UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ To ____________
Commission File Number: 001-34542
CHINA VALVES TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Nevada
|
86-0891931
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer
|
|
Identification No.)
|
|
|
21F Kineer Plaza, 226 Jinshui Road ,Zhengzhou,
Henan Province, Peoples Republic of China
|
450008
|
(Address of principal executive offices)
|
(Zip Code)
|
(86) 371-8612-7222
|
|
(Registrants telephone number, including area
code)
|
|
Not Applicable
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES [X] NO [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). YES [X] NO
[_]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer [_]
|
Accelerated filer [X]
|
|
|
Non-accelerated filer [_] (Do not check if a smaller
reporting company)
|
Smaller reporting company [_]
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange
Act). YES [_] NO [X]
As of May 6, 2012, there were 36,119,654 shares of common stock
of the registrant outstanding. There is only one class of common stock.
1
Explanatory Note
This Amendment No. 1 on Form 10-Q/A is an amendment to the
Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2012
(the Report) filed with the Securities and Exchange Commission on May 8, 2012.
This Form 10-Q/A is being filed for the sole purpose of amending its financial
notes and some disclosures in Management Discussion and Analysis. This Form
10-Q/A does not alter any other part of the content of the Report and does not
affect the information originally set forth in the Report, the remaining
portions of which have not been amended.
2
CHINA VALVES TECHNOLOGY, INC.
FORM 10-Q
INDEX
|
|
|
Page
|
Part I
|
Financial
Information
|
4
|
|
Item 1.
|
Condensed Financial Statements:
|
4
|
|
|
Condensed Consolidated Balance
Sheets
|
5
|
|
|
Condensed Consolidated Statements of Income and
Other Comprehensive Income
|
6
|
|
|
Condensed Consolidated
Statements of Cash Flows
|
7
|
|
|
Notes to Condensed Consolidated Financial Statements
|
8
|
|
Item 2.
|
Managements Discussion and
Analysis of Financial Condition and Results of Operations
|
24
|
|
Item 3.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
30
|
|
Item 4.
|
Controls and Procedures
|
30
|
Part II
|
Other
Information
|
31
|
|
Item 1.
|
Legal Proceedings
|
31
|
|
Item1A.
|
Risk Factors
|
32
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use
of Proceeds
|
32
|
|
Item 3.
|
Defaults Upon Senior Securities
|
32
|
|
Item 4.
|
(Removed and Reserved)
|
32
|
|
Item 5.
|
Other Information
|
32
|
|
Item 6.
|
Exhibits
|
32
|
Signatures
|
|
33
|
3
Part I - Financial Information
Item 1. Condensed Financial Statements
The accompanying unaudited condensed consolidated balance sheets
for the periods ended March 31, 2012 and September 30, 2011,condensed
consolidated statements of income and other comprehensive income for the three
and six months ended March 31, 2012, and the related notes thereto, have been
prepared in accordance with generally accepted accounting principles (GAAP) in
the United States of America for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission (SEC).
Accordingly, they do not include all of the disclosures required
by GAAP for complete financial statements. The financial statements reflect all
adjustments, consisting only of normal, recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation for the interim
periods.
As previously disclosed, the Company has determined that the
financial statements for the year ended September 30, 2011 can no longer be
relied upon. The Company has not yet determined the amount of the adjustment
that impacts each quarterly period. Since they are unable to determine the
amount of the error impacting the three and six month periods ended March 31,
2011, these income statements and the related statement of cash flows for the
six month period ended March 31, 2011 are not considered to be reviewed. See
note 2 to the interim financial statements.
The accompanying financial statements should be read in
conjunction with the notes to the aforementioned financial statements and
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended September 30, 2011.
The results of operations for the three and six months ended March
31, 2012 are not necessarily indicative of the results to be expected for the
entire fiscal year or any other period.
4
CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(Amounts in U.S. dollars)
|
|
|
March 31, 2012
|
|
|
September 30, 2011
|
|
ASSETS
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
11,060,540
|
|
$
|
28,076,692
|
|
Restricted cash
|
|
4,044,152
|
|
|
2,344,276
|
|
Notes receivable
|
|
1,058,666
|
|
|
1,465,369
|
|
Accounts receivable, net of allowance for
doubtful accounts of
$8,134,227
and
$4,052,398
as of March
31, 2012 and September 30, 2011, respectively
|
|
152,665,973
|
|
|
124,514,274
|
|
Other receivables
|
|
7,746,257
|
|
|
5,106,572
|
|
Inventories, net of allowance of
$1,959,843
and $
2,394,319
as of March 31, 2012 and
September 30, 2011, respectively
|
|
28,050,218
|
|
|
23,868,885
|
|
Advances on inventory and purchases
|
|
4,169,883
|
|
|
2,421,390
|
|
Advances on inventory purchase - related
party
|
|
-
|
|
|
1,552,123
|
|
Prepaid expenses and other current assets
|
|
98,658
|
|
|
79,295
|
|
Total current assets
|
|
208,894,347
|
|
|
189,428,876
|
|
Property, plant and equipment, net
|
|
39,267,005
|
|
|
40,192,636
|
|
Accounts receivable - retainage, long term
|
|
4,484,135
|
|
|
5,724,024
|
|
Goodwill
|
|
34,415,741
|
|
|
33,976,186
|
|
Intangible assets, net
|
|
23,003,465
|
|
|
22,914,008
|
|
Other investments, cost
|
|
825,610
|
|
|
815,066
|
|
Other non-current assets
|
|
14,302
|
|
|
395,514
|
|
Deferred tax assets
|
|
1,885,817
|
|
|
-
|
|
Total assets
|
$
|
312,790,422
|
|
$
|
293,446,310
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable trade
|
$
|
25,067,784
|
|
$
|
24,575,461
|
|
Accounts payable - related parties
|
|
-
|
|
|
786,471
|
|
Short-term loans
|
|
8,182,314
|
|
|
6,513,810
|
|
Other payables
|
|
3,280,532
|
|
|
5,287,964
|
|
Other payables - related parties
|
|
1,030,121
|
|
|
94,226
|
|
Notes payable
|
|
3,010,044
|
|
|
469,200
|
|
Accrued liabilities
|
|
5,173,615
|
|
|
4,091,998
|
|
Customer deposits
|
|
13,221,098
|
|
|
11,139,936
|
|
Income and other taxes payable
|
|
8,241,407
|
|
|
8,462,128
|
|
Total current liabilities
|
|
67,206,915
|
|
|
61,421,194
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
-
|
|
Shareholders Equity:
|
|
|
|
|
|
|
Common stock, $0.001 par value; 300,000,000 shares
authorized;
36,119,654 and
35,869,654
shares issued and
outstanding as of March 31, 2012 and September 30, 2011, respectively
|
|
36,119
|
|
|
35,869
|
|
Additional paid-in capital
|
|
107,208,452
|
|
|
106,508,099
|
|
Statutory reserves
|
|
11,460,305
|
|
|
11,224,490
|
|
Retained earnings
|
|
105,305,580
|
|
|
95,571,501
|
|
Accumulated other comprehensive income
|
|
21,573,051
|
|
|
18,685,157
|
|
Total shareholders equity
|
|
245,583,507
|
|
|
232,025,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
$
|
312,790,422
|
|
$
|
293,446,310
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
|
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME
|
(Amounts in U.S. dollars)
|
|
|
Three months ended March
31,
|
|
|
Six months ended March
31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited and
|
|
|
(unaudited)
|
|
|
(unaudited and
|
|
|
|
|
|
|
not reviewed)
|
|
|
|
|
|
not reviewed)
|
|
Sales
|
$
|
38,395,870
|
|
$
|
41,825,806
|
|
$
|
94,062,843
|
|
$
|
93,536,188
|
|
Sales related parties
|
|
16,979
|
|
|
127,775
|
|
|
68,928
|
|
|
746,568
|
|
Total sales
|
|
38,412,849
|
|
|
41,953,581
|
|
|
94,131,771
|
|
|
94,282,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
(24,338,612
|
)
|
|
(24,450,331
|
)
|
|
(59,772,511
|
)
|
|
(58,332,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
14,074,237
|
|
|
17,503,250
|
|
|
34,359,260
|
|
|
35,950,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
(2,603,717
|
)
|
|
(2,294,616
|
)
|
|
(6,380,848
|
)
|
|
(6,058,068
|
)
|
General and administrative expenses
|
|
(7,925,419
|
)
|
|
(5,963,702
|
)
|
|
(13,796,361
|
)
|
|
(12,497,733
|
)
|
Research and development expenses
|
|
(162,180
|
)
|
|
(59,078
|
)
|
|
(269,240
|
)
|
|
(106,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
(10,691,316
|
)
|
|
(8,317,396
|
)
|
|
(20,446,449
|
)
|
|
(18,661,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
3,382,921
|
|
|
9,185,854
|
|
|
13,912,811
|
|
|
17,288,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
231,978
|
|
|
(3,102
|
)
|
|
372,653
|
|
|
175,592
|
|
Gain from acquisition
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,698,642
|
|
Interest and finance expense, net
|
|
(122,081
|
)
|
|
(57,670
|
)
|
|
(212,722
|
)
|
|
(76,378
|
)
|
Change in fair value of warrant liabilities
|
|
-
|
|
|
912,207
|
|
|
-
|
|
|
389,490
|
|
Total other income, net
|
|
109,897
|
|
|
851,435
|
|
|
159,931
|
|
|
3,187,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
3,492,818
|
|
|
10,037,289
|
|
|
14,072,742
|
|
|
20,475,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
(1,722,182
|
)
|
|
(2,467,843
|
)
|
|
(4,102,848
|
)
|
|
(6,498,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income after income taxes
|
|
1,770,636
|
|
|
7,569,446
|
|
|
9,969,894
|
|
|
13,977,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
1,648,731
|
|
|
645,910
|
|
|
2,887,894
|
|
|
3,127,346
|
|
Comprehensive income
|
$
|
3,419,367
|
|
$
|
8,215,356
|
|
|
12,857,788
|
|
|
17,104,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
36,083,940
|
|
|
35,623,376
|
|
|
35,976,211
|
|
|
35,132,917
|
|
Earnings per share
|
$
|
0.05
|
|
$
|
0.21
|
|
|
0.28
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares
|
|
36,083,940
|
|
|
35,678,277
|
|
|
35,976,211
|
|
|
35,216,138
|
|
Earnings per share
|
$
|
0.05
|
|
$
|
0.21
|
|
|
0.28
|
|
|
0.40
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
Six months ended March
31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited and
|
|
|
|
|
|
|
not reviewed)
|
|
CASH FLOWS FROM
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
$
|
9,969,894
|
|
$
|
13,977,605
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
|
2,994,782
|
|
|
3,238,022
|
|
Allowance for doubtful accounts
|
|
4,020,804
|
|
|
1,049,806
|
|
Gain on acquisition
|
|
-
|
|
|
(2,698,642
|
)
|
Loss(Gain) on disposal of fixed assets
|
|
(12,068
|
)
|
|
6,798
|
|
Stock-based compensation
|
|
700,603
|
|
|
41,282
|
|
Change in fair value of warrant liabilities
|
|
-
|
|
|
(389,490
|
)
|
Deferred tax assets
|
|
(1,881,792
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Restricted cash due to sales covenant
|
|
-
|
|
|
(95,775
|
)
|
Notes receivable
|
|
424,753
|
|
|
(294,546
|
)
|
Accounts receivable-trade and retainage,
short term
|
|
(30,505,000
|
)
|
|
(16,385,371
|
)
|
Accounts receivable - related parties
|
|
-
|
|
|
(402,794
|
)
|
Other receivables
|
|
(2,568,982
|
)
|
|
60,663
|
|
Other receivables-related party
|
|
-
|
|
|
(171,194
|
)
|
Prepaid expenses and other current assets
|
|
81,101
|
|
|
2,401,668
|
|
Inventories, net
|
|
(3,864,272
|
)
|
|
3,563,801
|
|
Advances on inventory
purchases
|
|
(1,713,502
|
)
|
|
(1,935,805
|
)
|
Advances on inventory purchases-related
party
|
|
1,568,847
|
|
|
(560,961
|
)
|
Accounts receivable - retainage, long term
|
|
1,311,137
|
|
|
(3,899,147
|
)
|
Accounts payable-trade
|
|
174,014
|
|
|
3,570,702
|
|
Accounts payable-trade- related parties
|
|
(794,945
|
)
|
|
1,499,948
|
|
Other payables
|
|
(2,019,904
|
)
|
|
3,024,468
|
|
Other payables - related parties
|
|
915,115
|
|
|
(57,264
|
)
|
Accrued liabilities
|
|
1,041,463
|
|
|
(53,355
|
)
|
Customer deposits
|
|
1,932,910
|
|
|
(151,841
|
)
|
Taxes payable
|
|
(326,947
|
)
|
|
(1,414,144
|
)
|
Net cash provided by(used in) operating activities
|
|
(18,551,989
|
)
|
|
3,924,434
|
|
CASH FLOWS FROM
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets
|
|
(208,852
|
)
|
|
(369,275
|
)
|
Cash proceeds from sale of equipment
|
|
61,175
|
|
|
-
|
|
Purchases of equipment
|
|
(947,081
|
)
|
|
(1,123,082
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(1,094,758
|
)
|
|
(1,492,357
|
)
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Decrease (Increase) in restricted cash
|
|
(1,665,984
|
)
|
|
159,331
|
|
Short term notes payable
|
|
2,529,364
|
|
|
-
|
|
Cash proceeds from public offering and
warrants exercised
|
|
-
|
|
|
9,391,482
|
|
Net proceeds from short-term loan - banks and others
|
|
1,580,853
|
|
|
3,614,497
|
|
Repayments of notes payables
|
|
-
|
|
|
(297,700
|
)
|
Net cash provided by financing activities
|
|
2,444,233
|
|
|
12,867,610
|
|
Effects of foreign currency translation
|
|
186,362
|
|
|
514,939
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(17,016,152
|
)
|
|
15,814,626
|
|
Cash and cash equivalents, beginning of
period
|
|
28,076,692
|
|
|
8,387,646
|
|
Cash and cash equivalents, ending of period
|
$
|
11,060,540
|
|
$
|
24,202,272
|
|
SUPPLEMENTAL
DISCLOSURE OF
CASH
FLOW INFORMATION:
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
212,722
|
|
$
|
134,585
|
|
Cash paid for income taxes
|
$
|
4,476,715
|
|
$
|
12,117,336
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
Note 1 Description of Business and Basis of Presentation
China Valves Technology, Inc. (the Company), was incorporated
in Nevada in August 1997. Through its direct and indirect subsidiaries, the
Company focuses primarily on the development, manufacture and sale of
high-quality metal valves for the electricity, petroleum, chemical, water, gas
and metal industries in the Peoples Republic of China (the PRC). The
Companys operations are headquartered in Zhengzhou, Henan Province, PRC.
