securities brokers from Harbin SQ’s initial stockholders and sought monetary damages from Harbin SQ, including the costs of acquiring the shares, expenses and imputed interest.
In September 2008 the claims of the plaintiffs were refuted in a judgment of the Court of Bin County, Heilongjiang Province. On May 25, 2009, 48 individual plaintiffs appealed the decision to a higher court. The appeal of 13 plaintiffs has been rejected by the court and the remaining 35 have yet to have their hearing.
We know of no other material, active or pending legal proceedings against us, our subsidiaries or our property, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholders are an adverse party or have a material interest adverse to us.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
There is a limited public market for our common shares. Our common shares are quoted for trading on the OTC Bulletin Board under the symbol “CWEY”. The market for our stock is highly volatile. We cannot assure you that there will be a market in the future for our common stock. OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Bulletin Board stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
Our common shares became eligible for quotation on the OTC Bulletin Board on August 2, 2007, but no trades were made until September 11, 2007.
The following table shows the high and low prices of our common shares on the OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
We have never paid any cash dividends and currently do not intend to pay any dividends for the foreseeable future.
Holders
As of October 29, 2009, there were 3,488 holders of record of our common stock.
Dividends
Holders of our common stock are entitled to dividends if declared by the Board of Directors out of funds legally available therefore. As of October 29, 2009 no cash dividends have been declared.
We do not intend to issue any cash or stock dividends in the near future. We intend to retain earnings, if any, to finance the development and expansion of our business. Our future dividend policy will be subject to the discretion of the Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions and other factors.
Equity Compensation Plans
As of October 29, 2009, we did not have any equity compensation plans.
Recent Sales of Unregistered Securities
We have not made any previously unreported sales from August 1, 2008 to July 31, 2009.
Recent Purchases of Equity Securities by us and our Affiliated Purchases
We have not repurchased any of our common stock and have no publicly announced repurchase plans or programs as of October 29, 2009.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management's Discussion and Analysis or Plan of Operation
We are a development stage company with limited operations and revenues from our business operations. Our auditors have issued a going concern opinion. This means that our auditors believe there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional financing to fund our operations. Our only source of cash at this time is investments by others in our company.
Forward-Looking Statements
This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including, "could" "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Prospectus.
Liquidity and Capital Resources
As of July 31, 2009 we had cash of $65,233, total current assets of $1,730,951, total current liabilities of $4,365,158 and a working capital deficit of $2,634,207 compared to a working capital deficit of $7,002,730 as of July 31, 2008. The decrease in working capital deficit was due to an increase in accounts receivable associated with the transfer of our land use rights in Harbin City, together with a decrease in liabilities due to the elimination of $7,603,673 in advance receipts associated with the transfer of our land use rights in Harbin City. The decrease in liabilities due to the elimination of advance receipts was partially balanced out by an increase of $1,623,646 in accounts payable and accrued liabilities as well as an increase of $1,914,959 in short term loans.
On November 6, 2007, we signed a contract with Heilongjiang Nongkentaixing Real Estate Development Co. Ltd to sell our land use rights in Harbin City. The total contract price is approximately $10,308,827. We were obligated to clear the original buildings on the land before the transfer of the land use rights can be completed. As of July 31, 2008, we had completed the clearance of the original buildings on the land and all costs related to the clearance of the buildings had been incurred. As of July 31, 2008, we had received net proceeds of $7,603,673 from this sale. Since the legal process for title transfer has not been completed, the proceeds were recorded as other advance receipts.
In October 2008, the title transfer was approved by the government and by July 31, 2009, we had received net proceeds of $7,694,925. The remaining proceeds net of sales tax for the amount of $882,351 was included as accounts receivable at July 31, 2009. Loss on the disposal of land use rights for the amount of $1.7 million was recognized for the year ended July 31, 2009.
Since November 27, 2006 (inception) to July 31, 2009, our accumulated deficit was $4,478,842. We are dependent on the funds raised through our equity or debt financing, investing activities, and revenue generated through the sales of our products to fund our operations. We anticipate that we will incur substantial losses over the next year and our ability to generate any revenues in the next 12 months continues to be uncertain.
As of July 31, 2009 we had total assets of $22,002,466 compared to $30,865,947 as of July 31, 2008. The decrease in total assets was due to a decrease in intangible assets upon the sale of our land use rights in Harbin City. Our total liabilities decreased from $8,274,345 as of July 31, 2008 to $4,365,158 as of July 31, 2009 due to a decrease in advance receipts associated with the Harbin City land use rights. Once these were fully transferred, the asset and associated liability were removed from our balance sheet. Our total assets as of July 31, 2009 were primarily made up of property, equipment and goodwill.
We used net cash of $1,642,454 in operating activities for the year ended July 31, 2009, $403,041 for the year ended July 31, 2008 and $2,066,762 from inception to July 31, 2009. The large increase in cash used in operating activities for the year ended July 31, 2009 is attributed to an increase in operations in preparation for the production and sale of our wind turbine products.
We used net cash of $303,599 in investing activities for the year ended July 31, 2009 including $799,738 in purchases of property and equipment and $398,558 in cash paid for construction, offset by $723,541 collection of loans made to related parties. This compares to $110,638 provided by investing activities for the year ended July 31, 2008, comprised primarily of purchases of property and equipment offset by the cash acquired on acquisition and collection of loans made to related parties.
We received net cash of $1,934,109 from financing activities for the year ended July 31, 2009, including $19,614 as proceeds from related party loans and $2,462,936 from other short term loans. We also repaid $548,441 towards short term loans during the year ended July 31, 2009. During the year ended July 31, 2008 we received $172,040 from financing activities, including $100,000 from the issuance of our common stock and $44,999 from short term loans. From our inception to July 31, 2009 we received a total of $2,128,814 from investing activities.
