ITEM 1. BUSINESS
The December 2009 Share Exchange Transaction
On December 28, 2009, the Company entered into a share exchange agreement, or the Exchange Agreement, with Jolly Promise Limited, an investment holding company organized under the laws of the British Virgin Islands (“Jolly”) and the stockholder of Jolly, Welldone Pacific Limited, a limited company organized under the laws of the British Virgin Islands (“Welldone” or the “Stockholder”). As a result of the share exchange, or the Exchange, the Company acquired all of the issued and outstanding securities of Jolly from Welldone in exchange for 42,000,000 newly-issued shares of the Company’s common stock, par value $0.001 per share (“Common Stock”). Immediately following the Exchange, the Stockholder owned 70% of the 60,000,000 then-issued and outstanding shares of voting capital stock of the Company (as of the date hereof, the Company has 240,000,000 shares issued and outstanding as a result of a 4-for-1 forward stock split of the Common Stock effective on April 14, 2011). As a result of the Exchange, Jolly became a wholly-owned subsidiary of the Company.
Following the Exchange, the corporate structure of the Company consisted of Jolly, a wholly-owned subsidiary of the Company, Jolly’s wholly-owned subsidiary, Hong Kong Sindhi Fuel Injection Company Limited, a Hong Kong company (“HKSind”), HKSind’s wholly-owned subsidiary, Weifang Huajie Fuel Injection Company Limited, a People’s Republic of China or PRC company (“Huajie”), Huajie’s wholly-owned subsidiary, Weifang Xinde Fuel Injection System Company Limited, a PRC company (“Weifang”) and Weifang’s wholly-owned subsidiaries, Huaxin Diesel Engine Co., Ltd., a PRC company (“Huaxin”), Hengyuan Oil Pump and Oil Fitting Co., Ltd., a PRC company (“Hengyuan”) and Jinma Diesel Engine Co., Ltd., a PRC company (“Jinma” and together with Jolly, HKSind, Huajie, Weifang, Huaxin and Hengyuan, the “Subsidiaries”). The principal business activities of the Company and its Subsidiaries consist of the production and marketing of fuel injection systems, non-vehicle diesel engines, and diesel generator technology. The above described corporate structure is illustrated below:
On April 22, 2010, the Company held a special meeting of its stockholders. At the special meeting, the Company’s stockholders approved, by the requisite number of votes, to change the Company’s name from “Wasatch Food Services, Inc.” to “Xinde Technology Company”.
On April 7, 2011, the Company held a special meeting of its stockholders whereby the stockholders approved, by the requisite number of votes, (a) the proposal to increase the amount of the Company’s Common Stock from 150,000,000 shares to 350,000,000 shares and (b) the proposal to effect a 4-for-1 forward stock split of the Company’s outstanding Common Stock. The forward stock split became effective on April 14, 2011.
Summary of the Company’s Current Business
The Company operates in one business segment, the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units mainly in the People’s Republic of China. However, our products compete in three primary product segments, namely (1) fuel injection system products, (2) diesel engine products and (3) generator products. We believe our broad range of products (including non-vehicle diesel engines, diesel generators, injection pumps, injectors and three-coupling components, and agricultural machinery and construction machinery) increases our competitiveness.
The Company is based in China’s Shandong Province in the city of Weifang where many large and medium-sized diesel engine enterprises and related products and components manufacturers are located. Weifang is also an important traffic center on the east coast in northern China. We believe our location makes the purchase of raw materials and sales of our products very convenient and reduces the costs associated with sales while reducing freight costs.
We have developed fuel injection system products that we believe will meet the Euro III Emissions Standard, which will become most relevant in light of China’s initiative to implement the Euro III Emissions Standard in 2010. Furthermore, we believe that we are China’s only company with exclusive intellectual property rights for fuel injection systems meeting such Euro III Emissions Standard which could lead to broad market appeal. Due to our strict technical standards and quality control in production process, our products have become well-known brands in their markets throughout China. Our Company has always placed quality control first and we received our ISO9001 certification in 2005.
Our products feature a cost and price advantage arising from our independently owned intellectual property. For example, our integrated electromechanical electronically-controlled high-pressure fuel injection system with common rail sells for RMB7,000 (US$1,029) per set as compared with products produced by some of our largest competitors (BOSCH and DENSO) which offer comparable products for RMB15,000 (US$2,011) per set. As a result, we believe such products will gain market share and be instrumental in improving our competitive position and brand influence.
We also have a long-term relationship with Tianjin University’s Combustion Laboratory of Combustion Engines, a national key laboratory located in Tianjin, China, which contributes to our growing expertise and reputation in the field of integrated electromechanical electronically-controlled high-pressure fuel injection systems with common rail in China. In addition, we have an experienced team of in-house technicians which contributes to our product’s technical content and ultimately, our core competitiveness.
Through independent development, cooperation and introduction, we have developed a variety of diesel engine injector assemblies for Sitair, 170, 190 and 105 models as well as multi-cylinder No. 1, BX, BXD, IIW and DT12/24-10X (electronic regulator) injection pump assemblies and oil transfer pumps. In addition, we have fully acquired the production process and technology for EGR (Exhaust Gas Recirculation) diesel engines and gas power generators that are in growing demand in the marketplace.
Each of our Subsidiaries has its own marketing network. The Company’s goal is to utilize each of such networks to create a countrywide network. The Company has made its after-sales service a priority, setting up a special after-sales service management department to provide users with after-sales services.
Our principal offices are located at Number 363, Sheng Li West Street, Weifang, Shandong Province, The People’s Republic of China, Telephone: (86) 536-8322068, Facsimile: (86) 852-28450504. Our Company website is located at http://www.chinaxinde.cn/
Our Products
General
The Company’s existing products consist of ten series of more than 100 models, including a multi-cylinder oil pump assembly, an electronically-controlled multi-cylinder injection pump assembly, a single-cylinder injection pump assembly, an injection assembly, an oil-transfer pump assembly, coupling plungers, coupling injectors, coupling delivery valves, offset press and multi-cylinder diesel engines (including a diesel generator set, construction machinery, agricultural machinery, air compressors and rigidly-fixed power machines). The Company has developed a variety of diesel engine injector assemblies and multi-cylinder I, BX, BXD, IIW, DT12/24-10X (electron speed regulator) injector assemblies and oil transfer pumps. Set forth below is a brief description of our fuel injection system, diesel engine and generator products.
Fuel Injection System Products
Our fuel injection system products are a core component of diesel engines and are used in heavy, medium and light-duty vehicle diesel engines (including those used in mining, agricultural and construction machinery). We were recognized as a leader with respect to the technology of oil pump and fuel injection systems by the China Diesel Industrial Catalog 2007. For example, our DG-T2 digital electronically-controlled oil pump has sold very well since its development four years ago, with over 30,000 sets being sold from June 30, 2010 to June 30, 2011. The product can reduce oil consumption and pollution emissions of diesel engines and has become a new-generation oil supply product for modern diesel engines.
One of our main fuel injection system products is our electronically-controlled fuel system with common rail which we developed in conjunction with Tianjin University. In order to resolve traditional problems with respect to diesel engines such as high noise and hazardous tailpipe gas emissions, the European community, the U.S. and Japan have applied electronic control technology to vehicle diesel engines. Compared with traditional diesel engines, electronically-controlled diesel engines exhibit improvements in power performance, economic efficiency, emissions and noise indexes. Furthermore, high-pressure “common rail” technology is an oil supply method that separates injection pressure generation from the injection process in a closed loop system composed of high-pressure oil pumps, pressure sensors and electronic control units. In this method, a high-pressure oil pump transmits pressed fuel to common fuel supply lines and exhibits precise control over fuel pressure to realize fuel line pressure independent of the revolution speed of the engine. This technology considerably reduces the change of fuel supply pressure on the revolution speed of engines and, ultimately, remedies the drawbacks of traditional diesel engines with respect to high noise and hazardous emissions.
As governments begin to pay more attention to environmental protection concerns, stricter requirements are being established for the performance of diesel engines with regard to their pollutant emissions and economic fuel efficiency. Emissions standards are requirements that set specific limits to the amount of pollutants that can be released into the environment. The European Union has its own set of emissions standards that all new vehicles must meet, commonly referred to as Euro Standards. Currently, emissions standards are set for all road vehicles, trains, barges and non-road mobile machinery (such as tractors). As China’s wealth expands, the number of coal power plants and cars on China’s roads is also growing, creating an ongoing pollution problem. China enacted its first emissions controls on automobiles in 2000 which were equivalent to the Euro I Standard. China’s State Environmental Protection Administration, or SEPA, upgraded emission controls again on July 1, 2004 to the Euro II Emissions Standard. A more stringent emission standard, National Standard III, the equivalent of Euro III Emissions Standard, went into effect on July 1, 2007.
The Euro IV Emissions Standard is scheduled to take effect in 2012. Beijing introduced the Euro IV Emissions Standard on January 1, 2008, and thus became the first city in mainland China to adopt this standard. Due the fact that our product has passed all of the applicable professional tests administered by the Chinese National Laboratory, we believe that our integrated electromechanical high-pressure electronically-controlled fuel injection system with common rail will fully meet the Euro III Emissions Standard in China once fully implemented. We hold exclusive intellectual property rights to the technology. We believe that only our electronically-controlled fuel injection systems with common rail can currently meet the Euro III and IV Emission Standards. With extensive implementation of the Euro III Standard in China, we believe that our products will be well positioned. We intend to achieve even higher standards (such as Euro IV and V Emission Standards) through technological up-grading. Furthermore, in light of the fact that the most comparable products used in China are produced by foreign companies such as BOSCH and DENSO, we believe there is no compatible domestic product has been put into production in China.
Diesel Engine Products
Our vehicle diesel engines with electronic protective units feature automatic protection for abnormal situations in the vehicle’s running process, including over-speed protection, low oil pressure protection, high water temperature protection, overload protection and low voltage protection. This can ensure an effective operation of the diesel engine without it being monitored. We have manufactured vehicle diesel engine products in small volume to supply the international market, and our technology has reached internationally advanced levels having achieved ISO9001 qualification. In the near future, we intend to strengthen our marketing and sales efforts in the international market for these products. Our diesel engine products generated 34 %, 36% and 51% of the Company’s revenues in the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
We are currently devoting significant efforts to develop electronically-controlled non-vehicle diesel engines, including engines with electronic protecting units. Both are small and medium-sized non-vehicle diesel engines (12kW~250kW). Our non-vehicle diesel engine products currently include four-cylinder and six-cylinder engines, with output power ranging from 15kW to 250kW. These products have been widely used to power generators, agricultural machinery and construction machinery. Our product models are as follows:
• For power generators: K4100D\K4100ZD\R6105ZD\R6113ZLD\HR6126CD
• For construction machinery: K4100G\K4100G2\R6105G\R4100Y\HR6126G
• For agricultural machinery: R4105T\R6105K
Due to intense market competition with respect to vehicle diesel engines, some large diesel engine enterprises such as Weichai Power Co., Ltd. and Shanghai Diesel Engine Co., Ltd. focus on producing vehicle diesel engines. We have not been able to identify any leading enterprises that produce non-vehicle diesel engines in China according to our research regarding the national industrial market. Therefore, the Company intends to create such a market through the production of small and medium-sized non-vehicle diesel engines. In April 2010, the Company launched its new Huaxin “Zhongkang” 6CT/6LT product line which consists of smaller, lighter highly reliable and fuel efficient diesel engines. Till June 30,2011, over 1,100 generator construction machineries had been produced by the product line and contribute $8,449,259 of the revenue.