REPORTING ENTITIES
The accompanying condensed consolidated financial statements
include the following subsidiaries:
Name of entity
|
Place of
incorporation
|
Ownership
|
Principle
business
|
China Valves Technology (Changsha) Valve
Co., Ltd. (Changsha Valve)
|
PRC
|
100% Indirectly
|
Manufacturing
|
Yangzhou Rock Valve Lock Technology Co., Ltd. (Yangzhou
Rock)
|
PRC
|
100% Indirectly
|
Manufacturing
|
Henan Kai Feng High Pressure Valve Co.,
Ltd. (Kaifeng Valve)
|
PRC
|
100% Indirectly
|
Manufacturing
|
Zhengzhou City ZD Valve., Ltd. (ZD Valve)
|
PRC
|
100% Indirectly
|
Manufacturing
|
Tai Zhou Tai De Valve Co., Ltd. (Taide
Valve)
|
PRC
|
100% Indirectly
|
Manufacturing
|
Shanghai PudongHanwei Valve Co., Ltd. (Hanwei Valve)
|
PRC
|
100% Indirectly
|
Manufacturing
|
Henan Tonghai Fluid Equipment Co., Ltd.
|
PRC
|
100% Indirectly
|
Holding Company
|
China Valves Technology Holdings Co., Ltd. (formerly China
Fluid Equipment Holdings Limited)
|
Hong Kong
|
100% Directly
|
Holding Company
|
Note 2 Summary of significant accounting policies
RESTATEMENT
The presentation of certain line items presented on the
consolidated financial statements and the relevant notes for the year ended
September 30,2011 have been restated to correct the under accrued Value Added
Tax for the year ended September 30,2011. The restatement made the Companys
previously reported cost of sales in the consolidated statements of income for
the year ended September 30,2011 increase $2,670,688 and the income and other
tax payables in the consolidated balance sheet as of September 30,2011 increased
$2,670,688. The retained earnings in the consolidated balance sheet and
consolidated statements of stockholders equity as of September 30,2011
decreased $2,670,688. The restatement has no effect for the cash flow for the
six months ended March 31, 2012. Currently, the Company is still evaluating the
quarterly financial impact for the year ended September 30, 2011.
As a result of the restatement, the accompanying 2011 interim
financial statements and notes thereto for the quarterly periods ended March 31,
2011 have not been reviewed in accordance with Statement of Auditing Standards
No. 100 ("SAS 100"), as required by Rule 10-01(d) of Regulation S-X promulgated
under the Securities Act of 1934. The Company intends to file an amendment to
this Form 10-Q to file unaudited interim financial statements for the quarterly
periods ended March 31, 2011 reviewed in accordance with SAS 100 as required by
Rule 10-01(d) as promptly as practicable after it has resolved outstanding
matters addressed in the related Form 8-K which was filed with the SEC on
February 14, 2012. Because the financial statements contained in this Form 10-Q
do not meet the requirements of Rule 10-01 (d) of Regulation S-X, the Company
may not be considered current in our filings under the Securities Exchange Act
of 1934. Filing an amendment to this report, when the independent registered
public accountants' review is complete, would eliminate certain consequences of
a deficient filing, but the Company may become ineligible to use Form S-3 to
register securities until all required reports under the Securities Exchange Act
of 1934 have been timely filed for the 12 months prior to the filing of the
registration statement for those securities. The Company is evaluating the
impact of filing a deficient Form 10-Q due to lack of a review by an independent
registered public accounting firm on its covenants under its contractual
commitments, its obligations under NASDAQ Stock Market listing standards, and
the Securities Exchange Act.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
the Company and its wholly owned subsidiaries (collectively referred to herein
as the Company) have been prepared in accordance with generally accepted
accounting principles in the United States of America for interim consolidated
financial information. Accordingly, they do not include all the information and
notes necessary for comprehensive consolidated financial statements.
In the opinion of the management of the Company, all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the operating results for the three and six months ended March
31, 2012 have been made. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited financial
statements and notes thereto included in the Companys annual report on Form
10-K for the year ended September 30, 2011. The Company follows the same
accounting policies in preparation of interim reports.
Results for the interim periods presented are not necessarily
indicative of the results that might be expected for the entire fiscal year.
USE OF ESTIMATES
The preparation of consolidated financial statements in
conformity with US GAAP requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
items subject to such estimates and assumptions include the useful lives of
fixed assets; the allowance for doubtful accounts; the fair value determination
of financial and equity instruments, realizability of inventories; the
recoverability of goodwill, intangible assets, land use right, plant and
equipment; and accruals for income tax uncertainties and other contingencies.
The current economic environment has increased the degree of uncertainty
inherent in those estimates and assumptions.
FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS
The Renminbi (RMB) of the Peoples Republic of China has been
determined to be the Companys functional currency. The Company uses the U.S.
dollar for financial reporting purposes.
For those entities whose currency is other than the US dollar,
all assets and liabilities are translated into U.S. dollars at the exchange rate
on the balance sheet date; shareholders equity is translated at historical
rates and items in the statements of income and of cash flows are translated at
the average rate for the period. Because cash flows are translated based on the
average translation rate, amounts related to assets and liabilities reported in
the statement of cash flows will not necessarily agree with changes in the
corresponding balances in the balance sheet. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
statement of shareholders equity. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as incurred.
8
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 605, Revenue
Recognition, when persuasive evidence of an arrangement exists, the price is
fixed or determinable, collection is reasonably assured and delivery of products
has occurred or services have been rendered. These criteria are generally
satisfied at the time of delivery for domestic sales when risk of loss and title
passes to the customer. For international sales, the revenue recognition
criteria are generally satisfied under Freight on Board (FOB) terms, in which
the Companys responsibility ends once the goods clear the port of shipment.
Revenues presented on the consolidated statements of operations and
comprehensive income is net of a value-added tax (VAT) taxes.
The Company allows its customers to retain 5% to 10% of the
contract prices as retainage during the warranty period, usually 12 or 24 months
after the products were put into use, to guarantee product quality. Retainage is
considered as a payment term included as a part of the contract price, and
recognized as revenue based upon delivery of products. Due to nature of the
retainage, the Companys policy is to take into revenue the full value of the
contract without VAT, including any retainage, as it performs against the
contact since the Company has experienced insignificant warranty claims
historically resulting in the Company having to repair or exchange a defective
product. Due to the infrequency and insignificant amount of warranty claims, the
ability to collect retainage is reasonably assured and is recognized at the time
of delivery.
The Company also provides services to some of its sales agents
and distributors. The Company recognizes revenue on these services once a
contract is signed and the services have been rendered.
WARRANTIES
The Company typically provides warranty for all of its products
and provides replacement or credit to its customers who are not satisfied with
the products for a period of one year from the date of shipment. The Company has
not established reserve funds for potential customer claims because,
historically, the Company has not experienced significant customer complaints
about its products. The Company believes that its customer support teams,
quality assurance team and manufacturing monitoring procedures will continue to
keep claims at a level that does not support a need for a reserve. The Company
reviews customer claims on a monthly basis and may establish a reserve when
necessary.
VALUE ADDED TAX (VAT)
All China-based enterprises are subject to a VAT imposed by the
PRC government on their domestic product sales. The output VAT is charged to
customers who purchase goods from the Company and the input VAT is paid when the
Company purchases goods from its vendors. Input VAT rates are 17% for the
purchasing activities conducted by the Company. Output VAT rate is 17% for all
products. The input VAT can be offset against the output VAT. The VAT payable or
recoverable balance presented on the consolidated balance sheets represents
either the input VAT less than or larger than the output VAT.
COST OF GOODS SOLD
Cost of goods sold consists primarily of direct material costs,
direct labor costs, direct depreciation and related direct expenses attributable
to the production of the products. Inbound shipping and handling costs and
purchasing are included in direct material costs. Manufacturing overhead
includes expenses such as indirect labor, depreciation as it relates to the cost
of production, rent, utilities, receiving costs, and equipment maintenance and
repairs.
SHIPPING AND HANDLING COSTS
Shipping and handling costs incurred for shipping of finished
products to customers are included in selling expense and totaled $224,527 and
$130,801for the three months ended March 31, 2012, and 2011,
respectively;$469,168 and $516,457 for the six months ended March 31, 2012 and
2011, respectively.
ADVERTISING EXPENSES
Advertising costs are expensed when incurred and are included
in selling, general and administrative expenses, which amounted to $30,189 and
$27,870 for the three months ended March 31, 2012, and 2011,
respectively;$88,971 and $114,618 for the six months ended March 31, 2012 and
2011, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. The
costs of material and equipment that are acquired or constructed for research
and development activities and which have alternative future uses, either in
research and development, marketing, or sales, are classified as property and equipment and depreciated over
their estimated useful lives.
9
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with
maturity of three months or less to be cash equivalents. The Company maintains
its cash accounts at creditworthy financial institutions and closely monitors
the movements of its cash positions.
RESTRICTED CASH
The Companys restricted cash consists of cash in the bank as
security for its exported products, security deposits for contract performance,
notes payable and cash held in escrow to pay for certain investor relations
expenses. For restricted cash held in bank, the restriction is released after
the customers have received and inspected the products. The Company has notes
payable outstanding with various banks and is required to keep certain amounts
on deposit that are subject to withdrawal restrictions. Cash held in escrow is
expensed as incurred.
ACCOUNTS RECEIVABLES
The Companys business operations are conducted in the PRC by
selling on various payment terms.
The Company regularly evaluates and monitors the
creditworthiness of each of its customers in accordance with the prevailing
practice in the valve industry and based on general economic conditions in
China. The Company maintains a general policy of providing allowance for
doubtful accounts as follows:
Aging of Accounts Receivables
|
Allowance Percentage
|
With 12 months
|
-
|
12-24months
|
5%
|
24-36months
|
25%
|
Above 36months
|
100%
|
Management reviews its receivables on a quarterly basis to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable. Known bad debts are written off against the allowance for doubtful
accounts when identified. The Companys existing reserve is consistent with its
historical experience and considered adequate by management.
INVENTORIES
Inventories are stated at the lower of cost or market
determined using the weighted average method which approximates cost and
estimated net realizable value. Cost of work in progress and finished goods
comprise direct material, direct production costs and an allocated portion of
production overhead costs based on normal operating capacity.
