ITEM 1. Business
Forward Looking Statements
As used in this report, unless otherwise indicated, the terms “we”, “our”, “us”, the “Company”, the “Registrant” and “Chisen” refer to Chisen Electric Corporation, a Nevada corporation. We conduct our business through our subsidiaries, which include our wholly-owned subsidiary, Fast More Limited, a Hong Kong investment holding company (“Fast More”), its 100% owned and chief operating subsidiary, Zhejiang Chisen Electric Co., Ltd., (f/k/a Changxing Chisen Electric Co., Ltd. and hereinafter referred to as “CCEC”) a wholly foreign owned entity (“WFOE”) organized under the laws of the PRC and CCEC’s subsidiary, Chisen Electric Jiangsu Co., Ltd.(“CEJC”). “China” or “PRC” refers to the People’s Republic of China. “RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$” or “U.S. Dollars” refers to the legal currency of the United States.
The following discussion of our financial condition and results of operations of the Company is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this report. This report contains forward-looking statements. Generally, the words “believes”, “anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
Company Overview
We produce and sell sealed lead-acid motive batteries, also known as valve regulated lead-acid motive batteries (VRLA batteries) in China's personal transportation device market. Our motive battery products, sold under our own brand name “Chisen”, are predominantly used in electric bicycles and are distributed and sold in China. Among all types of batteries for electric bicycles, the lead-acid motive battery is the preferred choice of electric bicycle manufacturers in China, accounting for 95% of the market share because of its cost efficiency.
During the year ended March 31, 2012, we manufactured approximately 8,000,000 units of sealed lead-acid motive batteries and had more than 2,400 employees. We currently produce 13 different models of VRLA batteries for electric bicycles with an aggreate production capacity of 12,000,000 units per year, utilizing roughly 66.67% of our existing capacity, at our production facilities located at Jingyuan Road, Xuyi County, Jiangsu Province in China (Plant D).
For each of our fiscal years ended March 31, 2012 and 2011, sales revenues were US$119,563,000 and US$243,814,000, respectively, and our net (loss) income attributable to CIEC common stockholders during the same periods amounted to US$(15,742,000) and US$11,066,000, respectively. The Company also had negative working capital of US$38,937,000 as of March 31, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
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Corporate Relocation and Investment Agreements (CCEC)
On August 20, 2010, CCEC entered into a Compensation Agreement of Corporate Relocation Acquisition with the Administrative Committee of Changxing Economic Development Zone, Zhejiang Province (the Committee). Pursuant to the Relocation Agreement, CCEC agreed to transfer to the Committee the land-use rights to, and structures on, the property previously used by CCEC for its office and manufacturing facilities, and agreed to relocate the office and manufacturing facilities to a new location. The Committee requested the relocation pursuant to a general policy of the Government of Changxing County to relocate “secondary industries” from urban areas to the countryside. All manufacturing entities, including our plant on Jingyi Road (Plant A), have been classified to be a “secondary industry” by the National Bureau of Statistics of PRC. Pursuant to the “Withdraw from Secondary Industry and Progressing to Tertiary Industry” policy of Changxing County, all entities that are classified as participants in “secondary industries” shall be relocated from the Westside of Jing’er Road to the Eastside of Jing’er Road. The Government of Changxing’s policy is to negotiate with each entity with respect to the specific terms of relocation, including, without limitation, relevant compensation to be paid after assessment.
Pursuant to an assessment of the property and the compensation of the losses stated as follows, the Committee agreed to pay to CCEC RMB117,202,100 (approximately US$17,265,000) in total for the relocation. In addition to the compensation for the property, this amount also includes compensation for the value of losses associated with removing CCEC’s equipment at RMB6,939,900 (US$1,022,000) and the value of losses to CCEC with respect to the suspension of its operations for two months at RMB11,748,000 (approximately US$1,731,000). CCEC agreed to vacate the site within one year of the signing of the Relocation Agreement. In May 2011, CCEC wrote off the long-term land lease prepayment and buildings with net book value of approximately RMB14,354,000 (US$2,237,000). As of March 31, 2012, we completed relocation and recognized a net extraordinary gain of US$13,117,000.
On August 20, 2010, CCEC entered into an Investment Agreement with the Committee whereby CCEC agreed to participate in “Land Tender, Auction and Listing” activities organized by the Changxing County Land and Resources Bureau with respect to a pre-identified parcel of land to which CCEC agreed to relocate its business from Jingyi Road to Jingsi Road within Changxing County. We anticipate that the size of the plant at Jingsi Road (Plant C) will be 50% larger than Plant A. Plant C is located within three kilometers of Plant A.
Pursuant to the terms of the Investment Agreement, the construction project must be completed within two years from the date of execution of the Investment Agreement and the project shall be put into production in 2012. However, after negotiations with the Committee, the date of completion and production was extended to December 31, 2013.
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Following execution of the Investment Agreement, also on August 20, 2010, CCEC and the Committee entered into a supplemental agreement to the Investment Agreement whereby the Committee agreed to compensate CCEC when CCEC’s conditions of payment and tax scale under the Investment Agreement are satisfied.
Project Investment Contract (CEJC)
On September 6, 2010, CEJC entered into a Project Investment Contract and a Supplemental Agreement to the Project Investment Contract with the Jiangsu Xuyi Economic Development Zone Administrative Committee, pursuant to which CEJC shall invest, in the aggregate, approximately RMB1,200,000,000 (approximately US$177,000,000) in three stages to build the Chisen Circular Economy Industry Park (Plant D) to manufacture VRLA batteries, as well as our newest product, lithium-ion batteries, and other related products in the Jiangsu Xuyi Economic Development Zone. In the first stage, CEJC has satisfied the terms of contract. It has invested over RMB422,000,000 (approximately US$62,000,000) in assets for the production of VRLA batteries only. At the date of this report, the Company does not plan to construct lithium-ion battery production facilities in Plant D yet. CEJC has completed all construction related to the first stage at the date of this report.
The Committee agreed to grant preferential tax policies on Value Add Tax and Enterprise Income Tax to CEJC in accordance with policies as issued by the local government. However these policies will be forfeited if taxes levied from the project are less than RMB30,000 (approximately US$4,400) per mu on average (the Company will initially acquire a total area equal to 277.48 mu in the first stage and an aggregate of 1,000 mu for all three stages). The preferred policies include, but are not limited to, a 50% refund on the portion of value-added taxes which is legally retained by the local government for the first 5 years followed by a 25% refund in the following 5 years, and an exemption of the local portion of enterprise income tax which is legally retained by the local government for the first 6 years followed by a 50% reduction in the following 4 years. The policies shall commence upon the completion of the construction and commencement of production.
In exchange for CEJC’s investment, CEJC shall enjoy the lowest control standard for the price of land in Jiangsu Province (RMB19,000, or approximately US$2,200, per mu), and the Committee shall assist CEJC in implementing the project, including but not limited to, the acquisition of land use rights, the obtainment of certificates for production plants and buildings, and the provision of infrastructure in the transferred land such as water supply, drainage, gas, electricity, cable TV, roads and telecommunications.
In the event that CEJC fails to commence construction and is delayed more than 7 days, the Committee has the right to terminate the Agreement and reclaim the land. In the event that CEJC fails to follow the construction schedule, the Committee has the right to reclaim the land. If the land remains unused for more than one year, the Committee has the right to levy a penalty equal to 20% of the land transfer amount per mu. If the land remains unused for more than two years, in addition to collection of the aforementioned penalty, then the Committee has the right to terminate the Agreement and reclaim the land. In the event that circumstances beyond our control cause us not to perform (i.e., force majeure), the Committee shall not have the right to bring an action against us for breach of contract. As of March 31, 2012, the Company has obtained a land use right with total size of 74 mu and commenced production activities.
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Disposal of Chisen Technology
On May 27, 2011, Chisen fully disposed of its interest in Chisen Technology Holdings Corporation, a Nevada corporation (Chisen Technology) for cash consideration of US$10. Chisen Technology had no operations since its date of incorporation through May 27, 2011. The disposal of Chisen Technology has had no significant impact on the value of the Company’s assets, operating cash flows or earnings per share.
PRC Central Government Environmental Protection Policy
During the three months ended June 30, 2011 and without advance notice to the Company, the PRC Central Government tightened its environmental protection policy which affects all lead-acid battery manufacturers in China. Pursuant to the new policy, a 500 meter isolated area must be maintained between production facilities and residential areas. From the beginning of May 2011, the Zhejiang Environmental Protection Bureau conducted an environmental sanitation investigation at Jing'er Road Plant (Plant B). The results showed that the sewage and exhaust complied with national standards in China, however, the Company is not maintaining the 500 meter isolated area between production facilities and residential areas.
After discussion with the Government, our battery charging activities and packing activities in Plant B were permitted to keep operating until December 31, 2011 and further extended to October 31, 2012, however all other production activities were forced to stop pursuant to the tightened environmental policy on or before July 15, 2011. Management believes that our production facilities could not fully comply with the adjusted environmental policy as the residential area near Plant B showed (and continues to show) no signs of slowing its expansion towards Plant B, which is out of the Company’s control. As a result, we decided to scale down our operations at Plant B and relocate such production facilities to Plant D. We ceased all production activities, apart from battery charging activities and packing activities, during the period ended September 30, 2011. We did not suffer any penalty due to this tightened environmental protection policy. However, part of our production facilities in Plant B cannot be adequately transferred and implemented into our new production facility at Plant D, and we incurred an impairment loss of such facilities of US$1,848,000 during the year ended March 31, 2012.
Forward Stock Split
On November 22, 2011, Chisen effected a forward split of its common stock and the proportional increase in its authorized shares of common stock at a split ratio of 10-for-1. As a result of this corporate action, the total number of issued and outstanding shares of common stock increased from 50,000,000 to 500,000,000, and the Company’s authorized shares of common stock simultaneously increased from 100,000,000 to 1,000,000,000 shares. Shares of common stock are payable pursuant to the 10-for-1 forward stock split upon surrender of old certificates to the Company’s transfer agent, Interwest Transfer Co., Inc., 1981 East Murray Holladay Road, Suite 100, P.O. Box 17136, Salt Lake City, Utah 84117, telephone (801) 272-9294, facsimile (801) 277-3147.
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There has been no adjustment to the par value of the common stock and no changes have been made to the Company’s preferred stock as a result of this corporate action (as of November 22, 2011, the Company had no shares of preferred stock issued or outstanding). The Company’s Board of Directors approved this corporate action however shareholder approval was not required pursuant to Sections 78.207 and 78.209 of the Nevada Revised Statutes. In accordance with the Nevada Revised Statutes, the Company filed a “Certificate of Change Pursuant to Section 78.209” with the Nevada Secretary of State which became effective after the Financial Industry Regulatory Authority announced the effectiveness of the corporate action.
Recent Developments
During the year ended March 31, 2012, the Company acquired certain machinery in order to manufacture lead plates under the external formation technique for commercial purposes in Jiangsu Province. However, on March 1, 2012, the PRC government released a consultation paper concerning further governance and restrictions on the lead acid battery industry. In accordance with the consultation paper, any new lead plate manufacturing projects for commercial purposes will no longer be approved. After reviewing the consultation paper, management believed it to be highly likely that the proposed policies will be implemented and enforced by the PRC Government in the near future.
Management immediately reviewed the recently acquired machinery and identified items which could be directly integrated into our existing production lines of lead acid batteries production operating under the internal formation technique. For those items which could not be integrated directly, after a costs and benefits analysis of modification, management has decided to dispose of them in the near future. As of March 31, 2012, a full impairment, amount to US$2,857,000, was provided for the machinery as management estimated the scrap value of these assets to be minimal.
On May 31, 2012, the PRC government released a new policy which governs the lead acid battery industry effective July 1, 2012, which confirmed management’s estimation in relation to the final implementation of the tightened policies as initiated in the consultation paper. We were also advised by the local authority that the external battery formation technique will be prohibited after October 31, 2012 in Plant B. Due to the recent industry reform by the PRC Government, we lost market share of our main products, and considering the sluggish market, management has decided that the Company will focus on recovering such lost market share.
As of March 31, 2012, we shifted a majority of our production activities to Plant D. Since the environmental protection facilities of Plant D comply with the new tightened policy, from this issue, management believes the Company’s business will not suffer any further material adverse effects.
During the year ended March 31, 2012, the Government preliminarily agreed to re-designate the land in Changxing County to us for redevelopment. Prior to the new plant in Changxing County being built, we mainly conduct lead-acid battery production activities in Plant D.
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Corporate Information
Our offices are located in the Changxing Economic Development Zone at the bank of the Taihu Lake in the County of Changxing in Zhejiang Province, in close proximity to major national transportation systems, including National Highways 104 and 318, the Shanghai - Jiangsu - Zhejiang - Anhui - Hangzhou - Nanjing Expressway, the Changxing - Huzhou - Shanghai Channel, the Xuancheng - Hangzhou Railway and the Xinyi - Changxing Railway. Our registered office is located at No. 1188, Taihu Avenue, Economic Development Zone, Changxing County, Zhejiang Province, PRC, where the office building is under construction. The executive office is temporarily moved to No. 559, Jing’er Road, Economic Development Zone, Changxing County, Zhejiang Province, PRC. Our telephone number is (86) 572-6267666 and our corporate website in English is located at www.chisenelectric.com.
We are a reporting company under Section 13 of the Securities Exchange Act of 1934, as amended. Our shares of common stock are not currently listed or quoted for trading on any national securities exchange however our common stock is currently quoted under the symbol “CIEC” on the OTCQB and the OTCBB.
Corporate Structure
Our corporate structure is illustrated as follows:
Our Competitive Strengths
We believe the following strengths contribute to our competitive advantages and differentiate us from our competitors:
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Established Brand Awareness
We believe we have established good brand awareness across China. In 2009, the “Chisen” brand was awarded the Most Trust and Worthy Brand of Consumer Electric Bicycle Batteries from CCTV, a major television station in China. Because of this awareness, CCEC obtained one of the providers contract for a dedicated project, namely “Introducing Electronic Appliance (Lead-Acid Motive Battery Project of Electric Bicycle) into Rural District” in Shandong Province.
We believe CCEC has established for itself a positive social image across China as the official batteries supplier for electric bicycles used in the Beijing Olympic and Paralympics Games in 2008 and the alternative power source sponsor of the 2010 Shanghai World Expo.
Well-Established Distribution Channels
We primarily sell our battery products to manufacturers of electric bicycles and desire to develop our sales channels to sell our products directly to distributors through our regional sales teams of the Company.
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Our Cooperative Partnership with Suppliers
The Company establishes strategic cooperation partnerships with suppliers and vendors by means of supply chain integration to control procurement cost and quality. Moreover, a supplier’s assessment system is set up for ensuring the stability of the quality of our direct materials.
Research and Development
On the development of new products lines, the Company’s academic fields include, but are not limited to, ultra lead-acid motive batteries, wind and solar energy storage batteries, lithium-ion power batteries, anode material for lithium-ion batteries and lithium-ion ultra capacitors.
In April 2008, CCEC entered into a cooperation agreement with Xiamen University to establish the Zhejiang Changxing Chisen Physical-Chemical Power Supply Research and Development Center (the R&D Center) at the College of Chemistry and Chemical Engineering at Xiamen University for researching and developing new products. Xiamen University is a first-class research university in China with 9 graduate schools, 120 research institutions and cooperative inter-university ties to over 100 institutions worldwide. Pursuant to the terms of the cooperation agreement, both parties shall be entitled to share equally in the benefits of any achievements from the R&D Center, and any such benefits or achievements realized shall not be transferrable to any third party without the consent of both parties. For example, CCEC will own jointly and equally with Xianmen University any intellectual property developed at or by individuals employed at the R&D Center.
Pursuant to the terms of the cooperation agreement, CCEC shall contribute RMB300,000 (approximately US$44,000) annually to fund operating costs for the R&D Center and provide additional funds for certain engaged research projects. Xiamen University shall contribute staff, laboratory usage and relevant equipment to the R&D Center. The R&D Center provides us with solid support on the research and development of new batteries technology. For example, we have developed the technology of producing lithium-ion batteries and lithium-ion iron phosphate anode materials through the cooperation with Xiamen University. The products have entered into the alpha test phase.
The Company accelerates the production technology updates of existing products. Apart from the Research Center at Xiamen University, the Company is also running an on-site R&D center for the research and development of new manufacturing techniques for its lead acid batteries and new products. In the past year, we successfully developed internal battery formation technology and applied it to battery production, which significantly reduced the pollution generated from battery production process. Also, we become pioneer on applying internal formulated technology in the lead acid batteries production process.
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Our Products
Current Products
The key components of a lead-acid motive battery include electrode plates and fiberglass dividing plates. The electrode plates are coated with oxidized lead and alloy lead. Pairs of positively charged electrode plates and negatively charged electrode plates each separated by a fiberglass dividing plate are bound together by metal strip and installed into the plastic casing of a lead-acid motive battery. The battery is then filled with sulfuric acid and charged with electricity. The number and the size of electrode plates required to be installed in a lead-acid motive battery will depend on the required level of its storage capacity and the power output.
We mainly produce and offer the following 13 models of VRLA battery products for electric bicycles:
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(1) Estimated minutes required per charging refers to the estimated number of minutes required for charging the battery from nil to full storage capacity.
(2) Estimated hours of use per charging refer to the estimated maximum number of hours for which the battery is able to be used on each occasion when it is charged to its full storage capacity.
Of the 13 models of lead-acid motive battery products set forth above, the 6-DZM-12Ah and 6-DZM-20Ah are our core products, which accounted for 50% and 30% of our total revenues for the year ended March 31, 2012, respectively.
All the lead-acid motive battery products produced by us are re-chargeable and can be recharged approximately 500 times. They are standardized and can be used in electric bicycles produced by different manufacturers.
Products Reserve
We have developed non-industrial wind and solar energy lead-acid storage batteries and lead-acid motive batteries for electric cars. These products have passed beta testing and we are capable of producing these products with existing facilities in a larger scale. However, because of recent industry reform by the PRC government, we lost market share of our main products, and considering the sluggish market, management has decided that the Company will focus on recovering such market share of our main products. The Company has not determined a timeframe for launching our wind and solar energy lead-acid storage batteries and lead-acid motive batteries for electric cars.
Future Products
For future market development, we intend to focus on the development of the lithium-ion batteries. We have cooperated with Xiamen University to research and develop anode materials for the lithium-ion battery and we have designed and developed lithium-ion battery products for electric bicycles, which have entered into the alpha test phase. However, we will expect a longer alpha test period, especially after a recently publicized fatal traffic accident in China caused by the explosion of a lithium-ion battery, which was manufactured by another well-known lithium-ion manufacture in China. Management believes it is extremely important for us to manufacture and sell safety products. We plan to extend the alpha test process and pay particular attention to safety and the stability of our lithium-ion battery products and anode materials for the lithium-ion battery. We have not determined the timeframe of this product launch.
Distribution Methods
We sell our sealed lead-acid motive battery products principally to manufacturers of electric bicycles. However, with the growing retail market for replacement of battery products, i.e. our secondary market, we have also strengthened our efforts in the sales of battery products to exclusive distributors which are strategically located in 27 provinces, autonomous regions and directly-administered municipalities in China.
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The Company currently has exclusive sales agreements with distributors at the provincial and county levels. Pursuant to such exclusive sales agreements, distributors shall cooperate with us to establish sales networks in a designated location and to distribute our products exclusively. The Company sells products directly to the distributors, and such distributors have no right to return the unsold products to the Company. Furthermore, the Company provides a discount to such distributors and employs sales teams in each province across China to help distributors further distribute products from counties to towns and villages. The distributor is obligated to develop the end-user market and sales activities and brand promotion activities and maintain the goodwill and product quality of the Company. On the other hand, the Company is obligated to provide technical support to the distributor in order to improve the sales capacity and market share of the distributor, and the Company is also obligated to provide manuals, samples, copies of any relevant information and information with respect to sales-related promotions to the distributor.
The Company has no obligation, financial or otherwise, with respect to the establishment of the distribution centers of the distributors. Such agreements typically have terms of one to two years, and provisions which allow for us to terminate early in the event that the distributor fails to meet its sales targets within the prescribed time limits or if we suffer losses caused by the breach of the agreement by the distributor (for example, breaches of confidentiality and exclusivity by the distributor or for activities of the distributor which damage our image).