Generator Products
Diesel generators have traditionally been in a short supply in China. From 2004 to 2005, diesel generators were out of stock in the Chinese market and remained a scarce commodity as described in China Statistical Yearbook 2005. In China, the annual demand for diesel generators was approximately 800,000 sets according to national industrial market research in 2009. Our Company receives orders for 80,000 sets each year however our production capacity is only about 20,000 sets each year. Therefore, the demand for our generator products greatly exceeds the supply. Our generator products generated 18%, 27% and 3% of the Company’s revenues in the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
Furthermore, the net profit of such product can reach approximately 18%, so we believe the profit margin is very attractive. According to an authoritative investigation, China’s power demand has increased by 20% each year however the power supply increased only by 2% each year over the past 5 years quoted from the China industrial Statistical Yearbook. We are therefore optimistic that demand for diesel engines for power generation and engineering construction may see significant growth over the next ten years. Our diesel generator set can meet extensive service requirements and may be used for:
• basic energy supply of public facilities to meet power demands;
• emergency power supply of public facilities to provide uninterrupted power supply to workshops, public utilities and commercial mansions;
• mobile and portable power supply;
• auxiliary power supply for ships to meet power needs of auxiliary devices;
• peak load absorption units to absorb peak loads at peak hours; and
• joint power and heat supply units to provide power, heat and cold energy to office buildings.
We are currently developing an “intelligent” generator set which is a fully automatic intelligent power station that integrates self-monitoring, site machine room monitoring and remote computer monitoring. Such generator implements full automatic control at the start-up phase, shut-down phase, state monitoring and on-line control. This product is suitable for self-closing unit control systems under unmanned operation or remote computer operations. Its specific advantages are as follows:
• Automatic start or the occurrence of electricity failure and automatic connection with civil power network. When the external power supply recovers, the product will automatically shut down. As a result, it is suitable for use in hospitals, banks, machine rooms, communities and hotels;
• Four self-protection functions. In the event of excessively high water temperature, high oil temperature, low oil pressure, over-speed, overload on account of loss of pressure, or short circuit and start failure, the protection device will give sound and light warnings and automatically stop the machine.
• Remote control function. The unit has a remote control interface and effectuates remote control, remote measurement and remote communication. This can automate office control of the unit “operation” and automated power station without human monitoring.
• Intelligent fully-automatic remote control power station with low noise (green power supply). This unit is suitable for the user who requires strict noise control. The unit mute shell is made of high-quality steel plate, resistant to corrosion, with high-efficient acoustical material inside. This can effectively reduce noise. In addition, shock pack is installed at bottom of each unit to reduce the shock of unit.
Distribution Methods
We have established nationwide marketing and after-sale service networks in China. We have established more than 20 branches throughout China, including branches in Fu’an, Guangzhou, Dongguan, Jiangdu, Chengdu, Chongqing, Kunming, Taiyuan, Shenyang, Changsha and Urumchi. The Company employs agents throughout China, who receive commissions on the amount of products that they help the Company to sell. Agreements with such agents are generally formed during national trade fairs or other types of trade exhibitions. We pay for transportation expenses and the products are generally delivered via road vehicles.
Mobile technicians operate our after-sales network. Each is assigned to a different geographical area.
For the fiscal years ended June 30, 2009, 2010 and 2011, distribution of our products through our 3 largest distributors accounted for approximately 7.4%, 9.4% and 7.5 % of our total annual sales, respectively.
Sources and Availability of Raw Materials from Suppliers
For the fiscal years ended June 30, 2011, we had one supplier accounted slightly over 10% of the Company’s purchases, which was 10.4%, and no single supplier accounted for more than 10% of the Company’s accounts payable in the same time period. No single supplier accounted for more than 10% of the Company’s purchases and accounts payable for the years ended June 30, 2011.
Key Customers
No single customer accounted for more than 10% of the Company’s total revenue or accounts receivable for the years ended June 30, 2011 and 2010.
Competition and Market Share
The following sections discuss the competitive environment that the Company navigates with respect to its fuel injection system, diesel engine and diesel generator products.
Fuel Injection Systems Market
According to our market research, there are more than 70 companies that produce fuel injection systems in China (with the exception of small enterprises that are specialized in rough manufacturing for the large and medium-sized oil pump and nozzle enterprises). From January to November in 2010, the whole industrial sector manufactured 6,760,000 multi-cylinder injection pumps, to an increase of 15.43%.
In recent years, there were considerable heavy-duty truck overloads in many districts (trucks filled beyond their mandatory capacity limit). In order to maintain the restrictions on overruns and overloads, China’s Ministry of Transport has stressed the importance of strengthening restrictions on overruns and overloads so that greater safety may be achieved. Undoubtedly, such news favors the market of 12~19t which had not been prosperous in the past.
The rural transport markets and urban logistics markets have great demand for light trucks, specifically special light trucks. The light trucks are becoming a popular form of rural transporting because they are environment friendly, have high maneuverability and good safety records. This contributes to the increase in the sales volume of light trucks. In addition, the upgrading of agricultural trucks and an increase in income of farmers may improve the demand for medium-sized trucks. As coal, power and oil industries continue to expand, the demand for heavy and medium-duty trucks is likely to expand. Moreover, China’s heavy-duty trucks have high performance-price ratios, and the prices present an advantage in the global market.
China strengthened the construction and improvement of its public bus system, which may contribute to an increase in the development of urban buses. In addition, the tourism industry has become increasingly prosperous in China, which promotes a demand for tourist buses. The majority of public and tourist buses are large-scale passenger buses, and as a result of our products usefulness for these vehicles, we believe that our products will continue to sell well for such purposes.
Despite rapid growth of China’s diesel engine vehicles, the fuel injection systems mostly adopt foreign technology and imports from foreign countries. And now, some Chinese manufacturers are developing diesel engines for cars, but there will be quite a few years before industrial production occurs. Therefore, our future objective is to realize localization of fuel injection systems and lead the market.
As emission controls become stricter, electronically-controlled fuel injection systems will likely be in great demand. In China, some universities and hi-tech enterprises have conducted experimental research in electronically-controlled fuel injection systems, but few have achieved substantial progress. According to an analysis report generated from http://www.cndata100.com, it is estimated that there will be an increase in production of electronically-controlled fuel injection system products in the following three to seven years.
We do not hold a significant or reportable share of the fuel injection system market. Currently, domestic fuel injection systems face competition from large international enterprises. BOSCH Automotive Diesel Systems Co., Ltd. is a joint stock company invested by BOSCH and Weifu Group, which produces injector assemblies, injection coupling components and electronically-controlled fuel injection systems. Depending on advanced technology and strong capital strength, BOSCH Automotive Diesel Systems Co., Ltd. has a dominant position in China’s fuel injection system market. In addition, DENSO (Japan) and Shanghai Yiwei jointly invested to establish DENSO (Shanghai) Fuel Injection System Co., Ltd. Once the Chinese market needs electronically-controlled fuel injection system products, DENSO will hold the aforesaid company and its products will enter into Chinese market through such company. Meanwhile, Delphi Corporation is also seeking opportunities to establish a wholly-controlled or joint venture company. These large international companies are all attracted to the Chinese market. However, due to high prices of their products, we believe this leaves a tremendous opportunity for our products.
Diesel Engine Market
Diesel engines are the main power source for automobiles, agricultural machinery, construction machinery, ships, diesel locomotives, geological and oil drilling, military equipment, general-purpose machinery, mobile and spare power stations. As a result, the development of the diesel engine industry has an important impact on China’s industry, agriculture, transportation, national defense, construction and the life of urban and rural residents.
We do not hold a significant or reportable share of China’s diesel engine manufacturing market. However, we believe that the demand for energy saving and emissions reduction bring tremendous opportunity to the diesel engine industry and our business. Electronically-controlled fuel injection systems are the heart of diesel engines and they directly control the emissions level and comprehensive performance of engine. With China’s formal implementation of the National Standard III Emission regulation (the Euro III Emissions Standard equivalent in China) on July 1, 2007, electronically-controlled fuel injection systems are likely to replace mechanical fuel injection systems. Driven by the continuously increasing diesel engine market, the demand for electronically-controlled fuel injection systems for diesel engines keeps growing. As a result of the issuance of the national supporting policy and measures and the improvement of laws and regulations, we believe that the domestic market of electronically-controlled fuel injection system of diesel engines have a great development opportunity.
According to the Chinese government’s working report regarding its Eleventh Five-Year Plan, the annual demand for single-cylinder diesel engines is about 9,000,000~10,000,000 sets; the annual demand for multi-cylinder diesel engines installed in agricultural vehicles, large and medium-sized tractor and large agricultural machinery is approximately 880,000 ~ 1,100,000 sets; for automobiles, about 2,400,000~2,500,000 sets; large and medium-sized construction machinery, about 500,000 sets; large and medium-power ship and generators, approximately 500,000~700,000 sets. Further, it is expected that the diesel engine market will remain at a growth rate of ten percent (10%) during the Twelfth Five-Year Plan.
Our energy-saving diesel engines are mostly aimed at small agricultural machinery, construction machinery, small and medium-sized ship and generator sets. However, we believe that under the promotion of China’s policy for stimulating domestic demand and improving rural labor force, the market demand for diesel engines will keep increasing with the increase in the need of the abovementioned equipment.
Agricultural Machinery
According a report from http://www.cnki.com.cn , the total demand for large and medium-sized tractors continued to rise in 2011.In the first half year of 2011, the accumulated production value of tractors has reached 130 billion RMB, which increased by 20% from the same period in the previous year. The combustion engine market grew in coordination with agricultural, livestock, processing, transporting and construction machinery.
Since 2008, the Chinese central government has issued policies in favor of agriculture. This pushed forward the development of the market. The government subsidy for agricultural machinery stimulated market demand. Since China’s implementation of a subsidy policy for purchasing agricultural machinery in 2004, the central financial subsidy was increased by 190.48% every year on average, and exceeded RMB15 billion in 2010, with the subsidy’s scope expanding from sixty-six main grain production counties in sixteen provinces, regions and municipalities in 2004 to all agricultural livestock counties (farms) in 2010. More farmers and herdsmen benefited from the subsidy, and the types of subsidized implements increased to nine varieties including thirty-three types. Moreover, local governments are permitted to include on their own five other types of implements into the subsidy list. In 2010, most provinces further expanded the tractor subsidy to 25~30 horsepower medium-power and walking tractors and some increased subsidies for corn harvesters and transplanters. This promoted a rapid growth in the sales volume of large and medium tractors, walking tractors, rice harvesters, corn harvesters and transplanters in 2010.
In addition, the farmers’ purchasing power has increased during recent years. With an increase in farmers’ incomes and purchasing power, a tide of renewing agricultural machinery emerged in many districts.
Having analyzed the economic environment and development of the agricultural machinery market in the world and in China, we believe that the economic environment with respect to agricultural machinery will be more favorable in the future.
We believe that the main drivers promoting the growth of agricultural machinery market will include: (1) subsidies to agricultural machinery which will promote a continuous growth in the demand for large-power tractors; (2) the gradient replacement of small tractors with large and medium-power tractors will be an important driving force in the market; and (3) remote regions will be in rising demand.
Construction Machinery
The following is our analysis with respect to several industrial investments that have played a major role in promoting the construction machinery market development, from which we may see the demand tendency of the construction machinery market in China.