The Company provides a reserve for estimated inventory
obsolescence or excess quantities on hand equal to the difference between the
cost of the inventory and its estimated realizable value. The future estimated
realizable value of inventory is generally based on the historical usage of such
inventory. The Company ages its inventory with no recent demand and applies
various valuation factors based on the last demand from customers for such
material. If future conditions cause a reduction in the Companys current
estimate of realizable value, due to a decrease in customer demand, a drop in
commodity prices or other market-related factors that may influence demand for
particular products, additional provisions may be required. In addition, the
Company also reviews most recent quotes from vendors and compares with the
carrying value of its inventory. If carrying amount of raw materials exceeds
prices available at the balance sheet date, then the excess amount is directly
written off and included in cost of the goods sold.
Semi-finished products are work-in-process (WIP) inventory at
the finishing stages of production. These products that are awaiting final
assembly have similar physical shape to finished goods. The Company
differentiates these products from WIP for inventory management purposes.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are
stated net of accumulated depreciation. Depreciation expense is determined using
the straight-line method over the estimated useful lives of the assets, as
follows:
|
Estimated Useful
|
|
Economic Life
|
Buildings and improvement
|
10-30 years
|
Machinery and equipment
|
5-10 years
|
Office furniture and equipment
|
5 years
|
Motor Vehicles
|
8-10 years
|
10
Maintenance and repairs are charged directly to expense as
incurred, whereas improvements and renewals are generally capitalized in their
respective property accounts. When an item is retired or otherwise disposed of,
the cost and applicable accumulated depreciation are removed and the resulting
gain or loss is recognized and reflected as a line item in statements of income
before income from operations.
Construction in progress represents direct costs of
construction as well as acquisition and design fees incurred. Capitalization of
these costs ceases and the construction in progress is transferred to property,
plant and equipment when substantially all the activities necessary to prepare
the assets for their intended use are completed. Interest incurred during the
period required to complete the construction is capitalized into construction in
progress. All other interest is expensed as incurred. No depreciation is
provided until construction is completed and the asset is ready for its intended
use. Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterments to property and equipment are
capitalized.
INTANGIBLE ASSETS
Intangible assets consist of patents, software and land use
rights. Patents are being amortized over 5-20 years as management believes those
are the estimated useful life of the patents currently owned by the Company.
Software is amortized over 10 years, its estimated useful life.
According to the laws of the PRC, the government owns all the
land in the PRC. Companies or individuals are authorized to possess and use the
land only through the land use rights granted by the government. The land use
rights represent cost of the rights to use the land in respect of properties
located in the PRC. Land use rights are carried at cost and amortized on a
straight-line basis over the period of rights of 46.4 -50 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company, in accordance with ASC 360, Property, Plant and
Equipment, reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability is
determined by comparing projected undiscounted cash flows associated with such
assets to the related carrying value.
An impairment loss would be recognized when estimated
discounted future cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount. The Company performed
impairment review on its long-lived assets.For the products manufactured by
certain equipment that did not meet the customers needs any more, the Company
determined that the equipment was technically obsolete and needed to be replaced
with new equipment to meet the customers current and future needs. $0 and $0
impairment losses were recognized for the three month periods ended March 31,
2012 and 2011, respectively;$0and $1,341,962 for the six months ended March 31,
2012 and 2011, respectively.
11
RETIREMENT AND OTHER POST RETIREMENT BENEFITS
Full-time employees of the Company in the PRC participate in a
government mandated defined contribution plan, pursuant to which certain pension
benefits, medical care, employee housing fund and other welfare benefits are
provided to employees. Chinese labor regulations require the Company to make
contributions to the government for these benefits based on certain percentages
of the employees salaries. The Company accounts for the mandated defined
contribution plan under the vested benefit obligations approach based on the
guidance of ASC 715, CompensationRetirement Benefits.
The total amounts for such employee benefits which were
expensed were $519,997 and $729,489 for the three month periods ended March 31,
2012 and 2011, respectively;$1,072,752 and $1,169,631 for the six months ended
March 31, 2012 and 2011, respectively.
INCOME TAXES
The Company follows ASC 740, Income Taxes, which require the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates, applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The Company adopted ASC 740-10-25, which provides criteria for
the recognition, measurement, presentation and disclosure of uncertain tax
position. The Company must 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 are measured based on the benefit that has a greater than
50% likelihood of being realized upon ultimate resolution. The Company did not
recognize any additional liabilities for uncertain tax positions as a result of
the implementation of ASC 740-10-25.
COMPREHENSIVE INCOME
The Company adopted ASC 220, Comprehensive Income, which
establishes standards for reporting and presentation of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company has chosen to report comprehensive income in the statements of
operations and comprehensive income. Comprehensive income is comprised of net
income and all changes to stockholders equity except those due to investments
by owners and distributions to owners.
12
CONCENTRATIONS OF CREDIT RISK AND RISK FACTORS
Environment
The Companys operations are carried
out in the PRC. Accordingly, the Companys 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 PRCs economy. The
Companys operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. The Companys results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, restrictions on currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
Bank Deposits
Ce
rtain financial
instruments may subject the Company to concentration of credit risk. The Company
maintains bank deposits within state-owned banks within the PRC, Hong Kong and
the United States. Balances at financial institutions of state owned banks
within the PRC are not covered by insurance. As of March 31, 2012 and September
30, 2011, the Companys cash and restricted cash balances, totaling
$15,049,854 and $29,508,367 respectively were not covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.
Trade Accounts Receivable
Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers dispersed across diverse markets and generally short payment
terms. Credit is extended based on an evaluation of the customers financial
condition and collateral generally is not required. The Company evaluates the
collectability of accounts receivable based on a combination of factors. In
cases where the Company is aware of circumstances that may impair a specific
customers ability to meet its financial obligations subsequent to the original
sale, the Company will record a specific allowance against amounts due, and
thereby reduce the net recognized receivable to the amount the Company
reasonably believes will be collected. There is no customer individually with
over 10% of accounts receivable balance as of March 31, 2012 and 2011.
Revenues
Substantially all of the Companys
revenues are derived from sales of valves in the PRC. Any significant decline in
market acceptance of the Companys products could impair our ability to operate
effectively. Five major customers represented approximately 24% and 30% of the
Companys total sales for the three months ended March 31, 2012 and 2011,
respectively;16% and 13% of the Companys total sales for the six months ended
March 31, 2012 and 2011.Sales from the largest customer accounted for 8% and 12%
of total sales for the three months ended March 31, 2012 and 2011,
respectively;7% and 4% of the Companys total sales for the six months periods
ended March 31, 2012 and 2011
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 defines fair value as the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC 820 establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instruments
categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. ASC 820 establishes
three levels of inputs that may be used to measure fair value:
Level 1Valuations based on unadjusted
quoted prices in active markets for identical assets or liabilities that the
Company holds. An active market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 2Valuation based on quoted
prices in markets that are not active for which all significant inputs are
observable, either directly or indirectly.
Level 3Valuations based on inputs that
are unobservable and significant to the overall fair value measurement.
The Company adopted ASC 820, Fair Value Measurements and
Disclosures, on January 1, 2008 for all financial assets and liabilities and
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (at least
annually). ASC 820 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. The Company
has not adopted ASC 820 for nonfinancial assets and nonfinancial liabilities, as
these items are not recognized at fair value on a recurring basis. The adoption
of ASC 820 for all financial assets and liabilities did not have any impact on
the Companys consolidated financial statements and the Company does not expect
to have any impact on the Companys consolidated financial statements if ASC 820
for nonfinancial assets and liabilities is adopted.
Financial instruments include cash and cash equivalents,
restricted cash, accounts receivables, prepayments and other receivables,
investments, short term borrowings from banks, accounts payable and accrued
expenses and other payables. The carrying amounts of cash and cash equivalents, restricted cash, accounts
receivable, prepayments and other receivables, investments, short -term loans,
accounts payable and accrued expenses approximate their fair value due to the
short-term maturities of these instruments.
13
OTHER INVESTMENTS
The Company invested in China Perfect Machinery Industry Co.,
Ltd. in 1996 and Kaifeng Commercial Bank in 1997. The Company owns approximately
0.0955% of China Perfect Machinery Industry Co. Ltd. and approximately 1.6% of
Kaifeng Commercial Bank. The Company does not have the ability to exercise
control over the investee companies and the investments have been recorded under
the cost method. These long term investments amounted to $825,610 and $815,066
as of March 31, 2012 and September 30, 2011, respectively. There has been no
change in the carrying value since initial investment, other than the effects of
translation difference.
The Company evaluates potential impairment whenever events or
changes in circumstances indicate that the carrying amount of the investments
may not be recoverable. For investments carried at cost, the Company recognizes
impairment in the event that the carrying value of the investment exceeds the
Companys proportionate share of the net book value of the investee. As of March
31, 2012, management believes no impairment charge is necessary.
CUSTOMER DEPOSITS
Customer deposits represent amounts advanced by customers on
product orders. The product normally is shipped within six months after receipt
of the advance payment and the related sale is recognized in accordance with the
Companys revenue recognition policy. As of March 31, 2012 and September 30,
2011, customer deposits amounted to $ 13,221,098 and $11,139,936, respectively.
STOCK COMPENSATION
The Company receives employee and certain non-employee services
in exchange for (a) equity instruments of the Company or (b) liabilities that
are based on the fair value of the Companys equity instruments or that may be
settled by the issuance of such equity instruments. The Company accounts for
stock compensation expense under the fair value recognition provisions of the
ASC 718, which requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option pricing model.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2011, the FASB issued ASU No. 2011-03,
Transfers
and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase
Agreements
(ASU 2011-03), intended to improve financial reporting of
repurchase agreements and refocus the assessment of effective control on a
transferors contractual rights and obligations rather than practical ability to
perform those rights and obligations. The guidance in ASU 2011-03 is effective
for the first interim or annual period beginning on or after December 15, 2011.
The Company does not expect the adoption of ASU 2011-03 to have a significant
impact on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs
(ASU 2011-04). ASU 2011-04 represents the converged guidance of
the FASB and the International Accounting Standards Board (IASB) on fair value
measurement. A variety of measures are included in the update intended to either
clarify existing fair value measurement requirements, change particular
principles requirements for measuring fair value or for disclosing information
about fair value measurements. For many of requirements, the FASB does not
intend to change the application of existing requirements under Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements. ASU 2011-04 is
effective for interim and annual periods beginning after December 15, 2011 and
early application is not permitted. The Company is evaluating the impact
adoption of ASU 2011-04 and does not expect the adoption of ASU 2011-04 will
have significant impact on its consolidated financial statements.
In July 2011, the FASB issued accounting guidance on
disclosures about the credit quality of financing receivables and the allowance
for credit losses. The guidance expands disclosures for the allowance for credit
losses and financing receivables by requiring entities to disclose information
at disaggregated levels. It also requires disclosure of credit quality
indicators, past due information and modifications of financing receivables. The
Company does not expect the adoption of this guidance to have a significant
impact on its consolidated financial statements.
In September 2011, the FASB issued Intangibles Goodwill and
Other (Topic 350) Testing Goodwill for Impairment (ASU No. 2011-08), which
amends ASC 350 to first assess qualitative factors before performing the
quantitative goodwill impairment testing. The ASU provides the option to first
assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If the results
of the qualitative analysis indicate it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, the
quantitative two-step impairment test, which is required under current U.S.
GAAP, would not be necessary. The ASU is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December
15, 2011. The implementation of the ASU is not expected to have a material
impact on the Companys financial statements.
14
Note 3 Accounts receivable, net
Accounts receivable consists of the following:
|
|
March 31, 2012
|
|
|
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Total accounts receivable
|
$
|
165,284,335
|
|
$
|
134,290,696
|
|
Allowance for bad debts
|
|
(8,134,227
|
)
|
|
(4,052,398
|
)
|
Accounts receivable, net
|
|
157,150,108
|
|
|
130,238,298
|
|
Accounts receivable non-current retainage
|
|
(4,484,135
|
)
|
|
(5,724,024
|
)
|
Accounts receivable (including related
party) current
|
$
|
152,665,973
|
|
$
|
124,514,274
|
|
As of March 31, 2012 and September 30, 2011, retainage held by
customers included in the Companys accounts receivable was as follows:
|
|
March 31, 2012
|
|
|
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Retainage
|
|
|
|
|
|
|
Current
|
$
|
18,800,086
|
|
$
|
13,854,814
|
|
Non-current
|
|
4,484,135
|
|
|
5,724,024
|
|
Total retainage
|
$
|
23,284,221
|
|
$
|
19,578,838
|
|
The following represents the changes in the allowance for
doubtful accounts:
|
|
March 31, 2012
|
|
|
September 30,2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Balance, beginning of the period
|
$
|
4,052,398
|
|
$
|
998,739
|
|
Additions to the reserve
|
|
4,020,804
|
|
|
2,974,399
|
|
Foreign currency translation adjustment
|
|
61,025
|
|
|
79,260
|
|
Balance, end of the period
|
$
|
8,134,227
|
|
$
|
4,052,398
|
|
15
Note 4 Inventories, net
|
|
March 31, 2012
|
|
|
September 30,2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Raw materials
|
$
|
7,592,385
|
|
$
|
5,438,464
|
|
Work-in-progress
|
|
9,486,444
|
|
|
9,088,975
|
|
Finished goods
|
|
11,059,774
|
|
|
8,613,573
|
|
Semi-finished products
|
|
1,871,458
|
|
|
1,417,185
|
|
Inventory in transit
|
|
|
|
|
1,705,007
|
|
Total
|
|
30,010,061
|
|
|
26,263,204
|
|
Less: Inventory allowance
|
|
(1,959,843
|
)
|
|
(2,394,319
|
)
|
Inventories, net
|
$
|
28,050,218
|
|
$
|
23,868,885
|
|
As of March 31, 2012 and September 30, 2011, the management of
the Company estimated its inventories at the lower of cost or market, determined
on a weighted average method, or net realizable value.
