ITEM 1A.RISK FACTORS
In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected, and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.
Risks Related to Our Business
Key employees are essential to growing our business.
Jianzhong Zuo, Jintai Zhao, and Junheng Su are essential to our ability to continue to grow our business. These individuals have established key relationships with customers and suppliers within the industries in which we operate. If one or more of these key employees were to leave us, our relationships with our customers and suppliers may become strained, and our growth strategy might be hindered, which could limit our ability to increase revenue.
In addition, we face competition for attracting skilled personnel. If we fail to attract and retain qualified personnel to meet current and future needs, this could slow our ability to grow our business, which could result in a decrease in market share.
We may need additional capital and we may not be able to obtain it at acceptable terms, or at all, which could adversely affect our liquidity and financial position.
We may need additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including, but not limited to the following, and therefore may never occur:
·investors’ perception of, and demand for, securities of similar oil and gas equipment and services companies in China;
·conditions of the U.S. and other capital markets in which we may seek to raise funds;
·our future results of operations, financial condition and cash flow;
·PRC governmental regulation of foreign investment in oil and gas equipment and services companies in China;
·economic, political and other conditions in China; and
·PRC governmental policies relating to foreign currency borrowings.
We rely on computer software and hardware systems in managing our operations, the failure of which could adversely affect our business, financial condition and results of operations.
We are dependent upon our computer software and hardware systems in supporting our network and managing and monitoring programs on the network. In addition, we rely on our computer hardware for the storage, delivery and transmission of the data on our network. Any system failure which interrupts the input, retrieval and transmission of data or increases the service time could disrupt our normal operation. Any failure in our computer software or hardware systems could decrease our revenues and harm our relationships with our customers, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Our dependence on a limited number of suppliers could adversely impact our distribution capabilities or increase our costs, which could harm our reputation or materially and adversely affect our business, results of operations and financial condition.
We import high-quality petroleum and petrochemical valves and other equipment from a limited number of third-party suppliers, including Cameron, DeltaValve, Poyam Valves, Rotork, Bornemann, Metso, Ruhrpumpen, ABB, Sandvik, GE and Finder Pompes., and distribute them to our domestic clients who are large petroleum and petrochemical companies located and operating in China. The failure of a supplier to supply valves and other equipment satisfying our quality, quantity and cost requirements in a timely and efficient manner could impair our ability to distribute these products, increase our costs, and have an adverse effect on our ability to maintain our client network of domestic buyers of this machinery. The third-party suppliers from whom we import petroleum and petrochemical valves and other equipment have not committed, contractually or otherwise, to distribute their products through us on an exclusive or a non-exclusive basis. If we fail to maintain our relationships with these suppliers or fail to develop new relationships with other suppliers, we may only be able to distribute these products at a higher cost or after lengthy delays, or may not be able to distribute these products at all. If our suppliers identify alternative sales channels, they may choose to sell to other buyers or raise their prices. As a result, we may be compelled to pay higher prices to secure our product supply, which could adversely affect our business, results of operations and financial condition.
Although our continuing relationships with products manufacturers and suppliers are important components of our future growth plan, there can be no assurance that we will continue to be a distributor for such manufacturers, on an exclusive or non-exclusive basis, or that we will in the future successfully consummate the expansion and investment opportunities that we seek.
In the past, we have had a strong working relationship with our products’ manufacturers/suppliers and have acted as the sole distributor of some of these products in China. Although we believe that our relationship with the products’ manufacturers and suppliers will continue, there is no assurance that we will retain our position as sole distributor of certain products, or as a distributor of their products. The manufacturers and suppliers may decide to provide licenses to distribute their products to our competitors and/or may not renew our licenses with them on terms favorable to us or at all. Furthermore, although we continually explore many potential expansion and investment opportunities in our industry with third parties, there can be no assurance that the opportunities that we pursue will ultimately be consummated, or appropriately licensed and approved. In such circumstances, we may be required to pursue other opportunities at lower margins, which could adversely affect our business, results of operations and financial condition.
In the past several years we have derived a significant portion of our revenues from a small group of customers. If we are to remain dependent upon only a few customers, such dependency could negatively impact our business, operating results and financial condition.
Our customer base has been highly concentrated. For the years ended March 31, 2012 and 2011, our two largest customers accounted for 76% and 67% of our total sales, respectively, and the single largest customer accounted for 49% and 35% of our total sales, respectively. As our customer base may change from year-to-year, during such years that the customer base is highly concentrated, the loss of, or reduction of our sales to, any of such major customers could have a material adverse effect on our business, operating results and financial condition.
Many of the contracts that we enter into with purchasers of our products contain liquidated damages provisions for up to 10% of the contract value which, if enforced, would have a negative effect on our business, financial condition and results of operations.
It is customary in our industry for purchase agreements to contain liquidated damages provisions and many of the purchase agreements that we enter into to sell our products contain provisions requiring us to pay a penalty for delays in delivery of our products in the amount of 1% of the contract value for each week delivery is delayed, up to a maximum penalty of 10% of the contract value. We have never had an instance where a purchaser of our products has enforced this or similar liquidated damages provisions for delivery delays, but we can make no assurance that we will not have such provisions enforced against us in the future. Any enforcement of liquidated damages provisions by our customers would have a negative effect on our business, financial condition and results of operations.
We have limited insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. We have determined that the cost of insuring for certain risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for our operations in China except for insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, 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.
As a public company, we will have significant additional requirements for enhanced financial reporting and internal controls. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its Annual Report that contains management assessment of the effectiveness of the company’s internal control over financial reporting. The process of designing and implementing effective internal control is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal control that is adequate to satisfy our reporting obligations as a public company.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, our management has concluded that our internal controls over our financial reporting are ineffective as of March 31, 2012 due to the following material weaknesses:
· we do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of some specific accounting principles generally accepted in the United States commensurate with our financial reporting requirements, which resulted in the restatement of one of our quarterly reports during the year ended March 31, 2012; and
· currently, we do not have an “audit committee financial expert” as defined by the rules and regulations of the SEC serving as a member of our Audit Committee.
We intend to remediate the material weaknesses before March 31, 2013, but we can give no assurance that we will be able to do so. Any failure to implement and maintain improvements in the controls over our financial reporting, or difficulties encountered in the implementation of any improvements in our controls, could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting and related regulatory filings requirements on a timely basis. Any failure to improve our internal controls to address these identified weaknesses could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.
Risks Relating to Regulation of Our Business
Uncertainties with respect to government regulations applicable to our business could have a material and adverse effect on us.
There are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, including, but not limited to, the laws and regulations governing our business and our ownership of equity interest in our PRC subsidiaries. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to our PRC subsidiaries by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
Our PRC subsidiaries will be subject to restrictions on dividend payments.
We may rely on dividends and other distributions from our PRC subsidiaries, our PRC subsidiaries, to provide us with cash flow and to meet our other obligations. Current regulations in the PRC would permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.
PRC regulations on loans and direct investments by overseas holding companies in PRC entities may delay or prevent us to make overseas loans or additional capital contributions to our PRC subsidiaries.
Under the PRC laws, foreign investors may make loans to their PRC subsidiaries or foreign investors may make additional capital contributions to their PRC subsidiaries. Any loans to such PRC subsidiaries are subject to the PRC regulations and foreign exchange loan registrations. Loans by foreign investors to their PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE, or its local branch. Foreign investors may also decide to finance their PRC subsidiaries by means of additional capital contributions. These capital contributions must be examined and approved by the Ministry of Commerce, or MOFCOM, or its local branch in advance.
Under the PRC Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China, and such classification would likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On March 16, 2007, the National People’s Congress or the NPC, approved and promulgated the PRC Enterprise Income Tax Law, which we refer to as the New EIT Law. The New EIT Law took effect on January 1, 2008. Under the New EIT Law, Foreign Investment Enterprises (“FIEs”) and domestic companies are subject to a uniform tax rate of 25%.
Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Because the New EIT Law and its implementing rules are new, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
If the PRC tax authorities determine that we are “resident enterprises” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.
Dividends we received from our PRC subsidiaries may be subject to PRC withholding tax.
The New EIT Law provides that an income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises” and that do not have an establishment or place of business in the PRC, or which have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source, with the payer acting as the obligatory withholder under the New EIT Law, and therefore such income taxes are generally called withholding tax in practice. The State Council of the PRC has reduced the withholding tax rate from 20% to 10% through the Implementation Rules of the New EIT Law. It is currently unclear in what circumstances a source will be considered as located within the PRC. We are an offshore holding company. Thus, if we are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to us by our subsidiaries in the PRC are considered income sourced within the PRC, such dividends may be subject to a 10% withholding tax.
The new tax law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified. Any increase in our combined company’s tax rate in the future could have a material adverse effect on our financial conditions and results of operations.
Our PRC subsidiaries are obligated to withhold and pay PRC individual income tax on behalf of our employees who are subject to PRC individual income tax. If we fail to withhold or pay such individual income tax in accordance with applicable PRC regulations, we may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws.
Under PRC laws, our PRC subsidiaries are obligated to withhold and pay individual income tax on behalf of our employees who are subject to PRC individual income tax. If our PRC subsidiaries fail to withhold and/or pay such individual income tax in accordance with PRC laws, they may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws.
In addition, the State Administration of Taxation has issued several circulars concerning employee stock options. Under these circulars, our employees working in the PRC (which could include both PRC employees and expatriate employees subject to PRC individual income tax) who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions.
Regulation of foreign currency’s conversion into RMB and investment by FIEs may adversely affect our PRC subsidiaries’ direct investment in China
On August 29, 2008, the SAFE issued a Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises or Notice 142, to further regulate the foreign exchange of FIEs. According to Notice 142, FIEs shall obtain a verification report from a local accounting firm before converting its registered capital of foreign currency into Renminbi, and the converted Renminbi shall be used for the business within its permitted business scope. Notice 142 explicitly prohibits FIEs from using RMB converted from foreign capital to make equity investments in the PRC, unless the domestic equity investment is within the approved business scope of the FIE and has been approved by SAFE in advance.
Regulations of Overseas Investments and Listings may increase the administrative burden we face and create regulatory uncertainties.