Railway Construction
There was an investment of RMB200 billion into the Beijing-Shanghai High-speed Railway in 2008, the basic construction of which was completed in July 2010. In addition, twelve more railways, including the Beijing-Shijiazhuang, Shijiazhuang-Wuhan and Tianjin-Qinhuangdao railways, began construction, one after another starting in 2009, covering total miles of 4,100km. Tracks are now being laid for special passenger transportation lines including Wuhan-Guangzhou, Shijiazhuang-Taiyuan, Yichang-Wanzhou, Ningbo-Taizhou-Wenzhou, Wenzhou-Xiamen, Qingdao-Jinan which travel at speeds of 300km/h and above. The tracking mileage for these trains will reach 13,000km.
China’s total railway mileage has increased from 78,000km in 2008 to over 90,000km in 2010. Special passenger lines with speeds exceeding 200km/h are 7,000km long and total constructed passenger lines have reached 9,700km.
Rural Road Construction
With respect to rural road construction, during the Eleventh Five-Year Plan, the Ministry of Transport will carry out a construction project worth RMB100 billion to rebuild more than 500,000km asphalt roads. The government will also invest RMB40 billion to implement a project that will result in roads being built in all suitable towns and villages. It is estimated that in the following five years, the mileage of roads built in rural areas will reach 810,000km, including approximately 200,000km in eastern China, about 500,000km in central China and about 110,000km in western China (excluding village to village roads).
According to the plan, in 2020, asphalt roads will be built in all suitable towns and villages and the total mileage of rural roads will reach 3,700,000km, with 600,000km road newly added.
Water Conservation and Hydroelectricity
We believe that by 2015, water conservation and hydroelectricity will be still at a peak. The Middle and Long-term Development Planning for Renewable Energy report prepared by the National Development and Reform Commission, has planned for an increase in China’s hydroelectricity installed capacity to 190,000,000 kW in 2010 and 300,000,000kW in 2020.
During the Eleventh Five-Year Plan, RMB800 billion will be invested in water conservation and hydroelectricity construction, in which construction equipment procurement will account for 30% of total investment. Generally, the construction period of large-scale water conservation is about 6~7 years, the long term plan makes it less affected by macroscopic economic adjustments.
Civil and Urbanization Construction
In order to resolve the traffic problem which exists in developed cities, urban track construction (subway and light track) is becoming a hot bed of civil construction. Until 2011, many second-tier cities, such as Chongqing, Zhengzhou and Wuhan, have initiated track construction projects.
In 2010, the World Exposition was held in Shanghai where significant civil construction took place. For Expo Shanghai 2010, the total floor area of exhibition halls reached 800,000m2, and RMB10 billion was invested, plus RMB20 billion invested in site development. The total investment in Expo Shanghai 2010 reached RMB30 billion.
Petrochemical Projects
According to China’s national planning, China will construct 30 sets of ethane projects (1 million t/a) and 30 sets of oil refining projects (10 million t/a) in the next ten years. In addition, as a result of a shortage in oil, the central government is providing support to the coal chemical industry. Currently, there are fewer than ten sets of ethane production units each with 1 million t/a production capacity in China. There will be two sets of production units constructed each year in the future. Similarly, there are only about ten sets of oil refining units each with 10 million t/a production capacity in China, and in the following several years, there will be two sets of production units constructed each year. We believe that the construction machinery used in such construction projects is an ample market for our products.
As a result of the national economy and the foreign economic environment, the industry of construction machinery has experienced rapid development. According to an estimate made by China Construction Machinery Association, the sales revenue of construction machinery in the first half year of 2011 have increased41.42%from the same period in the previous year .
From the above data, the demand for diesel engines installed in construction machinery has been increasing and will likely continue to increase for the next three to five years.
Diesel Generator Market
In China, a series of factors, including (1) the policy for stimulating domestic demand, (2) accelerating development in Central and Northern China, (3) promoting urbanization, (4) reconstruction after national disasters and (5) the upgrading of railways and power grids will likely result in an increase in investment in China which in turn will undoubtedly promote the development of the equipment industry. According to the China Machinery Industry Association’s report, in China, the demand for diesel generators will increase by 20% each year, and the annual market demand should be 2,000,000 sets. Demand for power increases by 20% every year, but power supply increases only by 2%. As a result, diesel engines for power generation and construction could be prevalent in the next 10 years.
As of the date of this Report, the Company does not hold a significant or reportable share of China’s generator manufacturing market.
From 2004 through 2005, diesel generator sets have been out-of-stock in the Chinese market and still today, there is a high demand for diesel generator sets. China’s annual demand for diesel engines is approximately 500,000 sets. Our annual orders are for 80,000 sets, despite our present production capacity of 20,000 sets. Therefore, our diesel engine production cannot meet market demand.
Employees
As of June 30, 2011, the Company had 580 full-time employees and 800 total employees.
Intellectual Property
The Company holds the exclusive right to use the electronic control fuel injection system with common rail technology which was developed with Tianjing University. On December 29, 2003, the Company entered into a Business Proposal on Co-development for the Electronically-Controlled Fuel Injection System with Common Rail for Diesel Engines with the State Key Laboratory for Internal Combustion Engine and Combustion of Tianjin University. Such agreement was supplemented on December 12, 2009. Such agreement, in reliance on the Certificate for Patent of Utility Model “New Model of Electronically-Controlled Fuel Injection System with Common Rail” held by Tianjin University, has granted to the Company an exclusive right to use the patent of the utility model for the life of the patent.
The Company holds the rights to a character mark, which has been registered with the proper regulatory authority in China.
The Company also holds the rights to the website address located at http://www.chinaxinde.cn/
Compliance with Environmental Regulations and Other Laws
Environmental Regulations
The Industrial Development Policy for Automobiles issued by the State-owned Assets Supervision and Administration Commission in 2009 stated that attention should be focused on the development of diesel engine technology for car in automobile industry with consideration of the national strategy for adjustment of energy structure and the requirements for emission standard. Apparently, this is a recognition and support for the development direction of diesel oil-consumed cars. Also, in the Technical Policy for Prevention and Treatment of Pollutant Emission by Diesel Engine Vehicle issued by the Ministry of Environmental Protection in 2003, it stated that no discriminative policy should be adopted with regard to the production and use of diesel engines that have advanced technology and low pollutant emission. This reflects the Chinese government’s encouragement for the development of reliable diesel engine vehicles with low-energy consumption and low pollution and also gives powerful support to diesel engine vehicles that use advanced technology and meet emission standards. At the same time, the aforesaid Technical Policy also stresses that in regarding the adverse effects of the emission of diesel engine vehicles and the pollutants produced by its secondary reaction in air on human health and ecological environment, the emission of new diesel engine vehicles and vehicle diesel engines must meet the national or local emission standards, or it may not be manufactured, sold, or used. Presently, China’s emission standard for diesel engine vehicleS is only equivalent to the Euro I Standard, which is behind the international level and must be enhanced gradually.
We believe that China’s central government will keep strengthening the requirements for control over the pollutant emission of diesel engine vehicles to reduce environmental pollution. The Technical Policy required the Euro III Standard to be reached in 2008 and the international level after 2010. This shows China’s intent for emission laws to meet the international standard. China’s emission control is ten years behind other developed countries, so there is a big gap between China’s standard and the standard. On the other hand, it will be a great task to improve the technical levels, apply electronic control, develop outboard processing technology and upgrade fuel quality. The Technical Policy clearly states that China will adopt preferential tax and other economic policies to encourage the production and use of diesel engine vehicles and diesel engines that can meet the emission standard ahead of time. This means enterprises may be partly exempt from tax on account of producing advanced diesel engine vehicles or diesel engine.
The policy-based subsidy to purchase agricultural machinery sharply increased from RMB70 million (US$50 million) in 2004 to RMB15 billion (US$2.1 billion) in 2010. Under the promotion of high capital subsidy, China’s agricultural equipment industry plays a benign role in the market of agricultural engine, thus pushing forward the whole development of the diesel engine industry.
General Business Licenses
According to certain corporate laws of the PRC, in order to be a lawfully established company in China, the relevant corporate registration authority shall issue a business license, the date of which shall be the date of the establishment of the company. The company business license must state the name, domicile, registered capital, actually paid capital, business scope and the name of the legal representative of such company. If any of the items as stated in the business license is changed, the company must modify the company’s registration, and the company registration authority shall issue a new business license. We believe we have all business licenses to operate our business and that all such business licenses are in good order in accordance with the applicable PRC corporate laws.
Environmental Reports, Certifications and Licenses
According to certain environmental laws and regulations in China, the Department of Environmental Protection Administration under the State Council shall, in accordance with the national standards for environment quality and China’s economic and technological conditions, establish the national standards for the discharge of pollutants. The People’s Governments of Provinces, Autonomous Regions and Municipalities directly under the Central Government may establish their local standards for the discharge of pollutants for items not specified in the national standards. With regard to items already specified in the national standards, they may set local standards, which are more stringent than the national standards, and report the local ones to the Department of Environmental Protection Administration under the State Council for the record. Units that discharge pollutants in areas where the local standards for the discharge of pollutants have been established shall observe such local standards.
The Construction Project Environmental Impact Report Form, which is the environment license applicable to the Company’s common rail electronic control fuel injection system manufacturing program, was approved as satisfying the national and local environmental standards by the Economic and Technological Development Zone of Weifang City as of December 2007.
ITEM 2.
ITEM 2. PROPERTIES
Under Chinese law, all land in China is owned by the State or rural collective economic organizations. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of fifty years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
The Company currently holds land use rights with respect to three properties. Hengyuan holds that certain certificate granting to the Company the right to utilize the real property located at No. 363 Shengli West Road, Weicheng District, Weifang, China, which encompasses 11,403 square meters, expiring March 28, 2052. Hengyuan holds that certain certificate granting to the Company the right to utilize the real property located at Wolong Qiao Village, Beiguan Sub-District, Weicheng District, Shandong, China, which encompasses 5,443 square meters, expiring March 28, 2052. Jinma holds that certain certificate granting to the Company the right to utilize the real property located at Northern to Yuqing West Street, Eastern to Caihong Road, Shandong, China, which encompasses 20,645 square meters, expiring July 24, 2056. The Administrative Committee of Foreign Investment and Development Zone of Weifang has granted to Huaxin the right to utilize a section of real property located west of Tengfei Road and south of Industry No. 1 Street, Shandong, China, which encompasses 40,000 square meters and the land use right certificate applicable to such property is currently being processed.
The Company owns six buildings. Of these six buildings, five are recorded in the name of Hengyuan, such buildings located at (a) the north section of Shengli Branch Road, Weicheng District, Weifang, Shandong, China, having 931.97 square meters, (b) the north section of Shengli Branch Road, Weicheng District, Weifang, Shandong, having 111.84 square meters, (c) No. 36 Building, No. 363 Shengli West Road, Weicheng District, Weifang, Shandong, China, having 635.43 square meters, (d) No. 363 Shengli West Road, Weicheng District, Weifang, Shandong, China, having 1,398.65 square meters, and (e) No. 363 Shengli West Road, Weicheng District, Weifang, Shandong, China, having 1,503.53 square meters. The sixth building is recorded in the name of Jinma and is located at No. 2 Yuqing West Street No. 7, Weicheng Economic Development Zone, Weifang, Shandong, China, having 2,873.51 square meters. Also, applications for ownership certificates with respect to eleven buildings are in progress.
As of June 30, 2011, the legal title to five of the Company’s motor vehicles and two office buildings were registered in the names of management members of the Company. On October 27, 2009, legal title to one of the motor vehicles was transferred to the Company. The Company estimates the transfer of the legal titles of the five motor vehicles and two office buildings will be completed by the end of December 2011. Also, as of June 30, 2011, two land use rights were registered in the names of two management members of the Company. The Company estimates that the application for the transfer of the certificates of these two land use rights will be completed by the end of 2011.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, we are named as the defendant in lawsuits in which claims are asserted against us. In our opinion, the liabilities, if any, which may ultimately result from such lawsuits, are not expected to have a material adverse effect on our financial position, results of operations or cash flows. As of the June 30, 2011, there was no pending or outstanding material litigation with the Company.