Per the estimation, the Company recognized $1,959,843 and
$2,394,319 inventory allowance for slow moving inventory as of March 31, 2012
and September 30, 2011, respectively, most of which were slow moving commodity
valves produced for general usage whose technical specification was obsolete.
The Company recognized $0 and $213,229 inventory impairment loss as cost of
sales for the three months periods ended March 31, 2012 and 2011, respectively;
$0 and $920,065 inventory impairment loss as cost of sales for the six months
periods ended March 31, 2012 and 2011, respectively. During the six months
periods ended March 31, 2012, the Company disposed some of slow moving
inventories, which made the inventory allowance decrease $434,476 as of March
31, 2012.
Note 5 Property, plant and equipment, net
Property, plant and equipment consist of the following:
|
|
March 31, 2012
|
|
|
September 30,2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Buildings and improvements
|
$
|
23,930,507
|
|
$
|
23,592,085
|
|
Machinery and equipment
|
|
29,228,816
|
|
|
27,934,105
|
|
Motor vehicles
|
|
2,963,772
|
|
|
2,925,919
|
|
Office equipment
|
|
1,687,005
|
|
|
1,665,384
|
|
Construction in progress
|
|
132,395
|
|
|
165,511
|
|
Total
|
|
57,942,495
|
|
|
56,283,004
|
|
Less: Accumulated depreciation
|
|
(18,675,490
|
)
|
|
(16,090,368
|
)
|
Property plant and equipment, net
|
$
|
39,267,005
|
|
$
|
40,192,636
|
|
Depreciation expenses were $1,301,451 and $1,282,428 for the
three months ended March 31, 2012 and 2011, respectively; $2,571,204 and
$2,855,240 for the six months ended March 31, 2012 and 2011, respectively.
Certain buildings with an aggregate carrying value of
$1,513,061 and $1,522,456 were pledged as collateral for bank loans as of March
31, 2012 and September 30, 2011 respectively.
Note 6 Goodwill
Goodwill represents the excess of cost of an acquisition
business over the fair value of the identifiable tangible and intangible assets
acquired and liabilities assumed in a business combination at the date of the
acquisition.
Goodwill for impairment has been tested annually, or whenever
events or circumstances indicate that it is more likely than not that the fair
value of a reporting unit is below its carrying amount. The Company determines
the reporting units based on following factors: a. it engages in business
activities from which it may earn revenues and incur expenses; b. its operating
results are regularly reviewed by the Companys chief operating decision makers
to make decisions about resources to be allocated to the segment and assess its
performance; and c. its discrete financial information is available. No
impairment loss was incurred for the three months ended March 31, 2012 and 2011
based on the Companys estimation; No impairment loss was incurred for the six
months ended March 31, 2012 and 2011 based on the Companys estimation.
A significant amount of judgment is involved in determining if
an indicator of impairment has occurred. Such indicators may include current period operating or cash flow losses combined with a
historical of operating or cash flow losses, a projection or forecast that
demonstrates continuing operating or cash flow losses, a significant adverse
change in AR collection and unanticipated technology revolution in valves
industry, among others. The Company performs its annual impairment review of
goodwill every year at September 30 and when a triggering event occurs between
annual impairment tests. The goodwill impairment test is a two-step test. Under
the first step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). If the fair value of the reporting unit is
less than its carrying value, an indication of goodwill impairment exists for
the reporting unit, and the Company must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess
of the carrying amount of the reporting units goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, and the residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. Fair value of the
reporting unit is determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying value, step two does not need
to be performed.
16
A summary of changes in the Companys goodwill was as follows:
|
|
Goodwill
|
|
Balance, September 30, 2011
|
$
|
33,976,186
|
|
Foreign currency translation adjustment
|
|
439,555
|
|
Balance, March 31, 2012
|
$
|
34,415,741
|
|
The goodwill was generated from the acquisitions of a number of
companies engaged in production of valves in China. According to ASC805
Business Combinations, the acquisition of these businesses should be treated
as acquisition of a business. Any excess of the purchase prices over the
estimated fair values of the net assets acquired is recorded as goodwill.
In 2004, the Company acquired two companies engaged in the
production of valves. The Company recognized approximately $21 million goodwill
representing the excess of cost of an acquisition business over the fair value
of the identifiable tangible and intangible assets acquired and liabilities
assumed in a business combination at the date of the acquisition.
On April 8, 2010, the Company acquired 100% of Hanwei Valve and
recognized approximately $11 million goodwill representing the excess of cost of
an acquisition business over the fair value of the identifiable tangible and
intangible assets acquired and liabilities assumed in a business combination at
the date of the acquisition.
The goodwill recognized in conjunction with the acquisition of
Hanwei Valve represents intangible values that Hanwei Valve has built over its
more than 16 years of history, which do not qualify for separate recognition.
These values include but are not limited to:
|
i)
|
Expected synergies from combining operations of the
Companys operating subsidiaries and Hanwei Valve;
|
|
|
|
|
ii)
|
The experienced work force;
|
|
|
|
|
iii)
|
Proprietary technologies related to certain products;
and
|
|
|
|
|
iv)
|
The proprietary manufacturing
processes.
|
The Company has six operating subsidiaries as reporting units
included in continuing operations as of March 31, 2012, among which three
reporting units had goodwill. The following table represents goodwill of the
three subsidiaries as of March 31, 2012 and September 30, 2011, respectively.
(in thousands)
|
|
March 31, 2012
|
|
|
September 30, 2011
|
|
|
|
(Unaudited)
|
|
|
(unaudited)
|
|
Kaifeng Valve
|
$
|
10,783
|
|
$
|
10,783
|
|
ZD Valve
|
|
10,029
|
|
|
10,029
|
|
Hanwei Valve
|
|
11,046
|
|
|
11,046
|
|
Foreign currency translation adjustment
|
|
2,558
|
|
|
2,118
|
|
|
|
|
|
|
|
|
Total
|
$
|
34,416
|
|
$
|
33,976
|
|
As at March 31, 2012, the Company updated its goodwill
impairment tests because the market capitalization is significantly below the
carrying value of its net assets. The result is that the fair values of our
reporting units are substantially in excess of their carry values. Therefore,
the management believed no goodwill was subject to the risk of impairment.
The management believe the difference between the market
capitalization and the carrying value of our net assets is to due (a) a control
premium that should be applied to the market capitalization in determining the
fair value of the entire Company and (b) a temporary decline in the stock price
suffered by Chinese companies that are public in the U.S. as a result of
negative press surrounding accounting practices and reverse mergers of certain
Chinese companies.
17
Note 7 - Intangible assets, net
Intangible assets consist of the following:
|
|
March 31, 2012
|
|
|
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Patents
|
$
|
2,801,618
|
|
$
|
2,765,836
|
|
Software
|
|
2,084,227
|
|
|
1,850,982
|
|
Land use rights
|
|
20,278,187
|
|
|
20,019,196
|
|
Total
|
|
25,164,032
|
|
|
24,636,014
|
|
Less: Accumulated amortization:
|
|
|
|
|
|
|
Patents
|
|
(405,245
|
)
|
|
(307,061
|
)
|
Software
|
|
(553,132
|
)
|
|
(442,451
|
)
|
Land use rights
|
|
(1,202,190
|
)
|
|
(972,494
|
)
|
Total accumulated amortization
|
|
(2,160,567
|
)
|
|
(1,722,006
|
)
|
Intangibles, net:
|
|
|
|
|
|
|
Patents
|
|
2,396,373
|
|
|
2,458,775
|
|
Software
|
|
1,531,095
|
|
|
1,408,531
|
|
Land use rights
|
|
19,075,997
|
|
|
19,046,702
|
|
Intangible assets, net
|
$
|
23,003,465
|
|
$
|
22,914,008
|
|
Amortization expense was $220,636 and $193,191 for the three
months ended March 31, 2012 and 2011, respectively; $423,578 and $382,782 for the
six months ended March 31, 2012 and 2011, respectively.
Certain land use rights with an aggregate carrying value of
$5,900,322 and $5,894,995 were pledged as collateral for short-term bank loans
as of March 31, 2012 and September 30, 2011 respectively.
Note 8 Loans
SHORT-TERM LOANS:
|
|
March
|
|
|
September 30,
|
|
|
|
31, 2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Bank of Communications , Changsha branch,
due December 2012, annum interest at 7.872%, pledged by Changsha Valves
land use rights
|
$
|
633,693
|
|
$
|
625,600
|
|
China Everbright Bank, Changsha branch, due June 2012,
annum interest at 7.572%, pledged by Changsha Valves land use rights and
buildings
|
|
950,540
|
|
|
938,400
|
|
China Citic Bank, Zhengzhou branch, due
December 2012 annum interest at 8.528%, guaranteed by Kaifeng
High-pressure valve steel casting Iron Co., Ltd.
|
|
4,752,701
|
|
|
3,128,000
|
|
Unrelated third parties, due on demand, annum interest rate
range from 0% to 10.000%, and unsecured
|
|
995,223
|
|
|
982,511
|
|
Local Bureau of Finance, Kaifeng City, due on demand,
non-interest bearing and unsecured
|
|
850,157
|
|
|
839,299
|
|
Total short-term loans
|
$
|
8,182,314
|
|
$
|
6,513,810
|
|
Interest expense incurred for the three months ended March 31,
2012 and 2011 amounted to $122,081 and $57,670, respectively; the six months
ended March 31, 2012 and 2011 amounted to $212,722 and $76,378, respectively. For
the three months ended March 31, 2012 and 2011, $0 and $0 interest expense was
capitalized for assets, respectively; and for the six months ended March 31,
2012 and 2011, $0 and $60,152 interest expense was capitalized for assets,
respectively. As of March 31, 2012, there are no restrictive covenants related
to the loans stated above.
18
Note 9 Statutory reserves
The laws and regulations of the PRC require that before a
foreign invested enterprise can legally distribute profits, it must first
satisfy all tax liabilities, provide for losses in previous years, and make
allocations, in proportions determined at the discretion of the board of
directors, to the statutory reserve. The statutory reserves include the surplus
reserve fund.
The Company is required to transfer 10% of its net income, as
determined in accordance with the PRC accounting rules and regulations, to a
statutory surplus reserve fund until such reserve balance reaches 50% of the
Companys registered capital. The transfer to this reserve must be made before
distribution of any dividends to shareholders. The Company had $11,460,305 and
$11,224,490 statutory reserves as of and March 31, 2012 and September 30, 2011,
respectively.
The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 50% of the
registered capital.
Note 10 Commitments and contingencies
The Companys subsidiary, ZD Valve entered into a lease
agreement for a manufacturing plant and office space with Zhengzhou Cheng Long
Corporation, a related party, from January 1, 2008 to December 31, 2008. The
lease agreement was subsequently extended to December 31, 2012. In 2009, ZD
Valve made leasehold improvements to its leased manufacturing plant in the
amount of $615,260, which has been used as rental payments for the following two
years. As of March 31, 2012, the prepaid rental had been fully amortized as
rental expense and a new lease contract has been signed at annual rental of
$212,466 for three years.
The Companys subsidiary, Tonghai entered into a lease
agreement for an office space with Jia Hong Yao, an unrelated party, from
September 20, 2009 to September 19, 2014 with annual lease payments of $230,493.
For the three months ended March 31, 2012 and 2011, total lease
expense, including amounts included in cost of sales and administrative
expenses, were totally $125,870 and $284,965, respectively; for the six months
ended March 31, 2012 and 2011,were totally $302,211 and $447,067, respectively.
