ITEM 1. BUSINESS
Until July 30, 2007 the Company’s business consisted of providing software applications and system integration services in The People’s Republic of China (“PRC”). That business was conducted by our wholly-owned subsidiary, HXT Holdings, Inc. On March 31, 2009 we distributed all of the capital stock of HXT Holdings, Inc. to our shareholders, and we now have no remaining involvement in the software applications business.
On July 30, 2007 we acquired all of the equity in Chaoyang Liaogang Special Steel Co., Ltd. (“Chaoyang Liaogang”), which is engaged in the business of manufacturing special steel in the PRC. Chaoyang Liaogang was organized in 2004 as a joint stock limited company under the laws of the PRC. Its offices and manufacturing facilities are located in the City of Chaoyang, which is in the Liaoning Province in northeast China. This location provides the company ready access to customers in the industrial sector of northeast China, including the Beijing metropolitan area.
Products
For the past eight years China has been the world’s largest producer of steel. However, for the same eight years China has been the world’s largest importer of specialty steel. With the rapid development of China’s automobile, electronic and machine tool industries, the demand for refined steels than can be used in precision applications has increased dramatically. Chaoyang Liaogang has been organized to meet that demand.
Chaoyang Liaogang specializes in the production of specialty steels that boast high quality and more added value than common construction steel. Chaoyang Liaogang produces steel in three primary categories:
Tungsten Carbide Steel. This is a very high quality, super-hard steel, possessing a fine texture and a high degree of purity. Tungsten carbide steel has a bending strength that exceeds 280 kg/mm2. The durability of tungsten carbide steel exceeds that of common die steel by more than a factor of ten. It is used for tools, dies and precision measuring instruments, as well as gears and bearings. The market price for tungsten carbide steel ranges from 8,000 to 10,000 RMB ($1,025 - $1,282) per ton.
Stainless Steel. Chaoyang Liaogang employs a patented technology to produce stainless steel primarily for the cookware and tableware industry. Its products are free of toxins, and contain microelements that are believed to provide health benefits.
Die Steel. Chaoyang Liaogang’s SRM-1 hot die steel and its SLM-2 cold die steel both possess a high tensile hardening layer that enables the die cavity to resist high compressive stress and aid durability. The steels are used to produce precision punch dies, coining dies, cold extrusion dies, etc. In addition, Chaoyang Liaogang produces special steel dies and forged pieces used for tools, dies and measuring instruments in a wide variety of industries, including aviation, automobile, machine tool, and defense.
We anticipate that our growth will be driven primarily by our tungsten carbide steel technology. Our patented technology for the production of tungsten carbide steel provides us an exclusive niche in the steel industry. Carbonized tungsten steel provides all of the benefits of carbide tungsten that make it the metal of choice for precision products - fine texture, durability, flexibility. But carbonized tungsten steel, such as we produce, is actually more durable than carbide tungsten. In addition, carbonized tungsten steel can be recovered and reused, whereas there is no available technology for the recovery of tungsten carbide. Products made with our tungsten carbide steel, therefore, have a built-in resale value for scrap, which the manufacturer can reflect in their market price.
Facilities
Chaoyang Liaoyang has entered the steel industry with a relatively modest capital investment due to the political capital of its Chairman and the inventive industry of its researchers. Most of the company’s equipment was purchased for not much more than scrap value from failed steel enterprises owned by the Chinese government. Chaoyang Liaoyang has supplemented that equipment with its own creations - for example, the electroslag melting equipment that it uses to render scrap steel to a molten state was developed and built by the company’s own staff.
At the present time, Chaoyang Liaogang’s factory has the capacity to produce 20,000 tons of steel products in a year, consisting of:
200 tons - tungsten carbide steel.
2,000 tons - stainless steel.
14,200 tons - raw die steel.
3,600 tons - die steel products.
The quality management system in Chaoyang Liaogang’s facility has been certified as ISO 2000 compliant. Chaoyang Liaogang is a member of the China Die Association.
Raw Materials; Mining Rights
At the present time, Chaoyang Liaogang produces most of its steel by melting scrap steel using an electroslag remelting process, combining the molten steel with other materials, and then utilizing the company’s patented technologies to produce its high quality steels. The scrap steel that is its primary raw material is readily available on the international market.
In the past few years, however, the growing demand for scrap steel, in large part fueled by the expansion of Chinese industry, has caused the international price of scrap steel to multiply several-fold. In order to reduce its need for scrap steel and to prepare for growth, Chaoyang Liaogang has initiated the process of developing a captive source of iron ore, from which it will manufacture most of its steel in the future.
During fiscal year 2006, our Chairman, Yang Kuidong, contributed to Chaoyang Liaogang mineral rights that he purchased for $3,846,000 in 2005. The Tenth Geological Prospecting Team of the Inner Mongolia Autonomous Region has calculated that the proven reserves of iron to which Mr. Yang has rights total 5.25 million tons, with additional reserves of 4.7 million tons probable. In 2007, however, management determined that the transfer of the mining rights to Chaoyang Liaogang was not permissible under Chinese law applicable to mines. Therefore Chaoyang Liaogang transferred the mining rights back to Mr. Yang, and recorded a reduction in capital on its financial statements. Nevertheless, we expect to have priority access to the iron production from Mr. Yang’s mines, once he obtains capital sufficient to develop iron mining operations.