Our largest distributors are located in Shanxi Province, Guangdong Province, Jiangsu Province, Tianjin and Beijing. We have established and maintained long-term relationships with distributors who we believe have local business experience and established regional sales networks.
Sources and Availability of Raw Materials from Suppliers
Although we purchase raw materials used in the manufacturing of our products from a small number of sources in order to maintain the stability of the quality of the raw materials, we have the ability to purchase from numerous sources, primarily in Jiangsu and Anhui province in the PRC. We believe that all necessary raw materials for its products are readily available and will continue to be so in the foreseeable future. We have never had, nor do we anticipate experiencing, any shortages of such materials.
The raw material for our battery products consist primarily of electrolytic lead. Our success significantly depends on our ability to secure sufficient and constant supply of electrolytic lead for our production at acceptable price levels. Electrolytic lead represents our largest cost item in our lead-acid motive battery production. During each of the two fiscal years ended March 31, 2012 and March 31, 2011, the average selling price of electrolytic lead by our suppliers was approximately RMB16,000 (approximately US$2,500) and RMB16,000 (approximately US$2,400) per ton, respectively. For each of the two years ended March 31, 2012 and March 31, 2011, costs of lead-related material accounted for approximately 80% and 80% of our total cost of sales, respectively. We do not have long-term contracts with any of our electrolytic lead suppliers, nor have we entered into any arrangement to mitigate the effect of price fluctuations of electrolytic lead. Therefore, any significant increase in the cost of electrolytic lead in the future could adversely affect our results if we cannot transfer the price increment to our customers.
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We believe the Company generally maintains sufficient quantities of inventories of its products to meet customer demand.
The Company has entered into written contracts with several suppliers and vendors. The Company has major suppliers who accounted for the following percentage of total purchases and total trade payables in the fiscal years ended March 31, 2012 and 2011:
Trade payables related to the Company’s major suppliers for the years ended March 31, 2012 and 2011 comprise Nil and 36% of all trade payables, respectively.
Sales and Marketing
In order to promote the sales and reputation of our “Chisen” brand, we launch specific publicity campaigns and marketing based on the market needs. With reference to the conditions of regional markets and the local wholesale market for electric bicycles, we promote our band through roadside billboards and launch promotional dealer sales in Anhui, Henan, Hebei and Jiangsu Provinces in China.
With reference to the need for increased sales in our secondary market, we have convened product exhibition meetings in large metropolitan areas and mid-sized cities. We have shared our image and services, which we believe will enhance confidence with our distributors and sales offices. We believe this will enhance the Company’s visibility and reputation of our products, which may ultimately boost our sales.
A small number of our customers account for a very significant percentage of our revenue. Trade receivables related to the Company’s major customers for the years ended March 31, 2012 and 2011 comprised 73% and 78% of all trade receivables, respectively. The Company’s major customers for the fiscal years ended March 31, 2012 and 2011 accounted for the following percentages of total revenue and trade receivables:
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The loss of any of our major customers could have a material adverse effect upon our revenue and net income.
Quality Control
We implement quality management control on our production line and producing quality products through advanced production technologies and testing methods, which has passed the ISO9001 Quality Management System Certification (which expired and is currently in the process of becoming renewed) ISO14001 Environmental Management System Certification, OHSAS (GB/T28001:2001) “Occupational Health and Safety Management System” certification, clean production certification and CE certification. Our measurement of quality objectives and processes were analyzed through planning, process, performance, recognition, execution and supervision, in order to produce products to meet requirements of customers and regulators.
We established and implemented a supplier evaluation system, which improve the quality of raw material supplies. We strengthened the production process by implementing the “3 Ns” principle: (1) No defective materials will be accepted; (2) No defective products will be produced and (3) No defective products will be distributed.
Research and Development
During the fiscal year ended March 31, 2012, we significantly increased our Company-sponsored research and development activities expenses to US$2,104,000 from US$1,065,000 for the fiscal year ended March 31, 2011 in order to further enhance the competitiveness of our products through the improvement of our production techniques and the release of new VRLA batteries products. The Company plans to spend approximately US$2,000,000 during fiscal year ending March 31, 2013 and approximately US$2,000,000 during fiscal year ending March 31, 2014 on Company-sponsored research and development activities.
In order to further enhance the competitiveness of our products and fulfill the tightened environmental protection policy, we have expended resources on R&D and technology innovation. We are one of the pioneer companies in PRC to apply internal batteries formation technique in producing lead acid motive batteries. This technology significantly decreased the pollution during the production process. In addition, we have been able to decrease our cost of production as a result of our R&D efforts focused on improving our manufacturing technology. For example, we now use less lead in the production of our batteries while preserving the same efficiency of such batteries. We desire to increase our competitiveness through continued improvement of valve regulated lead-acid battery production techniques and the development and production of new-model power batteries, including, without limitation, the lithium-ion batteries.
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On the development of new products lines, we have conducted research on ultra lead-acid motive batteries, wind and solar energy storage batteries, VRLA batteries applied for telecommunications and uninterruptible power supply (UPS) equipment, lithium-ion power batteries, lithium-ion ultra capacitors and anode material for lithium-ion batteries, which is a component of lithium-ion batteries.
Backlog
We have historically shipped the majority of our products within one month of the time that the order confirmation occurs. Due to the short-cycle nature of our business, we do not sustain significant backlogs and had no backlog of unfilled orders as of March 31, 2012 and March 31, 2011.
Warranties and Return Policy
We provide 15 months of warranties and return policy for products. For any defective batteries sold and returned within the first 8 months of warranty period, the Company will exchange a new battery to the customers. For defective batteries sold and returned from 9 to 15 months of warranty period, the Company will replace a functional battery to the customers.
Product Liability and Insurance
We do not have any product liability insurance. Because of the nature of our products, we may be subject to product liability claims resulting from personal injuries and become involved in lawsuits that incidental to our business. As of today, we have not yet been involved in any products liability litigation. Product liability insurance is expensive, restrictive and difficult to purchase. Accordingly, there is no assurance that we will have sufficient capital to pay for any successful product liability claims that made against us in the future. Such claims could have a material adverse effect on our financial condition and results of operations.
Competition
The lead-acid motive battery has a dominant position in China, in which 95% of electric bicycles in China are powered by lead-acid motive battery. The core product competitor in the market is the lithium-ion battery. The major manufacturers of the lithium-ion motive battery in the market are BYD Company Limited (1211.HK). As compared to lead-acid motive batteries, the lithium-ion battery has advantages in terms of useful life, environmental friendliness, more compact size and lighter weight. However, lead-acid motive battery still has the advantage of greater stability in terms of performance and reliability, safety and lower price.
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Our chief competitors that produce lead-acid motive batteries in China are Tianneng Power International Ltd. (Tianneng) and Zhejiang Chaowei Power Co., Ltd. (Chaowei). These companies were the first companies to enter the battery industry in China. For example, Chaowei and Tianneng are the leading companies in terms of production and sales volume. Chaowei has a lot of after-sales service stores and takes an advantage in the secondary market by its continued business expansion. Tiannneng and Chaowei’s capital stock are both listed on The Hong Kong Stock Exchange.
In order to maintain our competitive position, the Company intends to (1) increase the scale of production through expansion of production capacity; (2) expand the distribution networks in the end user customer market; (3) invest more resources in the research and development of new products and new manufacturing technology in order to diversify our product range; (4) decrease the cost of production and improve quality control; (5) maintain adequate human resources, production resources, as well as the financing resources to support the growth of the Company; and (6) implant effective and efficient risk management.
Intellectual Property
We rely on trademark and patent rights to protect our intellectual property rights and to maintain and enhance our competitiveness in the battery industry. We intend to make strategic investments in intellectual property through self-development and acquisition. These initiatives are designed to enhance our technology, improve existing products, rapidly introduce new products to fill identified needs, and address new applications and markets. We believe our ability to successfully develop and produce new products will allow us to open market opportunities and enhance our market position.
Our success will depend in part on our ability to obtain patents and preserve other intellectual property rights covering the design and operation of our products. We intend to continue to seek patents on our inventions when we deem it commercially appropriate. The process of seeking patent protection can be lengthy and expensive, and there can be no assurance that patents will be issued for currently pending or future applications or that our existing patents or any new patents issued will be of sufficient scope or strength or provide meaningful protection or any commercial advantage to us. We may be subject to, or may initiate, litigation or patent office interference proceedings, which may require significant financial and management resources. The failure to obtain necessary licenses or other rights or the advent of litigation arising out of any such intellectual property claims could have a material adverse effect on our operations.
The Company currently holds 32 patents in total, of which 17 expire in 2016, 1 expires in 2017, 4 expire in 2018, 3 expire in 2019, 4 expire in 2020, 2 expire in 2021 and 1 expire in 2029.
The Company currently has two domain names, http://www.chisenelectric.com and http://www.chisenpower.com. These domain names are in good standing.
Employees
As of March 31, 2012, the Company had approximately 2,430 full-time employees, including approximately 1,837 employees in production, approximately 100 employees in research and development, approximately 115 employees in sales and marketing and approximately 221 employees in administration. All of our employees are based inside China. Our employees are members of our Company’s labor union and are organized under a collective bargaining agreement, but we have never experienced any work stoppage. We believe that our relationships with our employees are generally good.
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PRC Government Regulations
Compliance with Environmental Regulations and Other Laws
We are subject to various national and local environmental laws and regulations in China, including those governing the use, discharge and disposal of hazardous substances and the discharge of waste water, exhaust fumes and solid waste in the ordinary course of our manufacturing process. The main pollutants generated by us are lead dust or particles and waste water which contain lead and sulfuric acid. During the operation of our production, we do not release any toxic element other than those that are permitted under the relevant laws and regulations.
Lead is the key raw material used in our production of lead-acid motive battery products. An excessive intake of lead dust or particles, whether through inhalation or skin contact, could have harmful effect on health. Lead poisoning may also result from occupations that involve close and frequent contact with or exposure to lead dust or particles. Lead dust and particles are generated during our production process. Our workers are exposed to electrode plates during different stages of our production process. Pursuant to the applicable environmental laws and regulations in China, we are obliged to install environmental protection equipment to ensure effective removal of lead dust and particles generated during our production process. We have installed such equipment at each of our production plants.
Our production process generates waste water containing lead and sulfuric acid. Such waste water will be neutralized and treated to remove lead contents in accordance with the applicable environmental standards in China. We have installed such waste water treatment facilities at all our production plants. Waste water generated at our production process, after the required treatment, will either be collected and reused for our production requirements or discharged to the municipal waste water collection systems for further treatment and discharge to the environment.
We are also required by the laws and regulations governing health and safety at work in China to provide our employees exposed to lead dust or particles with protective clothing and accessories, such as gloves, goggles and masks. We also arrange all our employees engaging in the lead-related production process to receive medical checks at least once a year. The medical checks include measurement of blood lead level.
We believe that our current manufacturing operations comply in all material respects with applicable environmental laws and regulations. Although we believe that our current manufacturing operations comply in all material respects with applicable environmental laws and regulations, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create environmental liability with respect to our other facilities, operations, or products.
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The manufacturing facilities in which we operate are subject to the PRC’s environmental laws and requirements. Our landlord that leases the factory to us is required to and has obtained a Pollution Discharge Certificate issued by the Environment Protection Bureau of Changxing County and is responsible for the disposal of the waste in accordance with applicable environmental regulations. If our landlord fails to comply with the provisions of the permit and environmental laws, our landlord could be subject to sanctions by regulators, including the suspension or termination of its Certificate, which would result in the suspension or termination of our manufacturing operations.
Business Qualification and Licenses
According to certain corporate laws of the PRC, in order to be a lawfully established company in China, the relevant corporate registration authority shall issue a business license, the date of which shall be the date of the establishment of the company. The company business license shall state the name, domicile, registered capital, actually paid capital, business scope and the name of the legal representative of such company. If any of the items as stated in the business license is changed, the company shall modify the company’s registration, and the company registration authority shall issue a new business license.
CCEC obtained its business license on February 25, 2002, which such license was issued by the Huzhou Administration for Industry and Commerce. According to the Industrial Product Production License Control Regulation of the PRC, enterprises which manufacture valve regulated lead-acid batteries are permitted to engage in said production if the company obtains a production license.
On January 13, 2005, the Administration of Quality Supervision, Inspection and Quarantine of the PRC issued a Production License to CCEC (the license number XK06-044-00223) which expired on January 12, 2010. On August 17, 2007, due to the Company adding a new product line, an updated Production License with the same license number was reissued to CCEC, which expired on January 12, 2010. On February 10, 2010, a production license was issued (XK06-006-00627) which shall expire on February 9, 2015. On November 29, 2010, due to the Company adding a new product line, an updated Production License with the same license number (XK06-006-00627) was reissued to CCEC which shall expire on February 9, 2015.
Environmental Reports, Certifications and Licenses
According to certain environmental laws and regulations in China, the Department of Environmental Protection Administration under the State Council shall, in accordance with the national standards for environment quality and China’s economic and technological conditions, establish the national standards for the discharge of pollutants. The People’s Governments of Provinces, Autonomous Regions and Municipalities directly under the Central Government may establish their local standards for the discharge of pollutants for items not specified in the national standards. With regard to items already specified in the national standards, they may set local standards, which are more stringent than the national standards, and report the local ones to the Department of Environmental Protection Administration under the State Council for the record. Units that discharge pollutants in areas where the local standards for the discharge of pollutants have been established shall observe such local standards.
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On October 9, 2010, the China Quality Mark Certification Group and IQNet Association (the International Certification Network) jointly issued the ISO9001 Certificate to the Company (number 00210Q15168R0M) agreeing that the quality management system applied in the Company’s production and management activities. The certificate shall expire on October 8, 2013.
On October 9, 2010, the China Quality Mark Certification Group and IQNet Association (the International Certification Network) jointly issued the ISO14001 Certificate (number 00210E21312R0M) to the Company and signed-off on the environmental management system applied in the Company’s production and management activities. The certificate shall expire on October 8, 2013.
On September 5, 2008, the Changxing Environmental Protection Bureau issued the Notice of Examination Opinion approving the Company’s Environment Effect Report on its Relocation and Extension of the Company’s 1500 unit-per-year Lead-Acid Battery Production Project.
On September 20, 2008, the Changxing Environmental Protection Bureau issued the Pollutant Discharge License to the Company (license number HuChang080042). The License shall expire on September 19, 2012.
On June 22, 2010, the China Quality Mark Certification Group and IQNet Association (the International Certification Network) jointly issued OHSAS18001 Certificate (# 00210S10501R0M) to the Company after the Company passed its evaluation on Occupational Health and Safety Assessment Series. The Certificate shall expire on June 21, 2013.
Employment laws
We are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantial resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, which became effective on January 1, 2008, permit workers in both state and private enterprises in China to bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.
Patent Protection in China
The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets.
The PRC is also signatory to most of the world’s major intellectual property conventions, including:
¨ Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
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¨ Paris Convention for the Protection of Industrial Property (March 19, 1985);
¨ Patent Cooperation Treaty (January 1, 1994); and
¨ The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2009 and 2010, respectively.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents-patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file; therefore, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it cannot be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One broad exception to this rule, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license to date. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.
PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. Patent holders who believe their patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one or more times the license fee under a contractual license. If there is no unlawful income so earned, the infringing party may be fined from RMB10,000 to RMB1,000,000, or approximately US$1,000 to US$146,000.
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Foreign Currency Exchange
Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission. We currently do not hedge our exposure to fluctuations in currency exchange rates.
Mandatory Statutory Reserve and Dividend Distributions
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year for its general reserves until the cumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
ITEM 1A
ITEM 1A Risk Factors
Not required for a “smaller reporting company”.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
ITEM 2. Properties
During the year ended March 31, 2012, the Company purchased a 50-year land use right for US$773,000 at Jingyuan Road in Xuyi County, Jiangsu Province. The total area of the land is 49,323.00 square meters and we have constructed plants and auxiliary buildings on the land.
We also maintain leases with our landlord Changxing Xiangyi Industrial Park Investment Co. for the purpose of the production of our battery products at Plant B, which is located at Xiangyi Industrial Park, Jing’er Road, Changxing Economic Development Zone, Changxing County, Zhejiang Province, the People’s Republic of China. Those leases, none of which are affected by our relocation, are described in the table below:
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During the year ended March 31, 2012, the Company also purchased a 50-year land use right for US$4,111,000 at Jingsi Road in Changxing County, Zhejiang Province. The total area of the land is 81,188.00 square meters and the plants and auxiliary building are being constructed in progress.
ITEM 3.
ITEM 3.Legal Proceedings
In the normal course of business, we are named as defendant in lawsuits in which claims are asserted against us. In our opinion, the liabilities, if any, which may ultimately result from such lawsuits, are not expected to have a material adverse effect on our financial position, results of operations or cash flows. As of March 31, 2012, there was no pending or outstanding material litigation with the Company.
ITEM 4.
ITEM 4.Mine Safety Disclosures
None.
PART II
ITEM 5.
ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Equity
Our common stock is currently quoted on the OTCBB and OTCQB under the symbol “CIEC”. There has been an extremely limited public market for our common stock.
When the trading price of our common stock is below US$5.00 per share, it may be considered to be a “penny stock” that may be subject to rules promulgated by the SEC (Rule 15-1 through 15g-9) under the Exchange Act. These rules impose significant requirements on brokers under these circumstances, including: (a) delivering to customers the SEC’s standardized risk disclosure document; (b) providing customers with current bid and ask prices; (c) disclosing to customers the brokers-dealer’s and sales representatives compensation; and (d) providing to customers monthly account statements.
The following table sets forth on a per share basis for the periods shown, the high and low closing bid prices of the Company’s common stock. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
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	The high and low bid quotations for our common stock prior to March 31, 2012 were US$7.75 and US$0.045, respectively. The market quotations represent prices between dealers, do not include retail markup, markdown, or commissions and may not represent actual transactions.
Holders of Common Equity
As of June 28, 2012, we have issued Five Hundred Million (500,000,000) shares of our common stock to approximately 64 holders of record. The Company believes that it has more stockholders since many of its shares are held in "street" name.
Securities Authorized for Issuance under Equity Compensation Plans
As of the date hereof, we have no compensation plans (including individual compensation arrangements) under which the Company’s equity securities are authorized for issuance.
Transfer Agent and Registrar
Interwest Transfer Company, Inc., 1981 East Murray Holladay Road, Suite 100, P.O. Box 17136, Salt Lake City, Utah 84117, telephone (801) 272-9294, facsimile (801) 277-3147, currently serves as our transfer agent and registrar.
ITEM 6.
ITEM 6. Selected Financial Data
	Not required for a “smaller reporting company”.
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ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
	The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This Annual Report includes forward-looking statements. Generally, the words “believes ”, “anticipates”, “ may ”, “ will ”, “ should ”, “ expect ”, “ intend ”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be place on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
	The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Annual Report.
Forward Stock Split
On November 22, 2011, the Company effected a forward split of its common stock and the proportional increase in its authorized shares of common stock at a split ratio of 10-for-1. As a result of this corporate action, the total number of issued and outstanding shares of common stock increased from 50,000,000 to 500,000,000 shares, and the Company’s authorized shares of common stock simultaneously increased from 100,000,000 to 1,000,000,000 shares. Shares of common stock are payable pursuant to the 10-for-1 forward stock split upon surrender of old certificates to the Company’s transfer agent, Interwest Transfer Co., Inc., 1981 East Murray Holladay Road, Suite 100, P.O. Box 17136, Salt Lake City, Utah 84117, telephone (801) 272-9294, facsimile (801) 277-3147.
There has been no adjustment to the par value of the common stock and no changes have been made to the Company’s preferred stock as a result of this corporate action (as of November 22, 2011 and as of the date of this report, the Company had no shares of preferred stock issued or outstanding). The Company’s Board of Directors approved this corporate action however shareholder approval was not required pursuant to Sections 78.207 and 78.209 of the Nevada Revised Statutes. In accordance with such statutes, the Company filed a “Certificate of Change Pursuant to Section 78.209” with the Nevada Secretary of State which became effective after the Financial Industry Regulatory Authority announced the effectiveness of the corporate action.