The future minimum lease payments at March 31, 2012, are as
follows:
|
|
Amount
|
|
Year ending March 31, 2013
|
$
|
260,183
|
|
Year ending March 31, 2014
|
|
260,183
|
|
Year ending March 31, 2015
|
|
189,934
|
|
Year ending March 31, 2016 and thereafter
|
|
6,601
|
|
Total
|
$
|
716,901
|
|
19
Contingency
On February 4, 2011, a plaintiff filed a purported class action
naming the Company, its Chairman and certain present and former senior
executives as defendants, asserting claims for certain violations of the
securities laws and seeking unspecified damages. The complaint, which was
styled
Donald Foster, et al. v. China Valves Technology, Inc., et al.
,
was filed in the U.S. District Court for the Southern District of New York.
Several substantially identical complaints were subsequently filed in the same
court. On or about June 29, 2011, the Court consolidated the three cases
referenced above and appointed Bristol Investment Fund, LTD (Bristol) as lead
plaintiff. In the consolidation order the Court renamed the case
In re China
Valves Technology Securities Litigation
. On August 29, 2011, Bristol filed a
consolidated class action complaint, which named additional defendants including
an individual shareholder of the Company and the Companys auditor. The Company
and the individual defendants filed a motion to dismiss the consolidated
complaint in the class action on November 21, 2011. The briefing on the motion
to dismiss is complete, and the parties are waiting for the Court either to set
a hearing date for oral argument on the motion or to rule on the motion.
Discovery continues to be stayed pending resolution of the motion.
The consolidated complaint purports to assert claims on behalf
of a purported class of persons and entities who purchased shares of the
Companys common stock at allegedly artificially high prices during the period
between December 1, 2009 and January 13, 2011 and who suffered damages as a
result of such purchases. The allegations in the consolidated complaint relate
to the Companys acquisitions of Able Delight and Hanwei Valves and include
allegations regarding the Companys financial statements and press releases. The
complaint alleges, among other things, that the Companys statements about the
nature and quality of the Companys acquisition of Able Delight were materially
false and misleading and that the Companys statements failed to describe the
role in the transaction of an alleged related party. In addition, the complaint
alleges that the Companys statements about the Hanwei Valves acquisition were
materially false and misleading because they failed to disclose the alleged
involvement of certain related parties and allegedly misdescribed the
transaction as a purchase of assets rather than as a purchase of an entity. The
Company intends to contest the allegations and to defend itself vigorously.
On September 14, 2011, a plaintiff filed an action,
derivatively and on behalf of the Company, naming its Chairman and certain
senior executives as defendants, and naming the Company as a nominal defendant.
The complaint, which is styled
Gervat v. Fang et al.
, was filed in the
U.S. District Court for the Southern District of New York, and asserts claims
for breach of fiduciary duty, gross mismanagement, and other common law claims,
and seeks unspecified damages. On October 11, 2011, the plaintiff filed an
Amended Complaint with substantially similar claims. The parties have stipulated
to a scheduling order that would stay all proceedings in the derivative action
pending resolution by the Court of the defendants motion to dismiss the class
action consolidated complaint.
Nevertheless, there is possibility that a loss may have been
incurred from above class actions. In accordance with ASC Topic 450, no loss
contingency was accrued as of March 31, 2012 since the possible loss or range of
loss cannot be reasonable estimated.
Note 11 Related party transactions
The Company had the following significant related party
balances as of March 31, 2012 and September 30, 2011, respectively:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(unaudited)
|
|
Advances on inventory purchase - related
party, the Casting Company
|
|
-
|
|
|
1,552,123
|
|
Accounts payable related party, payable to Zhengzhou
Tonghai Trade
|
|
-
|
|
|
(783,148
|
)
|
Accounts payable related party: Kaifeng
Zhenghe Northern Song Porcelain Art Co., Ltd.
|
|
-
|
|
|
(3,323
|
)
|
Other payable: cash advance from officers, unsecured,
interest-free, due on demand
|
|
(1,030,121
|
)
|
|
(94,226
|
)
|
Total
|
$
|
(1,030,121
|
)
|
|
671,426
|
|
The Company had the following significant related party
transactions for the three and six months periods ended March 31, 2012 and 2011,
respectively:
(1)On August 26, 2008, Kaifeng Valve purchased some land use
rights and real estate from Kaifeng High-Pressure Valve Steel Casting Co.,
Ltd(the Casting Company), a company controlled by the Companys chairman, Mr.
Siping Fang, through the issuance of 2,750,000 shares of the Companys common
stock at $3.576 per share. On April 11, 2009, Kaifeng Valve and the Casting
Company entered into a leasing agreement pursuant to which the Casting Company
leased back the portion of the Real Estate used at an annual rental of $400,000
for a period of two years starting on April 1, 2009. The lease agreement was
automatically extended for one more year when no disagreement was raised as of
April 1, 2011. For the three months period ended March 31, 2012 and 2011, total
rental income from the Casting Company amount to $100,000 and $100,000,
respectively. For the six months period ended March 31, 2012 and 2011, total
rental income from the Casting Company amount to $200,000 and $200,000,
respectively.
(2)The Company also purchases raw material, such as castings,
from and sells scrap metals and valves to the Casting Company. Total raw
material purchase from the related party amounted to $500,106 and $5,420,032 for
the three months ended March 31, 2012 and 2011, respectively;$1,163,838 and
$6,790,354 for the six months ended March 31, 2012 and 2011, respectively. The
Company also sold a total of $5,592 and $0 of valves to the Casting Company for
the three months ended March 31, 2012 and 2011, respectively,$36,972 and $42,240 for the six months ended March
31, 2012 and 2011, respectively.
(3)The Company makes finished goods and raw material purchases
from and valve sales to related party Zhengzhou Tonghai Trade Co., Ltd, which
is established by an officer of the Company. Total valve purchases from
Zhengzhou Tonghai Trade Co., Ltd amounted to $1,000,745 and $5,929,325 for the
three months ended March 31, 2012 and 2011, respectively; $2,213,799 and
$7,401,117 for the six months ended March 31, 2012 and 2011, respectively. Total
valve sales to Zhengzhou Tonghai Trade Co., Ltd amounted to $11,101 and
$127,775 for the three months ended March 31, 2012 and 2011,
respectively; $31,955 and $704,328 for the six months ended
March 31, 2012 and 2011, respectively.
20
Note 12 Stock compensation
On April 27, 2011, the Compensation Committee of the Board of
Directors approved the grant of restricted stock to three directors and three
officers of the Company. On May 1, 2011, the Company entered into a restricted
stock grant agreement with each of the directors. Pursuant to the Stock Grant
Agreement, the Company granted 25,000 shares of restricted stock to each of Mr.
William Haus, Mr. Peter Li and Mr. Zengbiao Yu, independent directors of the
Company. The restricted stock granted vested immediately on May 1, 2011.
On May 16, 2011, the Company entered into the Stock Grant
Agreement with three officers of the Company. Pursuant to the Stock Grant
Agreement, the Company granted 500,000 shares of restricted stock to Mr. Jianbao
Wang, the Companys Chief Executive Officer, 250,000 shares to Mr. Gang Wei, the
Companys Chief Financial Officer, and 125,000 shares to Mr. Renrui Tang, the
Companys Vice President of Finance. 125,000 shares of Mr. Jianbao Wangs
restricted stock vested immediately on May 16, 2011. The remaining shares for
Mr. Jianbao Wang and all restricted shares for Mr. Gang Wei and Mr. Renrui Tang
will vest in three equal installments over a three-year period starting from
January 1, 2012, subject to performance criteria set forth by the Board and the
Compensation Committee. As of January 13, 2012, 125,000 shares of Mr.Jianbao
Wang restricted stock,83,333 shares of Mr.Gang Weis restricted stock and
41,667 shares of Mr.Renrui Tangs restricted stock were vested.
For the three months ended March 31, 2012 and 2011, $153,103
and $9,111 were recorded as compensation expense in the Companys income
statements, respectively. For the six months ended March 31, 2012 and 2011,
$700,603 and $41,282 were recorded as compensation expense in the Companys
income statements, respectively.
The following is a summary of the stock options activity:
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Value
|
|
Outstanding at October 1, 2011
|
|
50,000
|
|
$
|
6.90
|
|
$
|
-
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding at March 31, 2012
|
|
50,000
|
|
|
6.90
|
|
|
-
|
|
Exercisable at March 31,2012
|
|
50,000
|
|
|
6.90
|
|
|
-
|
|
Following is a summary of the status of options outstanding at
March 31, 2012:
Outstanding and Exercisable Options
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
Exercise Price
|
|
Number
|
|
|
Contractual
|
|
|
|
|
|
|
Life
|
|
$6.00
|
|
27,500
|
|
|
2.50
|
|
$8.00
|
|
22,500
|
|
|
1.90
|
|
Total
|
|
50,000
|
|
|
2.23
|
|
There is no aggregate intrinsic value of exercisable shares as
of March 31, 2012.
21
Note 13 - Earnings per Share
The Company reports earnings per share in accordance with the
provisions of the accounting standard regarding ASC260 "Earnings per Share."
This accounting standard requires presentation of basic and diluted earnings per
share in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution (using the treasury stock method) that
could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
Common stock equivalents represent the dilutive effect of the
assumed exercise of the outstanding stock options and warrants, using the
treasury stock method, at either the beginning of the respective period
presented or the date of issuance, whichever is later, and only if the common
stock equivalents are considered dilutive based upon the Companys net income
(loss) position at the calculation date.
The following is a reconciliation of the basic and diluted
earnings per share computation for the three and six months ended March 31, 2012
and 2011:
|
|
Three months ended March 31,
|
|
Basic earnings per
share
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to holders of
common shares
|
$
|
1,770,636
|
|
$
|
7,569,446
|
|
Basic weighted average number of common shares outstanding
|
|
36,083,940
|
|
|
35,623,376
|
|
Basic earnings per share
|
$
|
0.05
|
|
$
|
0.21
|
|
|
|
Three months ended March 31,
|
|
Dilutive earnings per
share
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to holders of
common shares
|
$
|
1,770,636
|
|
$
|
7,569,446
|
|
Basic weighted average number of common shares outstanding
|
|
36,083,940
|
|
|
35,623,376
|
|
Warrants
|
|
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
Dilutive weighted average number of common
shares outstanding
|
|
36,083,940
|
|
|
35,678,277
|
|
Dilutive earnings per share
|
|
|
|
|
|
|
|
$
|
0.05
|
|
$
|
0.21
|
|
|
|
Six months ended March 31,
|
|
Basic earnings per
share
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to holders of
common shares
|
$
|
9,969,894
|
|
$
|
13,977,605
|
|
Basic weighted average number of common shares outstanding
|
|
35,976,211
|
|
|
35,132,917
|
|
Basic earnings per share
|
$
|
0.28
|
|
$
|
0.40
|
|
|
|
Six months ended March 31,
|
|
Dilutive earnings per
share
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to holders of
common shares
|
$
|
9,969,894
|
|
$
|
13,977,605
|
|
Basic weighted average number of common shares outstanding
|
|
35,976,211
|
|
|
35,132,917
|
|
Warrants
|
|
|
|
|
|
|
Stock compensation
|
|
|
|
|
|
|
Dilutive weighted average number of common
shares outstanding
|
|
35,976,211
|
|
|
35,216,138
|
|
Dilutive earnings per share
|
$
|
0.28
|
|
$
|
0.40
|
|
No options in the three and six months ended March 31, 2012.
The 50,000 option shares granted to its independent directors
and 500,000 restricted stock granted to its officers in 2012 were anti-dilutive
for the three and six months ended March 31, 2012 as the average stock price was
lower than the exercise prices. No dilution of shares from options or restricted
stocks for the three and six months ended March 31, 2011
22
Note 14 Segment reporting
The Company sells valves which are used by customers in various
industries. The production process, class of customer, selling practice and
distribution process are the same for all valves. The Companys chief operating
decision-makers (i.e. chief executive officer and his direct reports) review
financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues by product lines for purposes of
allocating resources and evaluating financial performance. There are no segment
managers who are held accountable for operations, operating results and plans
for levels or components below the consolidated unit level. Based on qualitative
and quantitative criteria established by the accounting standard regarding
Disclosures about Segments of an Enterprise and Related Information, the
Company considers itself to be operating within one reportable segment.
