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| WUHN > SEC Filings for WUHN > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Overview
As a result of the share exchange or "reverse acquisition" transaction consummated on February 7, 2007, the Company became a holding company conducting operations through three indirect operating subsidiaries: Wuhan Blower Wuhan Generating and Wuhan Xingelin Equipment, each a company operating in China. A wholly owned subsidiary of the Company, UFG, owns 100% of the capital stock of Wuhan Blower, which in turn owns 100% of the capital stock of Wuhan Generating. Wuhan Blower owns over 99% of the capital stock of Wuhan Xingelin Equipment.
For accounting purposes, the share exchange transaction is treated as a reverse acquisition with UFG as the acquirer and the Company as the acquired party. As a result, the Company is deemed to be a continuation of the business of UFG. Accordingly, the accompanying consolidated financial statements are those of the accounting acquirer (UFG). The historical stockholders' equity of the accounting acquirer prior to the share exchange has been retroactively restated as if the share exchange transaction occurred as of the beginning of the first period presented.
The information and data contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the operating results and financial condition for the years ended December 31, 2008 and 2007.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Sales. Sales increased $36.13 million, or 43.79%, to $118.63 million in 2008 from $82.50 million in 2007. This increase was mainly attributable to the increased demand for anti-pollution equipment in China and revenue from the construction of a thermal electric power plant in Jiangyin, Jiangsu.
Cost of Sales. Our cost of sales increased $27.01 million, or 47.04%, to $84.44 million in 2008 from $57.43 million in 2007. This increase was due to the significant increase in sales and higher cost of materials. As a percentage of sales, the cost of sales was 71.18% in 2008 compared to 69.61% in 2007. This increase was primarily attributable to the increase in the cost of materials.
Gross Profit. Our gross profit increased $9.12 million to $34.19 million in 2008 from $25.07 million in 2007. Gross profit as a percentage of sales was 28.82% in 2008 compared to 30.39% in 2007.
Selling Expenses. Our selling expenses increased $1.61 million, or 92.16%, to $3.35 million in 2008 compared to $1.74 million in 2007. As a percentage of sales, selling expenses were 2.82% in 2008 compared to 2.11% in 2007. This increase as a percentage of sales was primarily attributable to increased marketing efforts.
General and Administrative Expenses. Our general and administrative expenses increased $2.14 million, or 38.07%, to $7.75 million in 2008 from $5.62 million in 2007. As a percentage of sales, general and administrative expenses were 6.54% in 2008 compared to 6.81% in 2007. This decrease as a percentage of sales was primarily attributable to increased cost control efforts.
Operating Income. Our operating income increased $6.22 million, or 37.94%, to $22.62 million in 2008 from $16.40 million in 2007. As a percentage of sales, operating income was 19.07% in 2008 compared to 19.88% in 2007. This decrease was primarily attributable to increased cost of materials and increased marketing efforts.
Other Income. Our other income increased $944,581 to $986,678 in 2008 from $42,097 in 2007. As a percentage of sales, other income was 0.83% in 2008 compared to 0.05% in 2007.
Interest Expense. Our interest expense increased $0.67 million, or 50.63%, to $1.99 million in 2008 from $1.32 million in 2007. This increase was attributable to an increase in bank loans and bank notes to fund our significant growth. In addition, the average bank loan interest rate was higher in 2008 than in 2007.
Income Taxes. Due to a tax exemption, Wuhan Blower and Wuhan Generating were exempt from Chinese tax liability in 2008 and 2007. Wuhan Xingelin Equipment was in a loss position and consequently did not incur any tax liability.
Net Income. Net income increased $1.28 million, or 8.60%, to $16.15 million in 2008 from $14.87 million in 2007, as a result of the factors described above and a non-cash charge of $5.36 million.
Liquidity and Capital Resources
As of December 31, 2008, we had cash and cash equivalents (including restricted cash) of $16.00 million.
As of December 31, 2008, we had banking facilities in the form of bank loans and loan facilities from other non-bank entities totaling approximately $36.63 million. Information regarding these loans is set forth below in U.S. dollars.