ITEM 4.
ITEM 4. (REMOVED AND RESERVED).
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock is quoted on the OTCQB under the symbol “WTFS.OB”.
On April 7, 2011, the Company held a special meeting of its stockholders whereby the stockholders approved, by the requisite number of votes, (a) the proposal to increase the amount of the Company’s Common Stock from 150,000,000 shares to 350,000,000 shares and (b) the proposal to effect a 4-for-1 forward stock split of the Company’s outstanding Common Stock. The forward stock split became effective on April 14, 2011. As of September 27, 2011, we had 240,000,000 common shares outstanding.
Set forth below is a table showing the high and low closing bids for the periods indicated from which information is available as provided to us from Pink Sheets, LLC (figures below have been adjusted for the 4-for-1 forward stock split):
Dividends
Dividends, if any, will be contingent upon our revenues and earnings, if any, capital requirements and financial conditions. The payment of dividends, if any, will be within the discretion of the Board. We presently intend to retain all earnings, if any, for use in our business operations and accordingly, the Board does not anticipate declaring any cash dividends for the foreseeable future.
Dividends payable relating to dividends declared prior to July 1, 2009 were $92,072 at June 30, 2009 and $3,990,235 at June 30, 2008. The Company had settled these dividends at 2009 and 2010 respectively.
Holders of Common Equity
As of September 27, 2011, we have issued 240,000,000 shares of our Common Stock to 43 holders of record.
See also the “Security Ownership of Certain Beneficial Owners and Management” below for a table setting forth (a) each person known by us to be the beneficial owner of 5% or more of our Common Stock and (b) all directors and officers individually and all directors and officers as a group as of the date of this Report.
Securities Authorized for Issuance under Equity Compensation Plans
As of the date of this Report, we have no compensation plans (including individual compensation arrangements) under which the Company’s equity securities are authorized for issuance.
Recent Sales of Unregistered Securities
During the fiscal year ended June 30, 2011, there were no issuances or sales of any of the Company’s unregistered securities, with the exception of the shares of Common Stock issued pursuant to the Exchange on December 28, 2009. We have never utilized an underwriter for an offering of our securities.
DESCRIPTION OF SECURITIES
As of the date of this Report, our authorized capital stock currently consists of 350,000,000 shares of Common Stock, par value $0.001 per share, of which there are 240,000,000 issued and outstanding and 10,000,000 shares of preferred stock, par value $0.001 per share, of which there are zero (0) shares issued or outstanding. The following statements set forth the material terms of our capital stock; however, reference is made to the more detailed provisions of, and these statements are qualified in their entirety by reference to, the Company’s Articles of Incorporation and Bylaws, copies of which are referenced as Exhibits herein, and the provisions of Nevada General Corporation Law. There are no provisions in the Company’s Articles of Incorporation or Bylaws that would delay, defer or prevent a change in our control.
Common Stock
As of the date of this Report, we had 240,000,000 shares of Common Stock outstanding. Except as otherwise required by applicable law and subject to the preferential rights of the any outstanding preferred stock, all voting rights are vested in and exercised by the holders of Common Stock with each share of Common Stock being entitled to one vote. In the event of liquidation, holders of Common Stock are entitled to share ratably in the distribution of assets remaining after payment of liabilities, if any. Holders of Common Stock have no cumulative voting rights. Holders of Common Stock have no preemptive or other rights to subscribe for shares. Holders of Common Stock are entitled to such dividends as may be declared by the Board out of funds legally available therefor.
Blank Check Preferred Stock
Our Board is empowered, without further action by stockholders, to issue from time to time one or more series of preferred stock, with such designations, rights, preferences and limitations as the Board may determine by resolution. The rights, preferences and limitations of separate series of preferred stock may differ with respect to such matters among such series as may be determined by the Board, including, without limitation, the rate of dividends, method and nature of payment of dividends, terms of redemption, amounts payable on liquidation, sinking fund provisions (if any), conversion rights (if any) and voting rights. Certain issuances of preferred stock may have the effect of delaying or preventing a change in control of our Company that some stockholders may believe is not in their interest.
Penny Stock Rules
Our common stock may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act. Our Common Stock may be a “penny stock” if it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the Nasdaq Capital Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million.
The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
Warrants
There are no outstanding warrants to purchase our securities.
Options
There are no options to purchase our securities outstanding. We may in the future establish an incentive stock option plan for our directors, employees and consultants.
Transfer Agent
Action Stock Transfer Corp., 7069 South Highland Dr., Suite 300, Salt Lake City, Utah 84121, telephone (801) 274-1088, fax (801) 271-1099, currently serves as the transfer agent and registrar for the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, the Company is not required to provide the information required by this Item.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein. Readers should carefully review the risk factors disclosed in this Report and other documents filed by the Company with the SEC.
Summary of Significant Accounting Policies
This section should be read together with the Summary of Significant Accounting Policies in the attached consolidated financial statements included in this Report.
Economic and Political Risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Fair Value of Financial Instruments
ASC 820-10 (formerly SFAS No. 157, Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
These tiers include:
• Level 1-defined as observable inputs such as quoted prices in active markets;
• Level 2-defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
• Level 3-defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 as of June 30, 2011 are as follows:
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, notes receivable, prepayments for goods, short-term bank loans, accounts payable, customer deposits, short-term notes payable, due to employee, due to related parties and other payables, approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term notes payable is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term notes payable was not significantly different from the carrying value at June 30, 2011.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the weighted average basis and comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.
Plant and Equipment
Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated useful lives are as follows:
Buildings:
30 years
Machinery:
10 years
Motor vehicles:
5 years
Office equipment:
5 years
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.
Land Use Rights
Under Chinese law land is owned by the state or rural collective economic organizations. The state issues to the land users the land use right certificate. Land use rights can be revoked and the land users forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent. The land use right granted to the Company is being amortized using the straight-line method over the lease term of fifty years.
Revenue Recognition
Revenue represents the invoiced value of goods sold, recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:
-Persuasive evidence of an arrangement exists,
-Delivery has occurred or services have been rendered,
-The seller's price to the buyer is fixed or determinable, and
-Collectability is reasonably assured.
The majority of the Company’s revenue results from sales contracts with distributors and revenue are recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of collectability.
The Company offers warranties on its products for periods between six and twelve months after the sale. The Company estimates the warranty reserves based on historical records and identical or similar types on the market. Warranty expenses related to product sales are charged to the consolidated statements of income and comprehensive income in the period in which sales is recognized. During the years ended June 30, 2011 and 2010, warranty expense was $406,772 and $640,404, respectively, and is included in selling and marketing expenses in the accompanying consolidated statements of income and comprehensive income.
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the quarter.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Segment
The Company operates in one business segment, the design, development, manufacture and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units mainly in the PRC. The sales of the Company outside of the PRC were insignificant for the years ended June 30, 2011 and 2010.
Recent Accounting Pronouncements
There are no new accounting pronouncements that have not been adopted by the Company that would have a material adverse effect on the consolidated financial statements.
Results of Operations for the Year Ended June 30, 2011 as Compared to the Year Ended June 30, 2010
The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the years ended June 30, 2011 and 2010:
Revenues
Our revenues are derived from the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units for the PRC and overseas markets. The table below sets forth a breakdown of our revenues by product for the years indicated:
Our revenues increased by 15%, or $18,381,438, to $141,686,826 for the year ended June 30, 2011 from $123,305,388 for the year ended June 30, 2010. This increase was primarily attributable to an increase in sales of multi-cylinder pumps, which increased by 51% and accounted for 28% of the Company’s total revenues in 2011, and an increase in revenues of electricity pumps by 87% to $14,164,854 for the year ended June 30, 2011 from $7,576,060 for the year ended June 30, 2010, which was partially offset by the decrease in the sales of generator sets by $8,258,456 which accounted for 27% of our total revenues for the year ended June 30, 2011. The main reason for this increase was attributable to the fact that high-end products with greater power are becoming the focus products of the diesel engine industry in the PRC. The Company has adjusted its product structure to introduce more products with greater engine power to accommodate this new trend.
Cost of Revenues
The principal components of our cost of goods sold are the cost of product sales, which is mainly affected by the cost of direct material and salaries. Our cost of goods sold increased in line with the growth of our revenues in 2011. The following table sets forth a breakdown of our cost of goods sold by product for the years indicated:
Our cost of goods sold increased by 3%, or $3,687,833, to $112,126,037 for the year ended June 30, 2011 from $108,438,204 for the year ended June 30, 2010. This increase was primarily in line with the increase in our revenues during the same period and consistent with the continuous expansion of our business. The cost for electricity pumps attributable to our total cost of goods sold increased by 74%, or $4,230,759, to $9,974,906 for the year ended June 30, 2011 from $5,744,147 for the year ended June 30, 2010. We believe our cost of goods sold will continue to increase as we expand our production lines.
Gross Profit and Gross Margin
Gross profit is equal to revenues less cost of goods sold. Gross margin is equal to gross profit divided by revenues. The table below sets forth a breakdown of our gross profit and gross margin by revenue source for the years indicated:
Our gross profit increased by 99%, or $14,693,606, to $29,560,790 for the year ended June 30, 2011 from $14,867,184 for the year ended June 30, 2010. This increase is primarily attributable to the increase in sales of our electric pumps, multi-cylinder pumps, diesel engines and generator sets, which resulted from the Company’s efforts to adjust its product mix by introducing more products with higher gross margins (such as generator sets with more power) and to reduce the production and sales of older style products having lower gross margins since July 2010. Additionally, the Company raised the price of certain popular products of electric pumps and multi-cylinder pumps in 2011.
Selling and Marketing Expenses
Our selling and marketing expenses primarily include sales commissions, after-sales services, payroll, travel costs and freight fees. The table below sets forth a breakdown of our selling and marketing expenses for the years indicated:
Our selling and marketing expenses remained stable as 2% of our revenues in the two-year period ended June 30, 2011. Selling and marketing expenses increased by 5%, or $136,807, to $2,950,077 for the year ended June 30, 2011 from $2,813,270 for the year ended June 30, 2010. This increase was primarily attributable to an increase in freight as a result of our improved sales performance as well as an increase in the payroll for newly-hired employees as a result of the expansion of our business.
We believe such expenses will continue to increase as we expand our sales network and build our operations in additional regional markets in China, and we expect such expenses will remain stable as a percentage of revenues in the near future.
General and Administrative Expenses
Our general and administrative expenses consist primarily of bad debt provisions, bonuses, consulting fees, payroll, legal consulting fees, entertainment fees, office general expenses, labor insurance fees, business travel fees, deprecation, transportation fees, land usage taxes, welfare fees and land use rights amortization. The table below sets forth a breakdown of our general and administrative expenses for the years indicated:
Our general and administrative expenses increased by 11%, or $261,315, to $2,565,280 for the year ended June 30, 2011 from $2,303,965 for the year ended June 30, 2010, which was primarily attributable to our expanding operations, hiring of additional staff to support our growth and retention of legal and accounting services in connection with the public listing of our stock in the U.S. Our general and administrative expenses were approximately 2% of revenues, which remained the same from the year ended June 30, 2010. Bad debt provision, bonuses for the senior and high level management, consulting fees and payroll are four major contributors for the increase in general and administrative expenses of the Company in 2011.
We believe such expenses will continue to increase as our business expands. We will also incur additional costs to meet the requirements of being a public company in the U.S., such as hiring additional staff with experience in U.S. GAAP and SEC reporting requirements and developing internal audit and disclosure control and compliance functions.