Development Strategy of the Company
We strive to create an international first-class brand and become the one of the leaders in providing “green” energy in the global electric bicycle market. Through our continuous researching and developing of new chemical energy technologies, we intend to provide energy-saving and highly-effective energy solutions to our customers for improving quality of life while maintaining a sustainable ecological environment. Our goal is to become the largest battery developer and producer with a first-class sales and service network in China. With one of the leading positions in the LABEB battery product market in China, our expansion plans in Changxing County (Zhejiang Province) and Jiangsu Province, our product research and development capability and our cooperative partnerships with clients, we believe that we are well positioned to capture additional business opportunities in China's personal transportation device markets. In light of the prevailing economic trends for developing alternative transportation devices that reduce the reliance on oil and produce lesser emissions, we plan to explore the motive battery market for electric-powered motorcycles and electric cars. Leveraging our experience and expertise in producing lead-acid motive battery products for electric bicycles, we plan to expand our product mix to include valve regulated lead-acid back-up batteries, the lithium-ion battery, lead-acid power storage batteries dedicated for solar and wind power and lead-acid motive batteries for electric cars.
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Production Capacity
On September 6, 2010, CEJC entered into a Project Investment Contract and a Supplemental Agreement to the Project Investment Contract with the Jiangsu Xuyi Economic Development Zone Administrative Committee, pursuant to which CEJC shall invest, in the aggregate, approximately RMB1,200,000,000 (approximately US$177,000,000) in three stages to build the Plant D to manufacture VRLA batteries, as well as our newest product, lithium-ion batteries, and other related products in the Jiangsu Xuyi Economic Development Zone. At the date of this report, CEJC has completed all construction related to the first stage and has invested approximately RMB422,000,000 (approximately US$62,000,000) in assets for the production of VRLA batteries only. Currently the Company does not yet plan to construct lithium-ion battery production facilities in Plant D.
Augment Marketing and Promotion Efforts to Increase Brand Awareness
The Company works with leading national brand designing companies to establish a complete plan for scientific branding, which use cartoon image endorsements to promote its corporate image, products and brand awareness, through television and printed advertisements. Furthermore, we believe CCEC has established for us a positive social image across China as the official batteries supplier for electric bicycles used in the Beijing Olympic and Paralympics Games in 2008 and the alternative power source sponsor of the 2010 Shanghai World Expo. We do not have any specific timetable for this strategy as we consider augmenting our marketing and promotional efforts to increase brand awareness to be part of our core business, and the amounts we decide to allocate to this strategy will be funded by our operating cash flows.
Expand Sales Network and Distribution Channels
We intend to put in more resources to expand our sales and distribution networks by: (1) adding new distributors in key sales regions in China; (2) developing new marketing strategies in different channels; (3) improving communication between sales teams and distributors; and (4) improving our brand awareness and promotion effort. We do not have any specific timetable for this strategy as we consider expanding our sales network and distribution channels to be part of our core business, and the amounts we decide to allocate to this strategy will be funded by our operating cash flows.
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Build Partnerships with New and Existing Clients
We continue to build a close, mutually beneficial and harmonious partnership with our existing factory customers. We aim to establish a win-win long-term partnership with all of our new customers. We intend to continue to utilize our customer relationship management to provide tailor-made management policies that focus the needs of different customers. We do not have any specific timetable for this strategy as we consider building partnerships with new and existing clients to be part of our core business, and the amounts we decide to allocate to this strategy will be funded by our operating cash flows.
Vertical Integration Strategy
During the year ended March 31, 2012, we have implemented a vertical integration strategy of producing lead plates at Plant D which has enabled us to reduce processing costs. Additionally, due to the implementation of a recent PRC Central Governmental environmental policy, hundreds of our competitors that are small and medium size battery manufacturers have been forced to shut down or to stop operations. As a result, the shortage of supply of lead acid batteries has armed us with strategic bargaining power when negotiating the sales price of our products with customers.
Summary of Significant Accounting Policies
Accounting principles
The consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America (“USGAAP”)
Preparation of financial statements
The Company had negative working capital of US$38,937,000 as of March 31, 2012 and incurred loss of US$15,742,000 for the year ended March 31, 2012. These conditions raised substantial doubt about the Company’s ability to continue as going concern.
Continuation of the Company as a going concern is dependent upon attaining profitable operations in the future, exercising tight cost and cash flow controls measures, and the financial support from a controlling stockholder of Chisen Electric. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The controlling stockholder had undertaken to make available adequate funds to the Company as and when required to maintain the Company as a going concern. Having taken into consideration the undertaking provided by the controlling stockholder, management believes that the Company will be able to settle its liabilities when they become due. However, there can be no assurance that any financing from the controlling stockholder will continue in the future.
Basis of consolidation
The consolidated financial statements include the financial information of Chisen and its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.
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Revenue recognition
Operating revenue represents sale of goods at invoiced value to customers, net of returns, discounts, rebates and value-added tax (“VAT”), and is recognized when the significant risks and rewards of ownership of goods have been transferred to customers, the sales price to the customers is fixed or determinable and the collectability of consideration is reasonably assured.
The Company recognizes revenue when goods are delivered to customers. The Company assesses whether the selling price is fixed or determinable based on the contract and/or customer purchase order and payment terms associated with the transaction and whether the sale price is subject to refund or adjustment. The Company assesses collectability based primarily on the creditworthiness of the customer as determined by the credit analysis, as well as the customer’s payment history.
Volume-based rebates are made at the time of sales of goods and are recognized as a reduction of sales.
Costs related to shipping and handling are included in selling, marketing and distribution expenses.
Segmental information
During the years ended March 31, 2012 and 2011, all revenue of the Company represented income from sales of sealed lead-acid batteries and related components, and therefore no financial information by business segment is presented. Furthermore, as all revenue is derived from the PRC, no geographical segment information is presented.
Retirement plan costs
Contributions to defined contribution retirement schemes are charged to cost of sales, sales, marketing and distribution costs and general and administrative expenses in the consolidated statements of operations and other comprehensive income as and when the related employee services are provided.
Income taxes
The Company provides for income taxes using the liability method. Under the liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current period.
A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax rate changes are reflected in the computation of the income tax provision during the period such changes are enacted.
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Under the provision of ASC 740 Income Taxes, tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% of being realized on examination by the tax authority. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Comprehensive income
ASC Topic 220, "Reporting Comprehensive Income", requires the presentation of comprehensive income, in addition to the existing statements of operations. Comprehensive income is defined as the change in equity during the year from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation.
Available-for-sale financial assets
The Company’s available-for-sale financial assets consist of investment in unlisted equity securities and are recorded at cost.
The Company periodically assesses whether its investment in non-marketable equity securities are impaired and if any impairment is other than temporary. Factors considered in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, the Company’s ability and intent to hold the investment until recovery and overall economic conditions. A decline in value of these securities below cost that is deemed to be other than temporary results in an impairment charge to earnings that reduces the carrying amount of the securities to fair value establishing a new cost basis.
The Company principally takes into account the financial information of the investee and investment returns for the purpose of identifying potential impairments.
Property, plant and equipment (“PPE”) and long-term land lease prepayments
PPE are stated at cost less accumulated depreciation, and include expenditure that substantially increases the useful lives of existing assets.
The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditures incurred after the assets have been put into operation, such as repairs and maintenance, overhaul and minor renewals and betterments, are normally charged to operating expenses in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalized.
Depreciation is provided, on a straight-line basis, to write off the cost less accumulated depreciation of each PPE item at rates based on their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values as follows:
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Buildings 20 years
Leasehold improvements Over the unexpired term of lease
Furniture, fixtures and office equipment 10 years
Motor vehicles 5 years
Plant and machinery 10 years
When assets are sold or retired, their costs and accumulated depreciation are eliminated from the consolidated financial statements and any gain or loss resulting from their disposal is recognized in the period of disposition as an element of other income.
Construction-in-progress consists of factories and office buildings under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time the relevant assets are completed and ready for their intended use.
Long-term land lease prepayments are amortized on a straight-line basis over the term of lease.
Impairment of long-lived assets
Long-lived assets are reviewed at least annually for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and recorded as a reduction of original costs. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Inventories
Inventories are stated at the lower of cost or market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to market value.
Trade receivables and allowance for doubtful accounts
The allowance for the risk of non-collection of trade receivables takes into account credit-risk concentration. Collective debt risk is assessed based on average historical losses and specific circumstances such as serious adverse economic conditions. The Company’s estimate is based on a variety of factors, including historical collection experience, existing economic conditions and a review of the current status of the receivables. Trade receivables are presented net of an allowance for doubtful accounts of US$6,000 and US$6,000 as of March 31, 2012 and 2011, respectively.
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Cash and cash equivalents
Cash represents cash on hand and deposits with financial institutions which are repayable on demand. Cash equivalents represent short-term, highly liquid investments purchased with an original maturity of three months or less, which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Foreign currency translation
Items included in the financial statements of the Company’s major subsidiaries operating in the PRC are measured using Renminbi (RMB), the currency of the primary economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in United States Dollars (US$), which is the Company’s presentation currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.
On consolidation, the results and financial position of all the group entities that have a functional currency different from the presentation currency are translated as follows:
a.assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
b.income and expenses for each statement of operations are translated at average exchange rates;
c.all resulting exchange differences are recognized as a separate component of equity.
Fair value of financial instruments
The ASC Topic 825, “Disclosures about Fair Value of Financial Instruments”, requires that the Company discloses estimated fair value of financial instruments. The carrying amounts reported in the balance sheets for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Fair value measurements
ASC 820 establishes a three-tier fair value hierarchy to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:
Level 1:	Observable inputs, such as unadjusted quoted market prices in active markets for the identical asset or liabilities.
Level 2:	Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
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Level 3:	Unobservable inputs reflecting the entity’s own assumptions in measuring the asset or liability at fair value.
The Company’s financial instruments consist principally of cash and cash equivalents, restricted bank balances, other financial assets, trade receivables and payables, deposits, prepayment and other receivables, notes payable, accrued expenses and other liabilities, amount due from/to related parties and short-term borrowings which are carried at amounts that generally approximate their fair values because of the short-term maturity of these instruments.
The Company’s trading securities are measured at fair value on recurring basis. The trading securities are listed on a stock exchange in the PRC with quoted price in active market (Level 1 inputs).
Warranty
Estimated warranty costs are recognized at the time when the Company sells its products and are included in sales, marketing and distribution expenses. The Company uses historical failure rates and costs to repair product defects during the warranty period to estimate warranty costs, which are reviewed periodically in light of actual experience. The carrying amounts of estimated warranty costs were included in accrued expenses and other accrued liabilities as of March 31, 2012 and 2011.
Use of estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reported periods. The management evaluates these estimates and judgments on an ongoing basis and bases their estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that they believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies.
Actual amounts could differ from those estimates. Estimates are used for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation and amortization, inventory allowance, taxes and contingencies.
Recent accounting pronouncements
In May 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-04 is effective for public companies during interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated results of operation and financial condition.
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In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, the reporting entity must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a material impact on the Company's consolidated results of operation and financial condition.
In September 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing goodwill for impairment”. This ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under ASU 2011-08, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual periods beginning after December 15, 2011. The Company believes that the adoption of ASU 2011-08 will not have any impact on the Company's consolidated results of operation and financial condition.
In December 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (ASU) 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements on its financial position. This includes the effect or potential effect of rights of offset associated with an entity’s recognized assets and recognized liabilities and require improved information about financial instruments and derivative instruments that are either (1) offset in accordance with Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with Section 210-20-45 or Section 915-10-45. The amendments are effective for annual reporting periods beginning on or after January 1, 2013 and retrospective disclosure is required for all comparative periods presented. No early adoption is permitted. The Company believes that the adoption of ASU 2011-11 will not have any impact on the Company's consolidated results of operation and financial condition.
Results of Operations for the Fiscal Year Ended March 31, 2012 Compared To the Fiscal Year Ended March 31, 2011
The following table sets forth a summary of certain key components of our results of operations for years indicated, in dollars and as a percentage of revenues.
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Revenues and cost of sales
Revenue decreased by US$124,251,000 or 50.96%, to US$119,563,000 for the year ended March 31, 2012 compared with US$243,814,000 for the year ended March 31, 2011. This decrease was mainly attributable to the decrease in production activities resulting from an unexpected tightening of an environmental protection policy implemented by the PRC Central Government enforced on all lead-acid battery manufacturers whereby a 500 meter isolated area must be maintained between production facilities and residential areas. All production facilities must have complied with this policy on or before July 15, 2011. Our production facilities at Plant B (Jing’er Road) are not capable of being in full compliance with the tightened environmental policy and the residential area near Plant B shows no signs of slowing its expansion towards Plant B, which is out of the Company’s control. Our management decided to gradually scale down the operations of Plant B and to relocate such production facilities to Plant D, apart from recharging and packing activities, before December 31, 2011. At the date of this report we have completed our relocation from Plant B to Plant D.
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Although our production capacities gradually recovered, the Company lost its market share and it has taken time to recover. As such, our revenue decreased significantly.
Cost of sales for the year ended March 31, 2012 and 2011 were US$101,716,000 and US$214,456,000, respectively. The decrease in cost of sales of US$112,740,000 or 52.57% was mainly attributable to the decrease in sales volume resulting from the unexpected tightening of the environmental protection policy as stated above.
The decrease in cost of sales was also attributable to a significant decrease of processing charges on lead plates, one of the major components of our battery products, resulting from our vertical integration of producing lead plates at Plant D commencing in August 2011.
We have improved our gross profit margin during the year ended March 31, 2012. The gross profit ratio increased by 2.89% to 14.93% for the year ended March 31, 2012 as compared with 12.04% for the corresponding year in 2011. The improvement was mainly attributable to the decrease in cost of production by implementing the vertical integration strategy as discussed above as well as an increase in the selling price due to the shortage of battery supplies as a result of the environmental protection policy discussed above, which has forced hundreds of our competitors to shut down or to stop operations.
Depreciation and Amortization
Depreciation and amortization expense for the years ended March 31, 2012 and 2011 were US$1,994,000 and US$1,093,000, respectively. The increase of US$901,000 or 82.43% was mainly attributable to the additional depreciation charges of US$558,000 incurred as a result of the change of estimated useful life on certain machinery at Plant B. During the year ended March 31, 2012, we were advised by the local authority that the external battery formation technique, which was used in Plant B to produce battery products, will be prohibited after October 31, 2012. Our management reviewed the machinery in Plant B and identified that certain machinery cannot be used after that date and therefore, their estimated useful life was adjusted accordingly.
In addition, in order to expand our production capacity, we have invested significantly in plant and machinery at Plant D during the year ended March 31, 2012. As such, the depreciation increased accordingly.
Sales, marketing and Distribution
Sales, marketing and distribution expense increased by US$747,000 or 6.86% to US$11,629,000 for the year ended March 31, 2012 as comparing with US$10,882,000 for the year ended March 31, 2011.
During the year ended March 31, 2012, we suffered significantly as a result of the tightening of the environmental policy implemented by the PRC Central Government as discussed above. Our sales activities and associated expenses decreased significantly, such as transportation expenses and commission expenses, which decreased by US$1,723,000 and US$387,000, respectively, as comparing with the corresponding year in 2011.
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In order to recover market share, the Company increased its participation in exhibition events and engaged in more advertising activities during the year ended March 31, 2012. The relevant expenses were increased by US$437,000 as compared to the corresponding year in 2011.
For the purpose of complying with the tightened environmental protection policy, during the year ended March 31, 2012, we introduced the internal battery formation technique into our production. However, this technique is relatively new to the Company. We are unable to handle it as well as the external battery formation technique which we used before. Under the internal formation technique we were unable to repair all returned malfunctioning batteries. Also, as a result of the Company gradually closing down the repair facilities in Plant B by October 2012, part of the returned batteries could not be repaired. The Company temporarily used more new batteries for providing warranty services. As the cost of new batteries is higher than the cost of repaired batteries, the cost of warranty for the year ended March 31, 2012 increased significantly by US$2,145,000 to US$3,093,000 as compared with the corresponding year in 2011.
General and Administrative Expenses
General and administrative expenses were US$9,295,000 and US$4,138,000 for the years ended March 31, 2012 and 2011, respectively, and mainly consisted of staff salaries and benefits, research and development, depreciation expenses, material consumption and startup costs.
The increase in general and administrative expenses of US$5,157,000 or 124.63% for the year ended March 31, 2012 as compared to the corresponding year in 2011 was mainly attributable to (a) an increase of US$1,868,000 for staff salaries and benefits, such as staff cafeteria expenses and social insurance, due to the new operation of Plant D where we employed more administrative staff; (b) an increase in research and development expenses of US$986,000, which were mainly attributable to the resources invested in improving the quality of existing products, developing new production technique, developing new products as well as the increase in number of staff in our R&D department; (c) an increase in audit fees and consultancy expenses of US$158,000 and US$158,000, respectively; (d) an increase in office consumables of US$881,000 following the setup of a new office in Plant D; and (e) an increase in depreciation expense of US$209,000, which were mainly attributable to the operation of Plant D.
Impairment loss on property, plant and equipment
During the year ended March 31, 2012, the Company acquired certain machinery in order to manufacture lead plates under the external formation technique for commercial purposes in Jiangsu Province. However, on March 1, 2012, the PRC government released a consultation paper concerning further governance and restrictions on the lead acid battery industry. In accordance with the consultation paper, any new projects for the manufacturing of lead plates for commercial purposes in the PRC will not be approved.
After reviewing the consultation paper, management believes that it is highly likely that the proposed policies not granting approval to any new project of manufacturing lead plates for commercial purposes would be implemented and enforced by the PRC government in the near future.
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Management reviewed the recently acquired machinery immediately and identified items which could be directly integrated into our existing lead acid battery production lines operating under the internal formation technique. For those items which could not be integrated directly, after a costs and benefits analysis of modification, management decided to dispose of them in the near future. As of March 31, 2012, a full impairment, amounting to US$2,857,000, was provided for the machinery as management estimated that the scrap value of the assets are minimal.
On May 31, 2012, the PRC government released a new policy to govern the lead acid battery industry, effective July 1, 2012, which confirmed management’s estimation of the final implementation of the tightened policies as initiated in the consultation paper referenced above.
Loss on disposal of scrap inventories
During the year ended March 31, 2012, the Company was advised by the local authority of Changxing County that its current production technique, external battery formation, in Plant B can no longer be used after October 31, 2012. Plant B is the only facility of the Company for repairing returned batteries which were produced under the external battery formation technique. After analyzing the future return rate of the batteries and our current inventory level, management considered that the Company’s current production capacity in Plant B was not adequate to repair all future returned batteries and existing inventories. Management decided to dispose of the obsolete inventories and the Company recognized a loss on disposal of scrap inventories of US$13,896,000 for the year ended March 31, 2012.
Interest Income
Interest income was US$1,766,000 and US$483,000 for the year ended March 31, 2012 and 2011, respectively. The increase of US$1,283,000 or 265.63% was mainly attributable to the increase in the average deposit interest rate as well as an increase in restricted cash pledged for facilities granted by banks.
(Loss) Income before Interest and Income Tax Expenses
Loss before interest and income tax expenses was US$17,204,000 for the year ended March 31, 2012 as compared with income of approximately US$14,275,000 for the corresponding year in 2011. The decrease of US$31,479,000 or 220.52% was mainly attributable to a decrease in gross income of US$11,511,000 and an increase in general and administrative expense of US$5,157,000, the impairment loss on property, plant and equipment of US$2,857,000 and the loss on the disposal of scrap inventories of US$11,568,000.
Interest expense
Interest expense for the year ended March 31, 2012 and 2011 was US$8,812,000 and US$3,359,000, respectively. The increase in interest expense of US$5,453,000 or 162.34% was mainly attributable to the increase in banking facilities utilized by the Company as well as an increase in interest rate.
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Income Taxes expense
Income tax was US$1,047,000 and US$2,447,000 for the year ended March 31, 2012 and 2011, respectively. The decrease in income tax expense of US$1,400,000 or 57.21% was mainly attributable to the decrease in the Company’s operating profit during the year.