Environmental Regulation
The facilities of Chaoyang Liaogang are operated in full compliance with all national and provincial regulations relating to the environment. The local government charges Chaoyang Liaogang 20,000 RMB (approximately $2,600) per year for sewage processing.
Intellectual Property
Chaoyang Liaogang has obtained five national patents for its steel production methods. Its existing patents are:
·
Production method for fusion cast tungsten carbide steel (Invention Patent ZL95-1-12012.3.
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Smelting process for paste cladding type alloy steel (Invention Patent ZL95-1-11885.4)
·
Special stainless steel for cookware (Invention Patent ZL00-1-23087.5)
·
Electronic smelting of compound dies (Use Patent ZL01-2-41258.9)
·
Electronic smelting of steel structure tungsten carbide bimetal machine tool cutter (Use Patent ZL94-2-30512.4)
The Government of China has named the fusion cast tungsten carbide steel patent as the foundation for Chaoyang Liaogang’s participation in the National Spark (Xinghuo) Program.
Chaoyang Liaogang has developed a close working relationship with Northeastern University in Shenyang City, the capital of Liaoning Province. Our contract with Northeastern University provides for joint efforts to exploit our patented technologies. Our engineers also consult regularly with the staffs of the Central Iron & Steel Research Institute, the Shenyang New and High Wear-Resistant Steel Research Institute, and the Hefei University of Technology.
Employees
Chaoyang Liaogang has over 250 employees. Included in its staff are 25 management personnel, 9 senior engineers, 22 staff engineers, and 35 senior skilled workers. None of Chaoyang Liaogang’s employees is a member of a collective bargaining unit. Management believes that the company’s relationship with its employees is good.
ITEM 1A
ITEM 1A RISK FACTORS
You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.
Because our production operations have only recently commenced, unexpected factors may hamper our efforts to implement our business plan.
Our first significant sales volume occurred in the three months ended March 31, 2007. Even then, over 90% of our sales were to one customer, a local distributor of special steel. Since then our sales revenue has fallen short of our administrative expenses. Our business plan contemplates that we will engage in much broader marketing operations, involving a lengthy menu of product offerings. Implementation of that business plan will also entail much more complex production operations. Because these are areas in which we have limited experience, problems may occur with production or marketing that we have not anticipated, which would interfere with our business, and prevent us from achieving profitability.
Our profits will be limited unless we are able to secure a source of iron ore.
We currently manufacture our special steel by melting scrap steel. The price of scrap steel on the international market is much higher today than it was five years ago, and our expectation is that the price will remain high. Therefore, in order to achieve efficient operations, it will be necessary for us to develop the capacity to smelt iron ore to produce steel. Our plan is to obtain iron ore from our Chairman, Yang Kuidong, who owns certain undeveloped mining rights. However, implementation of that plan will require that Mr. Yang make significant capital investments in order to develop his mining properties. If he is unable to obtain the necessary funds, or if our efforts to develop a source of iron ore are fruitless for any other reason, our profitability will be limited.
The capital investments that we plan for the next two years may result in dilution of the equity of our present shareholders.
Our business plan contemplates that we will invest approximately 35 million RMB ($4.5 million) in our manufacturing facility during the next years and an undetermined amount in creating a working capital reserve. We intend to raise a portion of the necessary funds by selling equity in our company. At present we have no commitment from any source for those funds. We cannot determine, therefore, the terms on which we will be able to raise the necessary funds. It is possible that we will be required to dilute the value of our current shareholders’ equity in order to obtain the funds. If, however, we are unable to raise the necessary funds, our growth will be limited, as will our ability to compete effectively.
Competition could prevent us from achieving a significant market position.
The special steel industry is populated by many large companies, many of which receive substantial state support and have capital assets that dwarf our own. Our efforts to secure a position in the market for special steel will be met by competition from Japanese and European producers of high quality special steels. We must also compete against lower grade steels that may attract customers who will sacrifice quality for price. Currently smelters in Russia and India are the source of significant competition at the lower end of the market. If a well-capitalized company directed its financial strength toward competition with us, it could achieve economies of scale that might permit it to market its products at lower prices than ours. If this occurred before we had established a significant market awareness of our brand, we might be unable to compete effectively, and would be unable to achieve profitability.
A recession in China could significantly hinder our growth.
The growing demand for special steel in China has been swelled, in large part, by the recent dramatic increases in industrial production in China. The continued growth of our market will depend on continuation of recent improvements in the Chinese economy. If the Chinese economy were to contract and investment capital became limited, manufacturers will be less able to pay premium prices for the higher quality special steels that we produce. Many financial commentators expect a recession to occur in China in the near future. The occurrence of a recession could significantly hinder our efforts to implement our business plan.
Increased environmental regulation could diminish our profits.
The production of steel involves the production of pollutants. At the present time our operations comply with all applicable government regulations designed to protect the environment. There is increasing concern in China, however, over the degradation of the environment that has accompanied its recent industrial growth. It is likely that additional government regulation will be introduced in order to protect the environment. Compliance with such new regulations could impose on us substantial costs, which would reduce our profits.
Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.