In accordance with the enterprise-wide disclosure requirements
of the accounting standard, the Companys net revenue from external customers by
main product lines (based upon primary markets defined by the Chinese Valve
Industry Association) and by geographic areas is as follows (unaudited):
(in thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Power Supply
|
$
|
7,282
|
|
$
|
12,646
|
|
Petrochemical and Oil
|
|
9,986
|
|
|
13,945
|
|
Water Supply
|
|
5,874
|
|
|
8,059
|
|
Metallurgy
|
|
1,551
|
|
|
1,608
|
|
Other
|
|
13,721
|
|
|
5,696
|
|
Total sales revenue
|
$
|
38,413
|
|
$
|
41,954
|
|
(in thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Domestic sales in the PRC
|
$
|
35,305
|
|
$
|
39,720
|
|
International sales
|
|
3,108
|
|
|
2,234
|
|
Total sales revenue
|
$
|
38,413
|
|
$
|
41,954
|
|
(in thousands)
|
|
Six Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Power Supply
|
$
|
20,307
|
|
$
|
25,811
|
|
Petrochemical and Oil
|
|
31,024
|
|
|
32,234
|
|
Water Supply
|
|
13,402
|
|
|
17,137
|
|
Metallurgy
|
|
4,944
|
|
|
4,371
|
|
Other
|
|
24,455
|
|
|
14,730
|
|
Total sales revenue
|
$
|
94,132
|
|
$
|
94,283
|
|
(in thousands)
|
|
Six Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Domestic sales in the PRC
|
$
|
87,679
|
|
$
|
89,870
|
|
International sales
|
|
6,453
|
|
|
4,413
|
|
Total sales revenue
|
$
|
94,132
|
|
$
|
94,283
|
|
23
ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; as well as all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those identified in Item 1A, Risk Factors described in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2011, as well as assumptions,
which, if they were to ever materialize or prove incorrect, could cause the
results of the Company to differ materially from those expressed or implied by
such forward-looking statements.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context and for the
purposes of this report only, references in this report to:
-
China Valves, the Company, we, us and our are to the
combined business of China Valves Technology, Inc., a Nevada corporation, and
its direct and indirect subsidiaries;
-
China Valves Holdings are to our wholly-owned direct
subsidiary China Valves Technology Holdings Limited, a Hong Kong company;
-
Changsha Valve are to our wholly-owned indirect subsidiary
China Valves Technology (Changsha) Valve Co., Ltd., a PRC company;
-
Hanwei Valve are to our wholly-owned indirect subsidiary
Shanghai Pudong Hanwei Valve Co., Ltd., a PRC company;
-
Kaifeng Valve are to our wholly-owned indirect subsidiary
Henan Kaifeng High Pressure Valve Co., Ltd., a PRC company;
-
Taide Valve are to our wholly-owned indirect subsidiary
TaizhouTaide Valve Co., Ltd., a PRC company;
-
ZD Valve are to our wholly-owned indirect subsidiary
Zhengzhou City ZD Valve Co., Ltd., a PRC company;
-
Yangzhou Rock are to our wholly-owned indirect subsidiary
Yangzhou Rock Valve Lock Technology Co., Ltd., a PRC company;
-
Henan Tonghai Fluid are to our wholly-owned indirect
subsidiary Henan Tonghai Fluid Equipment Co., Ltd., a PRC company;
-
Hong Kong are to the Hong Kong Special Administrative Region
of the Peoples Republic of China;
-
PRC and China are to the Peoples Republic of
China;
-
SEC are to the Securities and Exchange Commission;
-
Securities Act are to the Securities Act of 1933, as
amended;
-
Exchange Act are to the Securities Exchange Act of 1934, as
amended;
-
Renminbi and RMB are to the legal currency of China; and
-
U.S. dollars, dollars and $ are to the legal
currency of the United States.
24
Overview of Our Business
China Valves Technology, Inc. is a leading developer,
manufacturer and after market service provider of comprehensive flow management
products and services in China. Our flow service solutions help customers solve
problems in critical industries around the world.
As a recognized leader in supplying valves, actuators, forging
and castings, valve locks and related services, we supply global infrastructure
industries, including nuclear power, fossil power, hydropower, oil and gas,
chemical and petrochemical, water treatment, mining and metal, as well as
general industrial markets where our products and services add value. With
approximately 2,000 employees in China and more than 50 distributors in more
than 30 cities, we provide the most convenient services with a local presence.
China Valves has evolved through organic growth and strategic
acquisitions. The Company was created in 2007 with the merger of two leading
fluid motion and control companies - ZD Valve and Kaifeng Valve. We continually
evaluate acquisitions and other strategic investment opportunities to broaden
our product portfolio, service capabilities, geographic presence or operational
capabilities to meet the growing needs of our customers. We now have six
wholly-owned operating subsidiaries, six heritage brands and a comprehensive
product line including over 800 models and 10,000 series.
Our principal executive offices are located at 21F Kineer
Plaza, 226 Jinshui Road, Zhengzhou, Henan Province, the Peoples Republic of
China, 475002. Our corporate telephone number is (86) 371-8612-7222. We maintain
a website at http://www.cvalve.com that contains information about our company,
but that information is not part of this report.
Second Quarter Financial Performance Highlights
We experienced decreased demand for our products and
services during the three months period ended March 31, 2012, and for the
six months period ended March 31, 2012, which resulted in a decrease in our sales and net
income. The following are some financial highlights for the three months period
ended March 31, 2012:
-
Sales
: Sales decreased $3.6 million, or 8.4%, to
$38.4 million for the three months ended March 31, 2012, from $42.0 million for
the same period in 2011;
-
Gross profit
: Gross profit decreased $3.4
million, or 19.6%, to $14.1 million for the three months ended March 31, 2012,
from $17.5 million for the same period in 2011.
-
Income from operations
: Income from operations
decreased $5.8 million, or 63.2%, to $3.4 million for the three months ended
March 31, 2012, from $9.2 million for the same period in 2011.
-
Net income
: Net income decreased $5.8 million, or
76.6%, to $1.8 million for the three months ended March 31, 2012, from $7.6
million for the same period in 2011.
-
Fully diluted net income per share
: Fully diluted
net income per share was $0.05 for the three months ended March 31, 2012, as
compared to $0.21 for the same period in 2011.
The following are some financial highlights for the six months
period ended March 31, 2012:
-
Sales
: Sales decreased $0.2 million, or 0.2%, to
$94.1 million for the six months ended March 31, 2012, from $94.3 million for
the same period in 2011.
-
Gross profit
: Gross
profit decreased $1.6 million, or 4.4%, to $34.4 million for the six months
ended March 31, 2012, from $36.0 million for the same period in 2011.
-
Income from operations
: Income from operations
decreased $3.4 million, or 19.5%, to $13.9 million for the six months ended
March 31, 2012, from $17.3 million for the same period in 2011.
-
Net income
: Net income decreased $4.0 million, or
28.7%, to $10.0 million for the six months ended March 31, 2012, from
$14.0 million for the same period in 2011.
-
Fully diluted net income per share
: Fully diluted
net income per share was $0.28 for the six months ended March 31, 2012, as
compared to $0.40 for the same period in 2011.
Our results of operations in the second fiscal quarter of 2012,
as compared to the same period in fiscal 2011, was materially impacted by 1) less demand from larger customers due to their project
process and 2) higher accounts receivable allowance accrued due to our
managements assessment of accounts receivable collectability.
25
Results of Operations
Comparison of Three Months Ended March 31, 2012 and
2011
The following table sets forth key components of our results of
operations for the periods indicated.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
Sales
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
TOTAL SALES
|
$
|
38,413
|
|
|
100.0
|
|
$
|
41,954
|
|
|
100.0
|
|
COST OF SALES
|
|
(24,339
|
)
|
|
(63.4
|
)
|
|
(24,450
|
)
|
|
(58.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
14,074
|
|
|
36.6
|
|
|
17,504
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
(2,604
|
)
|
|
(6.8
|
)
|
|
(2,295
|
)
|
|
(5.5
|
)
|
General and administrative
|
|
(7,925
|
)
|
|
(20.6
|
)
|
|
(5,964
|
)
|
|
(14.2
|
)
|
Research and development
|
|
(162
|
)
|
|
(0.4
|
)
|
|
(59
|
)
|
|
(0.1
|
)
|
Total operating expenses
|
|
(10,691
|
)
|
|
(27.8
|
)
|
|
(8,318
|
)
|
|
(19.8
|
)
|
INCOME FROM OPERATIONS
|
|
3,383
|
|
|
8.8
|
|
|
9,186
|
|
|
21.9
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
232
|
|
|
0.6
|
|
|
(3
|
)
|
|
(0.0
|
)
|
Interest and finance expense, net
|
|
(122
|
)
|
|
(0.3
|
)
|
|
(58
|
)
|
|
(0.1
|
)
|
Change in fair value of warrant liabilities
|
|
-
|
|
|
-
|
|
|
912
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
110
|
|
|
0.3
|
|
|
851
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
3,493
|
|
|
9.1
|
|
|
10,037
|
|
|
23.9
|
|
PROVISION FOR INCOME TAXES
|
|
(1,722
|
)
|
|
(4.5
|
)
|
|
(2,468
|
)
|
|
(5.9
|
)
|
NET INCOME
|
$
|
1,771
|
|
|
4.6
|
|
$
|
7,569
|
|
|
18.0
|
|
Sales
. Our sales revenue for the three months
ended March 31 2012 amounted to $38.4 million, which is approximately $3.6
million, or 8.4%, less than that of the same period in 2011, when we had revenue
of $42.0 million. The decrease was primarily attributable to fewer orders from
our large customers as a result of their lowered budget and delays in projects.
The following tables set forth our sales by valve types, in
terms of sales revenues for the three months ended March 31, 2012 and 2011.
|
|
Three Months Ended March 31,
|
|
(All amounts in thousands of U.S. dollars)
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Gate valves
|
$
|
6,137
|
|
$
|
8,830
|
|
Check valves
|
|
1,104
|
|
|
1,987
|
|
Globe valves
|
|
1,185
|
|
|
1,558
|
|
Safety valves
|
|
219
|
|
|
524
|
|
Butterfly valves
|
|
19,803
|
|
|
17,413
|
|
Ball valves
|
|
5,487
|
|
|
7,553
|
|
Vent valves
|
|
256
|
|
|
32
|
|
Other valves and accessories
|
|
4,222
|
|
|
4,057
|
|
Total sales revenue
|
|
38,413
|
|
|
41,954
|
|
The China Valve Industry Association divides the valve market
into five primary segments; (i) power; (ii) petrochemical and oil; (iii) water
supply; (iv) metallurgy; and (v) other. Our revenues in these markets are as
follows:
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
(All amounts in thousands of U.S. dollars)
|
|
(Unaudited)
|
|
Power Supply
|
$
|
7,282
|
|
$
|
12,646
|
|
Petrochemical and Oil
|
|
9,986
|
|
|
13,945
|
|
Water Supply
|
|
5,874
|
|
|
8,059
|
|
Metallurgy
|
|
1,551
|
|
|
1,608
|
|
Other
|
|
13,720
|
|
|
5,696
|
|
Total sales revenue
|
$
|
38,413
|
|
$
|
41,954
|
|
Cost of sales
. Cost of sales, which consists of
raw materials, direct labor and manufacturing overhead expenses, was $24.3
million for the three month period ended March 31, 2012, a decrease of $0.2
million, or 0.5%, as compared with $24.5 million for the same period in 2011.
Cost of sales as a percentage of total sales were 63.4% and 58.3% for the three
month periods ended on March 31, 2012 and 2011, respectively. The raw material
costs in the overall costs were approximately 82% and 81% for the three months
ended March 31, 2012 and 2011, respectively. Labor cost in the overall costs was
approximately 9% and 8% for the three months ended March 31, 2012 and 2011,
respectively. The decrease in our cost of sales in the three months ended March
31, 2012 was consistent with our decrease in sales revenue during the same
period.
Gross profit and gross margin.
Gross profit was
$14.1 million for the three months ended March 31, 2012, a decrease of $3.4
million, or 19.6%, as compared with $17.5 million for the three months ended
March 31, 2011. Our gross profit margin decreased to 36.6% as compared to 41.7%
in the same period of 2011. The decrease in gross margin was mainly attributed
to higher labor and raw material costs which resulted in lower overall gross
profit percentage. Furthermore, during the period the Company sold more medium
to low price pressure valves, which generally have lower selling prices and
lower gross profit margin.
Operating expenses
. Our total operating expenses
increased by $2.4 million, or 28.5%, to $10.7 million for the three months ended
March 31, 2012, from $8.3 million for the same period in 2011. The increase was
primarily attributable to a 32.9% increase in our general and administrative
expenses during the 2012 period. The reasons for the increase are elaborated
below. Total expenses as a percentage of sales increased to 27.8% for the three
months ended March 31, 2012 from 19.8% for the same period in 2011.
Selling expenses
. Selling expenses, which consist
primarily of sales commission, advertising and marketing expenses, freight
charges and related compensation, were $2.6 million for the three month period
ended March 31, 2012, compared with $2.3 million for the three month period ended March 31,
2011, an increase of $0.3 million, or approximately 13.5%. The increase in our
selling expenses in the three months ended March 31, 2012 resulted from higher
marketing expenses during the period.