Extraordinary Gain
During the year ended March 31, 2012, we completed the relocation of Plant A at Jingyi Road. Pursuant to the Compensation Agreement on Relocation and Acquisition entered into by CCEC and the Administrative Committee of Changxing Economic Development Zone (ACC), ACC shall pay us compensation in the amount of RMB98,514,000 (US$15,354,000) for the loss on long-term land lease prepayment and buildings located at Jingyi Road. In May 2011, the Company wrote off the long-term land lease prepayment and buildings at Jingyi Road with a net book value of approximately RMB14,354,000 (US$2,237,000) and therefore, net compensation income of approximately RMB84,160,000 (US$13,117,000) was recognized for the year. The transaction of relocation was considered an involuntary conversion of a non-monetary asset into a monetary asset. According to ASC605-40-25, to the extent the cost of a nonmonetary asset differs from the amount of monetary assets received, the result of the realization of a gain from the transaction is recognized. The relocation activity is abnormal and significantly different from the ordinary and typical activities of the Company and is not expected to recur in the foreseeable future. In accordance with ASC225-20, the Company classified the gain as an extraordinary item. Pursuant to the Implementation Regulations to the EIT law of the PRC, only the portion of compensation income exceeding the reinvestment amount related to the relocation was taxable. All compensation income received by the Company would be reinvested into the fixed assets and long-term land lease prepayment of Plant C at Jingsi Road and therefore, no income tax was applicable.
Extraordinary Loss
During the year ended March 31, 2012 and without advance notice to the Company, the PRC Central Government tightened its environmental protection policy which applies to all lead-acid battery manufacturers. Pursuant to the new policy, a 500 meter isolated area must be maintained between production facilities and residential areas. From the beginning of May 2011, the Zhejiang Environmental Protection Bureau (ZEPB) conducted an environmental sanitation investigation at Plant B. The results showed that the sewage and exhaust complied with national standards in China, however, the Company is not maintaining the 500 meter isolated area between production facilities and residential areas. The ZEPB requires all production facilities at Plant B to have complied with and meet the adjusted environmental policy prior to July 15, 2011. However, the Company was permitted by the government to continue to conduct our battery charging activities and packing activities until October 31, 2012. We did not suffer any penalty due to this tightened environmental protection policy.
As such, the impairment loss of some fixed assets, including plant and machinery together with a leasehold improvement of approximately US$1,848,000, were recognized as an extraordinary loss. Management considers that this Government behavior is very unusual and therefore the impairment loss was classified as an extraordinary item.
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Pursuant to the Implementation Regulations to the EIT law of the PRC, the impairment loss can only be recognized when the relevant assets were disposed. Since the actual amount of loss in the future cannot be assessed accurately, no tax benefit was recognized.
As of the date of this report, the Government preliminarily agreed to re-designate the land in Changxing County to us for redevelopment. Prior to the new plant in Changxing County being built, our lead-acid battery production was relocated to Plant D.
Net (Loss) Income Including Non-Controlling Interest
Net loss including non-controlling interest was US$15,794,000 for the year ended March 31, 2012 as compared with a net income of US$11,074,000 at the corresponding year in 2011. The decrease of US$26,868,000 or 242.62% was mainly attributable to an increase in general and administrative expense of US$5,157,000, impairment loss on property, plant and equipment of US$2,857,000, loss on disposal of scrap inventories of US$11,568,000, interest expense of US$5,453,000 and a decrease in gross income of US$11,511,000, offset by increase in net gain on extraordinary items of US$8,664,000.
Liquidity and Capital Resources
The Company generally finances its operations through profits generated from its operations and through borrowings from banks.
During the reporting periods, the Company entered into a number of short-term bank loans to satisfy its financing needs. As of the date of this report, we have not experienced any difficulty in raising funds by bank loans, and we have not experienced any liquidity problems in settling our payables in the normal course of business and repaying our bank loans when they fall due.
The following table sets forth the summary of our cash flows, in U.S. dollars, for the periods indicated:
Operating Activities
During the year ended March 31, 2012, our operations were significantly impaired as a result of an unpredictable tightening of an environmental policy implemented by the PRC Central Government as discussed above. Our net cash provided by operating activities decreased significantly from US$21,566,000 for the year ended March 31, 2011 to US$10,833,000 for the year ended March 31, 2012. The decrease in cash inflow of US$10,733,000 or 49.77% was mainly attributable to the decrease in operating result of US$26,816,000, increase in other receivable of US$6,341,000 and decrease in bills payable of US$43,870,000, offset by decrease in trade receivables of US$67,090,000.
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Investing Activities
Our net cash used in investing activities increased by US$68,762,000 or 183.74% to US$106,185,000 for the year ended March 31, 2012 as comparing with US$37,423,000 for the year ended March 31, 2011.
During the year ended March 31, 2012, we invested significantly in Plant D in order to comply with the environment protection policy discussed above and shifted all our production capacity from Plant B to Plant D. For these reasons our cash used in investment of property plant and equipment and a deposit paid for acquisition of land and property, plant and equipment for the year ended March 31, 2012 increased US$28,546,000 and US$4,228,000, respectively as compared with the corresponding year of 2011.
Apart from the issues discussed above, the increase of US$68,762,000 net cash outflow was also attributable to the increase in deposits paid for land auctions and investment in restricted bank balance of US$30,898,000 and US$22,149,000 offset by an increase in compensation income received for loss of plant and machinery and leasehold improvement of US$11,980,000 and a decrease in investment in long-term land lease prepayment of US$3,354,000.
Financing Activities
Net cash provided by financing activities was US$101,283,000 and US$17,233,000 for the years ended March 31, 2012 and 2011 respectively. The increase of US$84,050,000 or 487.73% was mainly attributable to the increase in net proceeds from bills financing and short-term bank loans of US$59,673,000 and US$23,223,000, respectively.
Working Capital
During the year ended March 31, 2012 we had negative working capital of US$38,937,000 which, together with our decrease in sales revenues of US$124,251,000 or 50.96% and our net (loss) attributable to CIEC common stockholders of US$(15,742,000) raises substantial doubt about our ability to continue as a going concern.
The negative working capital was mainly attributable to the significant increase in loss from operation and the increase in long term capital investment.
During the year ended March 31, 2012, the Company suffered significantly from the result of the tightening of an environmental protection policy implemented by the PRC Central Government as discussed above. The Company shut down most of its production activities. We lost our market share and our revenues decreased significantly.
In order to rebuild and shift production capacity from Plant B to Plant D, we invested significantly in land lease prepayment and property, plant and equipment in Plant D. Accompanying with the decrease of cash generated from operations, it was necessary for us to increase bank borrowings to fund this project.
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For these reasons, our working capital decreased by US$52,877,000 or 364.97% as compared with the corresponding period of 2011.
In order to improve working capital flow, management decided to defer and/or decrease long term investment so as to maintain sufficient short term funds. Also, the Company’s principal stockholder may provide financial support as may be required to maintain the Company as a going concern at least for the next twelve months from the date of this report. Notwithstanding the above, the Company has regular cash flow control measures over the liquidity of its working capital as stated in the financial statements to strictly monitor the condition of the working capital. Apart from the above, management is confident that business is recovering and will continue to do so, which may also help improve working capital flow.
Capital Commitment
As of March 31, 2012 and 2011, the Company had outstanding capital expenditure commitments of approximately US$122,845,000 and US$150,448,000, respectively. The outstanding capital expenditure mainly relates to various construction projects and the purchase of land and machinery pursuant to the Project Investment Contract entered with Jiangsu Xuyi Economic Development Zone Administration Committee on September 6, 2010 and the Investment Agreement entered with the Administrative Committee of Changxing Economic Development Zone on August 20, 2010 as discussed above.
On April 26, 2012 and June 20, 2012, the Company had successfully obtained the land use rights of two pieces of land in Xuyi Country, Jiangsu province, PRC respectively. Total land size was 83,658 m2 with a total price of approximately US$31,262,000.
In order to enhance cash flow management, the Company decided to sell this land in the next twelve months. The land will be classified as assets held for sales and measured at the lower of its carrying amount and fair value less costs to sell.
At the date of this report, the Company has fully settled the cost of purchases and the Company has no current or future plans for a material capital commitment regarding these transactions.
Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions of foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not required for a “smaller reporting company”.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the “F” pages herein comprising a portion of this report.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
There were no changes in and disagreements with our independent accountants on accounting and financial disclosure for the fiscal year ended March 31, 2012.
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ITEM 9A.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, our management, including our principal executive officer and our principal financial officer, concluded that our disclosure controls and procedures were effective as of the fiscal quarter covered by this report, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act (i) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow appropriate decisions on a timely basis regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control structure and procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2012 based on the framework set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting as of March 31, 2012 was effective.
This report contains an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
None.
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PART III
ITEM 10.
ITEM 10. Directors, Executive Officers, and Corporate Governance
Executive Officers, Directors and Key Employees
The following individuals constitute our board of directors and executive management as of June 28, 2012. Our last annual meeting was held on September 9, 2010 at the Changxing International Hotel, No. 1 Taihu Rd., Changxing, Zhejiang Province, PRC, whereby stockholders of record on August 11, 2010 approved the appointment of Xu Kecheng, Liu Chuanjie, Lou Shourong, Dong Quanfeng, Jiang Yanfu, Gong Xiaoyan and Yun Hon Man, to our Board.
Name
Age
Position(s)
Xu Kecheng
Chairman of the Board, Chief Executive Officer & President
Liu Chuanjie
Chief Financial Officer, Treasurer, Director
Lou Shourong
Vice-President, Director
Fei Wenmei
Corporate Secretary
Zhu Zhongli
Vice-President of Sales
Dong Quanfeng
Independent Director
Jiang Yanfu
Independent Director
Gong Xiaoyan
Independent Director
Yun Hon Man
Independent Director
Gui Changqing
Significant Employee
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our stockholders or until removed from office in accordance with our Bylaws. Our officers are appointed by the Board and hold office until removed by the Board.
Biographies of Officers and Directors
Xu Kecheng. Mr. Xu has served as President, Chief Executive Officer and a Director of the Company since November 12, 2008. Mr. Xu founded CCEC in 2002 and has served as CCEC’s President and Chairman of the Board since its inception. Besides successfully establishing and running CCEC, Mr. Xu also acquired Ai Ge Organism Products Co., Ltd., a biological & pharmaceutical company in China in November 2006 where he serves as Chairman of the Board and Executive Director. In 2002, Mr. Xu was involved in the formulation of coated tempered glass panel standards used for home gas kitchen ranges, which was put on the list of the National Building Materials Industry Standard. Mr. Xu graduated from Hangzhou University in 1997 with the major in economic management. In addition to serving as senior economist to the Company, Mr. Xu is a member of China Battery Industry Association, a member of Huzhou CPPCC, a member of the Standing Committee of Changxing People’s Congress and he has been honored with the title of “Integrity Entrepreneur” by the Changxing Government. Mr. Xu also finished a course of study at the class of advanced training at the Party School of the CPC Central Committee.
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Liu Chuanjie. Mr. Liu has served as Chief Financial Officer of the Company since June 15, 2010, as Treasurer of the Company since November 12, 2008 and has served as a Director of the Company since November 24, 2008. Mr. Liu also serves as Controller, Director of Finance and as a Director of CCEC since May 2004. Mr. Liu has expertise in accounting systems and national accounting policies, fund raising and investing. Prior to joining CCEC, Mr. Liu served as the head of the financial department of Changxing Chisen Xinguangyuan Co., Ltd., a manufacturing company in China, from October 2000 to April 2004. Mr. Liu received his Degree in Economic and Administration Management at the Nanjing Institute of Political Studies in 2009.
Lou Shourong. Mr. Lou has served as a Vice President of the Company since November 12, 2008 and as a Director since September 9, 2010. From October 2007 to present, Mr. Lou has served as a Deputy General Manager of CCEC, a manufacturing company in China. From April 2006 to September 2007, Mr. Lou served as Executive Deputy General Manager for Changxing Nuo Wan Te Ke Co., Ltd., a manufacturing company in China. Prior to that, Mr. Lou served as the factory director and marketing manager in Changxing Chisen Glass Co., Ltd., a manufacturing company in China from June 1996 to March 2006. Mr. Lou has extensive experience in materials supply, procurement and production plan management.
Fei Wenmei. Ms. Fei has served as Corporate Secretary of the Company since November 12, 2008. In March 2005, Ms. Fei joined CCEC as Chief Administrative Manager in charge of corporate brand building, intellectual property and project application. Ms. Fei currently serves CCEC as an assistant economist and clean production management controller. From March 1991 to February 2005, Ms. Fei served as Chief Administrative Manager of the Huaneng Changxing Power Plant Industry & Trading Company and prior to that she served as Chief of Staff at the Changxing Land Administration Bureau from March 1987 to February 1991. Ms. Fei has been engaged in administrative management for many years and has vast experience in corporate administrative management. Ms. Fei graduated from Zhejiang Radio and Television University with a degree in Chinese Language.
Zhu Zhongli. Mr. Zhu has served as Vice-President of Sales of the Company since June 3, 2009. Mr. Zhu is in charge of overall sales and marketing management. Mr. Zhu previously served as the Assistant General Manager of the Company since August 2006. Prior to joining the Company, Mr. Zhu served as the General Manager of Changxing Lida Wear-Resisting Material Co., Ltd., a manufacturing company in China, since March 1999. Mr. Zhu has extensive experience in the local Chinese market and has achieved outstanding success in sales of storage batteries in China.
Dong Quanfeng. Professor Dong has served as a Director of the Company since November 24, 2008. Professor Dong has served as a Chemistry professor and doctorial tutor at the Department of Chemistry of Xiamen University since March 2006. Professor Dong concurrently acts as a visiting research fellow at the National Hi-Tech Green Material Development Center, is a Member of the Editorial Board of the industry magazine “Battery” is a Member of the Chinese Institute of Electrics Chemical and Physical Power Committee, a Member of ISE, a Member of the American ECS and is the Vice Director of the Changxing Chisen Physical Chemistry Battery Research Center. Professor Dong is engaged in the research of new chemical electric power sources and related energy storage material and has finished several national and provincial-municipal scientific research projects. In 1997, Professor Dong won the provincial second prize of the Development of Science and Technology. In 1999, Professor Dong won the technology innovation prize of Hubei province. In 2004, Professor Dong won third prize of the Development of Science and Technology of Xiamen. In 2006, he won the title of “Technology Innovation Advanced Individual” by the National Information Industry. Professor Dong has issued over 80 papers on internationally significant academic journals and has applied for several patents. Prior to his employment as a full time professor at Xiamen University, Professor Dong served as an associate professor at Xiamen University since January 2001. Mr. Dong graduated from Wuhan University with a Ph D degree in Chemistry and performed postdoctoral research at Israel Technical Institute.
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Jiang Yanfu. Professor Jiang has served as a Director of the Company since November 24, 2008. Professor Jiang has served as a professor and doctorial tutor of business administration at Tsinghua University since December 1993. Professor Jiang has served as Dean of the Entrepreneurial Research Center since April 2000 and has served as academic director-general and co-founded of Trinity Innovation since December 2003, a consulting company in China. Professor Jiang has expertise in entrepreneurial management, corporate governance and institutional economics. He has undertaken many important research programs such as the “Theoretical Study on Chinese Technology Innovation.” He served as a director of and as an advisor to many companies. Professor Jiang’s main research fields include risk investment and entrepreneurial management, corporate governance and cyber economy. The major courses he has instructed include Entrepreneurial Management, Technology and Institution Innovation, and Analysis of Institutional Economics.
Gong Xiaoyan. Ms. Gong has served as a Director of the Company since November 24, 2008. Ms. Gong currently serves as Chairman of Tianjin Bicycle Industrial Association, a non-governmental organization in China since June 2006. Prior to that, Ms. Gong served as Secretary-general of Tianjin Bicycle Industrial Association, a non-govermental organization in China since September 1998. She has been honored with the titles “China Top-Hundred Female Entrepreneurs,” “Most Influential Enterprises Leader of China” and “Tianjin Female Entrepreneur” issued by Tianjin Municipal Government.
Yun Hon Man. Mr. Yun has served as a director of the Company since November 24, 2008. Mr. Yun has served and continues to serve as a Corporate Consultant with Smart Pine Investment Limited since September 2007, a consulting firm organized under the laws of Hong Kong. Mr. Yun also serves as a Director of CH Lighting International Corporation (OTCBB: CHHN) since July 28, 2008 and as a Director of Xinde Technology Company (OTCBB: WTFS) since January 2010. Mr. Yun also served as Chief Operating Officer of China INSOnline Corp. (NASDAQ: CHIO) from January 2008 through April 2010. Prior to that, Mr. Yun served as Corporate Controller of Hi-Tech Wealth Inc. (n/k/a China Mobile Media Technology, Inc.)(OTCBB: CHMO) from January 2007 through August 2007. From January 2003 through December 2006, Mr Yun served as Corporate Controller of General Components, Inc. (n/k/a China Mobile Media Technology, Inc.)(OTCBB: CHMO). Mr. Yun is a Chartered Accountant having memberships with the Institute of Chartered Accountants in England and Wales. He is also a Fellow Member of the Chartered Association of Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants. He was a member of Association of International Accountants, the Society of Registered Financial Planners, the Institute of Financial Accountants and the Institute of Crisis and Risk Management. Mr. Yun received his MBA at the University of Western Sydney in 2007.
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Biographies of Significant Employees
Gui Changqing. Mr. Gui has served and continues to serve as Chief Scientist at the Zhejiang Changxing Chisen Physical-Chemical Power Supply Research and Development Center since June 2007 and as counselor of the 712 Institute since January 2005. Prior to that, Mr. Gui served as expert team member of the 712 Institute from January 2001 to December 2004. Early in his career Mr. Gui was engaged in the R&D of the powered lead-acid battery for the national military in China serving as General Engineer and Researcher. The product won a scientific and technical award from the State Commission of Science and Technology. Mr. Gui has published more than 100 papers of international significance and has trained 24 postgraduates. Mr. Gui is extremely well respected by his peers in the storage battery industry. In 1992, he won the special government allowance from the State Council, has served as Director of the Association of Chinese Chemical Physics Power Industry and as a Director of the Wuhan Power Supply Society. Mr. Gui earned his doctorate degree in electrochemistry from Shanghai Fudan University.
Code of Business Conduct and Ethics
The Company’s Board of Directors adopted a Code of Business Conduct and Ethics to help ensure compliance with legal requirements and our standards of business conduct. The Code of Business Conduct and Ethics applies to directors, officers and employees of Chisen. A copy of our Code of Business Conduct and Ethics is attached as Exhibit 14.1 to our Current Report on Form 8-K as filed with the SEC on February 4, 2009 which is accessible at the SEC’s website at www.sec.gov. The Code of Business Conduct and Ethics, and any amendments or waivers therefrom is also available in print, at no charge, to any stockholder who makes a written request to: Chief Financial Officer, Chisen Electric Corporation, Jingyi Road, Changxing Economic Development Zone, Changxing, Zhejiang Province, The People’s Republic of China.
Director Independence
Our Board of Directors has determined that 4 out of the 7 members of our Board of Directors are independent based on the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The following directors are independent: Dong Quanfeng, Jiang Yanfu, Gong Xiaoyan and Yun Hon Man. The following directors are not independent: Xu Kecheng, Liu Chuanjie and Lou Shourong.
Family Relationships
There are no family relationships by and between or among the members of the Board or other executives. None of our directors and officers are directors or executive officers of any company that files reports with the SEC except as set forth in the biographies section above.
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Legal Proceedings Involving Officers and Directors
Unless otherwise indicated, to the knowledge of the Company after reasonable inquiry, no current director or executive officer of the Company during the past ten years, has (i) been convicted in a criminal proceeding (excluding traffic violations or other minor offenses), (ii) been a party to any judicial or administrative proceeding (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, U.S. federal or state securities laws, or a finding of any violation of U.S. federal or state securities laws, (iii) filed a petition under federal bankruptcy laws or any state insolvency laws or has had a receiver appointed for the person’s property or (iv) been subject to any judgment, decree or final order enjoining, suspending or otherwise limiting for more than 60 days, the person from engaging in any type of business practice , acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity or engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws, (v) been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated, (vi) been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated, (vii) been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (a) any Federal or State securities or commodities law or regulation, (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity, or (viii) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
There are no material pending legal proceedings to which any of the individuals listed above is party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries. There are no family relationships between directors and executive officers of the Company.