Our cash position decreased by $15,115 during the year ended July 31, 2009 compared to an increase of $79,070 during the year ended July 31, 2008. This is due in part to a decrease of $3,171 in cash due to the effect of exchange rates during the year ended July 31, 2009 compared to an increase of $199,433 during the year ended July 31, 2008.
During the year ended July 31, 2009 we secured short term loans from an institutions and individuals to meet our ongoing cash requirements. Below is a table of these loans at July 31, 2009 and 2008.
Not all of the loans from individuals are interest-bearing. For interest bearing loans, the interest rate is ranging from 14% to 40% per annum. Interest expenses for short term loans were $239,141 for the year ended July 31, 2009 and $8,738 for the year ended July 31, 2008.
Our subsidiary, Harbin SQ provided a loan to Shouquan. Sun, our President, prior to us acquiring it. No monies have been loaned to Mr. Sun since our acquisition of Harbin SQ. As of July 31, 2009, Mr. Sun owed us $297,097. From April 30, 2008 to July 31, 2009, Mr. Sun has repaid a total of $1,616,859 on the original loan. We hope to have the remaining funds settled with Mr. Sun in the near future.
We expect that our total expenses will increase over the next year as we increase our business operations through Harbin SQ, our majority owned subsidiary. We have not been able to reach the break-even point since our inception and have had to rely on outside capital resources. Over the next 12 months, we plan to begin manufacturing and selling of our wind turbines. However, we do not anticipate that we will generate sufficient revenues to fund our proposed operations.
Our approximate monthly cash requirement during the year ended July 31, 2009 was $51,031 compared to $33,587 during the year ended July 31, 2008. At the moment, we do not have sufficient cash to cover our expenses for even one month. Additionally, we expect to require approximately $2,635,161 in financing to fund our business operations over the next 12 months (beginning November 2009), as follows:
At present, our cash requirements for the next 12 months outweigh the funds available to maintain or develop our operations. Of the $2,635,161 that we require for the next 12 months, we had $65,233 in cash as of July 31, 2009. In order to improve our liquidity, we intend to pursue additional equity financing from private investors or possibly a registered public offering. We currently do not have any arrangements in place for the completion of any further private placement financings and there is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to be within the amount of capital resources that are available to us.
Results of Operations
Revenues
Since our inception to July 31, 2009 we have generated gross revenues of $230,691 from the sale of combine harvesters manufactured by us. We generated $82,308 during the year ended July 31, 2009 and $148,383 during the year ended July 31, 2008. Our cost of goods sold was $631,507 for the year ended July 31, 2009 and $127,438 for the year ended July 31, 2008. Cost of goods is calculated as the difference in inventory at the beginning of the year compared to the end of the year. The reason that the cost of goods was so high was due to much of our combine harvester inventory being marked down on obsolescence as of July 31, 2009 due to a change in manufacturing focus from combine harvesters to wind turbines.
Expenses
For the year ended July 31, 2009, we have total operating expenses of $4,334,680, including $101,351 in selling expenses, $2,581,395 in general and administrative and $1,651,934 in loss of disposal of assets. By comparison, for the year ended July 31, 2008, we had total operating expenses of $408,954 which were made up of $405,169 in general and administrative costs and $3,785 in selling expenses. For the period from inception to July 31, 2009 our total operating expenses were $4,781,451.
The main reason for the increase in expenses is due to the significant increase in the activity of the company due to the acquisition of Harbin SQ and the preparation for production and sales of our wind turbine product.
Net Loss
Since our inception on November 27, 2006 to July 31, 2009, we incurred net a loss of $4,478,842. For the year ended July 31, 2009, we incurred net loss of $4,077,218 compared to $363,807 for the year ended July 31, 2008. Our net loss per share was $0.08 for the year ended July 31, 2009 and $0.01 for the year ended July 31, 2008.
Our net loss for the year ended July 31, 2009 was the result of limited revenue of $82,308 counted against $631,507 in cost of goods sold, $101,351 in selling expenses, $2,581,395 in general and administrative expenses and $1,651,934 in loss on disposal of assets. Comparatively, during the year ended July 31, 2008 we generated revenues of $148,383 against $127, 438 in cost of goods sold, $3,785 in selling expenses and $405,169 in general and administrative expenses. The increases in general and administrative expenses as well as the cost of goods sold and selling expenses was due to the change of focus from the sale of combine harvesters to wind turbines.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Inflation
The effect of inflation on our revenue and operating results has not been significant.
Critical Accounting Policies
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in note 3 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management.
Basis of Presentation and Use of Estimates
The consolidated financial statements include our accounts and our majority-owned subsidiaries after the elimination of intercompany accounts and transactions. Our fiscal year ends on July 31.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. We regularly evaluate estimates and assumptions related to obsolete inventory, useful life and recoverability of long lived assets, and goodwill. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Property and Equipment
Property and equipment are initially recorded at cost. Gains or losses on disposals are reflected as gain or loss in the period of disposal. The cost of improvements that extend the life of plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:
Goodwill
We periodically review the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”) requires that goodwill and certain intangible assets be assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of fair value of a reporting unit are determined using various valuation techniques with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on our budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Our evaluation of goodwill completed during the year ended July 31, 2009 and 2008 resulted in no impairment losses.
Item 7A.