Our future success depends on our ability to attract and retain highly skilled engineers, production supervisors, and marketing personnel. In general, qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand. In a specialized scientific field, such as ours, the demand for qualified individuals is even greater. If we are unable to successfully attract or retain the personnel we need to succeed, we will be unable to implement our business plan.
We may have difficulty establishing adequate management and financial controls in China.
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
Government regulation may hinder our ability to function efficiently.
The national, provincial and local governments in the People’s Republic of China are highly bureaucratized. The day-to-day operations of our business require frequent interaction with representatives of the Chinese government institutions. The effort to obtain the registrations, licenses and permits necessary to carry out our business activities can be daunting. Significant delays can result from the need to obtain governmental approval of our activities. These delays can have an adverse effect on the profitability of our operations. In addition, compliance with regulatory requirements applicable to steel production may increase the cost of our operations, which would adversely affect our profitability.
Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to pay dividends to our shareholders.
Currency fluctuations may adversely affect our operating results.
Chaoyang Liaogang generates revenues and incurs expenses and liabilities in Renminbi, the currency of the People’s Republic of China. However, as a subsidiary of American Wenshen, it will report its financial results in the United States in U.S. Dollars. As a result, our financial results will be subject to the effects of exchange rate fluctuations between these currencies. From time to time, the government of China may take action to stimulate the Chinese economy that will have the effect of reducing the value of Renminbi. In addition, international currency markets may cause significant adjustments to occur in the value of the Renminbi. Any such events that result in a devaluation of the Renminbi versus the U.S. Dollar will have an adverse effect on our reported results. We have not entered into agreements or purchased instruments to hedge our exchange rate risks.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
American Wenshen is not likely to hold annual shareholder meetings in the next few years.
Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. The current members of the Board of Directors were appointed to that position by the previous directors. If other directors are added to the Board in the future, it is likely that the current directors will appoint them. As a result, the shareholders of American Wenshen will have no effective means of exercising control over the operations of American Wenshen.
ITEM 1B
ITEM 1B UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Chaoyang Liaogang’s executive offices and manufacturing facility are located on a 20,000 m2 campus that is leased to Chaoyang Liaogang by its Chairman. The company’s several facilities total 2,000 m2 in floor space. The Chairman acquired the land and facility from the Chinese government for a modest payment in a distress sale situation. He contributed the buildings to Chaoyang Liaogang at his cost, and subleases the land to the company free of charge.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth quarter of fiscal 2009.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information.
Our common stock is listed for quotation on the OTC Bulletin Board under the trading symbol “AWSH.” The following table sets forth the bid prices quoted for our common stock during each quarterly period from October 2007 through September 30, 2009. ). Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions. All prices have been adjusted to reflect the pro forma effect of the 1-for-45 reverse stock split implemented on October 10, 2007.
(b) Holders. Our shareholders list contains the names of 400 registered stockholders of record of the Company’s Common Stock. Based upon information from nominee holders, the Company believes the number of owners of its Common Stock exceeds 400.
(c) Dividend Policy. The Company has never paid or declared any cash dividends on its Common Stock and does not foresee doing so in the foreseeable future. The Company intends to retain any future earnings for the operation and expansion of the business. Any decision as to future payment of dividends will depend on the available earnings, the capital requirements of the Company, its general financial condition and other factors deemed pertinent by the Board of Directors
(d) Securities Authorized for Issuance Under Equity Compensation Plans
The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of September 30, 2009.
(e) Recent Sales of Unregistered Securities.
None.
(f) Repurchase of Equity Securities. The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of fiscal 2009.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS.
Entity Spun Off
As of September 30, 2009, American Wenshen Steel Group owned only one operating subsidiary: Chaoyang Liaogang, which carries on its specialty steel operations. On May 10, 2007, the Company approved a plan to spin-off HXT Holdings, Inc. to the shareholders as a tax-free distribution. The spin-off became effective in March 2009 and all shares were distributed to the shareholders on March 31, 2009. As part of this plan, the advances the Company made to HXT Holdings were offset against the amounts due to the Company; the net amount was converted to additional paid-in-capital of the Company. For that reason, on the financial statements in this report, HXT Holdings and its subsidiaries have been categorized as an “entity spun off;” its net assets have been recorded on our balance sheet as “Assets of the entity spun off;” and the results of its operations have been recorded as an extraordinary item labeled “loss from entity spun off.’ The remainder of the financial statements reflects the assets and liabilities and results of operations of Chaoyang Liaogang.
Results of Operations
Chaoyang Liaogang commenced substantial production activity in the fall of 2006. Through March 31, 2007 its revenues consisted only of sales of small amounts of steel incidental to its development activities. Most of the $1,162,555 in revenue that Chaoyang Liaogang recorded for the year ended September 30, 2007 were realized from one large sale of special steel and one variety of die steel to one distributor, Shenyang Geshite Special Steel Co., Ltd., which is located nearby in the capital of Liaoning Province. In fiscal 2008, we developed several other customers for our products. For the year ended September 30, 2008 we realized $2,253,816 in revenue, compared to $ 1,162,555 that we realized in the year ended June 30, 2007.