On August 8, 2006, six PRC regulatory agencies, including MOFCOM, the CSRC, the SASAC, the SAT, the SAIC and SAFE, jointly amended and released the New M&A Rule, which took effect as of September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore SPV formed for purposes of an overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process.
The application of the New M&A Rule with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
It is not clear whether the provisions in the new regulation regarding the offshore listing and trading of the securities of a SPV applies to an offshore company such as us which owns equity interest in the PRC Operating Entity. We believe that the New M&A Rule and the CSRC approval are not required in the context of the Share Exchange under our transaction because (i) such Share Exchange is a purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are not a SPV formed or controlled by PRC companies or PRC individuals; (iii) the PRC Operating Entity is a PRC wholly foreign owned enterprise, which is not owned or controlled by PRC individuals or entities; (iv) we are owned or substantively controlled by foreigners; and (v) there is no clear requirement in the New M&A Rule that would require an application to be submitted to the MOFCOM or the CSRC for the approval of the listing and trading of our company on the U.S. securities market. However, we cannot be certain that the relevant PRC government agencies, including the CSRC, would reach the same conclusion, and we still cannot rule out the possibility that CSRC may deem that the transactions effected by the Share Exchange circumvented the New M&A Rule, the PRC Securities Law and other rules and notices.
If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval is required for the transaction, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this Offering into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel the transaction.
The New M&A Rule, along with foreign exchange regulations discussed in the above subsection, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy.
Risks Associated With Doing Business In China
Our operations and assets in China are subject to significant political and economic uncertainties.
Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
We derive a substantial portion of our sales from the PRC.
Substantially all of our sales are generated from the PRC. We anticipate that sales of our products in the PRC will continue to represent a substantial proportion of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our products, among other things, which in turn would have a material adverse effect on our business and financial condition.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Chinese Renminbi appreciated approximately 4.0% against the U.S. dollar for the year ended March 31, 2012 and 3.95% for the year ended March 31, 2011. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.
The statements of income and cash flows are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies were introduced in 1996 to allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.
We may have limited legal recourse under PRC laws if disputes arise under our contracts with third parties.
The Chinese government has enacted laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, precedent and experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
We must comply with the Foreign Corrupt Practices Act which may make us less competitive with companies not subject to it.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business.
Renminbi is not a freely convertible currency currently, and the restrictions on currency exchanges may limit our ability to use revenues generated in Renminbi to fund our business activities outside the PRC or to make dividend or other payments in United States dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. In the PRC, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of Renminbi into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (such as remittance of foreign currencies for payment of dividends) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (for capital items such as direct investments, loans, securities) still requires the approval of SAFE.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic autonomy and private economic activities, and, as a result, we are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
Future inflation in China may inhibit our activity to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. We may have difficulty establishing adequate management, legal and financial controls in the PRC.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, some of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. It would also be difficult for investors to bring an original lawsuit against us or our directors or executive officers before a Chinese court based on U.S. federal securities laws or otherwise. Moreover, China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
Because Chinese laws will govern almost all of our business’ material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital.
The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in the PRC over the past 25 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the court rooms, interpretation and enforcement of PRC laws and regulations involve uncertainties, which could limit the legal protection available to us, and foreign investors. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our business, prospects, financial condition, and results of operations. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.
Our auditor, like other independent registered public accounting firms operating in China and - to the extent their audit clients have operations in China and Hong Kong, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States) (the “PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.
Because our operations are solely located in the People’s Republic of China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China and - to the extent their audit clients have operations in China - Hong Kong, is currently not inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors operating in China makes it more difficult to evaluate our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
Risks Related to our Securities
Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal stockholders hold approximately 69.08% of our outstanding common stock. Accordingly, these stockholders are able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.
We cannot assure you that our common stock will become liquid or that it will be listed on a securities exchange.
Currently, we are quoted on the OTC Bulletin Board, where an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, by law, various requirements would be imposed on broker-dealers who sell its securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.
There is currently only a limited public market for our common stock and there can be no assurance that a trading market will develop further or be maintained in the future.
The market price of our common stock may be volatile.
The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially and adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility, particularly for companies whose primary operations are located in the PRC. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Because we became a public company by means of a reverse merger, it may not be able to attract the attention of major brokerage firms.
Securities analysts of major brokerage firms may not provide coverage of our securities since there is little incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.
Our common stock is considered “penny stock”.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently less than $5.00 per share and therefore may be a “penny stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the common stock and may affect your ability to sell shares.
The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.
OTC Bulletin Board securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTC Bulletin Board reporting requirements are less stringent than those of the stock exchanges or NASDAQ.
Patterns of fraud and abuse include:
lControl of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
lManipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
l“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
lExcessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
lWholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be limited to the value of our common stock. We plan to retain any future earnings to finance growth.
Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firms and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers with business operations based in China and who have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can be particularly vulnerable to such short attacks.
These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy - oftentimes blogging from outside the U.S. with little or no assets or identity requirements - should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.
ITEM 1B.
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable for smaller reporting companies.
ITEM 2PROPERTIES
The following table summarizes the location of real property we lease. We do not own any real property.
Item
Address
Leased/Owned
Unit 401-405, 4/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China
Leased
Unit 710-712, 7/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China
Leased
Unit 1103, 11/F , Tower Two, Lippo Centre, 89 Queensway, Admiralty, Hong Kong
Leased
Our principal executive office is located at Unit 401-405, 4/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China 100089. The rentable space in this office consists of approximately 684 square meters (approximately 7,359 square feet). The lease agreement has a 5-year term which expires on April 23, 2013. The monthly rental payment is approximately $19,833 (RMB 124,834).
We also lease office space at Unit 710-712, 7/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China 10089. The rentable space in this office consists of approximately 349 square meters (approximately 3,755 square feet). The lease agreement has a 2-year term which expires on August 31, 2013. The monthly rental payment is approximately $7,127 (RMB 44,857). We used to lease office space at Unit 702-702A, in the same building with a monthly rental payment of approximately $4,735 (RMB 29,802), which expired on June 30, 2011.
We also lease office space at Unit 1103, 11/F, Tower Two, Lippo Centre, 89 Queensway, Admiralty, Hong Kong. The rentable space in this office consists of approximately 78 square meters (approximately 839 square feet). The lease agreement has a 1-year term which expires on September 16, 2011 and has been extended to September 16, 2012. The original monthly rental payment is approximately $3,998 (HK$31,043), which has been adjusted to approximately $4,121 (HK$32,000) from September 17, 2011 through September 16, 2012.
ITEM 3LEGAL PROCEEDINGS
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currently a party to any litigation or other legal proceedings brought against us. We are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations.
ITEM 4MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTC Bulletin Board under the trading symbol “LNDT”. Prior to April 21, 2010, our common stock was quoted on the OTC Bulletin Board under the trading symbol “RMSI”.
The following table sets forth the high and low bid quotations for our common stock for the periods indicated. The OTC Bulletin Board quotations reflect inter-dealer prices, without retail markup, markdowns or commissions, and may not necessarily represent actual transactions.
On July 12, 2012, the last reported price for our common stock on the OTC Bulletin Board was $1.21.
Number of Record Holders of Our Common Stock
As of July 12, 2012, we had 36,444,850 shares of our common stock outstanding and 118 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies.
Dividend Policy
We have never declared or paid cash dividends on our common stock and do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Payments of future dividends on our common stock, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
None.
Equity Repurchases
There were no purchases of equity securities made by the Company in the 4th quarter of fiscal 2012.
Recent Sales of Unregistered Securities
Any previous sales of unregistered securities by the Company have been previously disclosed in our reports on Form 10-Q or Form 8-K, as applicable, filed with the SEC.
ITEM 6SELECTED FINANCIAL DATA
Not applicable to smaller reporting companies.
ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Form 10-K. Our audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). In addition, our audited consolidated financial statements and the financial data included in this Form 10-K reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” and elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements.
Company Structure and Reorganization
Our company was incorporated in the State of Texas on June 25, 1999 under the name Slopestyle Corporation. On December 12, 2007, we changed our name from Slopestyle Corporation to Remediation Services, Inc. (“Remediation”) and re-domiciled from Texas to Nevada. On February 26, 2010, we completed a reverse acquisition of China LianDi Clean Technology Engineering Ltd. (“China LianDi”), which is further described below. The reverse acquisition of China LianDi resulted in a change-in-control of our company.
On February 26, 2010, we consummated the transactions contemplated by the Share Exchange Agreement (the “Exchange Agreement”) by and among (i) China LianDi and China LianDi’s shareholders, (collectively, the “China LianDi Shareholders”), who together owned shares constituting 100% of the issued and outstanding ordinary shares of China LianDi (the “China LianDi Shares”) and (ii) the former principal stockholder of our company. Immediately prior to the Share Exchange, 4,690,000 shares of our common stock then outstanding were cancelled and retired, so that immediately prior to the Share Exchange, we had 28,571,430 shares issued and outstanding. Pursuant to the terms of the Exchange Agreement, the China LianDi Shareholders transferred all of the China LianDi Shares to us in exchange for the issuance of 27,354,480 shares of our common stock, par value $0.001 per share (such transaction, the “Share Exchange”), representing approximately 96% of our shares of common stock then issued and outstanding. China LianDi also paid $275,000 to our former principal shareholder, in connection with the Share Exchange.
As a result, the Share Exchange has been accounted for as a reverse acquisition whereby China LianDi is deemed to be the accounting acquirer (legal acquiree) and we are the accounting acquiree (legal acquirer). The financial statements before the Share Exchange are those of China LianDi with our results being consolidated from the closing date. The equity section and earnings per share of our company have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded.
On March 17, 2010, we formed a corporation under the laws of the State of Nevada named LianDi Clean Technology Inc. (“Merger Sub”) and on the same day, acquired one hundred shares of Merger Sub’s common stock for cash. Accordingly, Merger Sub became our wholly-owned subsidiary.
Effective as of April 1, 2010, Merger Sub was merged with and into our company. As a result of the merger, our corporate name was changed to “LianDi Clean Technology Inc.” Prior to the merger, Merger Sub had no liabilities and nominal assets and, as a result of the merger, the separate existence of Merger Sub ceased. LianDi Clean was the surviving corporation in the merger and, except for the name change provided for in the Agreement and Plan of Merger, there was no change in our directors, officers, capital structure or business.