Income from Operations
As a result of the foregoing, our income from operations increased by 154%, or $15,005,814, to $24,755,763 for the year ended June 30, 2011 from $9,749,949 for the year ended June 30, 2010.
Interest Expense, Net
Our financing costs include primarily interest paid on short-term loans and miscellaneous bank charges. The table below sets forth a breakdown of our interest expense for the periods indicated:
For the two years ended June 30, 2011 and 2010, interest expense, net amounted to $439,991 and $345,172 and represented 0.1% and 0.3% of our revenues, respectively. The increase was primarily attributable to the increase in interest expense as a result of the increase in the interest rate by the central bank of China in 2011.
Other Income, Net
Other income primarily includes rental income as well as penalty payments tendered by the Company’s customers due to contract breaches. Other expenses primarily includes subsidies for retiring employees, penalties and losses on settlement of account receivable and account payable for fixed assets and inventories.
Other income was $204,422 for the year ended June 30, 2011 compared to other expenses of $15,020 for the year ended June 30, 2010. This was primarily due to an increase of $165,638 from the forfeiture of customer deposits and forgiveness of accounts payable.
Refunded Value Added Tax
To honor the Company’s continuous contribution to the local economy and its achievement of becoming a U.S. public reporting company, the local tax bureau exempted the Company’s output VAT payable, resulting in income of $3,305,512 and $12,085,158 for the years ended June 30, 2011 and 2010 respectively, which was reflected in the accompanying consolidated statements of income and comprehensive income as refunded value added tax for the years then ended.
Income Tax Expense
Our income tax expense increased by 242%, or $3,782,910, to $5,343,329 for the year ended June 30, 2011 from $1,560,419 for the year ended June 30, 2010. On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “new CIT law”), which went into effective on January 1, 2008. In accordance with the relevant tax laws and regulations of PRC, the applicable corporate income tax rate for Hengyuan, Jinma and Huaxin is 25%. However, prior to January 2011, Jinma and Huaxin were defined by the local tax bureau as tax payers subject to the “Verification Collection” method, according to which the amount of income taxes paid is determined by the local tax bureau based on certain criteria instead of applying the CIT rate of 25%, which is much smaller than the result from the normal computation by applying the CIT rate of 25%.
The consolidated effective tax rate for the Company in 2011 increased to 19% from 7.3% in 2010, which is mainly attributable to the change of the CIT computation method of Jinma and Huaxin from the favorable “Verification Collection” method to the normal approach by applying the CIT rate of 25%.
Net Income
Primarily as a result of the foregoing, our net income increased by 13%, or $2,567,881, to $22,482,377 for the year ended June 30, 2011 from $ 19,914,496 for the year ended June 30, 2010.
Net margin is a profitability ratio which is calculated by net income divided revenue. Our net margin remained at 16% from 2010, which was mainly attributable to the product mix adjustment and good performance of sales revenues
Liquidity and Capital Resources
We generally finance our operations through our operating profit and borrowings from banks. During the reporting periods, we arranged a number of bank loans to satisfy our financing needs. As of the date of this Report, we have not experienced any difficulty in raising funds through bank loans, and we have not experienced any liquidity problems in settling our payables in the normal course of business and repaying our bank loans when they are due. We believe that the Company has adequate funds and capital with respect to conducting its business over the next twelve months.
The following table sets forth a summary of our cash flows for the periods indicated:
We believe that the level of financial resources is a significant factor for our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financing to strengthen the Company’s financial position, to expand our facilities and to provide us with additional flexibility to take advantage of business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable to us.
Operating Activities
Net cash provided by operating activities primarily consists of net income, as adjusted for bad debt expense, depreciation and amortization, deferred income taxes, refunded value added tax, bad debt recoveries, and changes in operating assets and liabilities such as accounts receivable, prepayments, deposits and other receivables, due from employees and related parties, inventories, account payable, notes payable, advances from customers, other payables and accrued liabilities and income taxes payable.
Net cash provided by operating activities was $5,359,044 for the year ended June 30, 2011, which is primarily attributable to our net income of $22,482,377, adjusted by an increase in deferred taxes of $977,386, an increase in provision for doubtful accounts of $670,197, an increased in value added tax payable of $22,704,823, an increase in taxes payable of $4,733,334, and an increase of accounts payable $1,830,931, offset by a decrease in refunded value added tax of $3,305,512 , an increase in accounts receivable of $37,313,250, and an increase in inventories of $4,845,883.
Net cash provided by operating activities was $3,501,436 for the year ended June 30, 2010, which is primarily attributable to our net income of $19,914,496, adjusted by an increase in doubtful accounts of $633,468, an increase in inventories of $2,266,816, an increased in value added tax payable of $6,842,229 and an increase in taxes payable of $1,565,318, offset by a decrease in accounts receivable of $23,432,456 and a decrease in prepayments for goods of $3,447,737.
Investing Activities
Net cash used in investing activities primarily consists of purchases of plant and equipment, purchases of construction in progress, proceeds from disposal of fixed assets, proceeds from disposition of discontinued operation, reverse merger and notes receivable.
Net cash used in investing activities was $6,708,885 for the year ended June 30, 2011, which is primarily attributable to repayment of notes receivable of $89,813,567, offset by issuances of notes receivable of $96,203,852.
Net cash used in investing activities was $708,320 for the year ended June 30, 2010, which is primarily attributable to an increase in notes receivable of $136,711, offset by decrease in purchases of plant and equipment of $162,358 and decrease in purchases of construction in progress of $684,782.
Financing Activities
Net cash used in/provided by financing activities primarily consists of proceeds from short-term loans, repayments of short-term loans, repayments of notes payable, proceeds from notes payable, repayment of long-term debt and a dividend paid.
Net cash used in financing activities was $183,669 for the year ended June 30, 2011, which is primarily attributable to proceeds from notes payable of $3,386,962 and proceeds from short-term loans of $2,564,954, offset by repayments of notes payable of $3,164,745 and repayments of short-term loans of $2,957,241.
Net cash provided by financing activities was $447,723 for the year ended June 30, 2010, which is primarily attributable to an increase in proceeds from short-term loans of $4,042,961 and an increase in proceeds from notes payable of $2,760,094, offset by decrease in repayments of short-term loans of $3,937,492 and decrease in repayments of notes payable of $2,188,697.
Working Capital
Our working capital increased by $24,712,231 to $75,447,911 as at June 30, 2011, as compared to $50,735,680 as at June 30, 2010. The increase in working capital as at June 30, 2011 was mainly attributable to an increase in our accounts receivable of $37,312,029, increase in inventories of $4,845,882 and an increase in notes receivable of $6,586,262, offset by an increase in accounts payable of $1,725,539, an increase in income tax payable of $4,733,334 and an increase in value added tax payable of $19,399,310.
The Company received written authorization from the local Chinese government to extend the payment of its current income tax and its current VAT payable due of approximately $9.7 million and $26 million as of June 30, 2011, respectively, in anticipation of additional future exemptions from the local tax bureau. If no significant exemption of tax is granted by the local tax bureau, the Company needs to raise further capital adequate enough to pay for the income tax and VAT tax.
Off-Balance Sheet Commitments and Arrangements
Other than the arrangement described above, as of June 30, 2011, we do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions of foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
ITEM 7A.
ITEM 7A. QUANTITAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Reference is made to the “F” pages herein comprising a portion of this Report.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 2011 AND 2010
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
To the Board of Directors and Shareholders of:
Xinde Technology Company
We have audited the accompanying consolidated balance sheets of Xinde Technology Company and Subsidiaries (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of Xinde Technology Company and Subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Weinberg & Company, P.A.
Boca Raton, Florida
September 26, 2011
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying notes to the consolidated financial statements
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes to the consolidated financial statements
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
See accompanying notes to the consolidated financial statements
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL NON-CASH DISCLOSURES:
1. During the year ended June 30, 2011, accounts payable with an aggregate carrying amount of $15,088 was settled by two fixed assets with a combined fair value of $7,388, resulting in a gain of $7,700.
2. During the year ended June 30, 2011, customer deposits with a carrying amount of $75,333 were forfeited and accounts payable of $90,305 were forgiven, resulting in an aggregate gain of $165,638.
See accompanying notes to the consolidated financial statements
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Wasatch Food Services, Inc., (“Wasatch”) was incorporated under the laws of the State of Nevada on December 20, 2006. On April 22, 2010, Wasatch Food Services, Inc. changed its name to Xinde Technology Company (“Xinde”). The principal activities of Xinde and subsidiaries (the “Company”) are the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units in the People’s Republic of China (the “PRC”) and overseas markets.
On April 14, 2011, the Company (i) effected a 4-for-1 forward stock split of the Company's common stock; (ii) increased the number of authorized shares of common stock from 150,000,000 shares to 350,000,000 shares. As a result, all the amounts in the accompanying consolidated financial statements have been restated to give effect to the 4-for-1 forward stock split.
Details of the Company as of June 30, 2011 are as follows:
Name
Place and Date
of
Establishment/
Incorporation
Relationship
Principal Activities
Jolly Promise Ltd.
(“JPL”)
British Virgin Island
July 2, 2008
Wholly-owned subsidiary of Xinde
Investment holding company
H.K. Sindhi Fuel
Injection Co., Ltd
(“HKSIND”)
Hong Kong, PRC,
June 7, 2004
Wholly-owned subsidiary of JPL
Investment holding company
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Name
Place and Date
of
Establishment/
Incorporation
Relationship
Principal Activities
Weifang Huajie Fuel Injection Co., Ltd.
(“Huajie”)
Shandong, PRC
October 24, 2009
Wholly-owned subsidiary of HKSIND
Investment holding company
Weifang Xinde Fuel Injection System Co., Ltd.
(“Weifang Xinde”)
Shandong, PRC
October 29, 2007
Wholly-owned subsidiary of Huajie
Investment holding company
Weifang Hengyuan Oil Pump & Oil Fitting Co., Ltd.
("Hengyuan")
Shandong, PRC,
December 21, 2001
Wholly-owned subsidiary of Weifang Xinde
Design, development, manufacture, and commercializing of fuel injection pump, diesel fuel injection systems and injectors
Weifang Jinma Diesel Engine Co., Ltd. (“Jinma”)
Shandong, PRC
December 19, 2003
Wholly-owned subsidiary of Weifang Xinde
Manufacture and sale of multi-cylinder diesel engine and small generating units
Weifang Huaxin Diesel Engine Co., Ltd. (“Huaxin”)
Shandong, PRC
October 20, 2003
Wholly-owned subsidiary of Weifang Xinde
Manufacture and sale of multi-cylinder diesel engine and small generating units
Inter-company accounts and transactions have been eliminated in consolidation.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Economic and Political Risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b)
Fair Value of Financial Instruments
ASC 820-10, Fair Value Measurements, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
These tiers include:
• Level 1-defined as observable inputs such as quoted prices in active markets;
• Level 2-defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
• Level 3-defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10 as of June 30, 2011 are as follows:
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, notes receivable, prepayments for goods, short-term bank loans, accounts payable, customer deposits, short-term notes payable, due to employee, due to related parties and other payables, approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term notes payable is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term notes payable was not significantly different from the carrying value at June 30, 2011.
(c)
Cash and Cash Equivalents
For financial reporting purposes, the Company considers highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d)
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined on the basis of weighted average. The cost of finished goods is determined on the weighted average basis and comprises direct materials, direct labor and an appropriate proportion of overhead.
Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.
(e)
Prepayments
Prepayments represent cash paid in advance to suppliers for purchases of raw materials.