Interest At At
Rate December December
Per 31, 31,
Subsidiary Type Name of Creditor Due Date Annum 2008 2007
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 5/20/2009 8.96 % $ 729,480 $ -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 5/22/2009 8.96 % 729,480 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 5/25/2009 8.96 % 729,480 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 5/27/2009 8.96 % 729,480 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 5/29/2009 8.96 % 729,480 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 6/4/2009 8.96 % 729,480 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 6/23/2009 8.96 % 583,584 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 8/26/2009 8.96 % 1,167,168 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 8/24/2009 8.96 % 1,167,168 -
subtotal 7,294,797 -
Wuhan Blower Notes Payable China Minsheng
Banking Corp.,
Ltd. 1/22/2009 1,458,959 -
Wuhan Blower Notes Payable Citic
Industrial Bank 3/27/2009 3,647,399 -
Wuhan Blower Notes Payable Industrial Bank
Co., Ltd. 2/28/2009 1,313,064 -
Wuhan Blower Notes Payable Industrial Bank
Co., Ltd. 3/2/2009 1,750,751 -
Wuhan Blower Notes Payable Industrial Bank
Co., Ltd. 2/28/2009 1,313,064 -
Wuhan Blower Notes Payable Shanghai Pudong
Development Bank 2/10/2009 579,760 -
Wuhan Blower Notes Payable Shanghai Pudong
Development Bank 2/18/2009 744,069 -
subtotal 10,807,067 -
Wuhan Generating Bank Loans Citic
Industrial Bank 3/2/2009 8.22 % 2,917,919 -
Wuhan Generating Bank Loans Shanghai Pudong
Development Bank 1/7/2009 7.47 % 1,458,959 -
subtotal 4,376,878 -
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Wuhan Generating Long Term Loan Bank of
Communications 12/23/2010 5.67 % 1,458,959 -
Wuhan Generating Notes Payable Bank of
Communications 6/26/2009 2,480,231 -
Wuhan Generating Notes Payable Bank of
Communications 1/15/2009 1,458,959 -
Wuhan Generating Notes Payable Bank of
Communications 1/16/2009 4,376,878 -
Wuhan Generating Notes Payable Bank of
Communications 6/24/2009 4,376,878 -
subtotal 12,692,947 -
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 10/23/2008 7.29 % - 2,734,444
Wuhan Blower Bank Loans Shanghai Pudong
Development Bank 12/9/2008 7.29 % - 1,367,222
Wuhan Blower Bank Loans Citic
Industrial Bank 9/19/2008 7.29 % - 3,418,056
Citic
Wuhan Blower Bank Loans Industrial Bank 3/28/2008 4.80 % - 6,143
Wuhan Blower Bank Loans Citic
Industrial Bank -
Auto Loan 3/10/2008 5.76 % - 2,428
Wuhan Blower Bank Loans Citic
Industrial Bank 2/17/2008 6.73 % - 2,734,444
Wuhan Blower Bank Loans Jiang Xia On Demand 6.00 % - 410,167
Wuhan Blower Bank Loans Bank of China 3/14/2008 6.83 % - 717,792
subtotal - 11,390,696
Wuhan Blower Notes Payable Hubei Gong Chuang 4/30/2008 - - 5,143,490
Wuhan Blower Notes Payable 98 Various Other
Notes - 3,395,145
subtotal - 8,538,635
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Wuhan Generating Bank Loans Shanghai Pudong
Development Bank 8/27/2008 7.02 % - 1,093,778
Wuhan Generating Bank Loans Shanghai Pudong
Development Bank 8/22/2008 7.02 % - 1,093,778
Wuhan Generating Bank Loans Shanghai Pudong
Development Bank 6/3/2008 6.57 % - 2,734,444
Wuhan Generating Bank Loans Shanghai Pudong
Development Bank 6/24/2008 6.57 % - 546,889
Wuhan Generating Bank Loans Shanghai Pudong
Development Bank 5/21/2008 6.57 % - 1,367,222
subtotal - 6,836,111
Wuhan Generating Notes Payable Shanghai Pudong
Development Bank 1/7/2008 - - 1,367,222
total $ 36,630,649 $ 28,132,664
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We plan to either repay this debt as it matures or refinance this debt with other debt. For the year ended December 31, 2008, the amount of our outstanding debt from bank loans and notes has increased $8.50 million. This significant increase in debt was necessary to fund the cost of our rapid growth.
On February 7, 2007, immediately following the consummation of the share exchange, we completed a private placement of Series A Preferred Stock and warrants to accredited investors. As a result of this private placement, we received approximately $24.0 million in gross proceeds. After the deduction of sales commissions and offering expenses, we received approximately $20.0 million in net proceeds.
On September 29, 2008, the Company raised approximately $11.8 million in gross proceeds from the exercise of a portion of the Company's Series J warrants. These warrant holders exercised the Series J warrants for 5,006,524 shares of the Company's Series B Preferred Stock, which is convertible on a one-to-one basis for the Company's common stock. The Company paid approximately $1.18 million in commissions in connection with these warrant exercises.
In October and November 2008, the Company raised approximately $3.03 million in gross proceeds from additional exercises of Series J warrants. These warrants were exercised for 1,302,554 shares of the Company's Series B Preferred Stock and the Company paid approximately $303,500 in commissions in connection with these warrant exercises.
The Company believes that its currently available working capital, combined with cash from operations, should be adequate to sustain operations at current levels through at least the next 12 months. In order to continue the pace of the Company's recent growth, the Company may need additional capital.
At December 31, 2008, we had $41.49 million in accounts receivable. The majority of our customers pay us in installments at various stages of project completion. The percentage of the purchase price due at the various stages varies somewhat between contracts. In our standard sales contract, we receive 60% of the purchase price of a piece of equipment at the time of delivery. Alternatively, some sales contracts provide for 30% due upon signing and 30% due upon delivery. We generally receive an additional 30% of the purchase price when the equipment is installed and runs without problem for 72 hours. However, since our equipment is generally a component of a larger project, there are times that customers do not allow us to install the equipment immediately upon delivery. We generally receive the final 10% at 18 months following the installation. Although the payment terms in our standard sales contract result in a long payment cycle, we believe our payment terms are typical in our industry in China. Nonetheless, we are seeking more aggressive payment schedules on new sales contracts in order to improve our liquidity position.