General and administrative expenses
. Our general
and administrative expenses consist primarily of stock compensation expenses,
related salaries and benefits, business development, traveling expenses, legal
and professional expenses, depreciation, and bad debt expenses. The general and
administrative expenses were $7.9 million for the three month period ended March
31, 2012, compared with $6.0 million for the period ended March 31, 2011, an
increase of $1.9 million, or approximately 32.9% . The increase was mainly
caused by an increase of allowance in accounts receivables of $3.5 million as
compared with $1.2 million in the same period in 2011. Our management periodically
reviewed accounts receivable balances and based on our assessment of the
historical bad debt rate on individual customer receivable balances and aging,
customers financial conditions, project status in which our valves are used, retainage and current economic trends. Generally we consider a trade receivable
as a doubtful account if it remains uncollected for more than one year from the due date or as specific events
occurred to our customers which may require us to reserve allowance even if the
trade balance is less than one year. Due to the specificities of our industry,
collectability of accounts receivable with aging more than one year was assessed
case by case. Before our customers projects in which our valves installed are
completed and/or the corresponding retainage is due, the customers receivable
with aging more than one year is generally considered to be recoverable.
26
Further, our allowance for doubtful debts accounted for an
insignificant portion of the receivable balance in spite of the increasing trade
receivable balance throughout the reporting periods. Many of our customers with
whom we have long-term business relationships have good settlement histories. In
the absence of significant bad debt experience, we consider the existing policy
adequate.
Based on individual collectability assessment including aging
analysis, customer visit and interviews and background research, and historical
rate of bad debt write-off by aging, a $3.5 million of allowance has been
reserved against the Companys accounts receivable for the three months ended
March 31, 2012.
Income from Operations
. Income from operations
was $3.4 million for the three months ended March 31, 2012, compared with $9.2
million for the period ended March 31, 2011. The decrease was primarily
attributable to more allowance in accounts receivable being accrued in the second
quarter of 2012.
Income taxes
. We incurred income tax expenses of
$1.7 million for the three months ended March 31, 2012. This is a decrease of
$0.8 million, or 30.2%, from the taxes we incurred for the same period in 2011,
which was $2.5 million. The decrease was primarily due to lower profits in
the current quarter. Our effective tax rate was 49.3% for the three months ended
March 31, 2012, compared with 24.5% for the same quarter in 2011. The increase
was mainly due to the accounts receivable allowance accrued which cannot be
deductible according to PRC tax law.
Net income
.
As a result of the foregoing
factors, our net income decreased by $5.8 million, or 76.6%, to $1.8 million for
the three-month period ended March 31, 2012, from $7.6 million for the same
period in 2011. Net income as a percentage of sales was 4.6% and 18.0% for the
three month periods ended March 31, 2012 and 2011, respectively. The decrease
was mainly attributable to the account receivable allowance accrued.
Comparison of Six Months Ended March 31, 2012 and
2011
The following table sets forth key components of our results of
operations for the periods indicated.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
Sales
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
TOTAL SALES
|
$
|
94,132
|
|
|
100.0
|
|
$
|
94,283
|
|
|
100.0
|
|
COST OF SALES
|
|
(59,773
|
)
|
|
(63.5
|
)
|
|
(58,333
|
)
|
|
(61.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
34,359
|
|
|
36.5
|
|
|
35,950
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
(6,381
|
)
|
|
(6.8
|
)
|
|
(6,058
|
)
|
|
(6.4
|
)
|
General and administrative
|
|
(13,796
|
)
|
|
(14.7
|
)
|
|
(12,498
|
)
|
|
(13.3
|
)
|
Research and development
|
|
(269
|
)
|
|
(0.3
|
)
|
|
(106
|
)
|
|
(0.1
|
)
|
Total operating expenses
|
|
(20,446
|
)
|
|
(21.7
|
)
|
|
(18,662
|
)
|
|
(19.8
|
)
|
INCOME FROM OPERATIONS
|
|
13,913
|
|
|
14.8
|
|
|
17,288
|
|
|
18.3
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
373
|
|
|
0.4
|
|
|
176
|
|
|
0.2
|
|
Interest and finance expense, net
|
|
(213
|
)
|
|
(0.2
|
)
|
|
(76
|
)
|
|
(0.1
|
)
|
Gain from acquisition
|
|
-
|
|
|
-
|
|
|
2,699
|
|
|
2.9
|
|
Change in fair value of warrant liabilities
|
|
-
|
|
|
-
|
|
|
389
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
160
|
|
|
0.2
|
|
|
3,188
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
14,073
|
|
|
15.0
|
|
|
20,476
|
|
|
21.7
|
|
PROVISION FOR INCOME TAXES
|
|
(4,103
|
)
|
|
(4.4
|
)
|
|
(6,498
|
)
|
|
(6.9
|
)
|
NET INCOME
|
$
|
9,970
|
|
|
10.6
|
|
$
|
13,978
|
|
|
14.8
|
|
Sales
. Our sales revenue for the six months ended
March 31 2012 amounted to $94.1 million, which is approximately $0.2 million, or
0.2%, less than that of the same period in 2011, when we had revenue of $94.3
million. The slight decrease is primarily attributed to lower demand from large customers
due to the customer project process and macro economic slowdown.
The following tables set forth our sales by valve types, in
terms of sales revenues for the six months ended March 31, 2012 and 2011.
|
|
Six Months Ended March 31,
|
|
(All amounts in thousands of U.S. dollars)
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
Gate valves
|
$
|
16,757
|
|
$
|
20,193
|
|
Check valves
|
|
3,611
|
|
|
4,793
|
|
Globe valves
|
|
3,779
|
|
|
3,949
|
|
Safety valves
|
|
1,030
|
|
|
1,292
|
|
Butterfly valves
|
|
41,135
|
|
|
36,643
|
|
Ball valves
|
|
14,423
|
|
|
15,964
|
|
Vent valves
|
|
530
|
|
|
101
|
|
Other valves and accessories
|
|
12,867
|
|
|
11,348
|
|
Total sales revenue
|
|
94,132
|
|
|
94,283
|
|
The China Valve Industry Association divides the valve market
into five primary segments; (i) power; (ii) petrochemical and oil; (iii) water
supply; (iv) metallurgy; and (v) other. Our revenues in these markets are as
follows:
|
|
Six Months Ended March
31,
|
|
|
|
2012
|
|
|
2011
|
|
(All amounts in thousands of U.S. dollars)
|
|
(Unaudited)
|
|
Power Supply
|
$
|
20,307
|
|
$
|
25,811
|
|
Petrochemical and Oil
|
|
31,024
|
|
|
32,234
|
|
Water Supply
|
|
13,402
|
|
|
17,137
|
|
Metallurgy
|
|
4,944
|
|
|
4,371
|
|
Other
|
|
24,455
|
|
|
14,730
|
|
Total sales revenue
|
$
|
94,132
|
|
$
|
94,283
|
|
Cost of sales
. Cost of sales, which consists of
raw materials, direct labor and manufacturing overhead expenses, was $59.8
million for the six months ended March 31, 2012, an increase of $1.5 million, or
2.5%, as compared with $58.3 million for the same period in 2011. Cost of sales
as a percentage of total sales were 63.5% and 61.9% for the six months ended on
March 31, 2012 and 2011, respectively. The raw material costs in the overall
costs were approximately 80% and 81% for the six months ended March 31, 2012 and
2011, respectively. Labor cost in the overall costs was approximately 10% and 8%
for the six months ended March 31, 2012 and 2011, respectively. The increase in
our cost of sales in the six months ended March 31, 2012 was caused by the
increase in labor and raw material costs.
Gross profit and gross margin
. Gross profit was
$34.4 million for the six months ended March 31, 2012, a decrease of $1.6
million, or 4.4%, as compared with $36.0 million for the six months ended March
31, 2011. Our gross profit margin decreased to 36.5% as compared to 38.1% in the
same period of 2011. The decrease in gross margin was mainly because the higher
labor and raw material costs resulted in lower overall gross profit percentage.
Furthermore, during the period the Company sold more medium to low price
pressure valves, which generally have lower selling prices, which also
contributed to the decrease in gross profit percentage.
Operating expenses
. Our total operating expenses
increased by $1.7 million, or 9.6%, to $20.4 million for the six months ended
March 31, 2012, from $18.7 million for the same period in 2011. The increase was
primarily attributable to a 14.7% increase in our general and administrative
expenses during the 2012 period. The reasons for the increase are elaborated
below. Total expenses as a percentage of sales increased to 21.7% for the six
months ended March 31, 2012 from 19.8% for the same period in 2011.
Selling expenses
. Selling expenses, which consist
primarily of sales commission, advertising and promotion expenses, freight
charges and related compensation, were $6.4 million for the six month period
ended March 31, 2012, compared with $6.1 million for the period ended March 31,
2011, an increase of $0.3 million, or approximately 5.3%. The increase in our
selling expenses in the six months ended March 31, 2012, was caused by higher
promotional expenses during the period.
General and administrative expenses
. Our general
and administrative expenses consist primarily of stock compensation expenses,
related salaries and benefits, business development, traveling expenses, legal
and professional expenses, depreciation, and bad debt expenses. The general and
administrative expenses were $13.8 million for the six months ended March 31,
2012, compared with $12.5 million for the period ended March 31, 2011, an
increase of $1.3 million, or approximately 10.4% . The increase was mainly
caused by the allowance in accounts receivable accrued by $4.0 million,
compared with $1.1 million in the same period in 2011. Management periodically
reviewed accounts receivable balances and based on its assessment of the
historical bad debt rate on individual customer receivable balances and aging,
customers financial conditions, project status in which our valves are used, retainage and current economic trends. Generally we consider a trade receivable
as a doubtful account if it remains uncollected for more than one year from the
due date or as specific events occurred to our customers which may require us to
reserve allowance even if the trade balance is less than one year. Due to the
specificities of our industry, collectability of accounts receivable with aging
more than one year was assessed case by case. Before our customers projects in
which our valves installed are completed and/or the corresponding retainage is
due, the customers receivable with aging more than one year is generally
considered to be recoverable.
Further, our allowance for doubtful debts accounted for an
insignificant portion of the receivable balance in spite of the increasing trade
receivable balance throughout the reporting periods. Many of our customers with
whom we have long-term business relationships have good settlement histories. In
the absence of significant bad debt experience, we consider the existing policy
as adequate.
Based on individual collectability assessment including aging
analysis, customer visit and interviews, and background research, and the
historical rate of bad debt write-off by aging, a $4.0 million allowance was
reserved against their accounts receivable for the six months ended March 31,
2012.
Income from Operations
. Income from operations
was $13.9 million for the six month period ended March 31, 2012, compared with
$17.3 million for the period ended March 31, 2011. The decrease was primarily
attributable to the increase in bad debt expenses.
Income taxes
. We incurred income tax expense of
$4.1 million for the six months ended March 31, 2012. This is a decrease of $2.4
million, or 36.9%, from the taxes we incurred for the same period in 2011, which
was $6.5 million. The decrease was primarily due to lower taxable income
resulting from lower non-deductible expenses. Our effective tax rate was 29.2%
for the six-month period ended March 31, 2012, compared with 31.7% for the same
quarter in 2011. The decrease was mainly due to the decrease of the income tax
rate of ZD Valve from 25% to 15% as a High-Tech Company of PRC in the year of
2011and the lower non-deductible expenses.
Net income
.
As a result of the foregoing
factors, our net income decreased by $4.0 million, or 28.7%, to $10.0 million
for the six months ended March 31, 2012, from $14.0 million for the same period
in 2011. Net income as a percentage of sales was 10.6% and 14.8% for the six
months ended March 31, 2012 and 2011, respectively. The decrease was mainly
caused by an increase in bad debts expenses of $4.0 million.
Liquidity and Capital Resources
We have financed our operations primarily through cash flows
from operations, augmented by short-term bank borrowings and equity
contributions by our shareholders. As of March 31, 2012, we had cash and cash
equivalents of $11.1million. The following table sets forth a summary of our
cash flows for the periods indicated:
27
Cash Flow
(all amounts in thousands of U.S. dollars)
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net cash (used in) provided by operating
activities
|
$
|
(10,559
|
)
|
$
|
(10,425
|
)
|
Net cash used in investing activities
|
|
(243
|
)
|
|
(633
|
)
|
Net cash (used in) provided by financing activities
|
|
328
|
|
|
9,383
|
|
Effect of foreign currency translation
|
|
156
|
|
|
56
|
|
Net decrease in cash and cash
equivalents
|
|
(10,318
|
)
|
|
(1,619
|
)
|
Cash and cash equivalents at beginning of the period
|
|
21,379
|
|
|
25,821
|
|
Cash and cash equivalent at end of the
period
|
$
|
11,061
|
|
$
|
24,202
|
|
Operating Activities
Net cash used in operating activities was $10.6 million for the
three months ended March 31, 2012, compared with net cash used in operating
activities of $10.4 million for the same period in 2011. The decrease was
primarily attributable to the increase in accounts receivable.