Committees of our Board of Directors
As of January 15, 2009, our Board of Directors has an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee established in accordance with the Exchange Act and NASDAQ rules. Prior to January 15, 2009, we did not have an Audit Committee, a Compensation Committee or a Corporate Governance and Nominating Committee. During the fiscal year ended March 31, 2012, the Audit Committee met 4 times, the Compensation Committee met 1 time and the Corporate Governance and Nominating Committee met 1 time. A brief description of each committee is set forth below.
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¨ Audit Committee - The purpose of the Audit Committee is to provide assistance to our Board of Directors in fulfilling their oversight responsibilities relating to our consolidated financial statements and financial reporting process and internal controls in consultation with our independent registered public accountants. The Audit Committee is also responsible for ensuring that the independent registered public accountants submit a formal written statement to us regarding relationships and services which may affect the auditor’s objectivity and independence. The Board appointed Yun Hon Man, Gong Xiaoyan, Dong Quanfeng and Jiang Yanfu to serve as members of the Audit Committee, with Yun Hon Man serving as Chairman, commencing on January 15, 2009. Our Audit Committee financial expert is Yun Hon Man, an independent director.
¨ Compensation Committee - The purpose of the Compensation Committee is to review and make recommendations to our Board of Directors regarding all forms of compensation to be provided to our executive officers and directors, including stock compensation and loans, and all bonus and stock compensation to all employees. The Board appointed Jiang Yanfu, Dong Quanfeng, Yun Hon Man and Gong Xiaoyan to serve as members of the Compensation Committee, with Jiang Yanfu serving as Chairman, commencing on January 15, 2009.
¨ Corporate Governance and Nominating Committee - The purpose of the Nominating Committee is to review the composition and evaluate the performance of the Board, recommend persons for election to the Board and evaluate director compensation. The Nominating Committee is also responsible for reviewing the composition of committees of the Board and recommending persons to be members of such committees, and maintaining compliance of committee membership with applicable regulatory requirements. The Company does not have a formal diversity policy. Although the Board does not currently have formal specific minimum criteria for nominees, substantial relevant and diverse business and industry experience would generally be considered important qualifying criteria, as would the ability to attend and prepare for Board and shareholder meetings. We have not adopted procedures by which security holders may recommend nominees to our Board of Directors. The Board appointed Gong Xiaoyan, Dong Quanfeng, Yun Hon Man and Jiang Yanfu to serve as members of the Corporate Governance and Nominating Committee, with Gong Xiaoyan serving as Chairman, commencing on January 15, 2009.
¨ Strategy and Steering Committee - Xu Kecheng and Wang Chunyan served as members of the Strategy and Steering Committee, with Xu Kecheng serving as Chairman, during the fiscal year ended March 31, 2012.
Committee Charters
On January 15, 2009, the Board approved Charters for each of the Audit Committee, Compensation Committee and the Corporate Governance and Nominating Committee.
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Director Qualifications and Experience
The following discussion sets forth the specific experience, qualifications, attributes and skills that the Company considered in making its decision to appoint and nominate directors to the Board.
Mr. Xu Kecheng was selected to serve on the Board based on his management and corporate governance experience having founded CCEC in 2002 and having served as Chairman of the Board and President of that company, President and Chief Executive Officer of the Registrant as well as serving as Chairman of the Board and Executive Director of Ai Ge Organism Products Co., Ltd., a biological and pharmaceutical company in China. Mr. Xu was also chosen to serve on the Board based on his professional standing in the industry as a member of the China Battery Industry Association, a member of Huzhou CPPCC, a member of the Standing Committee of Changxing People’s Congress and having been honored with the title of “Integrity Entrepreneur” by the Changxing Government. Lastly, Mr. Xu was selected based on his expertise in the industry and in management, having been involved in the formulation of coated tempered glass panel standing used for home gas kitchen ranges, which was put on the list of National Building Materials Industry Standard and having graduated from Hangzhou University with a major in economic management.
Mr. Liu Chuanjie was selected to serve on the Board based on his financial management experience having served as Controller, Director of Finance and as a Director of CCEC since 2004 and as head of the financial department of Changxing Chisen Xinguanyuan Co., Ltd., a manufacturing company in China from October 2000 to April 2004. Mr. Liu was also selected to serve on the Board based on his expertise in accounting systems and national accounting policies, fund raising and investing, and having graduated from Nanjing PLA Polytechnic University with a degree in economics and management.
Mr. Lou Shourong was selected to serve on the Board based on his management experience having served as Deputy General Manager of CCEC since October 2007 and Executive Deputy General Manager of Changxing Nuo Wan Te Ke Co., Ltd., a manufacturing company in China. Mr. Lou was also selected based on his extensive experience in materials supply, procurement and production plan management, having served as the factory director and marketing manager in Changxing Chisen Glass Co., Ltd., a manufacturing company in China from June 1996 to March 2006.
Professor Dong Quanfeng was selected to serve on the Board based on his professional standing and expertise in the industry, having served as a Chemistry professor and doctorial tutor at the Department of Chemistry of Xiamen University since March 2006, as a visiting research fellow at the National Hi-Tech Green Material Development Center in China, as a Member of the Editorial Board of the industry magazine “Battery”, as a Member of the Chinese Institute of Electrics Chemical and Physical Power Committee, as a Member of ISE, as a Member of the American ECS and as the Vice Director of the Changxing Chisen Physical Chemistry Battery Research Center. Professor Dong is engaged in the research of new chemical electric power sources and related energy storage material and has finished several national and provincial-municipal scientific research projects. In 1997, Professor Dong won the provincial second prize of the Development of Science and Technology. In 1999, Professor Dong won the technology innovation prize of Hubei province. In 2004, Professor Dong won third prize of the Development of Science and Technology of Xiamen. In 2006, he won the title of “Technology Innovation Advanced Individual” by the National Information Industry. Professor Dong has issued over 80 papers on internationally significant academic journals and has applied for several patents.
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Professor Jiang Yanfu was selected to serve on the Board based on his professional standing and expertise in entrepreneurial management, corporate governance and institutional economics, having served as a professor and doctorial tutor of business administration at Tsinghua University since December 1993, as Dean of the Entrepreneurial Research Center since April 2000 and as academic director-general and co-founded of Trinity Innovation since December 2003, a consulting company in China. He has undertaken many important research programs such as the “Theoretical Study on Chinese Technology Innovation.” He served as a director of and as an advisor to many companies. Professor Jiang’s main research fields include risk investment and entrepreneurial management, corporate governance and cyber economy. The major courses he has instructed include Entrepreneurial Management, Technology and Institution Innovation, and Analysis of Institutional Economics.
Ms. Gong Xiaoyan was selected to serve on the Board based on her professional standing in the industry and her civic and community involvement, having served as Chairman of Tianjin Bicycle Industrial Association, a non-governmental organization in China since June 2006 and having been honored with the titles “China Top-Hundred Female Entrepreneurs,” “Most Influential Enterprises Leader of China” and “Tianjin Female Entrepreneur” issued by Tianjin Municipal Government.
Mr. Yun Hon Man was selected to serve on the Board based on his experience in finance and accounting as a “financial expert” as defined under the rules of the SEC and for his US public company experience as an officer, director and audit committee chairman, having served as a director of CH Lighting International Corporation (OTCBB: CHHN) since July 28, 2008, as a Director of Xinde Technology Company (OTCBB: WTFS) since January 2010 and having previously served as Chief Operating Officer of China INSOnline Corp. (NASDAQ: CHIO) from January 2008 through April 2010. Mr. Yun is a Chartered Accountant having memberships with the Institute of Chartered Accountants in England and Wales. He is also a Fellow Member of the Chartered Association of Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants. He was a member of Association of International Accountants, the Society of Registered Financial Planners, the Institute of Financial Accountants and the Institute of Crisis and Risk Management. Mr. Yun received his MBA at the University of Western Sydney in 2007.
Board Leadership Structure
The Board believes that the Company’s Chief Executive Officer is best situated to serve as Chairman of the Board because he is ultimately responsible for the day-to-day operation of the Company and is the director most familiar with the Company’s business and industry and most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy. Independent directors and management have different perspectives and roles in strategy development. Our independent directors bring experience, oversight and expertise from outside the Company and industry, while the Chief Executive Officer brings company-specific experience and expertise. The Board believes that the combined role of Chairman and Chief Executive Officer promotes strategy development and execution, and facilitates information flow between management and the Board, which are essential to effective governance.
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One of the key responsibilities of the Board is to develop strategic direction and hold management accountable for the execution of strategy once it is developed. The Board believes the combined role of Chairman and Chief Executive Officer, together with the presence of four independent directors on the Board, is in the best interest of shareholders because it provides the appropriate balance between strategy development and independent oversight of management. The Board retains the authority to modify this structure to best address the Company’s unique circumstances, and so advance the best interests of all shareholders, as and when appropriate.
The Board’s Role in Risk Oversight
The Board oversees our shareholders’ interest in the long-term health and the overall success of the Company and its financial strengths. The full Board is actively involved in overseeing risk management for the Company. It does so in part through discussion and review of our business, financial and corporate governance practices and procedures. The Board, as a whole, reviews the risks confronted by the Company with respect to its operations and financial condition, establishes limits of risk tolerance with respect to the Company’s activities and ensures adequate property and liability insurance coverage.
Because of the role of the Board in the risk oversight of the Company, the Board believes that any leadership structure that it adopts must allow it to effectively oversee the management of the risks relating to the Company’s operations. The Board recognizes that there are different leadership structures that could allow it to effectively oversee the management of the risks relating to the Company’s operations, and while the Board believes its current leadership structure enables it to effectively manage such risks, it was not the primary reason the Board selected its current leadership structure over other potential alternatives. See the discussion under the heading “Board Leadership Structure” above for a discussion of why the Board has determined that its current leadership structure is appropriate.
ITEM 11.
ITEM 11. Executive Compensation
Compensation Discussion and Analysis
Not required for a “smaller reporting company”.
Summary Compensation Table
The following table sets forth compensation information for services rendered by our named executive officers in all capacities during the last 3 completed fiscal years (ended March 31, 2012, 2011 and 2010). The following information includes the U.S. dollar value of base salaries, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.
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(1) Xu Kecheng has served as the Company’s Chief Executive Officer and President effective as of November 12, 2008. Mr. Xu also served (and continues to serve) as President of CCEC during the fiscal years ended March 31, 2012, 2010 and 2009. Mr. Xu’s compensation for the years ended March 31, 2012, 2011 and 2010 reflects his services as CEO and President of the Company and President of CCEC, combined.
(2) Liu Chuanjie has served as the Company’s Treasurer effective as of November 12, 2008. Mr. Liu also served (and continues to serve) as Controller and Director of Finance of CCEC during the fiscal years ended March 31, 2012, 2010 and 2009. Mr. Liu’s compensation for the years ended March 31, 2012, 2011 and 2010 reflects his services as Treasurer of the Company and Controller and Director of CCEC, combined. Mr. Liu has served as Chief Financial Officer of the Company since June 15, 2010.
(3) He Zhiwei served as the Company’s Chief Financial Officer effective as of November 12, 2008 until June 15, 2010. Mr. He’s compensation for the years ended March 31, 2011 and 2010 reflects his services as CFO of the Company during such time periods.
As of March 31, 2012, the Company did not have any “Grants of Plan-Based Awards,” “Outstanding Equity Awards,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans” or “Potential Payments Upon Termination or Change in Control” to report.
Furthermore, the Company does not have any bonuses, stock awards, option awards, non-executive incentive plan compensation or non-qualified deferred compensation earnings to report.
Narrative Disclosure to Summary Compensation Table
The Company has no other compensation plans other than basic salary and benefits.
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Additional Narrative Disclosure
Employment Agreements
There are currently no employment agreements by and between the Registrant and its officers and employees. CCEC has a labor contract with each employee as required by law in the PRC. The labor contract mainly includes working content, contract period, working time, payment and other terms.
Benefit Plans
The Company has no stock option, retirement, pension or profit-sharing programs for the benefit of its directors, officers or other employees; however our Board may recommend the adoption of one or more such programs in the future.In accordance with Chinese law, CCEC offers a welfare program pursuant to which it pays pension, accident, medical, birth, job and house allowance payments for all contract employees of CCEC.
Director Compensation
We did not provide any compensation to our Directors during the fiscal years ended March 31, 2012 and 2011. We may establish certain compensation plans (e.g. options, cash for attending meetings, etc.) with respect to Directors in the future.
Indemnification of Directors and Executive Officers and Limitations of Liability
Nevada law authorizes, and our Bylaws and Articles of Incorporation provide for, indemnification of our directors and officers against claims, liabilities, amounts paid in settlement and expenses in a variety of circumstances. Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
We may enter into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification provisions permitted by Nevada law, and that may provide additional procedural protection. As of the date of this annual report, we have not entered into any indemnification agreements with our directors or officers, but may choose to do so in the future. Such indemnification agreements may require us, among other things, to:
¨ indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors;
¨ advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions; or
¨ obtain directors’ and officers’ insurance.
At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.
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ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth each person known by us to be the beneficial owner of five (5%) percent or more of our Common Stock, all directors individually and all directors and officers as a group as of June 28, 2012. Each person named below has sole voting and investment power with respect to the shares shown unless otherwise indicated.
(1) Unless otherwise noted, each beneficial owner has the same address as the Registrant.
(2) Applicable percentage of ownership is based on 500,000,000 shares of our Common Stock outstanding as of June 13, 2011, together with securities exercisable or convertible into shares of Common Stock within sixty (60) days of June 28, 2012 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Note that affiliates are subject to Rule 144 and Insider trading regulations - percentage computation is for form purposes only.
(3) Xu Kecheng may be considered to beneficially own 329,000,000 shares by virtue of his 100% ownership in Wisejoin Group Limited, which owns and controls 100% of Cheer Gold, which directly beneficially owns 329,000,000 shares of Common Stock.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
During the fiscal year ended March 31, 2012, the Company purchased raw materials, amounting to US$4,058,000, from Zhejiang Changxing Ruilang Electronic Company Limited (“Ruilang Electronic”), a company which is controlled by a close family member of Mr. Xu Kecheng. As of March 31, 2012 and May 31, 2012, the outstanding balance due to Ruilang Electronic was US$1,387,000 and US$1,854,000, respectively.
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During the fiscal year ended March 31, 2012, the Company purchased raw materials, amounting to US$2,123,000, from Zhejiang Chisen Glass Company Limited (“Chisen Glass”), a company which is controlled by a close family member of Mr. Xu Kecheng. As of March 31, 2012 and May 31, 2012, the outstanding balance due to Chisen Glass was US$1,219,000 and US$1,358,000, respectively.
During the fiscal year ended March 31, 2012, the Company borrowed US$Nil from Zhejiang Ai Ge Organism Products Company Limited (“AGO”), a company controlled by Mr. Xu Kecheng, to help the Company settle liquidity shortages. As of March 31, 2012 and May 31, 2012, the outstanding balance due to AGO was US$316,000 and US$316,000, respectively. This oral, unsecured advance is interest-free and repayable on demand.
During the fiscal year ended March 31, 2012, the Company borrowed US$824,000 from Ms. Zhou Fangqin, the spouse of Mr. Xu Kecheng, for the purpose of funding the Company’s business operations. As of March 31, 2012 and May 31, 2012, the outstanding balance due to Ms. Zhou Fangqin was US$824,000 and US$349,000, respectively. This oral, unsecured advance is interest-free and repayable on demand.
On August 23, 2010, CCEC and Mr. Xu Kecheng formed Chisen Electric Jiangsu Co. Ltd. (CEJC) in Jiangsu Province, China. CEJC’s registered capital is RMB150,000,000, of which CCEC holds 98% (RMB147,000,000) and Mr. Xu Kecheng holds 2% (RMB 3,000,000). At the date of this annual report, CCEC has paid in RMB147,000,000 and Mr. Xu Kecheng has paid in RMB3,000,000.
Related Parties as Guarantors
Mr. Xu Kecheng was the guarantor under Contract of Guarantee No. 032 (“Agreement 10.35”) whereby he agreed to guarantee the payment by CCEC of up to RMB90,000,000 (US$14,258,000) to the Bank of China (Changxing Branch) under various credit business contracts by and between CCEC and the Bank of China (Changxing Branch) which could be entered into from July 1, 2008 through May 20, 2012. Agreement 10.35 was replaced by Contract of Guarantee No. 130 (“Agreement 10.41”) on October 25, 2010.
On October 25, 2010, Mr. Xu Kecheng and Ms. Zho Fangqin, the spouse of Mr. Xu Kecheng, became guarantors under Agreement 10.41 whereby they agreed to guarantee the payment by CCEC to the Bank of China Ltd. (Changxing Sub-Branch) for debt incurred by CCEC from October 25, 2010 to October 25, 2011, in a maximum guarantee amount up to RMB250,000,000 (US$38,167,000). Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.41. Agreement 10.41 was replaced by Contract of Guarantee No. CX2012RB006 (“Agreement 10.61”) on January 12, 2012.
On January 11, 2012, Mr. Xu Kecheng and Ms. Zho Fangqin, the spouse of Mr. Xu Kecheng, became guarantors under Agreement 10.61 whereby they agreed to guarantee the payment by CCEC to the Bank of China Ltd. (Changxing Sub-Branch) for debt incurred by CCEC from January 11, 2012 to January 11, 2013, in a maximum guarantee amount up to RMB250,000,000 (US$38,167,000). Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.61.
Mr. Xu Kecheng and Ms. Zhou Fangqin are also the guarantor under Contract of Guarantee No. 3350012010AM00077301 (“Agreement 10.43”) whereby he agreed to guarantee the payment by CCEC of up to RMB69,000,000 (US$10,931,000) to the Bank of Communication (Huzhou Branch) under a series of credit extension contracts which have been or may be entered into by and between CCEC and such bank for one year commencing November 16, 2010. Mr. Xu Kecheng and Ms. Zhou Fangqin did not receive any consideration for entering into Agreement 10.43. Agreement 10.43 was replaced by Contract of Guarantee No. 3350012011AM10031900 (“Agreement 10.62”) on November 29, 2011.
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On November 24, 2011, Mr. Xu Kecheng and Ms. Zho Fangqin, the spouse of Mr. Xu Kecheng, became guarantors under Agreement 10.62 whereby they agreed to guarantee the payment by CCEC to the Bank of Communication (Huzhou Branch) for debt incurred by CCEC from November 24, 2011 to November 24, 2012, in a maximum guarantee amount up to RMB69,000,000 (US$10.931,000). Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.62.
On April 19, 2010, Mr. Xu Kecheng and Ms. Zho Fangqin became guarantors under Guarantee Contract No. 64720012302010012 (“Agreement 10.45”) whereby they agreed to guarantee the payment by CCEC to the China Construction Bank Corporation (Changxing Sub-Branch) for debt incurred by CCEC under RMB Loan Contract No. 64720012302010012. Such debt was settled on April 1, 2011. Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.45.
On October 9, 2010, Mr. Xu Kecheng and Ms. Zho Fangqin became guarantors under Guarantee Contract No. 647200123020100201 (“Agreement 10.46”) whereby they agreed to guarantee the payment by CCEC to the China Construction Bank Corporation (Changxing Sub-Branch) for debt incurred by CCEC under RMB Loan Contract No. 64720012302010020. Such debt was settled on June 30, 2011. Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.46.
On October 18, 2010, Mr. Xu Kecheng and Ms. Zho Fangqin became guarantors under Guarantee Contract No. 64720092302010036 (“Agreement 10.47”) whereby they agreed to guarantee the payment by CCEC to the China Construction Bank Corporation (Changxing Sub-Branch) for debt incurred by CCEC under Bank Acceptance Agreement No. 64720092302010036. Such debt was settled on April 18, 2011. Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.47.
On November 10, 2010, Mr. Xu Kecheng and Ms. Zho Fangqin became guarantors under Guarantee Contract No. 647200923020100381 (“Agreement 10.48”) whereby they agreed to guarantee the payment by CCEC to the China Construction Bank Corporation (Changxing Sub-Branch) for debt incurred by CCEC under Bank Acceptance Agreement No.647200923002010038. Such debt was settled on May 10, 2011. Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.48.