Our growth was reversed during the year ended September 30, 2009. As a result of the global recession, construction activities in China have diminished, and so demand for our products waned. In addition we have negative working capital, which prevents us from financing large orders for our products. As a result, during the year ended September 30, 2009 we realized only $264,924 in revenue, an 88% reduction from the prior fiscal year. At present we cannot predict when our revenues will begin to grow again.
Chaoyang Liaogang’s gross margin for the year ended September 30, 2008 was 30.9%. This ratio was substantially improved over the 25.2% gross margin we realized in the 2007 fiscal year, and was closer to the ratios realized by our industry. During the year ended September 30, 2009, however, we realized negative gross margin. Our negative gross margin was primarily attributable to (a) our low sales volume, which leads to inefficiencies in the allocation of overhead expenses, and (b) the fact that we are using scrap steel for our primary raw material. In recent years the international market price for scrap steel has increased several-fold, making the reworking of scrap steel less substantially less profitable than it was at the beginning of the current decade.
If we are able to obtain the financing necessary to support an expansion of sales, we expect our profit margins to increase significantly in the future, due to:
·
increased sales volume, which will lead to more efficient use of our facilities;
·
introduction of tungsten carbide steel into our sales, which we will be able to market at a higher mark-up over cost than our other steel products; and
·
acquisition of sources of iron ore, which will lower our cost of raw materials.
Despite the reduction in our operations, our general and administrative expenses for the year ended September 30, 2009 increased by 37.3%, compared to the year ended September 30, 2008. The reason for this anomaly was a default by one of our suppliers, which caused us to incur a bad debt expense of $869,776, representing funds that we had advanced to the supplier.
In the future, if we are properly funded, we expect that our overall efficiencies will enable us to increase our sales volume at a rate that will be substantially greater than the accompanying increase in our general and administrative expenses. Sales and marketing expense, however, will increase as we expand our marketing program In addition, as noted below, we intend to raise money for capital investment: purchase of additional smelting equipment and development of an iron mining facility. To the extent that we obtain those funds as loans, our general and administrative expenses will be increased by (a) interest expense and (b) depreciation expense.
During the year ended September 30, 2008 the operations of Shenzhen Hengtaifeng Technology Co., Ltd. suffered certain serious negative effects. This caused management to review the value of the goodwill that it had recorded in connection with the acquisition of those operating assets. Because of the poor financial condition and poor operating results of Shenzhen Hengtaifeng Technology Co., Ltd., management determined that the goodwill was impaired. This resulted in an operating expense of $1,176,591. As a result, our total operating expenses in fiscal 2008 exceeded our total operating expenses in fiscal 2009.
The Company’s net loss from continuing operations for the year ended September 30, 2009 was $1,570,340. After taking into account the impairment of goodwill, the Company’s operations during the year ended September 30, 2008 yielded a net pre-tax loss of $1,296,178 (of which $1,176,591 was attributable to the write-off of goodwill). Nevertheless, because Chaoyang Liaogang recorded income under Chinese accounting principles for the fiscal 2008, we recorded income tax of $70,861, despite our lack of income. For the next several years, however, we will be entitled to substantial income tax abatements that the Chinese government affords to profitable foreign-owned enterprises. We can only obtain those abatements by applying for them after we meet the necessary criteria. As a result, our statement of operations will not reflect the effects of the abatements until some future date.
The operations of HXT Holdings, Inc., which are accounted for as an “entity spun off,” realized a net loss of $103,107 during the first six months of the 2009 fiscal year. For the 2008 fiscal year, HXT Holdings, Inc. realized a new loss of $2,109,483. Our company, therefore, reported a consolidated net loss of $1,673,447 for the year ended September 30, 2009, compared to a consolidated net loss of $3,476,522 for the year ended September 30, 2008.
Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income/loss and net comprehensive gain/loss. The net income/loss is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled “other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the 2009 fiscal year the unrealized loss on foreign currency translations reduced our accumulated other comprehensive income by $12,598. In the prior year, when the exchange rate was more volatile, $267,957 was added to our accumulated other comprehensive income.
Liquidity and Capital Resources
The development and operations of Chaoyang Liaogang have been funded to date primarily by capital contributions and loans from its shareholders, primarily Yang Kuidong. As a result, at September 30, 2009 Chaoyang Liaogang had $989,086 in debt, most of which was owed to Mr. Yang. Until we obtain a source of outside financing, we remain dependent on Mr. Yang as our primary source of working capital.
At September 30, 2009 Chaoyang Liaogang had a working capital deficit of $930,033, representing a $1,176,325 decrease of working capital since our last fiscal year ended on September 30, 2008. Since our current obligation to our Chairman exceeds our working capital deficit, the deficit does not imperil our existence. The deficit does, however, prevent us from aggressively marketing our products, resulting in our recent low level of operations.
Chaoyang Liaogang currently has sufficient capital resources to carry on its business as it is currently constituted, particularly as we can rely on the capital resources of our Chairman. However, our business plan calls for substantial capital investment over the next twelve months. We intend to expand the capacity of our factory by investing approximately $4.5 million in new capital equipment, specifically:
·
a 30 ton arc furnace - $2.5 million
·
a 30 ton heavy duty electric dregs furnace - $1.3 million
·
a 5 ton free-going hammer - $0.7 million
At the present time, we have received no commitments for the funds required to increase our marketing efforts and for our planned capital investments. Obtaining those funds, if we can do so, will require that we issue substantial amounts of equity securities or incur significant debts. We believe that the expected return on those investments will justify the cost. However, our plan, if accomplished, will significantly increase the risks to our liquidity.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
Critical Accounting Policies and Estimates
In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for fiscal year 2009, there were three estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results. These estimates were:
·
Our decision, described in Note 2 to the Consolidated Financial Statements, to record a total of $354,801 in provisions for uncollectible accounts. This decision was based on our knowledge of the accounts and the difficulty we may face in collecting.