(f)
Plant and Equipment
Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. Estimated useful lives are as follows:
Buildings 30 years
Machinery 10 years
Motor vehicles 5 years
Office equipment 5 years
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renewals and betterments are capitalized.
(g)
Construction in Progress
Construction in progress represents direct costs of construction or the acquisition cost of buildings or machinery and design fees. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the assets are completed and ready for their intended use.
(h)
Land Use Rights
According to the laws of China, land in the PRC is owned by the government and cannot be sold to an individual or company. However, the government grants the user a “land use right” to use the land. The land use right granted to the Company is being amortized using the straight-line method over the lease term of fifty years.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i)
Impairment of Long-Term Assets
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in ASC 360-10. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from the related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. There was no impairment for the year ended June 30, 2011.
(j)
Revenue Recognition
Revenue represents the invoiced value of goods sold, recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:
-Persuasive evidence of an arrangement exists,
-Delivery has occurred or services have been rendered,
-The seller's price to the buyer is fixed or determinable, and
-Collectability is reasonably assured.
The majority of the Company’s revenue results from sales contracts with distributors and revenue are recorded upon the shipment of goods. Management conducts credit background checks for new customers as a means to reduce the subjectivity of collectability.
The Company offers warranties on its products for periods between six and twelve months after the sale. The Company estimates the warranty reserves based on historical records and identical or similar products on the market. Warranty expenses related to product sales are charged to the consolidated statements of income and comprehensive income in the period in which sales are recognized. For the years ended June 30, 2011 and 2010, warranty expense was $406,772 and $640,404, respectively, and is included in cost of goods sold in the accompanying consolidated statements of income and comprehensive income.
(k)
Retirement Benefits
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to expense as incurred. The retirement benefits expense for the years ended June 30, 2011 and 2010 is $101,955 and $28,411, respectively. The retirement benefits expenses are included in cost of sales, selling expenses, and general and administrative expenses.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l)
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the quarter.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(m)
Comprehensive Income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain.
(n)
Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the years ended June 30, 2011 and 2010.
(o)
Segment and Geographic Reporting
The Company operates in one business segment, the design, development, manufacture, and commercialization of fuel injection pumps, injectors, multi-cylinder diesel engines and small generator units mainly in the PRC. The sales of the Company outside of the PRC were insignificant for the years ended June 30, 2011 and 2010.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(p)
Recent Accounting Pronouncements
There are no new accounting pronouncements that have not been adopted by the Company that would have a material effect on the consolidated financial statements.
NOTE 4 - CONCENTRATIONS
(a) Customers
The Company’s major customers accounted for the following percentages of total sales and accounts receivable as follows:
(b) Suppliers
The Company’s major suppliers accounted for the following percentages of total purchases and accounts payable as follows:
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 5 - INVENTORIES
Inventories are summarized as follows:
NOTE 6 - NOTES RECEIVABLE
Notes receivable consist of the following:
Notes receivable from unrelated individuals are unsecured.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 7 - DUE FROM/TO RELATED PARTIES
(I)
Due To Related Parties
(II)
Due From Employees
(III)
Due To Employees
(a)
Jin Xin is a shareholder of the Company and the chairman of Jinma, a subsidiary of the Company. The payable balance represents business related expenses paid by Jinxin on behalf of the Company, which is unsecured, interest-free and has no fixed repayment term.
(b)
Liu Dianjun is a shareholder of the Company and the chairman of Hengyuan, a subsidiary of the Company. The balances represent amounts advanced from Liu Dianjun, which are interest-free, unsecured and have no fixed repayment terms.
(c)
Li Zengshan is a shareholder of the Company and the chairman of Huaxin, a subsidiary of the Company. The balances represent business related expenses paid by Li Zengshan on behalf of the Company. The balances are interest-free, unsecured and have no fixed repayment terms.
(d)
Zhang Qixiu is the mother of Jin Xin, also see (a). The balance represented business related expenses paid by Zhang Qixiu on behalf of the Company, which was interest-free, unsecured and had no fixed repayment term.
(e)
Jin Wei is the brother of Jin Xin, also see (a). The balance represented money advanced from Jin Wei, which was interest-free, unsecured and had no fixed repayment term.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 7 - DUE FROM/TO RELATED PARTIES (CONTINUED)
(f)
Due from employees are interest-free, unsecured and have no fixed repayment terms. The Company provides these advances for business-related purposes only, including for the purchases of raw materials and business-related travel in the ordinary course of business.
(g)
Due to employees are interest-free, unsecured and have no fixed repayment terms. The amounts primarily represent business and traveling related expenses paid by sales personnel on behalf of the Company.
NOTE 8 - LAND USE RIGHTS, NET
Land use rights consist of the following:
Amortization expense for the years ended June 30, 2011 and 2010 was $23,265 and $22,587, respectively.
Amortization expense for the next five years and thereafter is as follows:
Two land use rights with an aggregate net book value of $52,995 and $51,880 at June 30, 2011 and 2010, respectively, were registered in the names of two members of management of the Company. The Company’s legal counsel has confirmed the ownership of these two land use rights by the Company. The Company estimates that the application for the transfer of the certificates of these two land use rights will be completed by the end of December, 2011. One of the land use rights has been pledged as collateral for bank loans borrowed by Li Zengshan (shareholder and officer of the Company) in the amount of $334,071. Also see Note 14.
At June 30, 2011 and 2010, the net book value of land use rights pledged as collateral for short-term bank loans was $26,497 and $514,662, respectively. Also see Note 10.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 9 - PLANT AND EQUIPMENT, NET
Plant and equipment consist of the following:
Depreciation expense for the years ended June 30, 2011 and 2010 was $269,360 and $238,507, respectively.
At June 30, 2011, the legal title to five motor vehicles and two office buildings with a total net book value of $70,501 and $642,265 were registered in the names of management members of the Company. The Company’s legal counsel has confirmed the ownership of the motor vehicles and office buildings by the Company. The Company estimates the transfer of the legal titles of the five motor vehicles and two office buildings will be completed by the end of December 2011.
One office building was pledged as collateral for bank loans borrowed by Li Zengshan (a shareholder and officer of the Company) in the amount of $334,071. Also see Note 14.
Application for ownership certificates of eleven buildings with an aggregate net book value of $1,078,626 is in progress. The Company’s legal counsel has confirmed the ownership of the eleven buildings by the Company. The application for the certificates of the buildings is expected to be completed by the end of December, 2011.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 10 - SHORT-TERM BANK LOANS
Short-term bank loans consist of the following:
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 10 - SHORT-TERM BANK LOANS (CONTINUED)
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 10 - SHORT-TERM BANK LOANS (CONTINUED)
Interest expense for short-term bank loans for the years ended June 30, 2011 and 2010 was $329,520 and $375,123, respectively.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 11 - NOTES PAYABLE, INCLUDING RELATED PARTIES
Notes payable consist of the following:
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 11 - NOTES PAYABLE, INCLUDING RELATED PARTIES (CONTINUED)
(a)
The notes were due to Mr. Li Zengshan, a shareholder and officer of the Company. The current balances represent loans to the Company which are unsecured.
Notes payable to an unrelated individual are unsecured.
NOTE 12 - LONG -TERM NOTES PAYABLE TO RELATED PARTIES
Long-term notes payable to related parties consist of the following:
The repayment schedule for long-term notes payable is as follows:
(a)
This note is due to Mr. Li Zengshan, who is a shareholder of the Company. The balance represents a loan to the Company to support business operations.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 13 - TAXES
(a) Corporation Income Tax (“CIT”)
On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “new CIT law”), which went into effective on January 1, 2008. In accordance with the relevant tax laws and regulations of PRC, the applicable corporate income tax rate for Hengyuan, Jinma and Huaxin is 25%. However, prior to January 2011, Jinma and Huaxin were defined by the local tax bureau as tax payers subject to the “Verification Collection” method, according to which the amount of income taxes paid is determined by the local tax bureau based on certain criteria instead of applying the CIT rate of 25%. Therefore, the amount of income tax assessed for Jinma and Huaxin under this Verification Collection method differed from the normal computation by applying the CIT rate of 25%.
The Company received written authorization from the local Chinese government to extend the payment of its current income tax due of approximately $9.7 million.
Effective January 1, 2007, the Company adopted ASC 740-10, Accounting for Uncertainty in Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of June 30, 2011, the Company does not have a liability for unrecognized tax benefits.
The Company’s income tax expense for the years ended June 30, 2011 and 2010 is summarized as follows:
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 13 - TAXES (CONTINUED)
The Company’s income tax expense differs from the “expected” tax expense for the years ended June 30, 2011 and 2010 (computed by applying the CIT rate of 25% percent to income before income taxes) as follows:
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of June 30, 2011 and 2010 is as follows:
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 13 - TAXES (CONTINUED)
(b) Tax Holiday Effect
For the years ended June 30, 2011 and 2010, the PRC corporate income tax rate was 25%. Certain subsidiaries of the Company were entitled to favorable tax rates for the years ended June 30, 2011 and 2010.
The pro forma combined effects of the favorable tax rates available to the Company for the years ended June 30, 2011 and 2010 is as follows:
(c) Value Added Tax (“VAT”)
Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with Chinese Laws. The value added tax standard rate is 17% of the gross sale price, and the Company records its revenue net of VAT. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products.
In the years ended June 30, 2011 and 2010, output VAT payable of $3,305,512 and $12,085,158, respectively, was exempted by the local tax bureau to honor the Company’s continuous contribution to the local economy and its achievement of becoming a United States public reporting company, resulting in other income of $3,305,512 and $12,085,158, respectively, which was reflected in the accompanying consolidated statements of income and comprehensive income as refunded value added tax for the years ended June 30, 2011 and 2010.
The VAT payable was $26,331,151 and $6,931,841 at June 30, 2011 and 2010, respectively. The Company received written authorization from the local tax authorities to defer the payment of its current VAT payable in anticipation of additional future exemptions from the local tax bureau.
XINDE TECHNOLOGY COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2011 AND 2010
NOTE 14 - CONTINGENCIES
On August 4, 2009, Hengyuan entered into a guarantee contract to serve as guarantor for bank loans borrowed by Mr. Li Zengshan, a shareholder and officer of the Company, from the Industrial and Commercial Bank of China with a guarantee amount of $334,071. Under this guarantee contract, a land use right and an office building of Hengyuan were pledged for the bank loans. (Also see Notes 8 and Note 9)
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the 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.
In connection with the preparation of this Report for the year ended June 30, 2011, our management, under the supervision of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of disclosure controls and procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011.
(b) Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control structure and procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2011 based on the framework set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, 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 or procedures may deteriorate.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting as of June 30, 2011 were effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the permanent exemption of the Commission which require the Company to provide only management’s report in this annual report.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART I - Directors and Executive Officers
Set forth below are the names of the Company’s directors, officers and significant employees, their business experience during the last five years, their ages and all positions and offices that they hold with the Company.
Name
Age
Position(s)
Dianjun Liu
President and Chief Executive Officer, Director
Chenglin Wang
Chief Financial Officer and Treasurer, Director
Zengshang Li
Vice-President, Director
Xin Jin
Vice-President, Director
Miusi Yang
Corporate Secretary
Weisheng Cong
Director
Beiping Zhai
Director
Jie Liu
Director
Yun Hon Man
Director
Wenxi Wu
Director
Family Relationships
None of our directors and officers are directors or executive officers of any company that files reports with the SEC except as set forth in the Biographies section below. No family relationships exist between any of our directors and executive officers.