Item 7A. Qualitative Disclosures about Market Risk
Not Applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
CHINA WIND ENERGY INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX
PAGE ~2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
PAGE CONSOLIDATED BALANCE SHEETS
PAGE CONSOLIDATED STATEMENTS OF OPERATIONS
PAGE CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
PAGE CONSOLIDATED STATEMENTS OF CASH FLOWS
PAGE ~20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
China Wind Energy Inc. and Subsidiaries
(A development stage company)
We have audited the accompanying consolidated balance sheet of China Wind Energy Inc. and subsidiaries as of July 31, 2009 and the related consolidated statement of operations, changes in stockholders’ equity (deficit) and cash flows for the year ended July 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The statements of operations, changes in stockholders’ equity (deficit) and cash flows from November 27, 2006 (date of inception) to July 31, 2007 were audited by other auditors whose report dated August 31, 2007 expressed an unqualified opinion, with an explanatory paragraph discussing the Company’s ability to continue as a going-concern. In addition, the statements of operations, changes in stockholders’ equity (deficit) and cash flows from August 1, 2007 to July 31, 2008 were audited by other auditors whose report dated October 9, 2008 expressed an unqualified opinion, with an explanatory paragraph discussing the Company’s ability to continue as a going-concern. Our opinion on the statements of operations, changes in stockholders’ equity (deficit) and cash flows from inception to July 31, 2009, insofar as it relates to amounts for prior periods through July 31, 2008, is solely based on the reports of other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Wind Energy Inc. and subsidiaries at July 31, 2009 and the consolidated results of its operations and its cash flows for the year ended July 31, 2009, and for the period from November 27, 2006 (date of inception) to July 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred accumulated deficits of $4,478,842 as of July 31, 2009 that include losses of $4,077,218 for the year ended July 31, 2009. The Company also had a working capital deficiency of $2,634,207 as of July 31, 2009. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
October 29, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
China Wind Energy Inc. and Subsidiaries
(A development stage company)
We have audited the accompanying consolidated balance sheets of China Wind Energy Inc. and subsidiaries as of July 31, 2008 and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year ended July 31, 2008, and for the period from November 27, 2006 (date of inception) to July 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The Company’s financial statements for the period from November 27, 2006 (date of inception) to July 31, 2007 were audited by other auditors who expressed an unqualified opinion, with an explanatory paragraph discussing the Company’s ability to continue as a going-concern in their report dated on August 31, 2007. The other auditors’ report has been furnished to us, and our opinion, insofar as it relates to amounts included for such prior period, is based solely on the report of such other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Wind Energy Inc. and subsidiaries at July 31, 2008 and the consolidated results of its operations and its cash flows for the year ended July 31, 2008, and for the period from November 27, 2006 (date of inception) to July 31, 2008 in conformity with accounting principles generally accepted in the in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred accumulated deficits of $401,624 as of July 31, 2008 that include losses of $363,807 for the year ended July 31, 2008. The Company also had a working capital deficiency of $7,002,730 as of July 31, 2008. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Yichien Yeh, CPA
Yichien Yeh, CPA
Rego Park, New York
October 9, 2008
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
China Wind Energy Inc. And Subsidiaries
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the period from November 27, 2006 (Date of Inception) to July 31, 2009
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
China Wind Energy Inc. And Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS BACKGROUND
The Company was incorporated in Nevada on May 8, 2006, under the name Pooch Pal Beverages Inc., and changed its name to K-Care Nutritional Products Inc. On November 29, 2007, the Company changed its name to China Wind Energy Inc.
On November 20, 2007, the former President of the Company entered into a Stock Purchase Agreement with Jian Ren, a resident and citizen of the Hong Kong SAR of the People’s Republic of China (the “Purchaser”), pursuant to which the Purchaser agreed to purchase 5,950,000 shares of the Company’s common stock, $0.0001 par value, from the former President of the Company for $50,000. These shares represented 81% of the issued and outstanding common stock of the Company. The Stock Purchase Agreement closed on November 27, 2007.
Also, on November 20, 2007, the Company entered into an Acquisition Agreement with the Purchaser, who is the owner of all of the share capital of China Wind Energy Limited, a corporation organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China, pursuant to which the Purchaser agreed to transfer all of his share capital in China Wind Energy Limited to the Company for $1. Upon closing of the Acquisition agreement on November 27, 2007, China Wind Energy Limited became a wholly owned subsidiary of the Company. China Wind Energy Limited has one wholly owned subsidiary, Harbin XingYe Wind Energy Technology Limited (“XingYe”), a company established under the Law of the People’s Republic of China (“PRC”).
The Acquisition was accounted for as a reverse merger, since the Purchaser owned a majority of the outstanding shares of the Company’s common stock immediately following the Acquisition. China Wind Energy Limited is deemed to be the acquirer in the merger. Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements prior to the Acquisition are those of China Wind Energy Limited and are recorded at the historical cost basis of China Wind Energy Limited, whereas, the consolidated financial statements after completion of the Acquisition will include the assets and liabilities of the Company and China Wind Energy Limited, the historical operations of China Wind Energy Limited, and the Company’s operations from the closing date of the Acquisition.
On May 16, 2008, the Company entered into a Share Exchange Agreement with Power Profit Technology Development Limited, a company incorporated under the laws of Hong Kong, People’s Republic of China (“Power Profit”), and Wan Yi Tse, the holder of 100% of the issued and outstanding registered share capital of Power Profit.
Pursuant to the share exchange agreement, on May 26, 2008, the Company completed the acquisition of 100% of the equity interests of Power Profit and 82.14% of the equity interests of its subsidiary, Harbin SQ Wind Power Co., Ltd. (formerly Harbin Sanye Wind Energy Technology Co., Ltd.) (“Harbin SQ”). Harbin SQ is a company incorporated under the laws of the People’s Republic of China, engaged in the business of harvesters and blades for wind generators. Together, Power Profit and Harbin SQ become the subsidiaries of the Company. Power Profit becomes the Company’s wholly owned subsidiary and Harbin SQ becomes the Company’s majority owned subsidiary.