Our company then became a holding company and, through our subsidiaries, is primarily engaged in distributing clean technology for refineries (unheading units for the delayed coking process), distributing a wide range of petroleum and petrochemical valves and equipment, providing systems integration, developing and marketing optimization software and providing related technical and engineering services to large domestic Chinese petroleum and petrochemical companies and other energy companies. We also expect to launch our oil sludge cleaning solution in fiscal 2013, which will be operated through our subsidiary, Beijing Hongteng Weitong Technology Co., Ltd.
The principal activities of our company’s subsidiaries as of March 31, 2012 are set forth below:
Subsidiaries’ names
Place and date of
incorporation
Percentage of
ownership
Principal activities
China LianDi Clean Technology Engineering Ltd. (“China LianDi”)
British Virgin Islands July 28, 2004
100% (directly by our company)
Holding company of the other subsidiaries.
Hua Shen Trading (International) Limited
(“Hua Shen HK”)
Hong Kong January 20, 1999
100% (through China LianDi)
Delivering industrial valves and other equipment with the related integration and technical services.
Petrochemical Engineering Limited
(“PEL HK”)
Hong Kong September 13, 2007
100% (through China LianDi)
Delivering industrial valves and other equipment with the related integration and technical services, and investment holdings.
Bright Flow Control Ltd.
(“Bright Flow”)
Hong Kong December 17, 2007
100% (through China LianDi)
Delivering industrial valves and other equipment with the related integration and technical services.
Beijing JianXin
Petrochemical Engineering Ltd. (“Beijing JianXin”)
People’s Republic of China (“PRC”) May 6, 2008
100% (through PEL HK)
Delivering industrial valves and other equipment with the related integration and technical services, developing and marketing optimization software, and provision of delayed coking solutions for petrochemical, petroleum and other energy companies.
Hongteng Technology Limited
(“Hongteng HK”)
Hong Kong, February 12, 2009
100% (through China LianDi)
Investment holding company.
Beijing Hongteng Weitong
Technology Co., Ltd
(“Beijing Hongteng”)
PRC January 12, 2010
100% (through Hongteng HK)
Delivering industrial equipment with the related integration and technical services, developing and marketing software, and provision of other technical consultancy services for petrochemical, petroleum and other energy companies in the production safety management field.
In July 2004, China LianDi was founded with 60% owned by Mr. Jianzhong Zuo, the Chief Executive Officer and Chairman of our company, and 40% owned by another minority shareholder. On October 2, 2007, Mr. Zuo acquired the remaining 40% interest in China LianDi for US$1 from the minority shareholder, and accordingly became the sole shareholder of China LianDi. On March 6, 2008, SJ Asia Pacific Limited (a company incorporated in the British Virgin Islands and wholly owned by SJI Inc., a company incorporated in Japan and whose shares are listed on the Jasdaq Securities Exchange, Inc.) acquired a 51% interest in China LianDi from Mr. Zuo in exchange for: (i) US$1.00; (ii) a commitment to invest HK$60,000,000 (or approximately $7.7 million) in China LianDi; and (iii) the provision of financial support for China LianDi by way of an unlimited shareholder loan bearing interest at a rate not exceeding 5% per annum. As a result, at such time China LianDi was owned 51% by SJ Asia Pacific Limited and 49% by Mr. Zuo.
On January 8, 2010, Mr. Zuo transferred a 25%, 14% and 10% interest in China LianDi to China LianDi Energy Resources Engineering Technology Ltd. (“LianDi Energy,” a company wholly owned by Mr. Zuo), Hua Shen Trading (International) Ltd. (“Hua Shen BVI,” a company incorporated in the British Virgin Islands and wholly owned by SJ Asia Pacific Limited, of which Mr. Zuo is a director and holds voting and dispositive power over the shares held by it) and Rapid Capital Holdings Ltd. (“Rapid Capital”), respectively. On February 10, 2010, SJ Asia Pacific Limited and LianDi Energy transferred 28.06% and 1.47% of their respective interests in China LianDi to Rapid Capital (26.53%) and TriPoint Capital Advisors, LLC (“TriPoint”) (3%), respectively. On February 12, 2010, Rapid Capital transferred its 31.53% interest in China LianDi to LianDi Energy (15.53%), Hua Shen BVI (11%) and Dragon Excel Holdings Ltd (5%). As a result, immediately before the Share Exchange, China LianDi was owned 48% by SJ Asia Pacific Limited (including 25% through Hua Shen BVI) and 39% by Mr. Zuo through LianDi Energy. The remaining 13% was held 5% by Dragon Excel Holdings Limited (“Dragon Excel”), 5% by Rapid Capital and 3% by TriPoint.
Dragon Excel and Rapid Capital were held by two individuals unaffiliated to China LianDi at the time of the transfers. The transfers of a 5% interest in China LianDi from Mr. Zuo to each of Dragon Excel and Rapid Capital were effected for Mr. Zuo’s own personal reasons. The transfer of a 3% interest of China LianDi from our principal shareholder, SJ Asia Pacific Limited, to TriPoint was entered into for consulting services to facilitate our private placement.
Hua Shen HK was founded by Mr. Zuo in 1999. On January 8, 2008, China LianDi acquired a 100% ownership interest in Hua Shen HK from Mr. Zuo. As Hua Shen HK and China LianDi had been under common control, the acquisition of Hua Shen HK by China LianDi has been accounted for using the “as if” pooling method of accounting.
In 2007, China LianDi established PEL HK and Bright Flow, as wholly-owned subsidiaries, in Hong Kong. In 2008, PEL HK established Beijing JianXin as a wholly-owned subsidiary in the PRC.
On December 31, 2010, one of our wholly owned subsidiaries, China LianDi, acquired a 100% equity interest in Hongteng HK (a company incorporated in Hong Kong) from Mr. Zuo, our CEO, for cash consideration of $2,272. This company has a wholly owned subsidiary incorporated in China, Beijing Hongteng Weitong Technology Co., Ltd.
On September 27, 2011, two of our existing stockholders, SJ Asia Pacific Limited ("SJ Asia") and China LianDi Energy Resources Engineering Technology Ltd. ("LianDi Energy"), and Jianzhong Zuo, a director and the sole stockholder of LianDi Energy and the Chairman, President and Chief Executive Officer of our company, consummated the transactions contemplated by the Share Purchase Agreement (the "Share Purchase Agreement"), dated as of September 22, 2011 relating to the purchase by SJ Asia from LianDi Energy of 5,400,000 shares of our common stock in exchange for an aggregate purchase price of $25,920,000 ($4.80 per share). The purpose of the Share Purchase Agreement and the transactions contemplated thereby was for SJ Asia to acquire in excess of 51% of the outstanding common shares of our company and consolidate our company's business with that of SJI, Inc., the parent company of SJ Asia. In addition to the Share Purchase Agreement described above, SJ Asia entered into a joinder agreement to a lock-up agreement with our company whereby SJ Asia agreed that it may only sell up to one-twelfth (1/12) of SJ Asia's holdings every month through February 26, 2012.
On March 30, 2012, SJ Asia signed an Accord and Satisfaction Agreement pursuant to which it agreed to accept on May 9, 2012 (the “Transfer Date”), in lieu of an outstanding debt in the amount of Japanese Yen (J¥) 539,255,277 (approximately US$6,763,518 at an exchange rate of US$1.00 = J¥80.00 on May 10, 2012), 100% of the shares of Rapid Capital Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“Rapid Capital”), who in turn, owns 1,367,725 shares of our common stock. Therefore, SJ Asia indirectly, beneficially owns 1,367,725 shares of our common stock through Rapid Capital.
As a result, SJ Asia beneficially owns an aggregate of 19,881,463 shares of our common stock, which constitutes approximately 54.6% of the outstanding common shares of our company as of the date of this report on Form 10-K. Following the completion of the transactions described above, Mr. Zuo remains the Chairman, President and Chief Executive Officer of our company with the backing of SJ Asia.
We are also engaged in the manufacturing and selling of industrial chemicals, which is operated through our equity method affiliate, Anhui Jucheng Fine Chemicals Co., Ltd. (“Anhui Jucheng”). Anhui Jucheng is engaged in the business of developing, manufacturing and selling organic and inorganic chemical products and high polymer fine chemical products, and providing chemical professional services.
Anhui Jucheng was incorporated in Anhui, PRC in January 2005. On July 5, 2010, we acquired a 51% interest in Anhui Jucheng and it became our majority-owned subsidiary. On August 30, 2011, six unaffiliated third party investors invested cash in the aggregate of RMB142 million (approximately $22.23 million) in Anhui Jucheng, and as a result, obtained a 23.28% equity interest in Anhui Jucheng. As a result, our equity interest in Anhui Jucheng decreased from 51% to 39.13% and we ceased to have a controlling financial interest in Anhui Jucheng. Nevertheless we still retain an investment in, and a significant influence over, Anhui Jucheng, Anhui Jucheng then became an equity method affiliate of ours.
Private Placement
On February 26, 2010 and immediately following the Share Exchange, we completed a private placement transaction pursuant to a securities purchase agreement with certain investors (collectively, the “Investors”) and sold 787,342 units at a purchase price of $35 per unit, consisting of, in the aggregate, (a) 7,086,078 shares of Series A convertible preferred stock, par value $0.001 per share (the “Series A Preferred Stock”) convertible into the same number of shares of common stock, (b) 787,342 shares of common stock, (c) Series A Warrants to purchase up to 1,968,363 shares of common stock, at an exercise price of $4.50 per share for a three-year period, and (d) Series B Warrants to purchase up to 1,968,363 shares of common stock, at an exercise price of $5.75 per share for a three-year period. We also issued to the placement agent in the private placement (i) warrants to purchase 787,342 shares of common stock at an exercise price of $3.50, (ii) Series A Warrants to purchase 196,836 shares of common stock, and (iii) Series B Warrants to purchase 196,836 shares of common stock, which expire in three years on February 26, 2013. We received aggregate gross proceeds of approximately $27.56 million from the private placement.
Basis of preparation and consolidation and use of estimates
Our audited consolidated financial statements for the years ended March 31, 2012 and 2011 are prepared in accordance with U.S. GAAP.