On March 31, 2011, Mr. Xu Kecheng and Ms. Zho Fangqin became guarantors under Guarantee Contract No. 672009992011036 (“Agreement 10.58”) whereby they agreed to guarantee the payment by CCEC to the China Construction Bank Corporation (Changxing Sub-Branch) for debt incurred by CCEC from March 31, 2011 to March 30, 2014, in a maximum guarantee amount up to RMB170,000,000 (US$25,954,000). Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.58.
On February 16, 2012 , Mr. Xu Kecheng and Ms. Zho Fangqin became guarantors under Guarantee Contract No. 2DBSX1781202002102 (“Agreement 10.63”) whereby they agreed to guarantee the payment by CCEC to the Bank of Shanghai (Hangzhou Branch) for debt incurred by CCEC from February 16, 2012 to February 16, 2013, in a maximum guarantee amount up to RMB60,000,000 (US$9,505,000). Mr. Xu Kecheng and Ms. Zho Fangqin did not receive any consideration for entering into Agreement 10.63.
Chisen Glass was the guarantor under a guarantee contract (“Agreement 10.31”) whereby it agreed to guarantee the payment by CCEC of up to RMB76,000,000 (US$12,040,000) to the Agricultural Bank of China (Changxing County Branch) under a series of business contracts by and between CCEC and such bank for a period of two years commencing on February 10, 2010. Agreement 10.31 was replaced by Contract of Guarantee No. 33905201000030826 (“Agreement 10.40”) on August 27, 2010.
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Chisen Glass is the guarantor under Agreement 10.40 whereby it agreed to guarantee the payment by CCEC of up to RMB110,000,000 (US$17,426,000) to the Agricultural Bank of China (Changxing County Sub-Branch) under a series of business contracts by and between CCEC and such bank for a period of two years commencing on August 27, 2010. Chisen Glass has joint and several liabilities under Agreement 10.40, and neither Chisen Glass nor Mr. Xu Kecheng’s family member who controls Chisen Glass have received any consideration for entering into Agreement 10.40.
Also, on April 2, 2010, Chisen Glass entered into Guarantee Contract No. 6472009992010011 (“Agreement 10.32”) whereby it agreed to guarantee the payment by CCEC of up to RMB65,000,000 (US$10,298,000) to China Construction Bank Corporation (Changxing Branch) under various loan contracts which may be entered into by and between CCEC and such bank for a period of two years. Chisen Glass has joint and several liabilities under Agreement 10.32, and neither Chisen Glass nor Mr. Xu Kecheng’s family member who controls Chisen Glass have received any consideration for entering into Agreement 10.32.
Chisen Glass is the guarantor under Contract of Guarantee No. ZB5202201100000010 (“Agreement 10.60”) whereby it agreed to guarantee the payment by CCEC of up to RMB40,000,000 ($6,337,000) to Shanghai Pudong Development Bank (Huzhou Branch) under a series of credit extension contracts which have been or may be entered into by and between CCEC and such bank for three years commencing March 31, 2011. The term of Agreement 10.60 is three years. Chisen Glass has joint and several liability under Agreement 10.60 and neither it nor the close family member of Mr. Xu Kecheng who controls Chisen Glass received any consideration for entering into Agreement 10.60.
Chisen Glass is also the guarantor under Contract of Guarantee No. HZ07GB20110054 (“Agreement 10.64”) whereby it agreed to guarantee the payment by CCEC of up to RMB60,000,000 ($9,505,000) to Huaxia Bank (Huzhou Branch) for debt incurred by CCEC from November 14, 2011 to November 14, 2012. Neither it nor the close family member of Mr. Xu Kecheng who controls Chisen Glass received any consideration for entering into Agreement 10.64.
On January 12, 2010, Ruilang Electronic entered into Guarantee Contract No. 64720092502010004 (“Agreement 10.34”) whereby it pledged certain land use rights owned by Ruilang Electronic to secure the obligations of CCEC up to RMB44,000,000 (US$6,972,000) to China Construction Bank (Changxing Branch) under various loan contracts by and between CCEC and such bank, for a period of three years. Neither Ruilang Electric nor Mr. Xu Kecheng’s family member who controls Ruilang Electronic have received any consideration for entering into Agreement 10.34.
	Xinguangyuan is also the guarantor under Contract of Guarantee No. ZB5201200900000013 (“Agreement 10.33”) whereby it agreed to guarantee the payment by CCEC of up to RMB26,000,000 ($4,119,000) to Shanghai Pudong Development Bank (Huzhou Branch) under a series of credit extension contracts which have been or may be entered into by and between CCEC and such bank for three years commencing April 14, 2009. The term of Agreement 10.33 is two years. Xinguangyuan has joint and several liability under Agreement 10.33 and neither it nor the close family member of Mr. Xu Kecheng who controls Xinguangyuan received any consideration for entering into Agreement 10.33.
Xinguangyuan is also the guarantor under Contract of Guarantee No. 3350012010AM00077300 (“Agreement 10.42”) whereby it agreed to guarantee the payment by CCEC of up to RMB69,000,000 (US$10,931,000) to the Bank of Communication (Huzhou Branch) under a series of credit extension contracts which have been or may be entered into by and between CCEC and such bank for one year commencing November 16, 2010. On November 16, 2011, such agreement expired. Neither Xinguangyuan nor the close family member of Mr. Xu Kecheng who controls Xinguangyuan received any consideration for entering into Agreement 10.42.
Xinguangyuan is also the guarantor under Contract of Guarantee No. 003 (“Agreement 10.51”) whereby it agreed to guarantee the payment by CCEC of up to RMB100,000,000 (US$15,842,000) to the Bank of China (Changxing County Sub-branch) under a series of credit extension contracts which have been or may be entered into by and between CCEC and such bank for one year commencing January 6, 2011. On January 6, 2012, such agreement expired. Neither Xinguangyuan nor the close family member of Mr. Xu Kecheng who controls Xinguangyuan received any consideration for entering into Agreement 10.51.
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Xinguangyuan is also the guarantor under Contract of Guarantee No. ZB5202201100000013 (“Agreement 10.59”) whereby it agreed to guarantee the payment by CCEC of up to RMB40,000,000 ($6,337,000) to Shanghai Pudong Development Bank (Huzhou Branch) under a series of credit extension contracts which have been or may be entered into by and between CCEC and such bank for three years commencing March 31, 2011. The term of Agreement 10.59 is three years. Xinguangyuan has joint and several liability under Agreement 10.59 and neither it nor the close family member of Mr. Xu Kecheng who controls Xinguangyuan received any consideration for entering into Agreement 10.59.
Xinguangyuan is also the guarantor under Contract of Guarantee No. 3390012011AM00031901 (“Agreement 10.65”) whereby it agreed to guarantee the payment by CCEC of up to RMB69,000,000 ($10,931,000) to Bank of Communication (Huzhou Branch) for debt incurred by CCEC from November 29, 2011 to November 29, 2012. Neither it nor the close family member of Mr. Xu Kecheng who controls Xinguangyuan received any consideration for entering into Agreement 10.65.
Xinguangyuan is also the guarantor under Contract of Guarantee No. CX2012RB007 (“Agreement 10.66”) whereby it agreed to guarantee the payment by CCEC of up to RMB100,000,000 ($15,842,000) to Bank of Communication (Huzhou Branch) for debt incurred by CCEC from January 11, 2012 to January 11, 2013. Neither it nor the close family member of Mr. Xu Kecheng who controls Xinguangyuan received any consideration for entering into Agreement 10.66.
In connection with Agreement 10.41, Agreement 10.51, Agreement 10.61, Agreement 10.62, and Agreement 10.65 described above (collectively, the “XXZ Guarantees”), Mr. Xu Kecheng, Zhou Fangqin and Xinguangyuan have provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$22,940,000, as of March 31, 2012.
In connection with Agreement 10.32, and Agreement 10.58 described above (collectively, the “XZG Guarantees”), Mr. Xu Kecheng, Ms. Zhou Fangqin and Chisen Glass have provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$3,961,000, as of March 31, 2012.
In connection with Agreement 10.40 described above (the “Glass Guarantees”), Chisen Glass has provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$11,089,000, as of March 31, 2012.
In connection with Agreement 10.51 and 10.59 described above (the “Xing Guarantees”), Xinguangyuan has provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$2,945,000, as of March 31, 2012.
In connection with Agreement 10.34 and Agreement 10.58 described above (collectively, the “XZR Guarantees”), Mr. Xu Kecheng, Ms. Zhou Fangqin and Ruilang Electronic have provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$1,109,000 as of March 31, 2012.
In connection with Agreement 10.32, Agreement 10.34 and Agreement 10.58 described above (collectively, the “XZRG Guarantees”), Mr. Xu Kecheng, Ms. Zhou Fangqin and Ruilang Electronic have provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$7,129,000 as of March 31, 2012.
In connection with Agreement 10.41, Agreement 10.61 and Agreement 10.63 described above (the “XZT Guarantee”), Mr. Xu Kecheng, Ms. Zhou Fangqin and third parties have provided guarantee securing indebtedness of CCEC in an aggregate amount up to US$19,801,000 as of March 31, 2012.
In connection with Agreement 10.60, Agreement 10.61 and Agreement 10.64 described above (the “GT Guarantee”), Chisen Glass and third parties have provided guarantee securing indebtedness of CCEC in an aggregate amount up to US$7,129,000 as of March 31, 2012.
In connection with Agreement 10.59 and Agreement 10.60 described above (the “YG and third Guarantee”), Xinguangyuan, Chisen Glass and third parties have provided guarantee securing indebtedness of CCEC in an aggregate amount up to US$3,485,000 as of March 31, 2012.
In connection with Agreement 10.41 and Agreement 10.59 described above (the “XZY and third Guarantee”), Xinguangyuan, Mr. Xu Kecheng, Ms. Zhou Fangqin and third parties have provided guarantee securing indebtedness of CCEC in an aggregate amount up to US$3,168,000 as of March 31, 2012.
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Agreement 10.31, Agreement 10.33, Agreement 10.35, Agreement 10.42, Agreement 10.43, Agreement 10.45, Agreement 10.46, Agreement 10.47, Agreement 10.48, Agreement 10.60, Agreement 10.65 and Agreement 10.66 were not utilized as of March 31, 2012.
In connection with, Agreement 10.32, Agreement 10.34, Agreement 10.40, Agreement 10.41, Agreement 10.51, Agreement 10.58, Agreement 10.59, Agreement 10.61, Agreement 10.62, Agreement 10.63 and Agreement 10.64 described above, Xinguangyuan, Ruilang Electronic, Chisen Glass, Mr. Xu Kecheng, Ms. Zhou Fangqin and third parties have provided guarantees securing indebtedness of CCEC in an aggregate amount up to US$86,961,000 at the date of this report.
An aggregate of US$83,476,000 was paid by CCEC towards the principal amount of the indebtedness secured by the Related Parties Guarantees as of March 31, 2012. An aggregate of US$7,468,000 was paid by CCEC towards the interest on the loans secured by the Related Parties Guarantees as of March 31, 2012.
As of March 31, 2012, Chisen Glass provided guarantees, in aggregate, amounting to US$6,337,000, US$2,376,000 and US$2,376,000 to secure the short-term bank loans, bills financing and notes payable of the Company, respectively.
As of March 31, 2012, Chisen Glass provided guarantees, in aggregate, amounting to US$6,337,000, US$2,376,000 and US$2,376,000 to secure the short-term bank loans, bills financing and notes payable of the Company, respectively.
As of March 31, 2012, Ruiling Electronic, Chisen Glass, Mr. Xu Kecheng and Ms. Zhou Fang Qin provided guarantees, in aggregate, amounting to US$7,129,000 to secure the bills financing of the Company.
As of March 31, 2012, Mr. Xu Kecheng, Ms. Zhou Fang Qin and a third party provided guarantees, in aggregate, amounting to US$7,920,000 and US$11,881,000 to secure the short term bank loans and bills financing of the Company, respectively.
As of March 31, 2012, Xinguangyuan, Mr. Xu Kecheng and Ms. Zhou Fang Qin, provided guarantees, in aggregate, amounting to US$792,000, US$5,545,000 and US$16,603,000 to secure the notes payable, bills financing and short term bank loans of the Company, respectively.
As of March 31, 2012, Chisen Glass and a third party provided guarantees, in aggregate, amounting to US$3,961,000, US$2,376,000 and US$792,000 to secure the short term bank loans, bills financing and notes payable of the Company, respectively.
As of March 31, 2012, Xinguangyuan provided guarantees, in aggregate, amounting to US$1,361,000 and US$1,584,000 to secure the bills financing and short term bank loan of the Company, respectively.
As of March 31, 2012, Xinguangyuan, Chisen Glass and a third party provided guarantees, in aggregate, amounting to US$3,485,000 to secure the bills financing of the Company.
As of March 31, 2012, Mr. Xu Kecheng, Ms. Zhou Fang Qin, Xinguangyuan and a third party provided guarantees, in aggregate, amounting to US$3,168,000 to secure the notes payable of the Company.
As of March 31, 2012, Chisen Glass, Mr. Xu Kecheng and Ms. Zhou Fang Qin, provided guarantees, in aggregate, amounting to US$3,961,000 to secure the bills financing of the Company.
As of March 31, 2012, Ruiling Electronic, Mr. Xu Kecheng and Ms. Zhou Fang Qin provided guarantees, in aggregate, amounting to US$1,109,000 to secure the notes payable of the Company.
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Policies and Procedures for Related-Party Transactions
The Company does not have any formal written policies or procedures for related party transactions, however in practice, the Audit Committee reviews and approves all related party transactions and other matters pertaining to the integrity of management, including potential conflicts of interest, trading in our securities, or adherence to standards of business conduct.
Director Independence
The following directors are independent: Dong Quanfeng, Jiang Yanfu, Gong Xiaoyan and Yun Hon Man. The following directors are not independent: Xu Kecheng, Liu Chuanjie and Lou Shourong.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The firm of Mazars CPA Limited (“Mazars”) acts as our independent registered public accounting firm effective as of January 14, 2009. The following is a summary of fees incurred for services rendered.
Audit Fees
During the year ended March 31, 2012, the fees for our current principal accountant, Mazars, were US$209,500 for the audit of our consolidated financial statements included in this Annual Report on Form 10-K and reviews of Form 10-Q.
Audit-Related Fees
During the year ended March 31, 2012, our current principal accountant, Mazars, did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.
Tax Fees
During the year ended March 31, 2012, our current principal accountant, Mazars, did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.
All Other Fees
During the year ended March 31, 2012, there were no fees billed for products and services provided by the current principal accountant, Mazars, other than those set forth above.
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Audit Committee Pre-Approval
The policy of the Audit Committee is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The Audit Committee has delegated pre-approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date. All of the services described above in this Item 14 were approved in advance by the Board of Directors during the fiscal year ended March 31, 2012, which, at the time of such approval, performed all of the functions of an Audit Committee in light of the subsequent formal creation of the Company’s existing Audit Committee and adoption of the Audit Committee’s Charter in January 2009.
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PART IV
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Schedules
The financial statements are set forth under Item 8 of this Annual Report. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
(b) Exhibits
EXHIBIT NO.
DESCRIPTION
LOCATION
2.1
Share Exchange Agreement, dated November 12, 2008, by and among World Trophy Outfitters, Inc., Fast More Limited, Cheer Gold Development Ltd. and Floster Investment Limited
Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
3.1
Articles of Incorporation of World Trophy Outfitters, Inc. (n/k/a Chisen Electric Corporation)
Incorporated by reference to Exhibit 3(i).1 to the Registrant’s Registration Statement on Form SB-2 as filed with the SEC on September 23, 2005
3.2
Certificate of Amendment to Articles of Incorporation of Chisen Electric Corporation (name change)
Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed with the SEC on February 4, 2009
3.3
Amended and Restated Bylaws of Chisen Electric Corporation
Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K as filed with the SEC on February 4, 2009
3.4
Certificate of Incorporation of Fast More Limited, dated December 17, 2007
Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
3.5
Memorandum and Articles of Association of Fast More Limited, dated as of December 17, 2007
Incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
3.6
Certificate of Incorporation of Changxing Chisen Electric Co., Ltd.
Incorporated by reference to Exhibit 3.5 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
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3.7
Articles of Association of Changxing Chisen Electric Co., Ltd.
Incorporated by reference to Exhibit 3.6 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
3.8
Business Registration Certificate of Changxing Chisen Electric Co., Ltd. (English Translated Version and Chinese Version)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
3.9
Certificate of Change Pursuant to Section 78.209 to Chisen Electric Corporation’s Articles of Incorporation (10-for-1 Stock Split)
Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the SEC on November 28, 2012
10.1
Agreement on Establishment of Changxing Chisen Physical Chemistry Power Research and Development Center, dated April 30, 2008
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.2
Form of Labor Contract
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.3
Lease Agreement, dated March 30, 2008, by and between Changxing Chisen Electric Co., Ltd. and Changxing Xiangyi Industrial Park Investment Co., Ltd.
Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.4
Contract For Loan on Guarantee, by and among Zhejiang Changxing Agricultural Cooperative Bank, Changxing Chisen Electric Co., Ltd. and Zhejiang Chisen Glass Co., Ltd.
Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.5
Renminbi Loan Contract, dated January 11, 2008, by and between Changxing Chisen Electric Co., Ltd. and China Construction Bank Corporation (Changxing Branch)
Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.6
Renminbi Loan Contract, dated April 11, 2008, by and between Changxing Chisen Electric Co., Ltd. and China Construction Bank Corporation (Changxing Branch)
Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
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10.7
Renminbi Loan Contract, dated March 31, 2008, by and between Changxing Chisen Electric Co., Ltd. and Bank of China (Hong Kong) Limited Shanghan Branch
Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.8
Loan Contract (Short Term), dated August 15, 2008, by and between Changxing Chisen Electric Co., Ltd. and Bank of China Changxing Branch
Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.9
Acceptance Agreement, dated August 25, 2008, by and between Changxing Chisen Electric Co., Ltd. and Industrial Bank Co., Ltd. Hangzhou Branch
Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.10
Acceptance Agreement of Commercial Bill, dated September 18, 2008, by and between Changxing Chisen Electric Co., Ltd. and China Bank Co., Ltd. Changxing Branch
Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.11
Cooperation Agreement, dated April 20, 2008, by and between Changxing Chisen Electric Co., Ltd. and Xiamen University
Included by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K as filed with the SEC on June 28, 2010
10.11
Acceptance Agreement of Commercial Bill, dated July 29, 2008, by and between Changxing Chisen Electric Co., Ltd. and China Construction Bank Changxing Branch Co., Ltd.
Incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.12
Acceptance Agreement of Commercial Bill, dated September 9, 2008, by and between Changxing Chisen Electric Co., Ltd. and China Construction Bank Changxing Branch Co., Ltd.
Incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.13
Components Purchase Contract, effective as of January 1, 2008, by and between Changxing Chisen Electric Co., Ltd. and Jiansu Xinri Electric Bicycle Co., Ltd.
Incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.14
Supply Contract, dated April 22, 2008, by and between Changxing Chisen Electric Co., Ltd. And Jiangsu Yadea Science & Technology Development Co., Ltd.
Incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
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10.15
Sales Contract of Battery, dated November 10, 2007, by and between Changxing Chisen Electric Co., Ltd. and Hu Qinzhong, Yancheng Office
Incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.16
Sales Contract of Battery, dated February 17, 2008, by and between Changxing Chisen Electric Co., Ltd. and Song Chunwei
Incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
10.17
Compensation Agreement of Corporate Relocation Acquisition, dated August 20, 2010, by and between the Company’s chief operating subsidiary, Changxing Chisen Electric Co., Ltd., and the Administrative Committee of Changxing Economic Development Zone, Zhejiang
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed with the SEC on August 24, 2010.
10.18
Investment Agreement, dated August 20, 2010, by and between the Company’s chief operating subsidiary, Changxing Chisen Electric Co., Ltd., and the Administrative Committee of Changxing Economic Development Zone, Zhejiang
Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K as filed with the SEC on August 24, 2010.
10.19
Supplemental Agreement, dated August 20, 2010, by and between the Company’s chief operating subsidiary, Changxing Chisen Electric Co., Ltd., and the Administrative Committee of Changxing Economic Development Zone, Zhejiang
Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K as filed with the SEC on August 24, 2010.