The Company has not yet generated significant revenues from planned principal operations and is considered a Development Stage Company, as defined by Statement of Financial Accounting Standard (“SFAS”) No.7 “Accounting and Reporting for Development Stage Enterprises”.
2. GOING CONCERN
As reflected in the accompanying combined financial statements, the Company has accumulated deficits of $4,478,842 and $401,624 at July 31, 2009 and 2008, respectively that include losses of $4,077,218 and $363,807 for the year ended July 31, 2009 and 2008, respectively. The Company also had a working capital deficiency of $2,634,207 and $7,002,730 as of July 31, 2009 and 2008. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements have been prepared on a going basis and do not include any adjustments that might result from outcome of this uncertainty.
At July 31, 2009, the Company has suffered losses from development stage activities to date. Although management is currently attempting to implement its business plan, and is seeking additional sources of equity or debt financing, there is no assurance these activities will be successful.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after the elimination of intercompany accounts and transactions. The Company’s fiscal year ends on July 31.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. The Company regularly evaluates estimates and assumptions related to obsolete inventory, useful life and recoverability of long lived assets, and goodwill. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
b. Fair values of financial instruments
The carrying amount reported in the balance sheet for cash, accounts receivable, inventory, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments.
c. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks and liquid investments with an original maturity of three months or less. Cash deposits with banks are held in financial institutions in China, which has no federally insured deposit protection. Accordingly, the Company has a concentration of credit risk related to these uninsured deposits.
d. Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollected amounts through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for bad debts and a credit to accounts receivable.
e. Inventories
Inventories are stated at the lower of cost, as determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management writes down the inventories to market value if market value is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.
f. Property and Equipment
Property and equipment are initially recorded at cost. Gains or losses on disposals are reflected as gain or loss in the period of disposal. The cost of improvements that extend the life of plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:
g. Construction in progress
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed.
h. Impairment of Long-Lived Assets
The Company accounts for impairment of property and equipment and amortizable intangible assets in accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.
i. Intangible Assets
The Company’s intangible assets are stated at cost less accumulated amortization and are mainly comprised of land use rights. Land use rights are related to land the Company occupies in Heilongjiang Province, PRC and are being amortized on a straight-line basis over a period of 40 years.
j. Goodwill
The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”) requires that goodwill and certain intangible assets be assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of fair value of a reporting unit are determined using various valuation techniques with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The Company’s evaluation of goodwill completed during the year ended July 31, 2009 and 2008 resulted in no impairment losses.
k. Comprehensive income
SFAS No.130, “Reporting Comprehensive Income”, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income arose from the effect of foreign currency translation adjustments.
l. Revenue recognition
The Company generates revenues from the sales of harvesters. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales are presented net of value added tax (VAT). No return allowance is made as products returns are insignificant based on historical experience.
m. Research and development costs
Research and development costs are expensed to operations as incurred.
n. Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
o. Foreign exchange and currency translation
The Company’s functional currency is Chinese currency Renminbi (“RMB”) and its reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollar at exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.
The financial statements of the Company are translated into United States dollars in accordance with Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency Translation”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. At July 31, 2009 and 2008, the cumulative translation adjustment of $50,301 and $44,369 were classified as an item of accumulated other comprehensive income in the stockholders’ equity section of the balance sheet respectively. For the year ended July 31, 2009 and 2008, other comprehensive income was $5,932 and $44,489, respectively.
The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the financial statements were as follows: As of July 31, 2009 and 2008, the Company used the period-end rates of exchange for assets and liabilities of $1 to RMB6.823 and $1 to RMB6.839 respectively. For the years ended July 31, 2009 and 2008, the Company used the period’s average rate of exchange to convert revenues, costs, and expenses of $1 to RMB6.82361 and $1 to RMB7.209939, respectively. The Company used historical rates for equity.
p. Related parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
q. Earnings per share
Basic loss per share is computed by dividing net loss by weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. At July 31, 2009 and 2008, respectively, the Company had no common stock equivalents that could potentially dilute future earnings per share; however, if present, a separate computation of diluted loss per share would not have been presented, as these common stock equivalents would have been anti-dilutive due to the Company’s net loss.
r. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2009 presentation.
s. Recently adopted accounting principles
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Positions (“FSP”) 157-1, which amends SFAS 157 to remove leasing transactions accounted for under SFAS 13, “Accounting for Leases” and FSP 157-2, which deferred the effective date of SFAS 157 for all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. The Company does not believe the adoption of SFAS 157 for nonfinancial assets and liabilities will have a material impact on its consolidated financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly ” (“FSP 157-4”). FSP 157-4 amends SFAS 157, “Fair Value Measurements” to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability significantly decreased in relation to market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 with early application permitted for periods ending after March 15, 2009. The Company’s adoption of FSP 157-4, effective July 31, 2009, did not have a material impact on its consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”, which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 is an elective standard which permits an entity to choose to measure many financial instruments and certain other items at fair value (Fair Value Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. Following the election of the Fair Value Option for certain financial assets and liabilities, the Company would report unrealized gains and losses due to changes in fair value in earnings at each subsequent reporting date. The Company adopted SFAS159 effective August 1, 2008 which did not have a material impact on the Company’s operating results, financial position or cash flows as the Company did not elected the Fair Value Option for any of its financial assets or liabilities.