Investing Activities
Net cash used in investing activities was $0.2 million for the
three months ended March 31, 2012, compared with $0.6 million for the same
period in 2011.The net cash used in investing activities during the period ended
March 31, 2012 was primarily used for the purchase of equipment, software and
payments made for construction in progress.
Financing Activities
Net cash provided by financing activities was $0.3 million in
the three months ended March 31, 2012, compared with $9.4 million provided by
financing activities in the same
period in 2011, as we paid a $1.9 million deposit for notes payables during
period.
Capital Expenditures
The capital expenditures in the three months ended March 31,
2012 and 2011 are set out as below. Our capital expenditures were used primarily
for plant construction and the purchase of equipment to expand our production
capacity. The table below sets forth the breakdown of our capital expenditures
by use for the periods indicated.
(All amounts in thousands of U.S. dollars)
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)-
|
|
|
(Unaudited)
|
|
Acquisition of intangible assets
|
$
|
(156
|
)
|
$
|
(17
|
)
|
Purchase of equipment
|
|
(112
|
)
|
|
(217
|
)
|
Construction costs
|
|
-
|
|
|
(316
|
)
|
Advance on equipment purchases
|
|
-
|
|
|
(83
|
)
|
Total capital expenditures
|
$
|
(268
|
)
|
$
|
(633
|
)
|
28
Cash Flow
(all amounts in thousands of U.S. dollars)
|
|
Six Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net cash (used in) provided by operating
activities
|
$
|
(18,552
|
)
|
$
|
3,924
|
|
Net cash used in investing activities
|
|
(1,095
|
)
|
|
(1,492
|
)
|
Net cash provided by financing activities
|
|
2,445
|
|
|
12,868
|
|
Effect of foreign currency translation
|
|
186
|
|
|
515
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(17,016
|
)
|
|
15,815
|
|
Cash and cash equivalents at beginning of the period
|
|
28,077
|
|
|
8,388
|
|
Cash and cash equivalent at end of the
period
|
$
|
11,061
|
|
$
|
24,202
|
|
Operating Activities
Net cash used in by operating activities was $18.6 million in the
six months ended March 31, 2012, compared with net cash provided by operating
activities of $3.9 million for the same period in 2011. The decrease was
primarily attributable to the increase in accounts receivable.
Investing Activities
Net cash used in investing activities was $1.1 million in the
six months ended March 31, 2012, compared with $1.5 million in the six months
ended March 31, 2011. The net cash used in investing activities during the
period ended March 31, 2012 was primarily used for the purchase of equipment,
software and payments made for construction in progress.
Financing Activities
Net cash provided by financing activities was $2.4 million in
the six months ended March 31, 2012, compared with $12.9 million in the same
period in 2011, as we received less net proceeds from short term notes payables
since the Companys cash could meet the operating needs and paid the deposit for
notes payables.
Capital Expenditures
The capital expenditures in the six months ended March 31, 2012
and 2011 are set out as below. Our capital expenditures were used primarily for
plant construction and the purchase of equipment to expand our production
capacity. The table below sets forth the breakdown of our capital expenditures
by use for the periods indicated.
(All amounts in thousands of U.S. dollars)
|
|
Six Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Acquisition of intangible assets
|
$
|
(209
|
)
|
$
|
(369
|
)
|
Purchase of equipment
|
|
(947
|
)
|
|
(724
|
)
|
Construction costs
|
|
-
|
|
|
(316
|
)
|
Advance on equipment purchases
|
|
-
|
|
|
(83
|
)
|
Total capital expenditures
|
$
|
(1,156
|
)
|
$
|
(1,492
|
)
|
We believe that our current available working capital and bank
loans should be adequate to sustain our operations at our current levels through
at least the next twelve months.
Obligations under Material Contracts
Below is a table setting forth our contractual obligations as
of March 31, 2012:
(All amounts in thousands of U.S. dollars)
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Operating lease obligations
|
$
|
717
|
|
$
|
260
|
|
$
|
450
|
|
$
|
7
|
|
$
|
-
|
|
Seasonality of our Sales
Our operating results and operating cash flows historically
have not been subject to seasonal variations. This pattern may change, however,
as a result of new market opportunities or new product introductions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to our investors.
Critical Accounting Policies and Estimates
Critical accounting policies are those we believe are most
important to portraying our financial conditions and results of operations and
also require the greatest amount of subjective or complex judgments by
management. Judgments and uncertainties regarding the application of these
policies may result in materially different amounts being reported under various
conditions or using different assumptions. There have been no material changes
to the critical accounting policies previously disclosed in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2011.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial
statements included elsewhere in this report.
29
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Our operations are carried out in the PRC and we are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. Accordingly, our business,
financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC economy. Our results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to
our short-term bank loans. Although the interest rates, which are based on the
banks prime rates with respect to our short-term loans, are fixed for the terms
of the loans, the terms are typically three to twelve months for short-term bank
loans and interest rates are subject to change upon renewal. There were no
material changes in interest rates for short-term bank loans renewed during the
three and six months ended March 31, 2012.
A hypothetical 1.0% increase in the annual interest rates for
all of our credit facilities under which we had outstanding borrowings as of
March 31, 2012 would decrease net income before provision for income taxes by
approximately $0.03 million and $0.06 million for the three and six months ended
March 31, 2012. Management monitors the banks prime rates in conjunction with
our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds. We have not entered into any hedging
transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S. Dollar, all of our
consolidated revenues and consolidated costs and majority of expenses are
denominated in RMB. All of our assets are denominated in RMB, except certain
cash balances. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. Dollars and RMB. If RMB depreciates against the U.S.
Dollar, the value of our RMB revenues, earnings and assets as expressed in our
U.S. Dollar financial statements will decline. Assets and liabilities are
translated at exchange rates at the balance sheet dates and revenue and expenses
are translated at the average exchange rates and shareholders equity is
translated at historical exchange rates. Any resulting translation adjustments
are not included in determining net income but are included in determining other
comprehensive income, a component of stockholders equity. We have not entered
into any hedging transactions in an effort to reduce our exposure to foreign
exchange risk.
The value of the RMB against the U.S. dollar and other
currencies is affected by, among other things, changes in Chinas political and
economic conditions. Since July 2005, the RMB has not been pegged to the U.S.
dollar. Although the Peoples Bank of China is regularly involved in the foreign
exchange market to prevent significant short-term fluctuations in the exchange
rate, the RMB may appreciate or depreciate significantly in value against the
U.S. dollar or Euro in the medium to long term. Moreover, it is possible that in
the future, PRC authorities may lift restrictions on fluctuations in the RMB
exchange rate and lessen involvement in the foreign exchange market.
Account Balances
We maintain balances at financial institutions which, from time
to time, may exceed Federal Deposit Insurance Corporation insured limits for the
banks located in the United States or may exceed Hong Kong Deposit Protection
Board insured limits for the banks located in Hong Kong. Balances at financial
institutions or state-owned banks within the PRC are not covered by insurance.
Total cash in banks and restricted cash as of March 31, 2012 and September 30,
2011 amounted to $15,049,854 and $29, 508, 367, respectively, all of which are
not covered by insurance. We have not experienced any losses in such accounts
and we do not believe that we are exposed to any significant risks on our cash
in bank accounts.
Inflation
Inflationary factors such as increases in the cost of our sales
and overhead costs may adversely affect our operating results. Although we do
not believe that inflation has had a material impact on our financial position
or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin
and selling, general and administrative expenses as a percentage of net sales if
the selling prices of our products do not increase with these increased costs.
ITEM 4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer
to controls and other procedures designed to ensure that information required to
be disclosed in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC 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.
As required by Rule 13a-15(e), our management has carried out
an evaluation, with the participation and under the supervision of our Chief
Executive Officer, Mr. Jianbao Wang and our Chief Financial Officer, Mr. Gang
Wei, of the effectiveness of the design and operation of our disclosure controls
and procedures, as of March 31, 2012. Based upon, and as of the date of this
evaluation, Mr. Wang and Wei, determined that, because of the material
weaknesses described in Item 9A Controls and Procedures of our Annual Report
on Form 10-K for the year ended September 30, 2011, which we are still in the
process of remediating as of March 31, 2012, our disclosure controls and
procedures were not effective. Investors are directed to Item 9A of our Annual
Report on Form 10-K for the year ended September 30, 2011 for the description of
these weaknesses.
During the quarter, the Company made following progress to
improve internal controls.
(a) Hired a third party to help the Company to improve
disclosure controls and procedures; and
(b) Strengthened the internal audit
function by hired qualified personnel.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over
financial reporting and make changes to our processes and systems to improve
controls and increase efficiency, while ensuring that we maintain an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems, consolidating activities, and
migrating processes.
There were no changes in our internal controls over financial
reporting during the second quarter of fiscal 2012 that have materially
affected, or are reasonably likely to materially affect, our financial
reporting.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 4, 2011, a plaintiff filed a purported class action
naming the Company, its Chairman and certain present and former senior
executives as defendants, asserting claims for certain violations of the
securities laws and seeking unspecified damages. The complaint, which was styled
Donald Foster, et al. v. China Valves Technology, Inc., et al., was filed in the
U.S. District Court for the Southern District of New York. Several substantially
identical complaints were subsequently filed in the same court. On or about June
29, 2011, the Court consolidated the three cases referenced above and appointed
Bristol Investment Fund, LTD (Bristol) as lead plaintiff. In the consolidation
order the Court renamed the case In re China Valves Technology Securities
Litigation. On August 29, 2011, Bristol filed a consolidated class action
complaint, which named additional defendants including an individual shareholder
of the Company and the Companys auditor.
The consolidated complaint purports to assert claims on behalf
of a purported class of persons and entities who purchased shares of the
Companys common stock at allegedly artificially high prices during the period
between December 1, 2009 and January 13, 2011 and who suffered damages as a
result of such purchases. The allegations in the consolidated complaint relate
to the Companys acquisitions of Able Delight and Hanwei Valves and include
allegations regarding the Companys financial statements and press releases. The
complaint alleges, among other things, that the Companys statements about the
nature and quality of the Companys acquisition of Able Delight were materially
false and misleading and that the Companys statements failed to describe the
role in the transaction of an alleged related party. In addition, the complaint
alleges that the Companys statements about the Hanwei Valves acquisition were
materially false and misleading because they failed to disclose the alleged
involvement of certain related parties and allegedly misdescribed the
transaction as a purchase of assets rather than as a purchase of an entity. The
Company intends to contest the allegations and to defend itself vigorously.
On September 14, 2011, a plaintiff filed an action,
derivatively and on behalf of the Company, naming its Chairman and certain
senior executives as defendants, and naming the Company as a nominal defendant.
The complaint, which is styled Gervat v. Fang et al., was filed in the U.S.
District Court for the Southern District of New York, and asserts claims for
breach of fiduciary duty, gross mismanagement, and other common law claims, and
seeks unspecified damages. On October 11, 2011, the plaintiff filed an Amended
Complaint with substantially similar claims. The parties have stipulated to a
scheduling order that would stay all proceedings in the derivative action
pending resolution by the Court of the defendants motion to dismiss the class
action consolidated complaint.
The Company and the individual defendants filed a motion to
dismiss the consolidated complaint in the class action on November 21, 2011. The
briefing on the motion to dismiss is complete, and the parties are waiting for
the Court either to set a hearing date for oral argument on the motion or to
rule on the motion. Discovery continues to be stayed pending resolution of the
motion.
31
ITEM 1A.RISK FACTORS.
There are no material changes from the risk factors previously
disclosed in Item 1A Risk Factors of our Annual Report on Form 10-K for the
year ended September 30, 2011.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. REMOVED AND RESERVED.
None
.
ITEM 5.OTHER INFORMATION.
We have no information to disclose that was required to be in a
report on Form 8-K during the period covered by this report, but was not
reported. There have been no material changes to the procedures by which
security holders may recommend nominees to our board of directors.
ITEM 6.EXHIBITS.
The following exhibits are filed as part of this report or
incorporated by reference:
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: May 10, 2012
CHINA VALVES TECHNOLOGY,
INC.
|
|
|
By:
|
/s/ Jianbao
Wang
|
|
Jianbao Wang, Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
By:
|
/s/ Gang
Wei
|
|
Gang Wei, Chief Financial Officer
|
|
(Principal Financial Officer and
Principal
Accounting Officer)
|
33
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