·
Our decision, described in Note 2 to the Consolidated Financial Statements, to reserve the full amount of our advances to suppliers, $892,277. This decision was based on the disruption of our relationship with the supplier.
·
Our decision, described in Notes 2 and 4 to the Consolidated Financial Statements, to record a $985,556 provision for obsolete inventories. This decision was based on fact that we have developed improvements in our manufacturing processes, which rendered inventory that we manufactured early in our operations as technologically obsolete.
We have made no material changes to our critical accounting policies in connection with the preparation of financial statements for fiscal year 2009.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
American Wenshen Steel Group, Inc.
We have audited the accompanying consolidated balance sheets of the American Wenshen Steel Group, Inc. and subsidiaries as of September 30, 2009 and 2008 and the related statements of operations, stockholders’ deficit and cash flows for the years ended September 30, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Wenshen Steel Group, Inc. as of September 30, 2009 and 2008 and the results of its operations and its cash flows for years ended September 30, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's significant operating losses and insufficient capital raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Kabani & Company, Inc.
Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
January 7, 2010
AMERICAN WENSHEN STEEL GROUP, INC. AND SUBSIDIARIES
(FORMERLY CHINA SOFTWARE TECHNOLOGY GROUP CO., LTD)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American Wenshen Steel Group, Inc. (formally known as China Software Technology Group Co. Ltd.) ("we", "us", or the "Company") through its operating subsidiary, Chaoyang Liaogang Special Steel Co., Ltd. ("Chaoyang Liaogang"), a corporation organized under the laws of The People's Republic of China, is engaged in the business of manufacturing tungsten carbide steel, stainless steel, and die steel. All of Chaoyang Liaogang's business is currently in China. On October 9, 2007, the Company changed its name to American Wenshen Steel Group, Inc.
On Nov 14, 2006, American China Software Technology Group Co., Ltd (China Software) re-domiciled from Canada to Delaware.
American Wenshen Steel Group, Inc., (“American Wenshen”), a wholly owned subsidiary of the Company was incorporated on August 29, 2006 in the state of Delaware. It currently has no operations. American Wenshen owns all of the registered capital of Liaoning Wenshen Steel Mold Co. Ltd. (“Liaoning Wenshen”). Liaoning Wenshen is a wholly owned foreign entity incorporated in Shenyang, Liaoning Province, China in January, 2007.
Liaoning Wenshen owns all the registered capital of Chaoyang Liaogang Special Steel Co., Ltd. (“Chaoyang Liaogang Steel Co.”) which is established in Chaoyang City, Shenyang Province, China in October 2004
On July 30, 2007 China Software acquired 100% of the equity in American Wenshen pursuant to a merger agreement dated June 29, 2007 (“American Wenshen Merger”). Pursuant to the acquisition of American Wenshen, it became the wholly owned subsidiary of China Software. The former shareholders of American Wenshen received 434,377 shares of Series A Preferred Stock of China software, which were convertible into 19,305,645 shares of common stock in exchange for all the issued and outstanding shares of American Wenshen. The Series A Preferred stock represented 97.58% of the voting power of the Company.
The acquisition of American Wenshen was accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of American Wenshen obtained control of the consolidated entity. Accordingly, the merger of the two companies was recorded as a recapitalization of American Wenshen, with American Wenshen being treated as the continuing operating entity. The continuing entity retained September 30 as its fiscal year end.
Subsequent to the American Wenshen Merger, the organization chart is as follows:
Prior to the American Wenshen Merger, China Software assigned all of its pre-Merger business and assets to HXT Holdings, Inc., its wholly-owned subsidiary, and HXT Holdings assumed responsibility for all of the liabilities of China Software that existed prior to the Merger. It was also agreed that HXT Holdings, Inc. would file a registration statement with the Securities and Exchange Agreement that would, when declared effective, permit China Software to distribute all of the outstanding shares of HXT to the holders of its common stock.
On May 10, 2007, the Company approved a plan to spin-off HXT Holdings to the shareholders as a tax-free distribution. The spin-off became effective in March 2009 and all shares of HXT Holdings were distributed to the Company’s shareholders on March 31, 2009. As part of this plan, the advances the Company made to HXT Holdings were offset against the amounts due to the Company, the net amount was converted to additional paid-in-capital of the Company (note 13).
GOING CONCERN:
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. Through September 30, 2009, the Company had incurred cumulative losses of $9,961,892 including net losses from continuing operations of $1,570,340 for the year ended September 30, 2009.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial requirements, (i) The company plans to raise additional capital by selling more shares to current shareholders and potential investors with a discount price (ii) The company also plans to borrow money from current shareholders and potential investors with an attractive interest rate. (iii) The company plans to reduce overhead and expenses by reducing unnecessary marketing and advertisement expenses, improving efficiency on distribution channel, freezing salary increase and laying off administrative staffs.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant inter-company transactions and accounts have been eliminated in the consolidation. The functional currency is the Chinese Renminbi (CNY); however the accompanying financial statements have been translated and presented in United States Dollars (USD).