In April 2009, the FASB issued FSP 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2”). FSP 115-2 provides new guidance on the recognition of Other-Than-Temporary-Impairments (“OTTI”) and provides some new disclosure requirements. FSP 115-2 is effective for interim and annual periods ending after June 15, 2009 with early application permitted for periods ending after March 15, 2009. The Company’s adoption of FSP 115-2, effective July 31, 2009, did not have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS 165, “Subsequent Events” (“SFAS 165”). SFAS 165 provides general standards for the accounting and reporting of subsequent events that occur between the balance sheet date and issuance of financial statements. SFAS 165 requires the issuer to recognize the effects, if material, of subsequent events in the financial statements if the subsequent event provides additional evidence about conditions that existed as of the balance sheet date. The issuer must also disclose the date through which subsequent events have been evaluated and the nature of any non-recognized subsequent events. Non-recognized subsequent events include events that provide evidence about conditions that did not exist as of the balance sheet date, but which are of such a nature that they must be disclosed to keep the financial statements from being misleading. FAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS 165 effective July 31, 2009. Since FAS 165 at most requires additional disclosures, the Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
t. Recent accounting pronouncements
On December 4, 2007, the FASB issued SFAS No. 160, “Noncontrolling interest in Consolidated Financial Statements”. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company does not expect the adoption of SFAS 160 will have a material impact on its consolidated financial position, results of operations or cash flows.
On December 4, 2007, the FASB issued SFAS No.141R, “Business Combinations”. SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to expand disclosures about the nature and financial effect of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 160 will have a material impact on its consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). This statement amends certain requirements of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”. Among other accounting and disclosure requirements, SFAS 167 replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. SFAS 167 becomes effective for interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial position, results of operations or cash flows.
Effective July 1, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162” (“ASC”), which became the single official source of authoritative, nongovernmental GAAP. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the SEC. All other literature became non-authoritative. ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of the ASC to have a material impact on its consolidated financial position, results of operations or cash flows.
4. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of credit risk, consist of cash and accounts receivable as of July 31, 2009 and 2008. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.
A portion of the Company’s cash at July 31, 2009 and 2008 is maintained at various financial institutions in the PRC which do not provide insurance for amounts on deposit. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
.
For the years ended July 31, 2009 and 2008, the Company’s sales were mainly made to customers located in the PRC. In addition, total accounts receivables as of July 31, 2009 and 2008 also arose from customers located in the PRC.
A significant percentage of the Company’s business is generated from a small number of customers. However, due to the immaterial amount of revenue generated, the Company does not believe they are exposed to significant concentration of credit risk in this area.
5. PREPAID EXPENSES
Prepaid expenses are mainly for deposit in advance for purchase of raw materials. The term of the advances is from 30 days to 180 days.
6. INVENTORIES
Inventories consist of the following:
7. DUE FROM RELATED PARTIES
Due from related parties consist of the following:
"Due from related parties" represents loans that are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore are not considered current assets.
The balance owed by the President and CEO, and the company under his control, totaled $297,097 and $947,315 as of July 31, 2009 and 2008, respectively. The loans were made by Harbin SQ before the acquisition of Harbin SQ by the Company and there has been no material modification or renewal of the loan after the date of acquisition. The Company has changed its related policy and procedures in line with the prohibition on personal loans to executives contained in Section 402 of the Sarbanes-Oxley Act of 2002.
Since April 30, 2008 to July 31, 2008, the Company’s President and CEO had repaid $965,942 of the original loan ($269,961 since the acquisition of Harbin SQ by the Company). During the fiscal year ended July 31, 2009, the Company’s President and CEO paid $650,917. The Company plans to settle all outstanding balance of this loan in the near future.
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
The construction in progress at July 31, 2008 is related to construction of manufacturing facility and office building which were completed and put into use at the beginning of the current fiscal year. The construction in progress at July 31, 2009 is related to an unfinished module for wind turbine blade.
The depreciation expense was $475,342 and $14,483 for the year ended July 31, 2009 and 2008, respectively. They are broken down as follows:
9. ACQUISITION
On May 26, 2008, the Company completed the acquisition of 100% of the equity interests of Power Profit Technology Development Limited (“Power Profit”) and 82.14% of the equity interests of its subsidiary, Harbin SQ Wind Power Co., Ltd. (formerly Harbin Sanye Wind Energy Technology Co., Ltd.)(“Harbin SQ”). The results of operation of Power Profit and Harbin SQ have been included in the consolidated financial statements since that date.
Power Profit is a company incorporated under the laws of Hong Kong, People’s Republic of China. Harbin SQ, located in Harbin, Heilongjiang Province, is a company incorporated under the laws of the People’s Republic of China and principally engaged in the business of harvesters and blades for wind generators. As a result of the acquisition, the Company has placed itself at the forefront of an emerging industry in an emerging market. The Company anticipates that the acquisition of a revenue producing, sustainable energy company will facilitate its growth and expansion.
The aggregate purchase price was the Company’s 15,000,000 common shares which was valued at $20,220,000 based upon the Company’s average common stock price of $1.348. The average stock price was based upon the average closing prices of the Company’s common stock during the five business days commencing two days before the acquisition was announced.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
The $22,853,171 Power Profit net assets acquired included $2,633,171 minority interest at the acquisition date May 26, 2008. The reconciliation between the aggregate purchase price of $20,220,000 and the $22,853,171 Power Profit net assets acquired is as follows:
The $8,110,960 of goodwill represents the excess of the purchase price over the fair market value of acquired net assets. Goodwill was assigned to only one industry segment the Company operates and is not deductible for tax purposes. At July 31, 2009, the Company performed their annual test of goodwill for impairment. The goodwill was tested by performing the two-step goodwill impairment test. For the year ended July 31, 2009, no impairments were recorded.
On the May 26, 2008 acquisition date, the balance of the land use rights was $12,207,135, comprised of the land use right in Binxi County ($1,898,308) and the land user right in Harbin City ($10,308,827). For the Harbin City land use right, the fair value was determined using the total $10,308,827 price of the underlying sales agreement (equivalent to 70,500,000 in Chinese currency). For the Binxi County land user right, the fair value of $1,898,308 was calculated based on the size of the land and the unit price based on government regulated price.