Our consolidated financial statements include the financial statements of our company and our subsidiaries. All significant inter-company transactions and balances between our company and our subsidiaries have been eliminated upon consolidation.
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to the useful lives of property and equipment and intangible assets, assumptions used in assessing impairment for long-term assets and goodwill, and the fair value of share-based payments and warrants granted in connection with the private placement of preferred stock. We base our estimates and judgments on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Accordingly, actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our financial statements.
l Revenue recognition
Revenue is recognized when the following four criteria are met as prescribed by Accounting Standard Codification (“ASC”) Topic 605 “Revenue Recognition”: (i) persuasive evidence of an arrangement exists, (ii) product delivery has occurred or the services have been rendered, (iii) the fees are fixed or determinable, and (iv) collectibility is reasonably assured.
Multiple-deliverable arrangements
We derive revenue from fixed-price sale contracts with customers that may deliver equipment with varied performance specifications specific to each customer and provide technical services for installation, integration and testing of the equipment. In instances where the contract price is inclusive of the technical services, the sale contracts include multiple deliverables. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:
lThe delivered item(s) has value to the customer on a stand-alone basis;
lThere is objective and reliable evidence of the fair value of the undelivered item(s); and
lIf the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company.
Our multiple-element contracts generally include customer-acceptance provisions which provide for us to carry out installation, test runs and performance tests at our cost until the equipment can meet the performance specifications within a specified period (“acceptance period”) stated in the contracts. These contracts generally provide the customers with the right to deduct certain percentages of the contract value as compensation or liquidated damages from the balance payment stipulated in the contracts, if the performance specifications cannot be met within the acceptance period. There is generally no provision giving the customers a right of return, cancellation or termination with respect to any uninstalled equipment.
Our delivered equipment has no standalone value to the customer until it is installed, integrated and tested at the customer’s site by us in accordance with the performance specifications specific to each customer. In addition, under these multiple-element contracts, we do not sell the equipment separately from the installation, integration and testing services, and hence there is no objective and reliable evidence of the fair value for each deliverable included in the arrangement. As a result, the equipment and the technical services for installation, integration and testing of the equipment are considered a single unit of accounting pursuant to ASC Subtopic 605-25, Revenue Recognition - Multiple-Element Arrangements. In addition, the arrangement generally includes customer acceptance criteria that cannot be tested before installation and integration at the customer’s site. Accordingly, revenue recognition is deferred until customer acceptance, indicated by an acceptance certificate signed by the customer.
We may also provide our customers with a warranty for one year following the customer’s acceptance of the installed equipment. Some contracts require that 5% to 15% of the contract price be held as retainage for the warranty and only due for payment by the customer upon expiration of the warranty period. For those contracts with retainage clauses, we defer the recognition of the amounts retained as revenue until expiration of the warranty period when collectibility can reasonably be assured. We have not provided for warranty costs for those contracts without retainage clauses, as the relevant estimated costs were insignificant based on historical experience.
Product only
Revenue derived from sales contracts that require delivery of products only is recognized when the titles to the products pass to customers. Titles to the products pass to the customers when the products are delivered and accepted by the customers.
Software sale
We recognize revenue from the delivery of software when the software is delivered to and accepted by the customer, pursuant to ASC Topic 985 “Software” and ASC Topic 605 “Revenue Recognition.” Costs of software revenue include amortization of software copyrights.
Service
We recognize revenue from provision of services when the service has been performed, in accordance with ASC Topic 605 “Revenue Recognition.”
We are subject to business tax of 5% and value added tax of 17% on the revenues earned for services provided and products sold in the PRC, respectively. We present our revenue net of business tax and related surcharges and value added tax, as well as discounts and returns. There were no product returns for the years ended March 31, 2012 and 2011.
l Foreign currency
We have evaluated the determination of our functional currency based on the guidance in ASC Topic 830 “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.
Historically, the sales and purchase contracts of our Hong Kong subsidiaries have substantially been denominated and settled in the U.S. dollar. Therefore, our Hong Kong subsidiaries generate and expend their cash predominately in the U.S. dollar. Accordingly, it has been determined that the functional currency of our Hong Kong subsidiaries is the U.S. dollar.
Historically, the sales and purchase contracts of our PRC subsidiaries have predominantly been denominated and settled in Renminbi (the lawful currency of Mainland China). Accordingly, it has been determined that the functional currency of our PRC subsidiaries is Renminbi.
On our own, we raise financing in the U.S. dollar, pay our own operating expenses primarily in the U.S. dollar, and expect to receive any dividends that may be declared by our subsidiaries (including Beijing JianXin and Beijing Hongteng, which are wholly foreign-owned enterprises with a registered capital denominated in the U.S. dollar) in the U.S. dollar.
Therefore, it has been determined that our functional currency is the U.S. dollar based on the sales price, expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.
We use the United States dollar (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. Our subsidiaries maintain their books and records in their respective functional currency, being the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of a subsidiary with functional currency other than the U.S. Dollar are translated into the U.S. Dollar using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of our financial statements are recorded as accumulated other comprehensive income.
Our PRC subsidiaries maintain their books and records in Renminbi (“RMB”), the lawful currency in the PRC, which may not be freely convertible into foreign currencies. The exchange rates used to translate amounts in RMB into the U.S. Dollar for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of People’s Bank of China and are as follows:
l Investment in equity method affiliate company
The equity method affiliate company that is not consolidated, but over which we exercise significant influence, is accounted for under the equity method of accounting in accordance to ASC Topic 323 “Equity Method and Joint Ventures”. Whether or not we exercise significant influence with respect to an equity method affiliate depends on an evaluation of several factors including, among others, representation on the equity method affiliate’ s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the equity method affiliate.
Under the equity method of accounting, our share of the earnings or losses of the equity method affiliate is reflected in the caption “Equity in earnings of equity method affiliate” in the consolidated statements of income and comprehensive income. The amount recorded in income is adjusted to eliminate intercompany gains and losses. Our carrying value (including advance to) in the equity method affiliate is reflected in the caption “Investment in and advance to equity method affiliate” in our consolidated balance sheets. Dividends received from the unconsolidated subsidiary reduce the carrying amount of the investment.
When our carrying value in an equity method affiliate is reduced to zero, no further losses are recorded in our consolidated financial statements unless we guarantee obligations of the equity method affiliate or have committed additional funding. When the equity method affiliate subsequently reports income, we will not record its share of such income until it equals the amount of its share of losses not previously recognized.
l Income taxes
We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” ASC Topic 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to realize their benefits, or that future deductibility is uncertain.
Our income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the tax jurisdictions where we operate. We assess potentially unfavorable outcomes of such examinations based on the criteria of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13. The interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04 - Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs. The amendments in this update intend to converge requirements for how to measure fair value and for disclosing information about fair value measurements in U.S. GAAP with International Financial Reporting Standards. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of the provisions in ASU 2011-04 will have no material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05 - Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this update require (i) that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements (the current option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity is eliminated); and (ii) presentation of reclassification adjustments from OCI to net income on the face of the financial statements. For public entities, the amendments in this ASU are effective for years, and interim periods within those years, beginning after December 15, 2011. The amendments in this update should be applied retrospectively. Early adoption is permitted. The adoption of the provisions in ASU 2011-05 will have no material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08 -Intangibles -Goodwill and Other (Topic 350). The amendments in this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of the provisions in ASU 2011-08 will have no material impact on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11 -Balance Sheet (Topic 210). The objective of this update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either 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 either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the provisions in ASU 2011-11 will have no material impact on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 -Comprehensive Income (Topic 220). The amendments in this update supersede certain pending paragraphs in ASU No. 2011-05, to effectively defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of the provisions in ASU 2011-12 will have no material impact on our consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
A. Results of Operations for the Years Ended March 31, 2012 and 2011
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period. All amounts are presented in US dollars.
Non-GAAP Measures
To supplement the audited consolidated statement of income and comprehensive income presented in accordance with U.S. GAAP, we also provided non-GAAP measures of income before income tax, net income, net income available to common stockholders and the basic and diluted earnings per share for the years ended March 31, 2012 and 2011, which are adjusted from results based on U.S. GAAP to exclude the non-cash gain and the related deferred income tax expense recorded, which are related to the gain on deconsolidation of Anhui Jucheng for the year ended March 31, 2012, and the non-cash charge recorded, which related to the fair value of the escrow shares allocated to the Series A preferred stock, treated as a deemed dividend, and a deduction of net income available to common stockholders for the year ended March 31, 2011. The non-GAAP financial measures are provided to enhance the investors' overall understanding of our current performance in on-going core operations as well as prospects for the future. These measures should be considered in addition to results prepared and presented in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. We use both U.S. GAAP and non-GAAP information in evaluating and operating business internally and therefore deem it important to provide all of this information to investors.
The following table presents a reconciliation of our non-GAAP financial measures to the audited consolidated statements of income and comprehensive income for the years ended March 31, 2012 and 2011: (All amounts in US dollars)
(1)For the year ended March 31, 2011, the effect of the potential dilutive convertible preferred stock was not included, because the effect is anti-dilutive upon recognition of the deemed dividend in accordance with U.S. GAAP.
(2)For the year ended March 31, 2011, the effect of the potential dilutive convertible preferred stock was included, because the effect is dilutive regardless of the recognition of the deemed dividend under non-GAAP measures.
Net Revenue:
Net revenue represents our gross revenue net of taxes and the related surcharges, as well as discounts and returns. There were no material discounts and returns for the years ended March 31, 2012 and 2011.
The following tables set forth the analysis of our net revenue:
We generated our revenue from delivery of industrial equipment with the related technical engineering services (including, but not limited to, installation, integration and system testing), sales of software products, providing software related technical services, providing other technical consultancy services and sales of chemical products. If sales of equipment and the related technical services or sales of software products and the related technical services are included in one agreement as a total solution package, we have neither objective nor reliable evidence for us to separate our total revenue amount into separate categories. Therefore, the revenue amount indicated as technical services in the above table was calculated based on the total revenue amount of stand-alone technical consultancy service agreements.