10.20
Xuyi Economic Development Zone Project Investment Contract, dated September 6, 2010, by and between Chisen Electric Jiangsu Co., Ltd. and Jiangsu Xuyi Economic Development Zone Administrative Committee
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 13, 2010.
10.21
Xuyi Economic Development Zone Project Investment Contract Supplemental Agreement, dated September 6 2010, by and between Chisen Electric Jiangsu Co., Ltd. and Jiangsu Xuyi Economic Development Zone Administrative Committee
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed with the SEC on September 13, 2010.
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10.22
Electrode Purchase Contract, dated August 2, 2010, by and between Changxing Chisen Electric Co., Ltd. and Jiangsu XiangFa Electric Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.25
Sales Contract, dated August 31, 2009, by and between Changxing Chisen Electric Co., Ltd. and Anqing Burui Power Supply Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.26
Contract, dated November 24, 2009, by and between Changxing Chisen Electric Co., Ltd. and Anyang City Yubei Gold and Lead Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.27
Parts Acquisition Contract, dated January 1, 2010, by and between Changxing Chisen Electric Co., Ltd. and Jiangsu Xinri E-Vehicle Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.29
Contract, dated August 1, 2010, by and between Changxing Chisen Electric Co., Ltd. and Tianjin Aima Technology Company Limited (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.30
Supplementary Agreement of Changxing Chisen Electric Co., Ltd. Relocation Project (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.31
Contract of Guaranty of Maximum Amount, dated on our about February 10, 2010, by and between Agricultural Bank of China (Changxing County Branch) and Zhejiang Chisen Glass Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
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10.32
Guarantee Contact, dated on or about April 2, 2010, by and between China Construction Bank Corporation (Changxing Branch) and Zhejiang Chisen Glass Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.33
Contract Guarantee of Maximum Amount, dated on or about April 14, 2009, by and between Shanghai Pudong Development Bank (Huzhou Branch) and Zhejiang Changxing Chisen Xinguangyuan Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.34
Guarantee Contract, dated on or about January 12, 2010, by and between Changxing Economic Development Zone and Zhejiang Changxing Ruilang Electric Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.35
Contract of Guarantee with a Maximum Amount, dated on or about July 1, 2008, by and between Bank of China (Changxing Branch) and Mr. Xu Kecheng (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.36
Contract of Guarantee, undated, by and between CITIC Trust Co., Ltd. and Zhejiang Changxing Xinguangyuan Co., Ltd. (RMB40,000,000) (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.37
Contact of Guarantee, undated, by and between CITIC Trust Co., Ltd. and Zhejiang Changxing Chisen Xinguangyuan Co., Ltd. (RMB60,000,000) (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
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10.38
Guarantee Contract (64720012302010005), dated January 13, 2010, by and among China Construction Bank Corporation, on the one hand, and Mr. Xu Kecheng and Ms. Zho Fangqin, on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.39
Guarantee Contract (64720012302010004), dated January 13, 2010, by and among China Construction Bank Corporation, on the one hand, and Mr. Xu Kecheng and Ms. Zho Fangqin, on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.40
Contract of Guarantee of Maximum Amount (33905201000030826), undated, by and between Agricultural Bank of China Changxing County Sub-branch, on the one hand, and Zhejiang Chisen Glass Co., Ltd., on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.41
Contract of Guarantee with a Maximum Amount (BOC 130), dated October 25, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and Bank of China Ltd., on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.42
Contract of Guarantee (3350012010AM00077300), dated November 16, 2010, by and between Zhejiang Changxing Chisen Xinguangyuan Co., Ltd. and Bank of Communication (Huzhou Branch) (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.43
Contract of Guarantee (3350012010AM00077301), dated November 16, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and Bank of Communication (Huzhou Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
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10.44
Guarantee Contract (6435009992012194), dated September 27, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and China Construction Bank Corporation (Changxing Sub-Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.45
Guarantee Contract (64720012302010012), dated April 19, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and China Construction Bank Corporation (Changxing Sub-Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.46
Guarantee Contract (647200123020100201), dated October 9, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and China Construction Bank Corporation (Changxing Sub-Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.47
Guarantee Contract (64720092302010036), dated October 18, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and China Construction Bank Corporation (Changxing Sub-Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.48
Guarantee Contract (647200923020100381), dated November 10, 2010, by and between Xu Kecheng and Zho Fangqin, on the one hand, and China Construction Bank Corporation (Changxing Sub-Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.49
Contract of Guarantee (P2009M17SZJZH0001JF14-0081-1) under Trust Loan Contract No. P2009M17SZJZH0001JF14-0081-1 , undated, by and between Xu Kecheng and CITIC Trust Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
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10.50
Contract of Guarantee (P2009M17SZJZH0001JF14-0081-2) under Trust Loan Contract No. P2009M17SZJZH0001JF14-0081-2), undated, by and between Xu Kecheng and CITIC Trust Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.51
Contract of Guarantee (003), by and between Zhejiang Changxing Chisen Xinguangyuan Co., Ltd. and the Bank of China (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.52
Contract by and between Changxing Chisen Electric Co., Ltd. and Zhejiang Chisen Glass Co., Ltd. dated March 8, 2010 (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.53
Contract by and between Changxing Chisen Electric Co., Ltd. and Zhejiang Chisen Glass Co., Ltd., dated December 20, 2010 (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.54
Contract by and between Changxing Chisen Electric Co., Ltd. and Zhejiang Changxing Ruilang Electronic Company Limited dated October 18, 2010 (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.55
Summary of Oral Loan Agreement with Ai Ge Organism Products Company Limited
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.56
Electrode Purchase Contract, dated August 2, 2010, by and between Changxing Chisen Electric Co., Ltd. and Jiangsu XiangFa Electric Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
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10.57
Electrode Plate Supply Contract, by and between Changxing Chisen Electric Co., Ltd. and Anqing Borui Power Supply Co., Ltd., dated August 2, 2010 (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.58
Guarantee Contract (6472009992011036), dated March 31, 2012, by and between Xu Kecheng, on the one hand, and China Construction Bank Corporation (Changxing Sub-Branch) on the other hand (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.59
Shanghai Pudong Development Bank Contract of Guarantee of Maximum Amount, dated March 31, 2012, by and between Shanghai Pudong Development Bank Huzhou Sub-branch and Zhejiang Chisen Glass Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.60
Shanghai Pudong Development Bank Contract of Guarantee of Maximum Amount, dated March 31, 2012, by and between Shanghai Pudong Development Bank Huzhou Sub-branch and Zhejiang Changxing Chisen Xingguangyuan Co., Ltd. (English Translated and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
10.61
Contract of Guarantee with a Maximum Amount, dated January 11, 2012, by and among Xu Kecheng, Zhou Fangqin and Bank of China Ltd. Changxing County Sub-branch (English translated and Chinese versions)
Provided herewith
10.62
Contract of Guarantee, dated November 29, 2011, by and between Xu Kecheng and Bank of Communication Huzhou Branch (English translated and Chinese versions)
Provided herewith
10.63
Maximum Amount Guarantee Contract, dated February 16, 2012, by and amoung Xu Kecheng, Zhou Fangqin and Bank of Shanghai Co., Ltd. Songshan Branch (English translated and Chinese versions)
Provided herewith
10.64
Maximum Amount Guarantee Contract, dated November 14, 2011, by and between Chisen Glass and Zhijiang Branch of Hangzhou City of Hua Xia Bank Co., Ltd. (English translated and Chinese versions)
Provided herewith
10.65
Contract of Guarantee, dated November 29, 2011, by and between Zhejiang Changxing Chisen Xinguangyuan Co., Ltd. and Bank of Communication Huzhou Branch (English translated and Chinese versions)
Provided herewith
10.66
Contract of Guarantee with a Maximum Amount, dated January 11, 2012, by and between Zhejiang Changxing Chisen Xinguangyuan Co., Ltd. and Bank of China Ltd. Changxing County Sub-branch (English translated and Chinese versions)
Provided herewith
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14.1
Code of Business Conduct and Ethics
Incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K as filed with the SEC on February 4, 2009
16.1
Letter to SEC from Pritchett, Siler & Hardy, P.C.
Incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K as filed with the SEC on January 21, 2009
Resignation of Mathew Evans, dated November 12, 2008
Incorporated by reference to Exhibit 17 to the Company’s Current Report on Form 8-K as filed with the SEC on November 12, 2008
List of Subsidiaries
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
31.1
Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Provided herewith
31.2
Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Provided herewith
32.1
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Provided herewith
32.2
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Provided herewith
99.1
Audit Committee Charter, dated January 15, 2009
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K as filed with the SEC on February 4, 2009
99.2
Compensation Committee Charter, dated January 15, 2009
Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K as filed with the SEC on February 4, 2009
99.3
Corporate Governance and Nominating Committee Charter, dated January 15, 2009
Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K as filed with the SEC on February 4, 2009
99.4
China Battery Industry Association Certificate of Ranking (English Translated Version)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
99.5
China News Article entitled “Electric Bicycles are Involved in Government’s Subsidy Program” (English and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
99.6
Subsidize Policy on New Energy Vehicle (English and Chinese Versions)
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on June 14, 2011
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101.INS
XBRL Instance Document
Provided herewith
101.CAL
XBRL Taxonomy Extension Calculation Link base Document
Provided herewith
101.DEF
XBRL Taxonomy Extension Definition Link base Document
Provided herewith
101.LAB
XBRL Taxonomy Extension Label Link base Document
Provided herewith
101.PRE
XBRL Taxonomy Extension Presentation Link base Document
Provided herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Provided herewith
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
In accordance with the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.
Signatures
Title
Date
/s/ Xu Kecheng
Chairman of the Board, Chief Executive Officer,
Name: Xu Kecheng
President, Principal Executive Officer
July 2, 2012
/s/ Liu Chuanjie
Chief Financial Officer, Principal Accounting and
Name: Liu Chuanjie
Financial Officer, Treasurer and Director
July 2, 2012
/s/ Lou Shourong
Name: Lou Shourong
Vice-President and Director
July 2, 2012
/s/ Dong Quanfeng
Name: Dong Quanfeng
Director
July 2, 2012
/s/ Yun Hon Man
Name: Yun Hon Man
Director
July 2, 2012
/s/ Jiang Yanfu
Name: Jiang Yanfu
Director
July 2, 2012
/s/ Gong Xiaoyan
Name: Gong Xiaoyan
Director
July 2, 2012
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Chisen Electric Corporation
Index to Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
F-i
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Chisen Electric Corporation
We have audited the accompanying consolidated balance sheets of Chisen Electric Corporation (“Chisen Electric”) and its subsidiaries (collectively referred to as the (“Company”)) as of March 31, 2012 and 2011, and the related consolidated statement of operations and other comprehensive income, changes in stockholders’ equity and cash flows for each of the year then ended. We also have audited the Company’s internal control over financial reporting as of March 31, 2011 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Chisen Electric Corporation
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2012 and 2011 and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by COSO.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company had a negative working capital as of March 31, 2012 and incurred loss for the year then ended, which raised substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Mazars CPA Limited
Certified Public Accountants
Hong Kong
Date: July 2, 2012
Chisen Electric Corporation
Consolidated Statements of Operations and
Other Comprehensive Income
For the years ended March 31, 2012 and 2011
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Consolidated Statements of Operations and
Other Comprehensive Income
For the years ended March 31, 2012 and 2011
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Consolidated Balance Sheets
As of March 31, 2012 and 2011
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Consolidated Balance Sheets
As of March 31, 2012 and 2011
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the years ended March 31, 2012 and 2011
Note:
In October 2011, the board of directors approved a 10-for-1 forward stock split of the common stock of the Company without changing its par value, which has become effective since November 22, 2011. The difference in value of common stock issued without changing the par value as a result of the forward stock split of US$450,000 has been debited to retained earnings.
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Consolidated Statements of Cash Flows
For the years ended March 31, 2012 and 2011
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Consolidated Statements of Cash Flows
For the years ended March 31, 2012 and 2011
The financial statements should be read in conjunction with the accompanying notes.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
1.ORGANIZATION AND PRINCIPAL ACTIVITIES
Chisen Electric Corporation (“Chisen Electric”), formerly known as World Trophy Outfitters, Inc., was formed as a Nevada corporation on January 13, 2005. Its common stocks are currently trading on the Over-The-Counter Quote Board under the symbol “CIEC”.
Chisen Electric is an investment holding company with no operations. The principal activities of its subsidiaries (together with Chisen Electric, collectively referred as “the Company”) are the manufacture and sales of sealed lead-acid battery products and relevant components, and investment holding.
As of May 27, 2011, Chisen Electric has fully disposed of its interest in Chisen Technology Holdings Corporation (Chisen Technology”) for a cash consideration of US$10. Chisen Technology has no operation since the date of incorporation. The fair value of Chisen Technology at the date of disposal was net liabilities of US$496. The disposal of Chisen Technology has no significant impact on the value of the Company’s assets, operating cash flows as well as earnings per share.
Details of Chisen Electric’s subsidiaries as of March 31, 2012 are as follows:
*These are direct translation of the name in Chinese for identification purpose only and are not the official name in English.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America (“USGAAP”).
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Preparation of financial statements
The Company had negative working capital of US$38,937,000 as of March 31, 2012 and incurred loss of US$15,742,000 for the year ended March 31, 2012. These conditions raised substantial doubt about the Company’s ability to continue as going concern.
Continuation of the Company as a going concern is dependent upon attaining profitable operations in the future, exercising tight cost and cash flow controls measures, and the financial support from a controlling stockholder of Chisen Electric. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The controlling stockholder had undertaken to make available adequate funds to the Company as and when required to maintain the Company as a going concern. Having taken into consideration the undertaking provided by the controlling stockholder, management believes that the Company will be able to settle its liabilities when they become due. However, there can be no assurance that the financing from the controlling stockholder will be continued.
Basis of consolidation
The consolidated financial statements include the financial information of Chisen Electric and its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.
Revenue recognition
Operating revenue represents sale of goods at invoiced value to customers, net of returns, discounts, rebates and value-added tax (“VAT”), and is recognized when the significant risks and rewards of ownership of goods have been transferred to customers, the sales price to the customers is fixed or determinable and the collectability of consideration is reasonably assured.
The Company recognizes revenue when goods are delivered to customers. The Company assesses whether the selling price is fixed or determinable based on the contract and/or customer purchase order and payment terms associated with the transaction and whether the sale price is subject to refund or adjustment. The Company assesses collectability based primarily on the creditworthiness of the customer as determined by the credit analysis, as well as the customer’s payment history.
Volume-based rebates are made at the time of sales of goods and are recognized as a reduction of sales.
Costs related to shipping and handling are included in selling, marketing and distribution expenses.
Segmental information
During the years ended March 31, 2012 and 2011, all revenue of the Company represented income from sales of sealed lead-acid batteries and related components, and therefore no financial information by business segment is presented. Furthermore, as all revenue is derived from the PRC, no geographical segment information is presented.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and development costs
All costs of research and development activities are generally expensed as incurred. Research and development costs were US$2,104,000 and US$1,065,000 for the years ended March 31, 2012 and 2011, respectively.
Advertising and promotion costs
Advertising and promotion costs are expensed as sales, marketing and distribution costs as incurred. Advertising costs were US$908,000 and US$636,000 for the years ended March 31, 2012 and 2011, respectively.
Shipping and handling costs
Shipping and handling costs are expensed as sales, marketing and distribution costs as incurred. Shipping costs were US$3,749,000 and US$5,472,000 for the years ended March 31, 2012 and 2011, respectively.
Retirement plan costs
Contributions to defined contribution retirement schemes are charged to cost of sales, sales, marketing and distribution costs and general and administrative expenses in the consolidated statements of operations and other comprehensive income as and when the related employee services are provided. Retirement plan costs were US$2,541,000 and US$808,000 for the years ended March 31, 2012 and 2011, respectively.
Income taxes
The Company provides for income taxes using the liability method. Under the liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current period.
A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax rate changes are reflected in the computation of the income tax provision during the period such changes are enacted.
Under the provision of ASC 740 Income Taxes, tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% of being realized on examination by the tax authority. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive income
ASC Topic 220, "Reporting Comprehensive Income", requires the presentation of comprehensive income, in addition to the existing statements of operations. Comprehensive income is defined as the change in equity during the year from transactions and other events, excluding the changes resulting from investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation.
Available-for-sale financial assets
The Company’s available-for-sale financial assets consist of investment in unlisted equity securities and are recorded at cost.
The Company periodically assesses whether its investment in non-marketable equity securities are impaired and if any impairment is other than temporary. Factors considered in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, the Company’s ability and intent to hold the investment until recovery and overall economic conditions. A decline in value of these securities below cost that is deemed to be other than temporary results in an impairment charge to earnings that reduces the carrying amount of the securities to fair value establishing a new cost basis.
The Company principally takes into account the financial information of the investee and investment returns for the purpose of identifying potential impairment.
Property, plant and equipment (“PPE”) and long-term land lease prepayments
PPE are stated at cost less accumulated depreciation, and include expenditure that substantially increases the useful lives of existing assets.
The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditures incurred after the assets have been put into operation, such as repairs and maintenance, overhaul and minor renewals and betterments, are normally charged to operating expenses in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalized.
Depreciation is provided, on a straight-line basis, to write off the cost less accumulated depreciation of each PPE item at rates based on their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values as follows:
Buildings 20 years
Leasehold improvements Over the unexpired term of lease
Furniture, fixtures and office equipment 10 years
Motor vehicles 5 years
Plant and machinery 10 years
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment (“PPE”) and long-term land lease prepayments (Continued)
When assets are sold or retired, their costs and accumulated depreciation are eliminated from the consolidated financial statements and any gain or loss resulting from their disposal is recognized in the period of disposition as an element of other income.
Construction-in-progress consists of factories and office buildings under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time the relevant assets are completed and ready for their intended use.
Long-term land lease prepayments are amortized on a straight-line basis over the term of lease.
Impairment of long-lived assets
Long-lived assets are reviewed at least annually for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and recorded as a reduction of original costs. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Trading securities
The Company’s trading securities consist of listed investment funds which are measured at fair values using quoted prices in active markets, with any resultant gain and loss recognized in net other income in the consolidated statements of operations and other comprehensive income.
Inventories
Inventories are stated at the lower of cost or market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to market value.
Trade receivables and allowance for doubtful accounts
The allowance for the risk of non-collection of trade receivables takes into account credit-risk concentration. Collective debt risk is assessed based on average historical losses and specific circumstances such as serious adverse economic conditions. The Company’s estimate is based on a variety of factors, including historical collection experience, existing economic conditions and a review of the current status of the receivables. Trade receivables are presented net of an allowance for doubtful accounts of US$6,000 and US$6,000 as of March 31, 2012 and 2011, respectively.
Cash and cash equivalents
Cash represents cash on hand and deposits with financial institutions which are repayable on demand. Cash equivalents represent short-term, highly liquid investments purchased with an original maturity of three months or less, which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation
Items included in the financial statements of the Company’s major subsidiaries operating in the PRC are measured using Renminbi (“RMB”), the currency of the primary economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in United States Dollars (“US$”), which is the Company’s presentation currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.
On consolidation, the results and financial position of all the group entities that have a functional currency different from the presentation currency are translated as follows:
(a)assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(b)income and expenses for each statement of operations are translated at average exchange rates;
(c)all resulting exchange differences are recognized as a separate component of equity.
Fair value of financial instruments
The ASC Topic 825, “Disclosures about Fair Value of Financial Instruments”, requires that the Company discloses estimated fair value of financial instruments. The carrying amounts reported in the balance sheets for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Fair value measurements
ASC 820 establishes a three-tier fair value hierarchy to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:
Level 1:Observable inputs, such as unadjusted quoted market prices in active markets for the identical asset or liabilities.
Level 2:Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:Unobservable inputs reflecting the entity’s own assumptions in measuring the asset or liability at fair value.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value measurements (Continued)
The Company’s financial instruments consist principally of cash and cash equivalents, restricted bank balances, other financial assets, trade receivables and payables, deposits, prepayment and other receivables, notes payable, accrued expenses and other liabilities, amount due from/to related parties and short-term borrowings which are carried at amounts that generally approximate their fair values because of the short-term maturity of these instruments.