The land use rights have a weighted-average useful life of 40 years with no residual value. The Harbin City land use right was sold at the end of the current fiscal year. See Note 10.
The following consolidated pro forma financial information presents the combined results of operations of the Company and Power Profit for the year ended July 31, 2008 as if the acquisition had occurred at August 1, 2007.
The amounts of revenue and net loss of Power Profit since the acquisition date of May 26, 2008 included in the consolidated statement of operation for the year ended July 31, 2008 are $148,383 and $151,601 respectively.
10. INTANGIBLE ASSETS
Intangible assets consist of the following:
The amortization expense was $48,334 and $51,319 for the year ended July 31, 2009 and 2008, respectively.
On November 6, 2007, the Company signed a contract with Heilongjiang Nongkentaixing Real Estate Development Co. Ltd to sell the Company’s land use rights in Harbin City. The total contract price is approximately $10,308,827 (equivalent to 70,500,000 in Chinese currency RMB). The Company did not reclassify the Harbin City land use right asset as “hold for sale” on the consolidated balance sheet as of July 31, 2008 because the sale of the land use right requires regulatory approval from the Chinese government. Since the land use right is within the area subject to urban planning restrictions in Harbin City, the government will not process the transfer of this right until the whole identified area complies with the use regulated by urban planning. Since the area subject to urban planning restrictions is quite large, the Company expect this process to take a long time and the delay in the transfer of the land use right demonstrates that the Company cannot immediately sell this right. Therefore, as of July 31, 2008, the sales proceeds received is recorded as “Other Advance Receipts” (see Note 13) and the land use right in Harbin City remains on balance sheet as intangible assets.
During the current fiscal year, the urban planning restriction is removed and the sales transaction is completed. This sales transaction resulted in a total $1.7 million loss on sales of assets. (Note 13)
11. SHORT TERM LOAN
Short term loans consist of the following:
The Company pledged the building and land located in Binxi city as collateral of the bank loan.
Loans from individuals were made by individuals to cover the Company’s temporary cash shortages. The short term loans are unsecured and due on demand. Not all of the loans are interest-bearing. For interest bearing loans, the interest rate is ranging from 14% to 40% per annum.
Interest expenses for short term loans are $239,141 and $8,738 for the year ended July 31, 2009 and 2008, respectively.
12. DUE TO RELATED PARTIES
Due to related parties consist of the following:
"Due to related parties" represents loans payable that are unsecured, non-interest bearing and have no fixed terms of repayment, and are therefore, deemed payable on demand.
13. OTHER ADVANCE RECEIPTS
On November 6, 2007, the Company signed a contract with Heilongjiang Nongkentaixing Real Estate Development Co. Ltd to sell the Company’s land use rights in Harbin City. The total contract price is approximately $10,308,827. The Company is obligated to clear the original buildings on the land before the transfer of the land use rights can be completed. As of July 31, 2008, the Company had completed the clearance of the original buildings on the land and all costs related to the clearance of the buildings had been incurred.
As of July 31, 2008, the Company had received net proceeds of $7,603,673 from this sale. Since the legal process for title transfer has not been completed, the proceeds were recorded as other advance receipts.
In October 2008, the title transfer was approved by the government and by July 31, 2009, the company had received net proceeds of $7,694,925. The remaining proceeds net of sales tax for the amount of $882,351 was included as accounts receivable at July 31, 2009. Loss on the disposal of land use rights for the amount of $1.7 million was recognized for the year ended July 31, 2009. See Note 10.
14. GERNERAL AND ADMINISTRATIVE
The amount of general and administrative expenses mainly composed of the following:
15. CHINA CONTRIBUTION PLAN
Full time employees of the Company participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.
The Company made the provisions based on the number of qualified employees and the rate and base regulated by the government. However, the Company did not make full monthly contribution to these funds. In the event that any current or former employee files a complaint with the PRC government, the Company may be subject to administrative fines. As the Company believes that these fines would not be material, no accrual for such fines has been made in this regard.
16. STATUTORY RESERVES
Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC ("PRC GAAP") at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). The Company did not make any appropriations to the reserve funds mentioned above due to lack of profit after tax since commencement of operations.
17. INCOME TAX
The Company accounts for income taxes pursuant to Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
Prior to January 1, 2008, the Company was governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the previous income tax laws and rules). Pursuant to the previous income tax laws and rules, wholly-owned foreign enterprises were subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax).
In March 2007, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which were effective January 1, 2008. The Corporate Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. The previous income tax laws and rules, which stipulated income tax rates for domestic and foreign invested enterprises at different rates, expired upon the effectiveness of the Corporate Income Tax Law.
Due to the Company’s net loss, there was no provision for income taxes. The Company’s effective tax rate for the year ended July 31, 2009 and 2008 was 0% and 0% due to the net loss position in both years.
The Company’s taxes were subject to a full valuation allowance as follows:
The net deferred tax asset generated by the loss carry-forward has been fully reserved.
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
The Company has no United States corporate income tax liability as of July 31, 2009 and 2008.
18. SEGMENT INFORMATION
The Company operates in one industry segment - research, development, manufacture, marketing and sales of harvesters. Substantially all of the Company’s identifiable assets and operations for all periods presented were located in the PRC.
19. CONTINGENCIES, RISKS AND UNCERTAINTIES
Country Risk
The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in have a material adverse effect upon the Company’s business and financial condition.
Source of Supply
The Company purchases components for its products from a number of suppliers. However, on occasion, a customer’s specifications may require us to purchase components from a specific supplier. The Company does not have any long term contracts with any of its suppliers, and the Company believes that alternative suppliers are available. Although the Company has not been subject to shortages for any of its components, since it does not have long-term contracts, the Company may be subject to cutbacks and price increases which it may not be able to pass on to its customers in the event that the demand for components generally exceeds the capacity of its suppliers.