For the year ended March 31, 2012, our total net revenue decreased to US$127.68 million from US$140.84 million for the same period of 2011. Without regard to the US$12.03 million and US$22.57 million of net revenue generated from sales of industrial chemicals, which were operated by Anhui Jucheng, and are discussed separately below, our total net revenue decreased to US$115.65 million for the year ended March 31, 2012 from US$118.27 million for the same period of 2011.
The decrease in the total net revenue for the year ended March 31, 2012 was primarily due to the decrease in the net revenue generated from sales and installation of equipment projects, which resulted from the decrease in the average contract amount of the projects completed for the year ended March 31, 2012 as compared to the same period of last year.
For the year ended March 31, 2012, we achieved approximately US$94.56 million of equipment sales and installation revenue, as compared to US$103.39 million for the same period of 2011. We completed 97 projects related to sales and installation of equipment for the year ended March 31, 2012, as compared to 75 projects for the same period of 2011. However, the average contract amount of the projects completed for the year ended March 31, 2012 decreased to approximately US$0.97 million from approximately US$1.38 million for the same period of 2011.
For the years ended March 31, 2012 and 2011, we achieved approximately US$17.47 million and US$14.67 million of software and related technical implementation services revenue, respectively.
For the years ended March 31, 2012 and 2011, we sold 85 sets and 32 sets of our data processing software and provided the related implementation services. We achieved approximately US$8.86 million and US$2.86 million of software revenue, respectively. In addition, for the year ended March 31, 2012, we also achieved approximately US$8.61 million from software sales and technical consultancy services, which related to a purchased software use right and the related training and application program. For the year ended March 31, 2011, we also achieved approximately US$11.81 million of software and the related technical implementation services revenue in relation to software sales and technical implementation contracts we signed with China Petroleum and Petrochemical Engineering Institute (CPPEI), a direct subsidiary of Petro China Company Limited (“PetroChina”), which related to a special ordered software we purchased and customized for PetroChina and primarily used for the production planning and products distribution management system, which covered approximately 200 end users of the logistics dispatch command centers of PetroChina in Beijing and six other provinces across China.
For the years ended March 31, 2012 and 2011, we achieved approximately US$3.62 million and US$0.21 million of technical consultancy services revenue, respectively. For the year ended March 31, 2012, our technical consultancy services revenue achieved were primarily related to the Hazard and Operability Analysis (“HAZOP”) consultancy services revenue.
As of March 31, 2012 and 2011, we had 16 and 17 signed but uncompleted contracts, respectively, with total contract amounts of approximately US$45 million and US$11 million, respectively. We have served the Chinese petroleum and petrochemical industries since 2004 through our PRC operating subsidiaries. We established and developed our relationships with international industrial equipment manufacturers, such as Cameron, DeltaValve and Poyam Valves. We also analyzed the domestic market and the local customers’ needs. As a result, we are one of the few domestic companies able to provide localized services for international companies lacking local offices in China. This process also allowed us to meet the high standards and requirements set by our customers, the major petroleum and petrochemical companies in China, and become an approved vendor. Along with the rapid growth of the petroleum and petrochemical industries and the rapid growth of the fixed asset investments within these industries, we successfully increased the scope of projects performed for our customers from the second half of our fiscal year 2009 and in our fiscal years 2010 and 2011. In fiscal 2012, due to increased competition in industrial equipment sales and installation projects, our revenue achieved in this segment decreased by approximately 8.5% as discussed above. In order to secure our competitive advantage and market share in this business segment, we successfully developed relationships with several new suppliers, such as Sandvik, GE and Finder Pompes S.A.S. to distribute their products to the large Chinese petroleum and petrochemical companies in fiscal 2012, which expanded our ability to bid for a broader range of products and services while meeting more of our customers’ needs. In return, this will enable us to enhance our completive advantages in this area and continue to secure our market share in future periods.
Our equity method affiliate company, Anhui Jucheng, is primarily engaged in manufacturing and selling an industrial chemical product called Polyacrylamide. Polyacrylaminde is primarily used in the following areas: (1) tertiary oil recovery; (2) wastewater, organic wastewater disposal and sewage treatments; (3) auxiliary for the papermaking industry; and (4) flocculant for river water treatments. On July 5, 2010, we acquired a 51% equity interest of Anhui Jucheng and Anhui Jucheng became our majority-owned subsidiary. On August 30, 2011, our equity ownership of Anhui Jucheng decreased from 51% to 39.13% as a result of a total investment of RMB142 million (approximately US$22.23 million) contributed by six unaffiliated Chinese equity funds, who in the aggregate obtained a 23.28% equity interest of Anhui Jucheng. We have ceased to have a controlling interest in Anhui Jucheng. Anhui Jucheng’s results of operations were consolidated with ours from July 5, 2010 through August 30, 2011.
For the period from April 1, 2011 through August 30, 2011, Anhui Jucheng sold approximately 5,156 tons of Polyacrylamide products and achieved approximately US$12.03 million of net revenue. For the period from July 5, 2010 through March 31, 2011, Anhui Jucheng sold approximately 10,855 tons of Polyacrylamide products and achieved approximately US$22.57 million of net revenue.
Cost of sales:
Cost of sales consists of the equipment purchase cost recognized in-line with the related contract revenue, the amortization amount of our software copyright, and the purchase cost of software user rights and software training courses related to the software sales and technical services contracts we sign with our customers. Other direct installation and testing costs related to the software sales and direct cost of performing separate technical services were insignificant based on our historical experience as compared to the related revenue amount. Therefore, in our normal course of business, we do not consider it necessary to separate these direct costs from our total operating expenses.
As stated above, Anhui Jucheng’s results of operations were consolidated with ours from July 5, 2010 through August 30, 2011. Cost of sales of Anhui Jucheng represented the manufacturing cost of the chemical product, Polyacrylamide, sold in each reporting period, which primarily consists of raw material cost (primarily acrylonitrile, acrylic acid and acrylamide solution), salary cost of the manufacturing department and other manufacturing overhead such as electricity, water, depreciation and other manufacturing supplies.
For the year ended March 31, 2012, our total cost of sales decreased to US$96.89 million from US$111.06 million for the same period of 2011. Without regard to the cost of sales of US$11.16 million and US$20.88 million incurred by Anhui Jucheng for the years ended March 31, 2012 and 2011, respectively, our total cost of sales decreased to US$85.73 million for the year ended March 31, 2012 as compared to US$90.18 million for the same period of 2011.
The decrease of the cost of sales for the year ended March 31, 2012 as compared to the same period of 2011 was primarily due to a decrease of cost of sales associated with equipment sales and installation contracts and was consistent with the decrease of our equipment sales and installation net revenue achieved for the year ended March 31, 2012 as compared to the same period of 2011.
Gross margin:
Without regard to the gross profit generated by Anhui Jucheng, which is discussed separately below, for the year ended March 31, 2012, our gross profit increased to US$29.92 million as compared to US$28.09 million for the same period of 2011. The level of our overall gross margin was primarily affected by (1) the relative percentage of our separate software sales and technical consultancy services volume for each reporting period, which contributed a much higher gross margin as compared to that of our equipment sales and installation contracts; and (2) the overall average gross margin of our equipment sales and installation projects completed for each reporting period, which normally constituted the majority of our total revenue amount, especially on an annual basis.
Our overall gross margins were 26% and 24% for the years ended March 31, 2012 and 2011, respectively. The increase in our overall gross margin for the year ended March 31, 2012 was primarily due to an increase of gross margin achieved from our software revenue as compared to the same period of 2011. Such increase was partially offset by the decrease in the gross margin achieved for our equipment sales and installation projects as discussed below.
For the years ended March 31, 2012 and 2011, the gross margin of our equipment sales and installation contacts was 15% and 19%, respectively. The decrease in the overall average equipment sales and installation gross margin for the year ended March 31, 2012 as compared to that for the year ended March 31, 2011 was primarily due to increased competition in this business segment.
For the years ended March 31, 2012 and 2011, the relative percentage of our separate software revenue over the total net revenue we achieved (excluding the revenue of Anhui Jucheng) was 15% and 12%, respectively, and the overall gross margin for our separate software sales was 71% and 58%, respectively. These were the main reasons for the increase in our overall gross margin for the year ended March 31, 2012 as compared to the same period of 2011, as discussed above.
For data processing software revenue, which related cost of sale was primarily the amortization expenses of our software copyright, the gross margin is normally between 80%-95%, depending on the volume of software packages sold during each reporting period. For the year ended March 31, 2012, the increase of our overall software gross margin were primarily due to: (1) the fact that we achieved approximately 93% gross margin for our data processing software revenue as compared to 79% for the same period of last year, which are primarily due to the increase of data process software revenue to US$8.86 million as compared to US$2.86 million in the same period of last year; and (2) the percentage of lower gross margin software revenue related to purchased software user rights customized and resold to customers over total software revenue decreased to 49% for the year ended March 31, 2012 as compared to 81% in fiscal 2011, which only achieved gross margin of 48% and 54% for the years ended March 31, 2012 and 2011, respectively.
For the year ended March 31, 2012, the percentage of our separate technical consultancy services revenue over total revenue (excluding the revenue of Anhui Jucheng) increased to 3% from 0.2% for the same period of last year, which also contributed to the increase in gross profit and gross margin for the year ended March 31, 2012.
We believe that our overall gross margin is typically between 20%-30% on a fiscal year basis, based on our existing business models. On a quarterly basis, our overall gross margin fluctuates primarily because of the different percentages of the software and technical services revenue and the equipment sales and installation revenue recognized in each quarter (reporting period).
As stated above, Anhui Jucheng’s results of operations were consolidated with ours from July 5, 2010 through August 30, 2011. There was no material fluctuation of the overall gross margin achieved by Anhui Jucheng for the periods when its results of operations were consolidated with ours.
With the RMB142 million of cash investment contributed by the six unaffiliated third party investors, Anhui Jucheng is now in the progress of expanding its production facilities, which is expected to be completed around the middle of fiscal 2013. According to management’s expectation, Anhui Jucheng’s total production capacities will be increased to 53,000 metric tons per annum from its current production capacities of 18,000 metric tons per annum.
Operating expense
Our operating expenses include selling expenses, general and administrative expenses and research and development expenses.