Term of Office
Each director is appointed for a one year term to hold office or until his or her successor is duly elected and qualified by the stockholders. Our officers are appointed by the Board and hold office until removed by the Board.
Biographies of Officers and Directors
Dianjun Liu has served as the Chairman and General Manager of Weifang since June 2008, and as the President, Chief Executive Officer and as a Director of the Company since December 28, 2009. In December 2001, Mr. Liu established Weifang Hengyuan Oil Pump and Nozzle Co., Ltd. and served as the Chairman and General Manager until assuming his position with Weifang. Prior to December 2001, Mr. Liu served as a director of the Economic Operations Section in the Office of Mechanical and Electronic Industry in the Weifang Municipal People’s Government. Mr. Liu also serves as a deputy of the Weicheng District People’s Congress. Mr. Liu earned an associate degree at Weifang University and has sixteen years of work experience relevant to the operations of Weifang. Mr. Liu was granted an honorary doctorate from the Center for Asia-Pacific Economic Research and Development.
Chenglin Wang was appointed to serve as the Chief Financial Officer and Treasurer, effective as of December 28, 2009, and as a director of the Registrant since January 2010. Mr. Wang has served as the Chief Financial Officer of Weifang since August 2004. From 1992 through 2004, Mr. Wang was the Business Director and General Accountant at the Bank of China Dongguan Branch. From 1987 through 1992, Mr. Wang was the Vice Director of the Financial Department of the Bank of China Weicheng Branch. Mr. Wang earned a Masters in Business Administration from Shandong University in 2002.
Zengshan Li was appointed to serve as Vice President of the Registrant effective as of December 28, 2009, and as a director of the Registrant since January 2010, and concurrently serves as the Chairman and General Manager of Huaxin Diesel Engine Co., Ltd. having served in those positions since April 2003. From July 1998 to March 2003, Mr. Li was the Chairman and General Manager of Weifang Guangyuan Agricultural Machinery Sales Center. Mr. Li earned his college degree from Weifang College of Vocation in 2002. Mr. Li held the post of Mechanical Team Leader at the Shouguang Garden Spot from 1994-1998.
Xin Jin was appointed to serve as Vice President, effective as of the December 28, 2009, and as a director of the Registrant since January 2010, and concurrently serves as Chairman and General Manager of Jinma Diesel Engine Co., Ltd. since May 2003. From July 1996 through April 2003, Mr. Jin served as General Manager a Weifang Sanya Economic and Trade Development Co., Ltd. Mr. Jin is a deputy to the Weifang Municipal People’s Congress, and a member of the Standing Committee of Weicheng District People’s Congress. Mr. Jin graduated from the Shandong Broadcasting and Television University.
Miusi Yang serves as the Corporate Secretary of the Company since June 2009. From October 2006 through May 2009, Miss Yang worked as a Teaching Assistant to the President of the School of Commerce, University of Exeter in Exeter, United Kingdom.Ms. Yang earned a Masters Degree in Finance and Investment from the University of Exeter, United Kingdom. Ms. Yang has also earned her CFA (Level 1) certificate.
Weisheng Cong has served as a director of the Registrant since January 2010. Mr. Cong is a senior engineer, who has served as the technician on the Mechanical Board at the former Changwei District from 1971 to 1984, as head of the technical department at the Bureau of Mechanical Industry of Weifang City from 1984-1996, and as industry department chief at the Bureau of Mechanical Industry of Weifang City from 1996 through July 2008. Since August 2008, Mr. Cong has served as vice president. Mr. Cong was also a director of the Mechanical Industry Quality Committee of Shandong Province from since October 2009.
Beiping Zhai has served as a director of the Registrant since January 2010. He served as accountant of Weifang Diesel Engine Manufacturing Co. Ltd. from August 1987 to August 2004 and then Vice General Engineer of that company since September 2004. Mr Zhai graduated from Tianjing University, Internal Combustion Engine department earning his BSC in engine research.
Jie Liu has served as a director of the Registrant since January 2010. She was qualified as an accountant and served as Chief Financial Officer at Weifang Minxin Food Service Co., Ltd. from July 1988 to March 2003. Since April 2003, Ms. Liu served as auditor in Weifang Yuandu Accounting Firm. Ms. Liu majored in Accounting and graduated from Shandong University.
Yun Hon Man has served as a director of the Registrant since January 2010. Mr. Yun has served and continues to serve as a Corporate Consultant with Smart Pine Investment Limited since September 2007, a consulting firm organized under the laws of Hong Kong. Mr. Yun also serves as a Director of CH Lighting International Corporation since July 28, 2008 (formerly OTCBB: CHHN) and as a Director of Chisen Electric Corporation (OTCBB: CIEC) since November 2008. Mr. Yun also served as Chief Operating Officer of China INSOnline Corp. (formerly NASDAQ:CHIO) from January 2008 through April 2010. Prior to that, Mr. Yun served as Corporate Controller of Hi-Tech Wealth Inc. (n/k/a China Mobile Media Technology, Inc.)(OTCBB: CHMO) from January 2007 through August 2007. From January 2003 through December 2006, Mr Yun served as Corporate Controller of General Components, Inc. (n/k/a China Mobile Media Technology, Inc.)(OTCBB: CHMO). Mr. Yun is a Chartered Accountant having memberships with the Institute of Chartered Accountants in England and Wales. He is also a Fellow Member of the Chartered Association of Certified Accountants. He is a member of the Hong Kong Institute of Certified Public Accountants, the Association of International Accountants, the Society of Registered Financial Planners, the Institute of Financial Accountants and the Institute of Crisis and Risk Management. Mr. Yun received his MBA at the University of Western Sydney in 2007.
Wenxi Wu has served as a director of the Registrant since January 2010. Ms. Wu is senior economist and had served as Corporate Secretary at the Industrial & Commercial Bank of China, Chengdong Branch in Weifang City from 2003 to 2004. From July 2004 through August 2009, she served as Corporate Secretary for the Henan Yugang Group. Since September 2009, Ms, Wu served as financial supervisor in Weifang Hengyuan Oil Pump and Nozzle Co., Ltd. Ms. Wu graduated with a masters degree in Economics and Management from the National Technical University of Ukraine.
Director Qualifications and Experience
The following discussion sets forth the specific experience, qualifications, attributes and skills that the Company considered in making its decision to appoint and nominate directors to the Board.
Mr. Dianjun Liu was selected to serve on the Board based on his management and corporate governance experience having served as Chairman and General Manager of Weifang since June 2008 and as President, Chief Executive Officer and as a Director of the Company since December 28, 2009. Furthermore, Mr. Liu established Weifang Hengyuan Oil Pump and Nozzle Co., Ltd. in December 2001 and served as the Chairman and General Manager of that company until assuming his position with Weifang. Mr. Liu was also chosen to serve on the Board based on his professional standing in the industry having been granted an honorary doctorate from the Center for Asia-Pacific Economic Research and Development, and for his civic and community involvement having served as a director of the Economic Operations Section in the Office of Mechanical and Electronic Industry in the Weifang Municipal People’s Government and as a deputy of the Weicheng District People’s Congress.
Mr. Chenglin Wang was selected to serve on the Board based on his management and corporate governance experience having served as the Chief Financial Officer of Weifang since 2004 and having served from 1992 through 2004 as the Business Director and General Accountant at the Bank of China Dongguan Branch. From 1987 through 1992, Mr. Wang was the Vice Director of the Financial Department of the Bank of China worked Weicheng Branch. Mr. Chenglin was also selected to serve on the Board based on his experience in finance and accounting as a “financial expert” as defined under the rules of the SEC and having earned a Masters in Business Administration from Shandong University in 2002.
Mr. Zengshan Li was selected to serve on the Board based on his management and corporate governance experience having served as the Chairman and General Manager of Huaxin Diesel Engine Co., Ltd. since April 2003. From July 1998 to March 2003, Mr. Li has served as the Chairman and General Manager of Weifang Guangyuan Agricultural Machinery Sales Center. Mr. Li was also chosen for his civic and community involvement having held the post of Mechanical Team Leader at the Shouguang Garden Spot from 1994-1998.
Mr. Xin Jin was selected to serve on the Board based on his management and corporate governance experience having served as the Chairman and General Manager of Jinma Diesel Engine Co., Ltd. since May 2003 and having served as General Manager at Weifang Sanya Economic and Trade Development Co., Ltd. from July 1996 through April 2003. Mr. Jin was also selected to serve on the Board based on his civic and community involvement having served as a deputy to the Weifang Municipal People’s Congress and a member of the Standing Committee of the Weicheng District People’s Congress. Mr. Jin graduated from the Shandong Broadcasting and Television University.
Mr. Weisheng Cong was selected to serve on the Board based on his management experience, professional standing in the industry and his civic and community involvement having served as the technician on the Mechanical Board at the former Changwei District from 1971 to 1984, as head of the technical department at the Bureau of Mechanical Industry of Weifang City from 1984-1996, and as industry department chief at the Bureau of Mechanical Industry of Weifang City from 1996 through July 2008. Since August 2008, Mr. Cong has served as vice president. Mr. Cong was also a director of the Mechanical Industry Quality Committee of Shandong Province from since October 2009.
Mr. Beiping Zhai was selected to serve on the Board based on his management and corporate governance experience having served as accountant of Weifang Diesel Engine Manufacturing Co. Ltd. from August 1987 to August 2004 and then Vice General Engineer of that company since September 2004. Mr. Zhai was also selected to serve on the Board based on his knowledge of engines and generators having graduated from Tianjing University, Internal Combustion Engine Department earning his BSC in engine research.
Ms. Jie Liu was selected to serve on the Board based on her professional standing in her chosen field of expertise and based on her management and corporate governance experience, being a qualified accountant and having served as Chief Financial Officer of Weifang Minxin Food Service Co., Ltd. from July 1988 to March 2003. Since April 2003, Ms. Liu served as auditor in Weifang Yuandu Accounting Firm. Ms. Liu also graduated from Shandong University with a degree in Accounting.
Mr. Yun Hon Man was selected to serve on the Board based on his experience in finance and accounting as a “financial expert” as defined under the rules of the SEC and for his US public company experience as an officer, director and audit committee chairman, having served as a director of CH Lighting International Corporation (formerly OTCBB: CHHN) since July 28, 2008, as a Director of Chisen Electric Corporation (OTCBB: CIEC) since November 2008 and having previously served as Chief Operating Officer of China INSOnline Corp. (formerly NASDAQ: CHIO) from January 2008 through April 2010. Mr. Yun is a Chartered Accountant having memberships with the Institute of Chartered Accountants in England and Wales. He is also a Fellow Member of the Chartered Association of Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants. He was a member of Association of International Accountants, the Society of Registered Financial Planners, the Institute of Financial Accountants and the Institute of Crisis and Risk Management. Mr. Yun received his MBA at the University of Western Sydney in 2007.
Ms. Wenxi Wu was selected to serve on the Board based on her professional standing in her chosen field of expertise based on her experience as a senior economist and having served as Corporate Secretary at the Industrial & Commercial Bank of China, Chengdong Branch in Weifang City from 2003 to 2004 and as Corporate Secretary for the Henan Yugang Group from July 2004 through August 2009. Since September 2009, Ms, Wu served as financial supervisor in Weifang Hengyuan Oil Pump and Nozzle Co., Ltd. Ms. Wu also graduated with a masters degree in Economics and Management from the National Technical University of Ukraine.