Loan to Officer
Prior to the acquisition by the Company, Harbin SQ forwarded a loan to Shouquan Sun, the Company’s President and CEO. The balance owed by the President and CEO, and the real estate company under his control, totaled $297,097 and $947,315 as of July 31, 2009 and 2008, respectively. Section 402 of the Sarbanese-Oxley Act of 2002 prohibits loans or the extension of credit to officers and directors of a publicly traded company or any of its subsidiaries. The Company is currently in contravention of these provisions and faces possible regulatory action by the SEC.
The Company’s management believes that the following will militate against potential action by the SEC:
-
The loan was provided to Mr. Sun prior to its acquisition by the Company;
-
no monies have been forwarded to the Company’s President since he became an officer and director of the Company;
-
from April 30, 2008 to July 31, 2008 a total of $965,942 of the outstanding balance of the loan has been repaid by the Company’s President; and $650,917 were paid back to the Company from August 1, 2008 to July 31, 2009. The Company plans to settle all outstanding balance of this loan in the near future.
20. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through October 29, 2009, which is the date the financial statements were issued, and has concluded that no such events or transactions took place which would require disclosure herein.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements or reportable events in connection with any changes in accountants undertaken by us.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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 of July 31, 2009. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision of our Chief Executive Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of July 31, 2009 using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of July 31, 2009, we determined that control deficiencies existed that constituted material weaknesses, as described below.
1. We have no audit committee as none of our directors is considered independent as each is also an officer of us or our subsidiaries.
2. There is a risk of management override given that our officers have a high degree of involvement in our day to day operations.
3. There is no policy on fraud and no code of ethics at this time, though we plan to implement such policies in fiscal 2009.
4. We do not have sufficient executive personnel to implement effective segregation of duties.
Management is currently evaluating remediation plans for the above control deficiencies.
Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result of the material weaknesses described above, management has concluded that the Company did not maintain effective internal control over financial reporting as of July 31, 2009 based on criteria established in Internal Control-Integrated Framework issued by COSO.
Malone & Bailey, PC, an independent registered public accounting firm, was not required to and has not issued a report concerning the effectiveness of our internal control over financial reporting as of July 31, 2009.
Changes in Internal Controls
During the quarter ended July 31, 2009 there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
The following table sets forth the name, age, and position of our executive officers and directors of as of October 29, 2009.
The directors will serve as directors until our next annual shareholder meeting or until a successor is elected who accepts the position. Officers hold their positions at the will of the Board of Directors, absent any employment agreement. There are no arrangements, agreements or understandings between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of our affairs.
Biographies
Shouquan Sun, President, Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer and Director
Shouquan Sun has been our President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer and director since May 26, 2008. Mr. Sun founded Harbin SQ in 2000 and has been Chairman, Chief Executive Officer and director of Harbin SQ from its inception to the present. Mr. Sun has over 19 years experience in business development and management. Mr. Sun is also the inventor, or co-inventor, of several patents secured by Harbin SQ relating to our wind turbine blades. Mr. Sun was also awarded two national-level scientific technology honors in 1992: the Provincial Technology Leader and National Expert with Outstanding Contribution entitled to Government Special Allowance for life in 1995. Shouquan Sun holds no other directorships in other public companies.
Xiya Sun, Director
Xiya Sun was appointed as our director on November 29, 2007. In April 2007, Ms. Sun was appointed as a director of XingYe, one of our subsidiaries. Ms. Sun obtained a bachelor degree from Northeast Agriculture University in Harbin, which she attended from 2002 to 2006. During her time there, Ms. Sun received a number of scholarships and awards. She followed up her degree with training in administrative skills, including human resource management and organizational structures, management training, rewarding and performance; and recruitment schedule planning from 2006 to April 2007.
Huaiwen Zheng, Director
We appointed Huaiwen Zheng as our director on November 29, 2007. Mr. Zheng attended Harbin Industrial University in Harbin from September 1998 to July 2002, where he received a degree in engineering. Thereafter, from July 2002 to July 2006, he worked at XingYe, one of our subsidiaries, where he played a key role in the quality control of blade designing and three-dimensional sculpting of the blades, as well as supervising the blade shaking analysis, module tire processing and production, and blade production and testing. From July 2006 to April 2007, he completed an administrative skills training course in human resource management and organization structure, management training, rewarding and performance; and recruitment schedule planning. In April 2007, he became the assistant head engineer at XingYe, overseeing blade design.
Board of Directors and Director Nominees
Our Board of Directors met in person or via telephone occasionally during our fiscal year ended July 31, 2009.
We do not have a nominating committee. The Board of Directors, sitting as a Board, selects individuals to stand for election as members of the Board. Since the Board of Directors does not include a majority of independent directors, the decision of the Board as to director nominees is made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise determined, not less than 90 days prior to the next annual Board of Directors' meeting at which the slate of Board nominees is adopted, the Board will accept written submissions of proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the shareholder submitting the proposed nominee believes that the nomination would be in the best interests of shareholders. If the proposed nominee is not the same person as the shareholder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee's qualifications to serve on the Board of Directors, as well as a list of references.
The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual's experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of management's slate of director nominees submitted to shareholders for election to the Board.
Among the factors that the Board considers when evaluating proposed nominees are their knowledge of, and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from the candidate prior to reaching a determination. The Board is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.
Director Independence
Our securities are quoted on the OTC Bulletin Board which does not have any director independence requirements. Once we engage further directors and officers, we will develop a definition of independence and scrutinize our Board of Directors with regard to this definition.