Principles of consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries American Wenshen, Liaoning Wenshen and Chaoyang Liaogang Steel Co. All significant inter-company accounts and transactions have been eliminated.
Foreign currency translation
The reporting currency is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“CNY”). 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 September 30, 2009 and 2008, the cumulative translation adjustment of $890,252 and $902,850, respectively, was classified as an item of other comprehensive income in the stockholders’ deficit section of the consolidated balance sheet. For the years ended September 30, 2009 and 2008, accumulated other comprehensive income (loss) was $(12,598) and $267,957, respectively.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.
Risks and uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Accounts and other receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful debts of Accounts and other receivable amounted to $354,801 and $383,868 as of September 30, 2009 and 2008, respectively.
On September 30, 2009, the company evaluated the adequacy of reserve for advance to suppliers, and the allowance for doubtful debts of advance to suppliers amounted to 892,277.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market value. Management compares the cost of inventories with market value and an allowance is provided for the difference between recorded and market values. At September 30, 2009 and September 30, 2008, management accounted an obsolescence reserve on inventories of $985,556 and 450,141, respectively.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of: 40 years for building, 5 years for machinery, equipments and vehicles.
Intangible Assets
The Company evaluates intangible assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (ASC 360), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 (ASC 825), "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments.
The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, advances to suppliers, accounts payable, other payable, tax payable, and related party advances and borrowings.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.
Basic and Diluted Earnings Per Share
Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (ASC 260),. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Revenue Recognition
In accordance wit SAB 104(ASC 605), revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
Income Taxes
The Company utilizes SFAS No. 109(ASC 740), "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized
Statement of Cash Flows
In accordance with Statement of Financial Accounting Standards No. 95(ASC 230), "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Segment Reporting
Statement of Financial Accounting Standards No. 131 (ASC 280"), "Disclosure about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. SFAS 131(ASC 280) has no effect on the Company’s consolidated financial statements as the Company consists of one reportable business segment. All revenue is from customers in People’s Republic of China. All of the Company’s assets are located in People’s Republic of China.
Recently Issued Accounting Standards
In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. The Codification is effective in the year ended September 30, 2009, and accordingly, the annual report on Form 10-K for the year ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The Company does not believe that this has a material effect on its consolidated financial statements.
In June 2009, the FASB issued amended standards ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements.
In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.
In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective for us beginning in the fourth quarter of fiscal year 2009 and are not expected to have a significant impact on our consolidated financial statements.
NOTE 3. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.
The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company does not maintain fire, theft or liability insurance. The Company is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; error and omissions and natural disasters.
NOTE 4. INVENTORY
Inventories as of September 30, 2009 and 2008 consist of the following:
NOTE 5.OTHER RECEIVABLE
Other Receivables as of September 30, 2009 and 2008 are as summarized below:
NOTE 6. PROPERTY AND EOUIPMENT
The balance of Company property and equipment as of September 30, 2009 and 2008 is summarized as follows:
The Company incurred depreciation expenses for the years ended September 30, 2009 and 2008 of $88,996 and $85,626, respectively.
NOTE 7. INTANGIBLE ASSETS - PATENTS
There are five patents that have been acquired from third parties in 2005. The Patents are being amortized over a 12 year period. At September 30, 2009, the net amount of the Patents was $460,688 after considering the accumulated amortization of $416,813. At September 30, 2008, the net amount of the Patents was $552,291 after considering the accumulated amortization of $331,375. The amortization expense was $87,653 & $84,584 and for the years ended September 30, 2009 & 2008 respectively.
Amortization expense for the Company’s intangible assets over the next five years after September 30, 2009 is estimated to be:
　
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable and Accrued expenses as of September 30, 2009 and 2008 are as follows:
NOTE 9. DUE TO RELATED PARTIES
Due to Related Parties was $989,086 and $961,666 as of September 30, 2009 and 2008, respectively. The loan is interest free, due on demand and unsecured.
NOTE 10. SHAREHOLDERS’ EQUITY
On July 30, 2007 China Software acquired 100% of the equity in American Wenshen pursuant to a merger agreement dated June 29, 2007 (“American Wenshen Merger”). Pursuant to the acquisition of American Wenshen, it became the wholly owned subsidiary of China Software. The former shareholders of American Wenshen received 434,377 shares of Series A Preferred Stock of China software, which were convertible into 19,305,645 shares of common stock in exchange for all the issued and outstanding shares of American Wenshen.
The acquisition of American Wenshen is accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of American Wenshen obtained control of the consolidated entity. Accordingly, the merger of the two companies is recorded as a recapitalization of American Wenshen, with American Wenshen being treated as the continuing operating entity. The historical financial statements presented herein will be those of American Wenshen. The continuing entity retained September 30 as its fiscal year end.