1. Equipment sales and installation, software sales and technical services
The following table sets forth the analysis of our operating expenses (excluding those of Anhui Jucheng):
Selling expenses:
Our selling expenses increased to US$2.04 million for the year ended March 31, 2012 from US$1.66 million for the same period of 2011. Our selling expenses primarily include freight, marketing research and development expenses, salary expenses and traveling expenses of our sales department.
For the year ended March 31, 2012, the change in our selling expenses was primarily due to the following: (1) salary expenses and other staff related benefits increased by approximately US$0.26 million, which was primarily due to the inclusion of Beijing Hongteng, the newly acquired subsidiary from January 2011, as a result, for the year ended March 31, 2012, a 12-month salary expense incurred by Beijing Hongteng was included in our results of operations as compared to a 3-month salary expense incurred by Beijing Hongteng that was included from January 2011 for the year ended March 31, 2011; (2) traveling expenses, entertainment expenses, communication expenses and other general office expenses of our sales department also increased by approximately US$0.16 million for the same reason as discussed above; (3) freight increased by approximately US$0.02 million; and (4) market research and development expenses decreased by approximately US$0.07 million, owing to our prior years’ efforts in the marketing activities allowing us to spend less marketing expenses for the year ended March 31, 2012.
According to our past experience, we believe the percentage of our total selling expenses compared to the total net revenue recognized for each reporting period is immaterial (normally less than 3%-5% of the total revenue) and fluctuates on a quarterly basis, because our average total solution business cycle is normally from six months to twelve months, and a significant portion of our sales activities (including, but not limited to, attending bidding invitation meetings, providing customers surveys and analysis, presenting proposals to customers, and finalizing total solution packages with customers) were performed before the contracts were signed, in consideration of the pre-market activities that may not generate revenue. In accordance with the principles set by U.S. GAAP, our expenses for the “pre-contract” stage were expensed and recorded in earnings when they incurred. Therefore, the amount of “pre-contract” expenses was directly related to marketing activities and the number of contracts we anticipated during each reporting period. Our “pre-contract” expenses were not related to corresponding contract revenue being recognized.
General and administrative expenses:
Our general and administrative expenses decreased to US$2.80 million for the year ended March 31, 2012 from US$2.93 million for the same period of 2011. Our general and administrative expenses primarily include: (1) salary and benefits for management and administrative departments (finance, importation, human resources and administration); (2) office rental and other administrative supplies; (3) management’s traveling expenses; (4) general communication and entertainment expenses; and (5) professional service charges (including, but not limited to, legal, audit, financial consultancy and investor relations).
For the year ended March 31, 2012, the changes in our general and administrative expenses was primarily due to the following: (1) salary expenses and related staff welfare increased by approximately US$0.19 million, primarily due to the inclusion of Beijing Hongteng, our newly acquired subsidiary from January 2011, as a result, for the year ended March 31, 2012, a 12-month salary expense incurred by Beijing Hongteng was included in our results of operations as compared to a 3-month salary expense incurred by Beijing Hongteng that was included from January 2011 for the year ended March 31, 2011; (2) rental expenses increased by approximately US$0.09 million, primarily due to the increase of rental expenses incurred by Beijing Hongteng, such increase was partially offset by the decrease of office space leased by our HK subsidiaries from September 2010; (3) bank handling charges related to contract settlement transactions increased by approximately US$0.20 million, due to the increase of the bank settlement transactions incurred for the year ended March 31, 2012 as compared with the same period of 2011; (4) general office administration expenses decreased by approximately US$0.04 million, primarily due to the decease of general office expenses of our HK subsidiaries, because we used to engage a third party service provider to help us assume the contract settlement transactions with the commercial banks in HK. However, starting from the second half of our fiscal 2011, we began to gradually assume these transactions with our HK banks without any assistance from third parties; (5) professional services charges decreased by approximately US$0.36 million, as we gradually trained our own staff to assume more duties in relation to these matters and decreased the related outsourcing of professional service; and (6) share-based payment also decreased by approximately US$0.20 million, due to a decrease of related outsourcing of professional services from third parties as discussed above.
Research and development expenses:
Research and development expenses represent salary expenses and other related expenses of our research and development department. Our research and development expenses increased to US$0.30 million for the year ended March 31, 2012 from US$0.26 million for the same period of 2011. The increase of our research and development expenses was primarily due to the increase in such expenses by Beijing Hongteng, our newly acquired subsidiary from January 2011. We expect our research and development expenses to increase in the future as we plan to hire additional research and development personnel to strengthen the functionality of our current software products, develop additional competitive industrial software products and provide more software related technical consultancy services.
2. Sale of industrial chemicals
As stated above, Anhui Jucheng’s results of operations were consolidated with ours from July 5, 2010 through August 30, 2011.
The following table sets forth the analysis of operating expenses of Anhui Jucheng:
Selling expenses:
For the period from April 1, 2011 through August 30, 2011, Anhui Jucheng incurred approximately US$0.55 million of selling expenses, which primarily consisted of (1) freight expenses of approximately US$0.16 million, (2) product packing material costs and other supplies of approximately US$0.11 million, (3) salary and bonus for the sales department of approximately US$0.17 million, and (4) other general expenses incurred by the sales department, such as traveling expenses, communication expenses and other similar expenses of approximately US$0.11 million.
For the period from July 5, 2010 through March 31, 2011, Anhui Jucheng incurred approximately US$0.64 million of selling expenses, which primarily consisted of (1) freight expense of approximately US$0.32 million, (2) products packing material costs of approximately US$0.13 million, (3) salary expense of the sales department of approximately US$0.09 million, and (4) other general expenses incurred by the sales department, such as traveling expenses, communication expenses and other similar expenses of approximately US$0.10 million.
General and administrative expenses:
For the period from April 1, 2011 through August 30, 2011, Anhui Jucheng incurred approximately US$0.50 million of general and administrative expenses, which primarily consisted of (1) salary and welfare of management and administrative staff of approximately US$0.12 million, (2) traveling and entertainment expenses of approximately US$0.06 million, (3) insurance and other taxes of approximately US$0.07 million, (4) office administration expenses, such as communication, utilities, depreciation and other office supplies, of approximately US$0.20 million, and (5) bad debts provision of approximately US$0.05 million.
For the period from July 5, 2010 through March 31, 2011, Anhui Jucheng incurred approximately US$0.80 million of general and administrative expenses, which primarily consisted of (1) salary and welfare of management and administrative staff of approximately US$0.30 million (including approximately US$0.10 million of special compensation paid to two key technical specialists hired during the period), (2) traveling and entertainment expenses of approximately US$0.11 million, (3) insurance and other taxes of approximately US$0.12 million, and (4) office administration expenses, such as communication, utilities, depreciation and other office supplies, of approximately US$0.27 million.
Research and development expenses:
For the period from April 1, 2011 through August 30, 2011, Anhui Jucheng incurred approximately US$0.05 million of research and development expenses, which was related to a product technical update project conducted by Anhui Jucheng during the period. No research and development expenses were incurred by Anhui Jucheng for the period from July 5, 2010 through March 31, 2011.
Operating profits
As a result of the foregoing, for the year ended March 31, 2012, our operating profit increased to US$24.55 million, of which approximately US$24.78 million was generated from our equipment sales and installation, software sales and technical services, and our sales of industrial chemicals incurred approximately US$0.23 million of operating loss for the year ended March 31, 2012, as compared to US$23.50 million of operating profits that we achieved for the year ended March 31, 2011, of which US$23.25 million was generated from our equipment sales and installation, software sales and technical services and US$0.25 million was generated from our sales of chemical products.
Other income and expenses
Our other income and expenses primarily include interest income, interest expenses and bank charges for credit facilities, exchange gains or losses, value added tax refunds, gain on the deconsolidation of our subsidiary, and other income and expenses. As stated above, Anhui Jucheng’s results of operations were consolidated with ours from July 5, 2010 through August 30, 2011.
Interest income, interest expenses, bank charges and exchange gains or losses:
lInterest income represents the interest income we earned from cash deposits we kept in the commercial banks and interest income from temporary loans we made to a related party as disclosed in Note 10 to our audited consolidated financial statements.
lInterest expenses represented the interest expenses incurred for the working capital loans we borrowed from our shareholder, SJ Asia, (annual interest rate of 3% to 5%) and from banks. For the year ended March 31, 2012, we incurred interest expenses of approximately US$0.25 million on shareholder loans, interest expenses of approximately US$0.05 million on working capital loans borrowed by Anhui Jucheng, and interest and bank charges of approximately US$0.30 million on overdrafts and short-term bank loans for importation of oil sludge cleaning equipment and equipment for our equipment sales and installation contracts.
lExchange losses incurred for the years ended March 31, 2012 and 2011 were primarily due to the devaluation of the US dollar against Renminbi, Japanese Yen and Euro.
Value added tax refund:
Our PRC subsidiary, Beijing JianXin, has been recognized by the PRC government as a software enterprise. The standard value added tax rate for sales of products of PRC enterprises is 17%. Under the PRC government’s preferential policies for software enterprises, Beijing JianXin is entitled to a refund of 14% value added tax with respect to sales of software products. This refund is regarded as subsidy income granted by the PRC government. We recognize the value added tax refund as other income only when it has been received. There is no condition to the use of the refund received. We received approximately US$nil and US$1.94 million of value added tax refund for the years ended March 31, 2012 and 2011, respectively.
Gain on deconsolidation of a subsidiary:
The deconsolidation of Anhui Jucheng occurred on August 30, 2011. It was accounted for in accordance with ASC Topic 810 “Consolidation”. For the year ended March 31, 2012, we recognized a non-cash gain of approximately US$30.41 million upon the deconsolidation of Anhui Jucheng in our consolidated statements of income and comprehensive income with a corresponding increase in the carrying value of our investment in Anhui Jucheng in our consolidated balance sheet. This deconsolidation gain represents the excess of the fair value of our retained equity interest in Anhui Jucheng, which is 39.13%, over its carrying value as of the date of deconsolidation.
Other:
For the period from April 1, 2011 through August 30, 2011, Anhui Jucheng achieved approximately US$0.11 million of other income from selling scrap raw materials and other supplies, and received approximately US$0.02 million subsidy income from its local government authorities. For the period from July 5, 2010 and through March 31, 2011, Anhui Jucheng received approximately US$0.46 million from its provincial and regional governments for its technologies contribution and development in the polyacrylamide production field, and also achieved approximately US$0.14 million of other income from selling of scrap raw materials and other supplies.