Audit Committee
The functions of the Audit Committee are currently carried out by our Board of Directors. Our Board of Directors has determined that we do not have an audit committee financial expert on our Board of Directors carrying out the duties of the Audit Committee. The Board of Directors has determined that the cost of hiring a financial expert to act as a director of us and to be a member of the Audit Committee or otherwise perform Audit Committee functions outweighs the benefits of having a financial expert on the Audit Committee.
Significant Employees
Other than the directors and officer described above, we do not expect any other individuals to make a significant contribution to our business.
Family Relationships
There are no family relationships among our officers or directors.
Legal Proceedings
None of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:
·
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
·
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
·
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
·
being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Compliance Reporting
Section 16(a) of the Exchange Act requires a company’s directors and officers, and persons who own more than ten-percent (10%) of the company’s common stock, to file with the Securities and Exchange Commission reports of ownership on Form 3 and reports of change in ownership on Forms 4 and 5 if the company has a class of securities registered under Section 12 of the Exchange Act. We did not have a class of securities registered under Section 12 of the Exchange Act during the year ended July 31, 2008 and as such none of our officers, directors or 10% shareholders were required to file ownership reports.
On October 30, 2008 we filed a Form 8-A to register our common shares under Section 12 of the Exchange Act. This event triggered the requirement under Section 16(a) of the Exchange Act for the company’s directors and officers, and persons who own more than ten-percent (10%) of our common stock, to file with the Securities and Exchange Commission reports of ownership on Form 3 and reports of change in ownership on Forms 4 and 5.
Code of Ethics
We have not yet adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions because we have not yet finalized the content of such a code.
Item 11.
Item 11. Executive Compensation
The following table sets forth, as of July 31, 2009, the compensation paid to our President and Chief Executive Officer and our Chief Financial Officer during the last three completed fiscal years. No other officers or directors received annual compensation in excess of $100,000 during the last three complete fiscal years.
(1)
Pursuant to Item 402(5) of Regulation S-K tables and columns have been omitted where no compensation has been awarded.
(2)
Jian Ren was our director, President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer from November 29, 2007 to May 26, 2008.
(3)
Shouquan Sun was appointed as our director, President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer on May 26, 2008. We did not enter into any management or consulting agreements with Shouquan Sun, but Harbin SQ, our subsidiary, agreed to pay Shouquan Sun $10,413 per month as consideration for his management services.
(4)
Shouquan Sun, our director and sole officer, as well as a real estate company under his control, were provided the benefit of a loan by our majority owned subsidiary, Harbin SQ before our acquisition of Harbin SQ. As of July 31, 2009 $135,870 was the outstanding balance of this loan. We plan to settle all outstanding balance on this loan as soon as possible.
We made no grants of stock options or stock appreciation rights since our inception to July 31, 2009.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Compensation of Directors
We reimburse our directors for expenses incurred in connection with attending board meetings but did not pay director's fees or other cash compensation for services rendered as a director in the year ended July 31, 2009.
We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
Compensation Committee
We do not currently have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Change of Control
As of October 29, 2009 we had no pension plans or compensatory plans or other arrangements which provide compensation on the event of termination of employment or change in control of us.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of October 29, 2009 by: (i) each of our directors, (ii) each of our named executive officers and (iii) owners of 5% or more of our common shares. There was no other person or group known by us to beneficially own more than 5% of our outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own. All persons named have sole voting and investment power with respect to the shares, except as otherwise noted. The number of shares described below includes shares which the beneficial owner described has the right to acquire within 60 days of the date of this Annual Report on Form 10-K.
(1)
The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.
(2)
Based on 51,902,250 issued and outstanding shares of common stock as of October 29, 2009.
(3)
Shouquan Sun is our director, President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer.
(4)
Xiya Sun is our director.
(5)
Less than 1%
(6)
Huaiwen Zheng is our director.
Item 13.
Item 13. Certain Relationships, Related Transactions and Director Independence
We owed the following amounts to the following related parties as at July 31, 2008 and 2009:
These loans payable that are unsecured, non-interest bearing and have no fixed terms of repayment, and are therefore, deemed payable on demand.
Additionally, we had the following amounts owing to us by related parties as at July 31, 2008 and 2009:
These loans are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore are not considered current assets.
We have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of these persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last three fiscal years.
Item 14.
Item 14. Principal Accountant Fees and Services.
Audit and Non-Audit Fees
The following table represents fees for the professional audit services and fees billed for other services rendered by our auditors for the audit of our annual financial statements for the years ended July 31, 2008 and July 31, 2009 and any other fees billed for other services rendered by our auditors during these periods.
Since our inception, our Board of Directors, performing the duties of the Audit Committee, reviews all audit and non-audit related fees at least annually. The Board of Directors as the Audit Committee pre-approved all audit related services in the year ended July 31, 2009.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
See “Index to Consolidated Financial Statements” set forth on page.
(a) (2) Financial Statement Schedules
None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto.
Exhibits
Exhibit
Number
Exhibit
Description
21.1
List of Subsidiaries
China Wind Energy Ltd. (HK), incorporated in Hong Kong
Harbin XingYe Wind Energy Technology Limited, incorporated in China
Power Profit Technology Development Limited, incorporated in Hong Kong
Harbin SQ Wind Energy Technology Co., Ltd., incorporated in China
31.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
CHINA WIND ENERGY INC.
Date: October 29, 2009
By:
/s/ Shouquan Sun
Shouquan Sun
Director, President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer
Pursuant to the requirements of the Exchange Act this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES
TITLE
DATE
/s/ Shouquan Sun
October 29, 2009
Shouquan Sun
Director, President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer
/s/ Xiya Sun
October 29, 2009
Xiya Sun
Director