Prior to the Merger, China Software assigned all of its pre-Merger business and assets to HXT Holdings, Inc., its wholly-owned subsidiary, and HXT Holdings assumed responsibility for all of the liabilities of China Software that existed prior to the Merger.
On October 12, 2007 the Company announced a 1:45 reverse split of its outstanding common . All actions were approved by the Board of Directors and the majority shareholders of the Company during Special Meeting of Shareholders held on October 9, 2007.
During the year ended September 30, 2008, the Company cancelled the preferred stock of 434,377 shares issued upon the reverse acquisition. The company issued 20 million shares of common stock in exchange for the preferred stock.
On May 10, 2007, the Company approved a plan to spin-off HXT Holdings to the shareholders as a tax-free distribution. The spin-off became effective in March 2009 and all shares were distributed to the above parties on March 31, 2009. As part of this plan, the advances the Company made to HXT Holdings were offset against the amounts due to the Company, the net amount was converted to additional paid-in-capital of the Company (Note 13).
NOTE 11 STOCK OPTIONS
The stock options summary for the year ended September 30, 2009 is as follows (has been stated to retroactively effect a 45:1 reverse stock split in October 2007) :-
Following is a summary of the status of options outstanding at September 30, 2009:
The Company recognized $1,104 in share-based compensation expense for the year ended September 30, 2009 in accordance with SFAS No. 123R(ASC 505),. The impact of this share-based compensation expense on the Company’s basic and diluted earnings per share was $0.00 per share. The fair value of our stock options was estimated using the Black-Scholes option pricing model.
NOTE 12 STATUTORY RESERVES
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
1.
Making up cumulative prior years' losses, if any;
2.
Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
3.
Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
In accordance with the Chinese Company Law, the Company reserved $0 to the Statutory surplus reserve for years ended September 30, 2009 and 2008 on account of net loss in the years ended September 30, 2009 and 2008.
NOTE 13 - ENTITY SPUN OFF
On May 10, 2007, the Company approved a plan to spin-off HXT Holdings to the shareholders as a tax-free distribution. Under the plan, each stockholder of the Company received one share of HXT Holdings common stock for every 2.157 shares of common stock held as of the record date of March 31, 2009.
On March 31, 2009, the Company completed the spin-off of HXT Holdings.
As a part of the spin off transaction of HXT Holdings, the net assets of HXT Holdings amounting $132,043 were adjusted to Additional paid in capital.
The components of loss from operations related to the entity spun off for the years ended September 30, 2009 and 2008 are shown below.
Assets and liabilities for the entity spun off as of September 30, 2009 and 2008 are as follows:
NOTE 14 INCOME TAXES
The Company through its subsidiary: Chaoyang Liaogang, is governed by the Income Tax Laws of the PRC. Operations in the United States of America have incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future and hence the Company has not recorded any deferred assets as of September 30, 2009.
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory rate of 33%, which is comprises of 30% national income tax and 3% local income tax. Beginning January 1, 2008, the new Ent erprise Income Tax (EIT) law replace d the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs). The new standard EIT rate of 25% replace d the 33% rate previously applicable to both DES and FIEs.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.
(b) Changes in internal controls.
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c)
Management’s Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of September 30, 2009, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control - Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified three material weaknesses in our internal control over financial reporting. These material weaknesses consisted of:
a. Inadequate staffing and supervision within the accounting operations of our company. The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.
b. Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters. Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in Liaoning Province in the People’s Republic of China. Few of our employees have experience or familiarity with U.S accounting principles. The lack of personnel in our Liaoning office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.
c. Lack of independent control over related party transactions. Yang Kuidong and his spouse, Zhang Liwei, are two of the three members of our Board of Directors and are the Chief Executive Officer and Chief Financial Officer, respectively, of American Wenshen Steel Group. The third member of our Board is an employee of our operating subsidiary. From time to time Mr. Yang has made loans and capital contributions to finance the operations of Chaoyang Liaogang. The absence of independent directors to review these transactions is a weakness because it could lead to improper classification of such related party transactions.
Management is currently reviewing its staffing and their training in order to remedy the weaknesses identified in this assessment. To date, we are not aware of significant accounting problems resulting from these weaknesses; so we have to weigh the cost of improvement against the benefit of strengthened controls. However, because of the above conditions, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of September 30, 2009.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following individuals are the members of American Wenshen’s Board of Directors and its executive officers.
Name
Age
Position with the Company
Director Since
Yang Kuidong Chairman, Chief Executive Officer
Zhang Liwei Chief Financial Officer, Director
Xiao Zhiquan Vice President - Marketing, Director
All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualify. Officers serve at the pleasure of the Board of Directors.
Yang Kuidong has over ten years experience in the specialty steel business. Since 2004 he has served as Chairman of the Board of Chaoyang Liaogang. From 1997 to 2004, Mr. Yang was a director of Shenyang Dongyu Special Steel Co., Ltd., and Chairman of the Board for the last two years of his tenure. From 1990 to 1997 Mr. Yang was employed by Beiman Special Steel Company in the departments of iron and steel materials and electric cookers. In 1990 Mr. Yang graduated from Harbin College of Physical Education. Mr. Yang is married to Zhang Liwei, the Company’s Chief Financial Officer and a member of the Board of Directors.