Income before income tax
As a result of the foregoing, for the year ended March 31, 2012, our income before income tax increased to US$53.65 million. Without regard to the US$30.41 million non-cash gain recognized upon the deconsolidation of Anhui Jucheng, for the year ended March 31, 2012, our adjusted income before income tax decreased to US$23.24 million. Approximately US$23.38 million was generated from our equipment sales and installation, software sales and technical services. Our sales of industrial chemicals incurred approximately US$0.14 million of loss before income tax for the year ended March 31, 2012. This compared to US$24.96 million of income before income tax for the year ended March 31, 2011, US$24.22 million of which was generated from our equipment sales and installation, software sales and technical services, and US$0.74 million of which was generated from our sales of industrial chemicals.
Income tax expenses
The entities within our company file separate tax returns in their respective tax jurisdictions in which they operate.
Under the Inland Revenue Ordinance of Hong Kong, profits arising in or derived from Hong Kong are chargeable to Hong Kong profits tax, and the residence of a taxpayer is not relevant. Therefore, our Hong Kong subsidiaries are generally subject to Hong Kong profits tax on their taxable income derived from the trade or businesses carried out by them in Hong Kong at 16.5% for the years ended March 31, 2012 and 2011, respectively.
Beijing JianXin, established in the PRC, is generally subject to PRC income tax. Beijing JianXin has been recognized by the relevant PRC tax authority as a software enterprise and is entitled to tax preferential treatment - a two year tax holiday through EIT exemption (from its first profitable year) for the calendar years ended December 31, 2009 and 2010 and a 50% reduction on its EIT rate for the three ensuing calendar years ending December 31, 2011, 2012 and 2013.
Beijing Hongteng and Anhui Jucheng are subject to a 25% income tax for the years ended March 31, 2012 and 2011.
No provision for other overseas taxes is made as neither we nor China LianDi have any taxable income in the U.S. or the British Virgin Islands.
The new income tax law in China imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside of China for distribution of earnings generated after January 1, 2008. Under the new income tax law, the distribution of earnings generated prior to January 1, 2008 is exempt from withholding tax. As our subsidiaries in the PRC will not be distributing earnings to us for the years ended March 31, 2012 and 2011, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries at March 31, 2012 and 2011. Total undistributed earnings of these PRC subsidiaries at March 31, 2012 and March 31, 2011 were RMB635,873,058 ($101,023,634) and RMB346,109,423 ($52,789,552), respectively.
Income tax expenses increased for the year ended March 31, 2012, which was mainly due to the expiration of the EIT exemption period of Beijing JianXin. From January 1, 2011, Beijing JianXin is subject to 12.5% EIT until December 31, 2013.
For the year ended March 31, 2012, our income tax expenses also included (1) approximately US$7.60 million of deferred income tax expense for the deconsolidation gain recognized upon the deconsolidation of Anhui Jucheng on August 30, 2011, which was calculated based on approximately US$30.41 million of deconsolidation gain and an income tax rate of 25%, the enacted tax rate that will be in effect in the period in which the differences are expected to reverse; and (2) approximately US$0.03 million of deferred income tax benefits, in relation to the depreciation and amortization of Anhui Jucheng’s revalued properties, plant and equipment and the land use right upon the acquisition of Anhui Jucheng on July 5, 2010. Given the foregoing, the net amount recognized as deferred income tax expense was approximately US$7.57 million for the year ended March 31, 2012. For the year ended March 31, 2011, our income tax expenses also included approximately US$0.04 million of deferred income tax benefits, in relation to the depreciation and amortization of Anhui Jucheng’s revalued properties, plant and equipment and the land use right upon the acquisition of Anhui Jucheng on July 5, 2010.
Equity in earnings of equity method affiliate
Upon the deconsolidation of Anhui Jucheng, which occurred on August 30, 2011, we ceased having a controlling financial interest in Anhui Jucheng and Anhui Jucheng became an equity method affiliate company of ours. Therefore, in accordance with ASC Topic 323 “Equity Method and Joint Ventures,” for the year ended March 31, 2012, we recognized our pro-rata share of net income incurred by Anhui Jucheng for the period from August 31, 2011 through March 31, 2012, which was approximately US$1.28 million, in our consolidated statement of income and comprehensive income, with a corresponding increase in the carrying value of our long-term investment in Anhui Jucheng in our consolidated balance sheet. The net income achieved by Anhui Jucheng for the period from August 31, 2011 through March 31, 2012 was primarily subsidy income received from its local government.
Net income
As a result of the foregoing, for the year ended March 31, 2012, our net income increased to US$44.27 million. Without regard to the US$30.41 million non-cash gain and related US$7.60 million deferred income tax expense recognized upon the deconsolidation of Anhui Jucheng, for the year ended March 31, 2012, our adjusted net income decreased to US$21.46 million, of which approximately US$20.35 million was generated from our equipment sales and installation, software sales and technical services, and approximately US$1.11 million was generated from our sales of industrial chemicals. This compared to US$24.44 million of net income for the year ended March 31, 2011, that consisted of US$23.84 million which was generated from our equipment sales and installation, software sales and technical services and US$0.60 million which was generated from our sale of industrial chemicals.
Loss (income) attributable to noncontrolling interests
As stated above, Anhui Jucheng’s results of operations were consolidated with ours from July 5, 2010 through August 30, 2011. During the period that Anhui Jucheng’s results of operations were consolidated with ours, net loss or income generated from Anhui Jucheng was allocated to the noncontrolling shareholder of Anhui Jucheng based on his percentage ownership in the entity, which was 49%, during that period. Therefore, for the period from April 1, 2011 through August 30, 2011, approximately US$0.08 million of Anhui Jucheng’s net loss incurred was attributable to the 49% noncontrolling shareholder of Anhui Jucheng. For the period from July 5, 2010 through March 31, 2011, approximately US$0.30 million of Anhui Jucheng’s net income was attributable to the 49% noncontrolling shareholder of Anhui Jucheng.
Net income available to LianDi Clean stockholders
Net income minus income attributable to noncontrolling interests is net income available to LianDi Clean stockholders. For the year ended March 31, 2012, net income available to LianDi Clean stockholders was US$44.35 million. Without regard to the US$30.41 million non-cash gain and the related US$7.60 million deferred income tax expense recognized upon the deconsolidation of Anhui Jucheng, for the year ended March 31, 2012, our adjusted net income available to LianDi Clean stockholders was approximately US$21.54 million as compared to US$24.14 million for the year ended March 31, 2011.
Preferred stock deemed dividend
The fair value of the escrow shares is attributed to newly issued securities in the private placement and was allocated according to their respective fair value at February 26, 2010:
The amount of the escrow shares allocated to preferred stock is accreted similar to a dividend to the preferred stock, regardless of the probability of meeting 2011 net income targets, over the period from the date of issuance of securities in the private placement to March 31, 2011, using the effective interest method. Accretion of such preferred stock deemed dividend for the year ended March 31, 2011 was approximately US$4.01 million, which was recorded as a deduction to the net income available to common stockholders of LianDi Clean for the year ended March 31, 2011. No further accretion was required after March 31, 2011.
Preferred stock dividend
In accordance with the securities purchase agreement we entered into with our investors on February 26, 2010, holders of Series A Preferred Stock are entitled to a cumulative dividend at an annual rate of 8%. The amount of the preferred stock dividend we accrued was calculated by the liquidation preference amount of the Series A Preferred Stock, which was US$3.50 per share, and the actual number of days each share was outstanding within the reporting period. The total preferred stock dividend accrued was approximately US$1.27 million and US$1.82 million for the years ended March 31, 2012 and 2011, respectively.
Net income available to common stockholders of LianDi Clean
Net income available to LianDi Clean stockholders minus the preferred stock deemed dividend and preferred stock cash dividend is net income available to common stockholders of LianDi Clean. For the years ended March 31, 2012 and 2011, net income available to common stockholders of LianDi Clean was approximately US$43.09 million and US$18.31 million, respectively. Without regard to the US$30.41 million non-cash gain and the related US$7.60 million deferred income tax expense recognized upon the deconsolidation of Anhui Jucheng, for the year ended March 31, 2011, and the US$4.01 million preferred stock deemed dividend recognized for the year ended March 31, 2011, our adjusted net income available to common stockholders of LianDi Clean was US$20.28 million and US$22.32 million, respectively.
B. Liquidity and capital resources
Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Restricted cash is excluded from cash and cash equivalents. As of March 31, 2012, we had cash and cash equivalents of approximately US$86.0 million.
Our liquidity needs include net cash used in operating activities, which primarily consists of: (a) cash required for importing the equipment to be distributed to our customers and cash required for our majority owned subsidiary, Anhui Jucheng, to purchase raw materials for the manufacturing of chemical products, before Anhui Jucheng was deconsolidated; (b) related freight and other distribution expenses for our shipments of equipment to customers and manufacturing expenses for the production of chemical products, before Anhui Jucheng was deconsolidated; and (c) our general working capital needs, which include payment for staff salary and benefits, payment for office rent and other administrative supplies. Our net cash used in investing activities primarily consists of the investments in computers and other office equipment, investment in purchasing oil sludge cleaning equipment and upgrading and expanding our existing manufacturing facilities for our majority owned subsidiary, Anhui Jucheng, before Anhui Jucheng was deconsolidated. For the years ended March 31, 2012 and 2011, we primarily financed our liquidity needs through our existing cash.
The following table provides detailed information about our net cash flow for the periods indicated:
Net cash provided by operating activities:
For the year ended March 31, 2012, net cash provided by operating activities of US$2.06 million was primarily attributable to:
(1)net income of US$21.69 million (excluding approximately US$1.53 million of non-cash expenses of depreciation, amortization, and share-based payments, approximately US$1.28 million of equity income in equity method affiliate and approximately US$30.41 million of non-cash gain and a related US$7.57 million of deferred income tax expense recognized for the deconsolidation of Anhui Jucheng);
(2)the receipt of cash from operations from changes in operating assets and liabilities such as:
-accounts payable increased by approximately US$3.09 million;
-deferred revenue, other payables and accruals increased by approximately US$0.33 million, and
-income tax payable increased by approximately US$2.99 million.