In 2008, we employed additional resources in collecting on outstanding accounts receivable. In 2008, our accounts receivable grew $9.61 million. During 2008, our sales grew $36.13 million. We believe that this demonstrates the benefits of more aggressive management of our accounts receivable.
For the year ended December 31, 2008, our accounts receivable increased $9.61 million, or 30.15%. Since our sales increased 43.79% for the year ended December 31, 2008 compared to the prior fiscal year, we believe the significant growth in accounts receivable during this period was primarily the result of our rapid sales growth. We further believe that a comparison of accounts receivable growth to sales growth for this period demonstrates our more aggressive management of accounts receivable during this period.
At December 31, 2008, we had $1.72 million in other receivables, compared to $1.98 million at December 31, 2007.
We also had advances to suppliers of $20.27 million at December 31, 2008, which increased by $7.53 million compared to the balance as of December 31, 2007. The increase was mainly due to some large payments made at the end of 2008 to some suppliers for electrical power generators and raw materials.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Method of Accounting: We maintain our general ledger and journals with the accrual method of accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies that we have adopted conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, UFG, Wuhan Blower, Wuhan Generating and Wuhan Xingelin Equipment. Inter-company transactions, such as sales, cost of sales, due to/due from balances, investment in subsidiaries, and subsidiaries' capitalization have been eliminated.
Economic and Political Risks: Our operations are conducted in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.
Use of Estimates: In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. These estimates and assumptions include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation of useful lives of property, plant and equipment. Actual results could differ from these estimates.
Cash and Cash Equivalents: We consider all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents. We maintain bank accounts in the PRC.
Accounts Receivable-Trade: Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when collection of the full amount is no longer probable. Pursuant to the Company's accounting policies, the allowance for doubtful accounts is determined by applying a rate of five percent on outstanding trade receivables. In addition, the Company uses a specific review process to determine if any additional allowances for doubtful accounts are required. Bad debts are charged against the allowance when outstanding trade receivables have been determined to be uncollectible.
Inventory: Inventory, consisting of raw materials, work in progress, and finished products, is stated at the lower of cost or market value. Finished products are comprised of direct materials, direct labor and an appropriate proportion of overhead.
Property, Plant, and Equipment: Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method with 5% salvage value. Estimated useful lives of the property, plant and equipment are as follows:
Buildings 30 years Machinery and Equipment 10 years Furniture and Fixtures 5 years Motor Vehicles 5 years
Intangible Assets: Intangible assets are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives of intangibles are as follows:
Technical Licenses 10 years Trademark 20 years
Land Use Rights: We carry land use rights at cost less accumulated amortization. Land use rights are amortized straight-line over the useful life of 50 years for the Wuhan Blower and Wuhan Generating campus and of 30 years for Wuhan Xingelin Equipment campus.
Accounting for Impairment of Long-Lived Assets: We adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. We periodically evaluate the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, we believe that, as of December 31, 2008 and 2007, there were no significant impairments of long-lived assets.
Revenue Recognition: Revenue from the sale of blower products and generating equipment is recognized at the time of the transfer of risks and rewards of ownership, which generally occurs when the goods are delivered to customers and the title passes. There are no customer acceptance clauses in the Company's standard sales contracts. Typically, installation begins between one to two weeks following delivery of the product. The installation process typically takes four to eight weeks.
Cost of Sales: Our cost of sales is comprised of raw materials, factory worker salaries and related benefits, machinery supplies, maintenance supplies, depreciation, utilities, inbound freight, purchasing and receiving costs, inspection and warehousing costs.
Selling Expenses: Selling expenses are comprised of outbound freight, salary for the sales force, client entertainment, commissions, depreciation, advertising, and travel and lodging expenses.
General & Administrative Expenses: General and administrative expenses include outside consulting services, research & development, executive compensation, quality control, and general overhead such as the finance department, administrative staff, and depreciation and amortization expense.
Advertising: We expense all advertising costs as incurred.
Research and Development: We expense all research and development costs as incurred.
Foreign Currency Translation: We maintain our financial statements in the functional currency, which is the Renminbi (RMB). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, the financial statements, which are prepared using the functional currency, have been translated into U.S. dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders' equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders' equity.
Exchange Rates December 31, 2008 December 31, 2007 Year-end RMB: US$ exchange rate 6.85420 7.3141 Average 12 month RMB: US$ exchange rate 6.96225 7.6172
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Income Taxes: We use the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. We have implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the U.S. and PRC tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain.
Effective January 1, 2008, PRC government implemented a new 25% tax rate across the board for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday which is defined as "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law of a standard 15% tax rate, tax holidays terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.
We are subject to U.S. income tax according to Internal Revenue Code Sections 951 and 957. Corporate income tax is imposed on progressive rates in the range of:
Taxable Income
Rate Over But Not Over Of Amount Over
15% 0 50,000 0
25% 50,000 75,000 50,000
34% 75,000 100,000 75,000
39% 100,000 335,000 100,000
. . .
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