Legal Proceedings Involving Officers and Directors
Unless otherwise indicated, to the knowledge of the Company after reasonable inquiry, no current director or executive officer of the Company during the past ten years, has (i) been convicted in a criminal proceeding (excluding traffic violations or other minor offenses), (ii) been a party to any judicial or administrative proceeding (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, U.S. federal or state securities laws, or a finding of any violation of U.S. federal or state securities laws, (iii) filed a petition under federal bankruptcy laws or any state insolvency laws or has had a receiver appointed for the person’s property or (iv) been subject to any judgment, decree or final order enjoining, suspending or otherwise limiting for more than 60 days, the person from engaging in any type of business practice , acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity or engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws, (v) been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated, (vi) been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated, (vii) been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (a) any Federal or State securities or commodities law or regulation, (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity, or (viii) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
There are no material pending legal proceedings to which any of the individuals listed above is party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires a company’s officers and directors, and persons who own more than ten percent (10%) of a registered class of the Registrant’s equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than ten percent (10%) stockholders are required by SEC regulation to furnish the Registrant with copies of all Section 16(a) forms they file.
To the Registrant’s knowledge, based solely on a review of the copies of such reports furnished to the Registrant, we believe that all reports under Section 16(a) required to be filed by its officers and directors and greater than ten percent (10%) beneficial owners were timely filed except that Welldone Pacific Limited has not filed a Form 3 with respect to its status as a greater than ten percent (10%) shareholder.
Committees of our Board of Directors
The Board has an Audit Committee, a Compensation Committee, a Corporate Governance and Nominating Committee and a Disclosure Policy Committee established in accordance with the Exchange Act and NASDAQ rules. The Board adopted charters for each of these committees on September 16, 2010. A brief description of each committee is set forth below.
Audit Committee
The purpose of the Audit Committee is to provide assistance to our Board in fulfilling its oversight responsibilities relating to our consolidated financial statements and financial reporting process and internal controls in consultation with our independent registered public accountants and internal auditors. The Audit Committee is also responsible for ensuring that the independent registered accountants submit a formal written statement ot use regarding relationship and services which may affect the auditor’s objectivity and independence. Currently, Beiping Zhai, Jie Liu, Wenxi Wu and Yun Hon Man to serve as members of the Audit Committee as appointed by the Board, with Yun Hon Man serving as Chairman. Our Audit Committee financial expert is Yun Hon Man.
Corporate Governance and Nominating Committee
The purpose of the Corporate Governance and Nominating Committee is to review the composition and evaluate the performance of the Board, recommend persons for election to the Board and evaluate director compensation. The Nominating Committee is also responsible for reviewing the composition of committees of the Board and recommending persons to be members of such committees, and maintaining compliance of committee membership with applicable regulatory requirements. The Company does not have a formal diversity policy. Although the Board does not currently have formal specific minimum criteria for nominees, substantial relevant and diverse business and industry experience would generally be considered important qualifying criteria, as would the ability to attend and prepare for Board and shareholder meetings. We have not adopted procedures by which security holders may recommend nominees to our Board of Directors. Currently, Beiping Zhai, Jie Liu and Wenxi Wu serve as members of the Corporate Governance and Nominating Committee, with Jie Liu serving as Chairman.
Compensation Committee
The purpose of the Compensation Committee is to review and make recommendations to our Board regarding all forms of compensation to be provided to our executive officers and directors, including stock compensation and loans, and all bonus and stock compensation to all employees. Currently, Jie Liu, Weisheng Cong and Yun Hon Man serve as members of the Compensation Committee, with Weisheng Cong serving as Chairman.
Disclosure Policy Committee
The purpose of the Disclosure Policy Committee is to ensure that communications to the investing public about the Company are timely and factually accurate, and disseminated in accordance with all regulatory and legal requirements. The Disclosure Policy Committee always consists of the Company’s then-current Chief Executive Officer, Chief Financial Officer and Corporate Secretary.
Code of Business Conduct and Ethics
The Company adopted a Code of Business Conduct and Ethics on September 16, 2010 that applies to the Company’s principal executive officer, principal financial officer, and principal accounting officer, as well as the employees of the Company. The Code of Business Conduct and Ethics is incorporated herein by reference to Exhibit 14.1 of this Report. The Company also adopted a Related Person Transaction Policy on September 16, 2010 which sets forth protocols and procedures with respect to the Company’s treatment of related person transactions.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation information for services rendered by our executive officers in all capacities during the last two (2) completed fiscal years. The following information includes the U.S. dollar value of base salaries, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.
Summary Compensation Table
Of June 30, 2011, the Company did not have any “Grants of Plan-Based Awards”, “Outstanding Equity Awards”, “Option Exercises and Stock Vested”, “Pension Benefits”, “Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans” or “Potential Payments Upon Termination or Change in Control” to report.
Executive and Director Compensation
The Company has not granted its officers or directors any stock options, stock awards or other forms of equity compensation. The Company does not currently provide its officers or directors with medical insurance or other similar employee benefits, although it may do so in the future. The Company does not have any retirement, pension, profit sharing, or insurance or medical reimbursement plans covering its officers or directors, although it may do so in the future.
Employment Agreements
The Company’s subsidiaries Huaxin, Hengyuan and Jinma also have labor contracts with each employee as required by law in the PRC. The labor contract mainly includes working content, contract period, working time, payment and other terms.
Benefit Plans
The Company has no stock option, retirement, pension or profit-sharing programs for the benefit of its directors, officers or other employees; however our Board may recommend the adoption of one or more such programs in the future.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth each person known by us to be the beneficial owner of 5% or more of our Common Stock, all directors individually and all directors and officers of the Company as a group as of September 27, 2011. Each person named below has sole voting and investment power with respect to the shares shown unless otherwise indicated.
(1)
Unless otherwise noted, each beneficial owner has the same address as the Company.
(2)
Applicable percentage of ownership is based on 240,000,000 shares of our Common Stock outstanding as of September 27, 2011 together with securities exercisable or convertible into shares of Common Stock within 60 days of September 27, 2011 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Note that affiliates are subject to Rule 144 and Insider trading regulations - percentage computation is for form purposes only.
(3)
Dianjun Liu directly owns 39.2% of the voting capital stock of Welldone Pacific Limited (which owns 168,000,000 shares of Common Stock), which gives him indirect control over 65,856,000 shares of Common Stock. Mr. Liu also indirectly owns 10% of Welldone Pacific Limited as he is the sole owner of the capital stock of Best Amigo Holding Ltd., which gives him indirect control over an additional 16,800,000 shares of Common Stock.
(4)
Chenglin Wang owns 2.86% of Welldone Pacific Limited, which gives him indirect control over 4,804,800 shares of Common Stock.
(5)
Zengshang Li owns 18.9% of Welldone Pacific Limited, which gives him indirect control over 30,559,200 shares of Common Stock.
(6)
Xin Jin owns 18.9% of Welldone Pacific Limited, which gives him indirect control over 30,559,200 shares of Common Stock.
(7)
Mr. Liu, the Company’s President, Chief Executive Officer and director directly and indirectly holds investment control over 49.2% of the voting capital stock of Welldone Pacific Limited. Zengshang Li and Xin Jin, directors of the Company, each have investment control over 18.9% of the voting capital stock of Welldone Pacific Limited. Chenglin Wang, the Company’s Chief Financial Officer, Treasurer and director holds investment control over 2.86% of the voting capital stock of Welldone Pacific Limited.
(8)
Best Amigo Holding Ltd. owns 10% of the voting capital stock of Welldone Pacific Limited, which gives it indirect control over 16,800,000 shares of Common Stock. Mr. Liu, the Company’s President, Chief Executive Officer and director is the sole stockholder of Best Amigo Holding Ltd. As the sole stockholder of Best Amigo Holding Ltd., Mr. Liu is deemed to have investment control over Best Amigo Holding Ltd.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
On or about August 4, 2009, the Company borrowed $464,145 from Mr. Li Zengshan, a shareholder of the Company, to support business operations. The note is due August 4, 2014, and the Company is obligated to make monthly interest payments at 7.46% per annum and payments of principal in 60 equal monthly installments of $7,736. As of June 30, 2011, $312,531 was due under the note and as of September 23, 2011, approximately $291,557 was due under the note.
Director Independence
Currently, the Company has the five following independent directors: Weisheng Cong, Beiping Zhai, Jie Liu, Wenxi Wu and Yun Hon Man.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Audit-Related Fees
The aggregate fees billed by our independent auditors, CPA Weinberg, for the audit of our annual consolidated financial statements for the years ended June 30, 2011 and 2010 and for the review of our quarterly financial statements during 2011was $235,000. Our auditors did not provide any tax compliance or planning services or any services other than those described above. The aggregate fees billed by our principal auditors for the audit of our annual consolidated financial statements for the years ended June 30, 2010 and 2009 and for the review of our quarterly financial statements during 2010 was $385,250. Our auditors did not provide any tax compliance or planning services or any services other than those described above.
Audit Committee Pre-approval
The policy of the Audit Committee is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The Audit Committee has delegated pre-approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date. All of the services described above in this Item 14 were approved in advance by the Board of Directors during the fiscal year ended June 30, 2011, which, at the time of such approval, performed all of the functions of an Audit Committee in light of the subsequent formal creation of the Company’s existing Audit Committee and adoption of the Audit Committee’s Charter in September 2011.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Schedules
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are either not required, not applicable, or the information is otherwise included.
2.1
Share Exchange Agreement, dated December 28, 2009, by and between the Company, Jolly Promise Limited and Welldone Pacific Limited
Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
3.1
Articles of Incorporation of the Company
Incorporated by reference to Exhibit 3.1 to the Company’s General Form for Registration of Securities on Form 10 as filed with the SEC on May 15, 2009
3.2
Amended and Restated Bylaws of the Company
Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
3.3
Memorandum and Articles of Association of Jolly Promise Limited, dated July 2, 2008
Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
3.4
Certificate of Incorporation of Jolly Promise Limited
Incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
10.1
Stock Purchase Agreement between Shaun Carter and the company dated December 28, 2009
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
14.1
Code of Business Conduct and Ethics
Incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
16.1
Letter Regarding Change in Certifying Accountant
Incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K as filed with the SEC on February 9, 2010
List of Subsidiaries of the Company
Incorporated by reference to Exhibit 21 to the Company’s Current Report on Form 8-K as filed with the SEC on December 29, 2009
Published Report Regarding Matter Submitted to Vote of Security Holders Regarding Name Change of the Company
Incorporated by reference to the Company’s Current Report on Form 8-K as field with the SEC on April 28, 2010
31.1
Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Provided herewith
31.2
Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Provided herewith
32.1
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Provided herewith
32.2
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Provided herewith
99.1
Audit Committee Charter
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
99.2
Compensation Committee Charter
Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
99.3
Corporate Governance and Nominating Committee Charter
Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
99.4
Related Person Transaction Policy
Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K as filed with the SEC on September 21, 2010
99.5
Written Disclosure Policy
Incorporated by reference to Exhibit 99.5 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2010 as filed with the SEC on September 28, 2010
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 28, 2011
By:
/s/ Dianjun Liu
Name: Dianjun Liu
Its: President, Chief Executive Officer and Principal Executive Officer
Date: September 28, 2011
By:
/s/ Chenglin Wang
Name: Chenglin Wang
Its: Chief Financial Officer, Corporate Secretary, and Principal Financial and Accounting Officer
In accordance with the requirement of the Securities and Exchange Act of 1934, this Annual Report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.
/s/ Dianjun Liu
Chairman of the Board, Chief Executive Officer (Principal Executive Officer)
September 28, 2011
/s/ Chenglin Wang
Chief Financial Officer and Treasurer, Director
September 28, 2011
/s/ Zengshang Li
VP, Director
September 28, 2011
/s/ Xin Jin
VP, Director
September 28, 2011
/s/ Beiping Zhai
Director
September 28, 2011