The Company’s trading securities are measured at fair value on recurring basis. The trading securities are listed on a stock exchange in the PRC with quoted price in active market (Level 1 inputs).
Warranty
Estimated warranty costs are recognized at the time when the Company sells its products and are included in sale, marketing and distribution expenses. The Company uses historical failure rates and costs to repair product defects during the warranty period to estimate warranty costs, which are reviewed periodically in light of actual experience. The carrying amounts of estimated warranty costs were included in accrued expenses and other accrued liabilities as of March 31, 2012 and 2011. The reconciliation of the changes in the warranty obligation is as follows:
Government subsidies
Government subsidies are recognized as income over the periods necessary to match them with the related costs. Subsidies related to expense items are recognized in the same period as those expenses are charged in the consolidated statements of operations and other comprehensive income and are reported as other income.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rental payables under operating leases are recognized as expenses on the straight-line basis over the lease term.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reported periods. The management evaluates these estimates and judgments on an ongoing basis and bases their estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that they believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies.
Actual amounts could differ from those estimates. Estimates are used for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation and amortization, inventory allowance, taxes and contingencies.
Related parties
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.
(Losses) Earnings per share
Basic (losses) earnings per share are computed by dividing (loss) income available to common stockholders by the weighted-average number of common stocks outstanding during the year. Diluted (losses) earnings per share are computed similar to basic (losses) earnings per share except that the denominator is increased to include the number of additional common stocks that would have been outstanding if the potential common shares had been issued and if the potential common shares were dilutive. Since there were no potentially dilutive securities for the years ended March 31, 2012 and 2011, basic and diluted (losses) earnings per share are the same for both years. As a result of a forward stock split in November 2011, the calculation of basic and diluted (losses) earnings per common stock for all years presented are adjusted retrospectively.
Recent accounting pronouncements
In May 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-04 is effective for public companies during interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated results of operation and financial condition.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (Continued)
In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, the reporting entity must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a material impact on the Company's consolidated results of operation and financial condition.
In September 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing goodwill for impairment”. This ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under ASU 2011-08, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual periods beginning after December 15, 2011. The Company believes that the adoption of ASU 2011-08 will not have any impact on the Company's consolidated results of operation and financial condition.
In December 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (ASU) 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements on its financial position. This includes the effect or potential effect of rights of offset associated with an entity’s recognized assets and recognized liabilities and require improved information about financial instruments and derivative instruments that are either (1) offset in accordance with Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with Section 210-20-45 or Section 915-10-45. The amendments are effective for annual reporting periods beginning on or after January 1, 2013 and retrospective disclosure is required for all comparative periods presented. No early adoption is permitted. The Company believes that the adoption of ASU 2011-11 will not have any impact on the Company's consolidated results of operation and financial condition.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
3.OPERATING RISKS
(a)Concentration of major customers and suppliers
Trade receivables related to the Company’s major customers comprised 80% and 94% of all account receivables as of March 31, 2012 and 2011, respectively.
Trade payables related to the Company’s major suppliers comprised 0% and 36% of all account payables as of March 31, 2012 and 2011, respectively.
Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arisen from financial economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The major concentrations of credit risk arise from the Company’s accounts receivable. Even though the Company has major concentrations, it does not consider itself exposed to significant risk with regard to the related receivables.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
3.OPERATING RISKS (CONTINUED)
(b)Country risks
The Company’s major subsidiary has operation conducted in the PRC. Accordingly, its business, financial condition and result of operation maybe influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.
The operation in the PRC is subject to special considerations and significant risks not typically associated with companies in the United States. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange and remittance restrictions. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, inter alia. The management does not believe these risks to be significant. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact.
(c)Cash and time deposits
The Company mainly maintains its cash balances with various banks located in the PRC. In common with local practice, such amounts are not insured or otherwise protected should the financial institutions be unable to meet their liabilities. There has been no history of credit losses. There are neither material commitment fees nor compensating balance requirements for any outstanding loans of the Company.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
4.INCOME TAXES
Chisen Electric had a net operating loss carry-forward for income tax reporting purposes that might be offset against future taxable income. No tax benefit has been reported in the financial statements, because Chisen Electric believes that it is more likely than not that the carry-forwards will finally expire and therefore cannot be used. Accordingly, the potential tax benefits of the loss carry-forwards are offset by a valuation allowance of the same amount.
Chisen Electric’s subsidiaries are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which each entity domiciles and operates.
Hong Kong Profits Tax has not been provided as Fast More had no assessable profit for the period.
Zhejiang Chisen and Chisen Jiangsu are subject to state and local enterprise income taxes in the PRC at a standard rate of 25%. Zhejiang Chisen received official designation by the local tax authority as a foreign invested enterprise engaged in manufacturing activities and is confirmed by the local tax authority that it is exempted from enterprise income tax for two years commencing from the first profitable year in 2006, followed by a 50% reduction for the next three years up to December 31, 2010. Since January 1, 2011, Zhejiang Chisen has been designated by the local tax authority as “New and High Technology Enterprises”. As a result, the effective tax rate applicable to Zhejiang Chisen was 15% commencing on January 1, 2011.
Dividends payable by a foreign invested enterprise in the PRC to its foreign investors in Hong Kong are subject to a 10% withholding tax. No deferred tax expenses on undistributed profits were charged to the statement of operations for the year ended March 31, 2012 and 2011 as the management considered that the undistributed profits were expected to be retained in the PRC subsidiaries and not to be remitted out of the PRC.
(a)Income tax expenses are comprised of the following:
The FASB ASC Topic 740 “Income Taxes” clarifies the accounting and disclosure for uncertainty in tax positions, as defined, and prescribes the measurement process and a minimum recognition threshold for a tax position, taken or expected to be taken in a tax return, that is required to be met before being recognized in the financial statements. Under ASC 740, the Company must recognize the tax benefit from an uncertain position only if it is more-likely-than-not the tax position will be sustained on examination by the tax authority, based on the technical merits of the position. The tax benefits recognized in the financial statements attributable to such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate resolution of the position.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
4.INCOME TAXES (CONTINUED)
(a)Income tax expenses are comprised of the following (Continued):
Subject to the provision of ASC 740, the Company has analyzed its filing positions in all of the jurisdictions where it is required to file income tax returns. As of March 31, 2012 and 2011, the Company has identified the following jurisdictions as “major” tax jurisdictions, as defined, in which it is required to file income tax returns namely the United States, Hong Kong and the PRC. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its consolidated financial statements.
As of March 31, 2012 and 2011, the Company had no unrecognized tax benefits or accruals for the potential payment of interest and penalties. The Company’s policy is to record interest and penalties in this connection as a component of the provision for income tax expense. For the years ended March 31, 2012 and 2011, no interest or penalties were recorded.
(b)Reconciliation from the expected income tax expenses calculated with reference to the statutory tax rate in the PRC of 25% (2011: 25%) is as follows:
(c)Components of deferred tax liabilities were as follows:
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
4.INCOME TAXES (CONTINUED)
(d)Components of deferred tax assets were as follows:
As it is not probable that taxable profits will be available against which the deductible temporary differences and the used tax losses of Zhejiang Chisen can be utilized, deferred tax assets have not been recognized.
5.RESTRICTED BANK BALANCES
Restricted bank balances represented time deposits with original maturity of 9 months or less from the date of deposit to secure banking facilities granted by various financial instruments as follows:
6.OTHER FINANCIAL ASSETS
Other financial assets represented notes receivable from customers for the settlement of trade receivable balances. As of March 31, 2012 and 2011, all notes receivable were guaranteed by established banks in the PRC and had maturities of 6 months or less from the date of issue. The fair value of the notes receivable approximated their carrying value.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
7.DEPOSIT PAID FOR LAND AUCTIONS
As of March 31, 2012, the Company paid US$31,262,000 deposits to the government of Jiangsu Province, the PRC to tender for the auctions of two pieces of land in subsequent period as further detailed in Note 21 below. All deposits are to be refunded if the Company fails to obtain the land.
8.INVENTORIES
Inventories consisted of the following:
9.AVAILABLE-FOR-SALE FINANCIAL ASSETS
Available-for-sale financial assets as of March 31, 2012 and 2011 represented investment in unlisted equity securities and are recorded at cost. The management has estimated that the recoverable amount of the assets exceed their carrying value.
10.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
Depreciation expenses were approximately US$1,994,000 and US$1,093,000 for the years ended March 31, 2012 and 2011, respectively.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
10.PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED)
In December 2011, the Company was advised by the local authority in Changxing that the original production technique, external battery formation, can no longer be used after October 31, 2012. Some of the Company’s machinery and equipment cannot be used under the tightened policy. Management revised the estimated remaining useful life of those machinery and equipment to 10 months. This change of accounting estimate increased cost of sales and net losses by US$558,000 and increased the losses per share by US$0.001 for the year ended March 31, 2012.
11.LONG-TERM LAND LEASE PREPAYMENTS, NET
Lease prepayment as of March 31, 2012 and 2011 represented the land use rights for lands located in the PRC, which are amortized over the leasehold periods.
Amortization expense for the years ended March 31, 2012 and 2011 were US$98,000 and US$10,000 respectively. The estimated aggregate amortization expense for each of the five succeeding years is US$98,000.
12.NOTES PAYABLE
Notes payable were issued by the Company to creditors with the banker’s acceptance payable at the maturity date for the purchase of raw materials for production exclusively. The Company has to repay the notes within nine months from date of issuance and service fees would be charged by banks for the issuance of the notes. The notes payable were collateralized by restricted bank balances and a long-term land lease prepayment with carrying amount of US$760,000 as of March 31, 2012 (as of March 31, 2011: the notes payable were collateralized by restricted bank balances).
In addition, various parties have issued guarantee against these notes payable as follows:
As of March 31, 2012 and 2011, the Group had unutilized banking facilities of approximately US$17,991,000 and US$4,809,000 to meet the liquidity needs.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
13.SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprise of the followings:
(i)Short-term bank loans
Short-term bank loans represent amounts due to various banks which are due within 12 months, and these loans can normally be renewed with the banks upon expiry/maturity.
The loans are collateralized by assets of the Company with carrying values as follows:
Various parties have also issued guarantee against these short-term bank loans as follows:
The weighted average annual interest rates of the short-term bank loans were 6.01% and 5.05% as of March 31, 2012 and 2011 respectively.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
13.SHORT-TERM BANK BORROWINGS (CONTINUED)
(ii)Bills financing
Bill financing represents amounts due to various banks which are repayable within nine months from the date of issue. As of March 31, 2012 and 2011, the bills are secured by certain restricted bank balances of the Company with carrying value of US$69,066,000 and US$14,122,000 and guaranteed by certain related parties and third parties jointly to the extent of US$59,414,000 and US$8,238,000, respectively.
The weighted average annual interest rates of the bills financing were 4.29% and 3.31% as of March 31, 2012 and 2011, respectively.
14.GOVERNMENT SUBSIDIES
During the year ended March 31, 2008, the Company received a government grant of approximately US$231,000 for the purpose of subsidizing its acquisition of property, plant and equipment, of which approximately US$51,000 and US$48,000 were credited to the statement of operations for the years ended March 31, 2012 and 2011 respectively.
15.RELATED PARTY TRANSACTIONS
(a) Names and relationship of related parties:
Name of related party
Existing relationships with the Company
Mr. Xu Kecheng
Director and controlling stockholder of Chisen Electric
Zhejiang Chisen Glass Company Limited (“Chisen Glass”)*
A company controlled by a close family member of Mr. Xu Kecheng
Mr. Xu Keyong
A close family member of Mr. Xu Kecheng
Ms. Zhou Fang Qin
Spouse of Mr. Xu Kecheng
Changxing Chisen Xinguangyuan Company Limited (“Xinguangyuan”)*
A company controlled by a close family member of Mr. Xu Kecheng
Zhejiang Ai Ge Organism Products Company Limited (“Ai Ge Organism”)*
A company controlled by Mr. Xu Kecheng
Zhejiang Changxing Nuo Wan Te Ke Glass Company Limited (“Nuo Wan Te Ke”)*
A company controlled by a close family member of Mr. Xu Kecheng
Zhejiang Changxing Ruilang Electronic Company Limited (“Ruilang Electronic”) *
A company controlled by a close family member of Mr. Xu Kecheng
*These are direct translation of the name in Chinese for identification purpose only and are not the official names in English.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
15.RELATED PARTY TRANSACTIONS (CONTINUED)
(b)Summary of balances with related parties:
All amounts due from / to related parties represent unsecured advances which are interest-free and repayable on demand.
(c)Summary of related party transactions:
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
15.RELATED PARTY TRANSACTIONS (CONTINUED)
(d)Other arrangements:
˙As of March 31, 2012, Chisen Glass provided guarantees, in aggregate, amounting to US$6,337,000, US$2,376,000 and US$2,376,000 to secure the short-term bank loans, bills financing and notes payable of the Company, respectively.
˙As of March 31, 2012, Ruiling Electronic, Chisen Glass, Mr. Xu Kecheng and Ms. Zhou Fang Qin provided guarantees, in aggregate, amounting to US$7,129,000 to secure the bills financing of the Company.
˙As of March 31, 2012, Mr. Xu Kecheng, Ms. Zhou Fang Qin and a third party provided guarantees, in aggregate, amounting to US$7,920,000 and US$11,881,000 to secure the short term bank loans and bills financing of the Company, respectively.
˙As of March 31, 2012, Xinguangyuan, Mr. Xu Kecheng and Ms. Zhou Fang Qin, provided guarantees, in aggregate, amounting to US$792,000, US$5,545,000 and US$16,603,000 to secure the notes payable, bills financing and short term bank loans of the Company, respectively.
˙As of March 31, 2012, Chisen Glass and a third party provided guarantees, in aggregate, amounting to US$3,961,000, US$2,376,000 and US$792,000 to secure the short term bank loans, bills financing and notes payable of the Company, respectively.
˙As of March 31, 2012, Xinguangyuan provided guarantees, in aggregate, amounting to US$1,361,000 and US$1,584,000 to secure the bills financing and short term bank loan of the Company, respectively.
˙As of March 31, 2012, Xinguangyuan, Chisen Glass and a third party provided guarantees, in aggregate, amounting to US$3,485,000 to secure the bills financing of the Company.
˙As of March 31, 2012, Mr. Xu Kecheng, Ms. Zhou Fang Qin, Xinguangyuan and a third party provided guarantees, in aggregate, amounting to US$3,168,000 to secure the notes payable of the Company.
˙As of March 31, 2012, Chisen Glass, Mr. Xu Kecheng and Ms. Zhou Fang Qin, provided guarantees, in aggregate, amounting to US$3,961,000 to secure the bills financing of the Company.
˙As of March 31, 2012, Ruiling Electronic, Mr. Xu Kecheng and Ms. Zhou Fang Qin provided guarantees, in aggregate, amounting to US$1,109,000 to secure the notes payable of the Company.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
16.DISTRIBUTION OF INCOME
Zhejiang Chisen and Chisen Jiangsu are required by the relevant laws and regulation to transfer at least 10% of their after-tax profit determined in accordance with the PRC accounting rules and regulations to a statutory surplus reserve until such reserve balance reaches 50% of their registered capital.
The Company transferred US$299,000 and US$1,465,000 out of the after-tax income to the statutory reserve for the years ended March 31, 2012 and 2011, respectively.
The statutory surplus reserve can only be utilized to offset prior years’ losses or for capitalization as paid-in capital. No distribution of the remaining reserves shall be made other than upon liquidation of Zhejiang Chisen and Chisen Jiangsu.
17.COMMITMENTS AND CONTINGENCIES
(a)Operating lease commitments
The following table summarizes the approximate future minimum rental payments under non-cancelable operating leases in effect as of March 31, 2012 and 2011:
(b)Capital commitments
As of March 31, 2012 and 2011, the Company had outstanding capital expenditure commitments relating to various construction projects and purchase of land and machineries for an aggregate amount of approximately US$122,845,000 and US$150,448,000 respectively.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
18.EXTRAORDINARY ITEMS
(a)Extraordinary gain
During the year ended March 31, 2012, Zhejiang Chisen had completed the relocation of production plant in Jingyi Road. Pursuant to the Compensation Agreement on Relocation and Acquisition entered into between Zhejiang Chisen and Administrative Committee of Changxing Economic Development Zone (“ACC”), ACC shall pay Zhejiang Chisen a compensation in the amount of RMB98,514,000 (US$15,354,000) for the loss on long-term land lease prepayment and buildings in Jingyi Road. In May 2011, the Company wrote off the long-term land lease prepayment and buildings with net book value of approximately RMB14,354,000 (US$2,237,000) and therefore net compensation income of RMB84,160,000 (US$13,117,000) was recognized as an extraordinary gain during the year. As of March 31, 2012, the compensation of US$1,692,000 has not been received and was recorded as other receivable in current assets in the consolidated balance sheet.
(b)Extraordinary loss
In May 2011, and without advance notice to the Company, the PRC Central Government tightened its environment protection policy which applies to all lead-acid battery manufacturers. Pursuant to the newly tightened policy, a 500 meters quarantined isolated area must be maintained between production facilities, including assembly facilities, and residential areas.
The Company’s Jing’er Road plant was mainly utilized for assembly activities and it cannot comply with the tightened policy. Management had gradually scaled down the operation of Jing’er Road plant and the Company had completed the relocation of certain production facilities to the plant in Xuyi County, Jiangsu Province during the year ended March 31, 2012. After evaluating the plant and machinery at Jing’er Road plant, some of them cannot fit into the plant in Jiangsu Xuyi. The Company decided to impair the value of plant and machinery as well as leasehold improvement of Jing’er Road plant down to its recoverable amount. The impairment loss was recorded as follows:
The management considered that this government behavior is very unusual and rare to happen, and thus the relevant impairment loss of plant and machinery was classified as an extraordinary item.
Chisen Electric Corporation
Notes to and Forming Part of Consolidated Financial Statements
For the years ended March 31, 2012 and 2011
19.IMPAIRMENT ON PROPERTY, PLANT AND EQUIPMENT
During the year ended March 31, 2012, the Company acquired certain machineries in order to manufacture lead plate under the external formation technique for commercial purpose in Jiangsu Province, PRC. However, on March 1, 2012, the PRC government released a consultation paper concerning about the further governance and restrictions on lead acid batteries industry. In accordance with the consultation paper, any new projects of manufacturing lead plates for commercial purpose in the PRC will no longer be approved.
After reviewing the consultation paper, management believes it is highly likely that the proposed policies of not granting approval to any new projects of manufacturing lead plates for commercial purpose would be implemented and enforced by the PRC government in the near future.
The management reviewed the recently acquired machineries immediately and identified items which could be directly integrated into the existing production lines of lead acid batteries production operating under internal formation technique in Xuyi Jiangsu. For items which could not be integrated directly, after the costs and benefits analysis of modification, the management decided to dispose of them in the near future. As of March 31, 2012, a full impairment of US$2,857,000 was made on these machineries as the management estimated that the scrap values of these assets are minimal.
On May 31, 2012, the PRC government released new policy to govern the lead acid batteries industry with effect from July 1, 2012, which confirmed the estimation of the management in relation to the final implementation of the tightened policies as initiated in the consultation paper.
20.LOSS ON DISPOSAL OF SCRAP INVENTORIES
During the year ended March 31, 2012, the Company was advised by the local authority of Changxing County that the current production technique, external battery formation, in one of the Company’s plant in Changxing County can no longer be used after October 31, 2012. The plant is the only facility of the Company for repairing the return batteries which were produced under external battery formation. After analyzed the future return rate of the batteries and the Company’s current inventory level, management considered that the production capacity at Jing’er Road plant was not enough to repair all future returned batteries and existing inventories. Management decided to dispose of the obsolete inventories as scrap.
As a result, the Company recorded a loss on disposal of scrap inventories amounting to US$13,896,000 for the year ended March 31, 2012.
21.SUBSEQUENT EVENT
On April 26, 2012 and June 20, 2012, the Company had successfully obtained the land use rights of two pieces of land in Xuyi Country, Jiangsu province, PRC respectively. Total size of lands was 83,658 m2 with total price amounted to approximately US$31,262,000.
In order to enhance the cash flow management, the Company decided to sell these lands in the next twelve months. The lands will be classified as assets held for sales and measured at lower of its carrying amount and fair value less costs to sell.