Zhang Liwei has been employed as Deputy General Manager - Finance by Chaoyang Liaogang since 2004. From 2003 to 2004, Ms. Zhang was Deputy General Manager - Finance for Shenyang Dongyu Special Steel Co., Ltd. Ms. Zhang is married to Yang Kuidong, the Company’s Chief Executive Officer and a member of the Board of Directors.
Xiao Zhiquan has been employed as Deputy General Manager - Sales by Chaoyang Liaogang since 2004. From 2001 to 2004 Mr. Xiao served as Chairman and Chief Executive Officer of Dalian Zhengdao Bio-tech Engineering Co., Ltd.
Nominating, Compensation, and Audit Committee
The Board of Directors does not have an audit committee, a compensation committee or a nominating committee, due to the small size of the Board. Decisions regarding nominations to the Board will be made by all currently-serving members of the Board. The Board also does not have an “audit committee financial expert” within the definition given by the Regulations of the Securities and Exchange Commission.
Code of Ethics
The Board of Directors has not adopted a Code of Ethics applicable to management personnel, due to the small size of management.
Section 16(a) Beneficial Ownership Reporting Compliance
None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended September 30, 2009.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid by American Wenshen and its subsidiaries to Yang Kuidong, its Chief Executive Officer. There were no other executive officers whose total salary and bonus for the fiscal year ended September 30, 2009 exceeded $100,000.
Equity Awards
The following tables set forth certain information regarding the stock options acquired by the executive officer named in the table above during the year ended September 30, 2009 and those options held by him on September 30, 2009.
Option Grants in the Last Fiscal Year
The following tables set forth certain information regarding the stock grants received by the executive officer named in the table above during the year ended September 30, 2009 and held by him unvested at September 30, 2009.
Unvested Stock Awards in the Last Fiscal Year
Remuneration of Directors
None of the members of the Board of Directors receives remuneration for service on the Board.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of the date of this prospectus by the following:
·
each shareholder known by us to own beneficially more than 5% of our common stock;
·
Yang Kuidong, our Chief Executive Officer
·
each of our directors; and
·
all directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.
(1)
Does not include shares owned by Zhang Liwei, his spouse.
(2)
Does not include shares owned by Yang Kuidong, her spouse.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships
From time to time Yang Kuidong, our Chief Executive Officer, has loaned money to the Company for working capital. The balance of the loans at September 30, 2009 was 989,086. The loans are due on demand and do not bear interest.
Director Independence
None of the members of the Board of Directors is independent, as “independent” is defined in the rules of the NASDAQ Stock Market.
ITEM 14
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Kabani & Company, Inc. billed $45,000 to the Company for professional services rendered for the audit of our fiscal 2009 financial statements. Kabani & Company, Inc. billed $55,000 to the Company for professional services rendered for the audit of our fiscal 2008 financial statements.
Audit-Related Fees
Kabani & Company, Inc. billed $0 to the Company during fiscal 2009 for assurance and related services that are reasonably related to the performance of the 2009 audit or review of the quarterly financial statements. Kabani & Company, Inc. billed $0 to the Company during fiscal 2008 for assurance and related services that are reasonably related to the performance of the 2008 audit or review of the quarterly financial statements.
Tax Fees
Kabani & Company, Inc. billed $0 to the Company during fiscal 2009 and $0 during fiscal 2008 for professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees
Kabani & Company, Inc. billed $0 to the Company in fiscal 2009 and $0 in fiscal 2008 for services not described above.
It is the policy of the Company’s Board of Directors that all services, other than audit, review or attest services, must be pre-approved by the Board of Directors, acting in lieu of an audit committee. All of the services described above were approved by the Board of Directors.
ITEM 15
ITEM 15 EXHIBITS
3-a
Certificate of Incorporation - filed as an exhibit to the Company’s Registration Statement on Form S-4, filed on September 1, 2006, and incorporated herein by reference.
3-a(1)
Certificate of Amendment of Certificate of Incorporation - filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 11, 2007, and incorporated herein by reference.
3-b
By-laws - filed as an exhibit to the Company’s Registration Statement on Form S-4, filed on September 1, 2006, and incorporated herein by reference.
3-b(1) Amendment to Bylaws - filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 11, 2007 and incorporated herein by reference.
10-a
Labour Contract made on July 10, 2007 between Yang Kuidong and Chaoyang Liaogang Special Steel Co., Ltd. - filed as an exhibit to the Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.
10-b
Labour Contract made on July 10, 2007 between Zhang Liwei and Chaoyang Liaogang Special Steel Co., Ltd. - filed as an exhibit to the Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.
10-c
Labour Contract made on July 10, 2007 between Xiao Zhiquan and Chaoyang Liaogang Special Steel Co., Ltd. - filed as an exhibit to the Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.
31.1
Rule 13a-14(a) Certification - CEO
31.2
Rule 13a-14(a) Certification - CFO
Rule 13a-14(b) Certification
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN WENSHEN STEEL GROUP, INC.
By:/s/Yang Kuidong
Yang Kuidong, Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below on January 12, 2010 by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.
/s/Yang Kuidong
Yang Kuidong, Director
Chief Executive Officer
/s/Zhang Liwei
Zhang Liwei, Director
Chief Financial Officer
/s/Xiao Zhiquan
Xiao Zhiquan, Director