(3)offset by the use from operations from changes in operating assets and liabilities such as:
-accounts receivable and notes receivable balance increased by approximately US$11.74 million;
-we spent approximately US$6.64 million as prepayments to our equipment suppliers for uncompleted contracts and our raw material suppliers of industrial chemicals and at the same time, inventory balances increased by approximately US$3.76 million; and
-we spent approximately US$3.90 million for prepaid expenses, and other current assets during the year, all of which represent a cash outflow of the year.
For the year ended March 31, 2011, net cash provided by operating activities of US$12.86 million was primarily attributable to:
(1)net income of approximately US$26.42 million (excluding approximately US$1.98 million of non-cash expenses of depreciation, amortization, deferred income tax and share-based payments);
(2)the receipt of cash from operations from changes in operating assets and liabilities such as:
-other payable and accrued expenses increased by approximately US$2.39 million; and
-income tax payable increased by approximately US$0.56 million.
(3)offset by the use from operations from changes in operating assets and liabilities such as:
-accounts receivable and notes receivable increased by approximately US$7.45 million;
-we spent approximately US$4.86 million in prepayments, which was primarily paid to our equipment suppliers for uncompleted projects of our equipment sales and installation contracts, and our raw material suppliers of industrial chemicals, and at the same time inventory balance increased by approximately US$3.12 million;
-tender deposits and other prepaid expenses increased by approximately US$1.03 million; and
-we spent approximately US$0.05 million to settle our account payables during the year, all of which represent a cash outflow of the year.
Net cash used in investing activities:
For the year ended March 31, 2012, our net cash used in investing activities primarily consisted of the following transactions: (1) we spent approximately US$0.14 million purchasing general office equipment; (2) Anhui Jucheng spent approximately US$2.89 million to purchase equipment to upgrade its current manufacturing facilities, and spent approximately US$2.11 million as a deposit for land use rights; (3) the cash outflow effect of the deconsolidation of Anhui Jucheng was approximately US$5.36 million, which represented the cash and cash equivalents balance of Anhui Jucheng on the date of the deconsolidation; (4) we made a temporary loan to a related party of approximately US$0.40 million during the year; and (5) we made temporary loans to unrelated parties of approximately US$5.63 million during the year. In aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$16.54 million for the year ended March 31, 2012.
For the year ended March 31, 2011, our net cash used in investing activities primarily consisted of the following transactions: (1) we had an approximately US$2.39 million net cash inflow in connection with the Anhui Jucheng acquisition that closed on July 5, 2010, representing Anhui Jucheng’s cash and cash equivalents upon acquisition by us. We injected capital of RMB40.8 million (approximately US$6 million) into Anhui Jucheng in the form of cash in exchange for a 51% equity interest. Anhui Jucheng then became our subsidiary. The capital contribution has no impact on our consolidated cash flows; (2) during the year ended March 31, 2011, we spent approximately US$0.62 million purchasing oil sludge cleaning equipment and approximately US$0.07 million for other office equipment; our majority owned subsidiary, Anhui Jucheng, spent approximately US$0.50 million to purchase equipment to upgrade its current manufacturing facilities and also spent approximately US$1.26 million as a deposit for land use rights to further upgrade its manufacturing facilities; (3) during the year ended March 31, 2011, we repaid approximately US$4.92 million in third party loans; and (4) we collected approximately US$3.30 million of temporary loan, made to a third party. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately US$1.68 million for the year ended March 31, 2011.
Net cash provided by financing activities:
Our net cash provided by or used in financing activities included the following transactions: (1) the loans we borrowed from or repaid to our shareholders and noncontrolling shareholder of our majority owned subsidiary, Anhui Jucheng, before Anhui Jucheng was deconsolidated; (2) cash used for the payment of cash dividends to our convertible preferred stockholders; (3) the decrease or increase of our restricted cash balance, which represents our bank deposits held as collateral for our credit facilities; (4) short-term loans and revolving lines of credit we borrowed from or repaid to commercial banks; and (5) temporary loans we borrowed from or repaid to other third parties.
For the year ended March 31, 2012, (1) we paid approximately US$0.76 million in cash for the dividends on our convertible preferred stock; (2) as of March 31, 2012, the restricted cash balance decreased by approximately US$0.27 million as collateral for issuance of contract performance guarantees to our customers as compared to that of March 31, 2011, which was recorded as a cash inflow from our financing activities; (3) we repaid approximately US$0.19 million to the noncontrolling shareholder of Anhui Jucheng; (4) our shareholder loans increased by approximately US$1.38 million, that consisted of approximately US$0.48 million from Mr. Zuo, president and CEO of our company, and approximately US$0.90 million of which we borrowed from SJ Asia; (5) we borrowed approximately US$14.19 million of short-term bank loans for the importation of oil sludge cleaning equipment and revolving lines of credit and repaid approximately US$5.31 million of short-term bank loans that we previously borrowed; (6) we repaid approximately US$6.19 million of third party loans we temporarily borrowed in the last quarter of fiscal 2011 for our short-term RMB financing needs for the tender bidding purposes; and (7) we received capital contributions in advance from new shareholders of Anhui Jucheng of US$22.23 million. A capital injection of RMB142 million (approximately US$22.23 million) by the six new unaffiliated third party investors was paid up to Anhui Jucheng in cash on August 9, 2011. The capital injection was approved by the PRC bureau and the new business license of Anhui Jucheng was issued on August 30, 2011. Anhui Jucheng was deconsolidated from our financial statements on August 30, 2011. In aggregate, these transactions resulted in a net cash inflow from financing activities of approximately US$25.62 million for the year ended March 31, 2012.
For the year ended March 31, 2011, (1) we paid approximately US$1.59 million of cash for the dividend on our convertible preferred stock; (2) as of March 31, 2011, the restricted cash balance increased by approximately US$1.11 million as collateral for issuance of letters of credit to our suppliers as compared to that of March 31, 2011, which was recorded as a cash outflow of our financing activities; (3) we repaid approximately US$0.83 million to the noncontrolling shareholder of Anhui Jucheng; (4) Anhui Jucheng repaid approximately US$0.60 million of short-term bank loans during the year; and (5) we received temporary payments of approximately US$5.9 million made by unaffiliated third parties for our short-term RMB financing needs for our tender bidding purposes. We have repaid these third parties after March 31, 2011. In aggregate, this resulted in a net cash inflow from financing activities of approximately US$1.75 million for the year ended March 31, 2011.
Credit Facilities:
As of March 31, 2012, the Company had available banking facilities (“General Facilities”), which consisted of overdraft, guarantee, trade finance and short term money market loan facilities, up to an aggregate amount of HK$79.5 million (equivalent to approximately US$10.24 million). Collateral for the General Facilities includes the Company’s bank deposits classified as restricted cash and trading securities as described in Notes 3 and 9 to our audited consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended March 31, 2012, respectively, an unlimited guarantee from Mr. Jianzhong Zuo (CEO and Chairman of the Company), a standby letter of credit of not less than HK$45 million (or approximately US$5.80 million) issued by a bank which is in turn guaranteed by SJI Inc. (the holding company of SJ Asia Pacific Ltd., a stockholder of the Company) and an undertaking from Hua Shen HK to maintain a tangible net worth of not less than HK$5 million (or approximately US$0.64 million).
The General Facilities are available to the Company until July 15, 2012. As of March 31, 2012, the General Facilities were utilized to the extent of $4,599,266 and $4,395,564 in relation to contract performance guarantees and short-term bank loans (Note 17 to our audited consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended March 31, 2012), respectively.
As of March 31, 2012, total outstanding contract performance guarantees were $5,880,476 issued by the banks on behalf of the Company.
On November 11, 2011, the Company obtained a banking facility for import facilities up to HK$6 million (equivalent to approximately US$773,000) under a Special Loan Guarantee Scheme sponsored and guaranteed by the Government of the Hong Kong Special Administrative Region (“Government Sponsored Facility”). Collateral for the Government Sponsored Facility includes a guarantee for HK$6 million provided by China LianDi. As of March 31, 2012, there was no borrowing under the Government Sponsored Facility.
C. Off-Balance Sheet Arrangements
We did not have any significant off-balance sheet arrangements as of March 31, 2012.
ITEM 7A.
ITEM 7A.	 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 8
ITEM 8	 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
The financial statements required by this item begin on page hereof.
ITEM 9
ITEM 9	 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
ITEM 9A.	 CONTROLS AND PROCEDURES
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, as of March 31, 2012, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were ineffective. This determination was primarily due to the identification of the material weaknesses identified in our internal control over financial reporting discussed below in “Management’s Report on Internal Control over Financial Reporting”, which we regard as an integral part of our disclosure controls and procedures.
Internal Control Over Financial Reporting
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, 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, and 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 our assets;
(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 our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.
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. Internal control over financial reporting also can be circumvented by collusion or improper management override. 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. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company.
Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was ineffective as of March 31, 2012, due to the following material weaknesses identified:
· We do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of some specific accounting principles generally accepted in the United States commensurate with our financial reporting requirements, which resulted in the restatement of one of our quarterly reports during the year ended March 31, 2012; and
· Currently, we do not have an “audit committee financial expert” as defined by the rules and regulations of the SEC serving as a member of our Audit Committee.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely manner.
Remediation Initiatives:
· we are committed to establish and maintain adequate internal control over financial reporting, but due to limited qualified resources in the region where we operate, we were not able to hire sufficient skilled accounting personnel with an appropriate level of U.S. GAAP technical accounting knowledge and experience and SEC financial reporting knowledge commensurate with our financial reporting requirements before the end of fiscal 2012. However, we have enhanced the training of our finance team and other relevant personnel on the U.S. GAAP accounting guidance and SEC reporting requirements applicable to our financial statements.
· we intend to seek an appropriate independent expert who is qualified as an “audit committee financial expert” as defined by the rules and regulations of the SEC to serve as the Chairman of our Audit Committee as soon as practicable.
We intend to remediate the material weaknesses before March 31, 2013, but we can give no assurance that we will be able to do so. Designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weaknesses that we have identified, and material weaknesses in our internal control over financial reporting may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only our management’s report in this Annual Report.
Changes in Internal Controls over Financial Reporting.
There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.	 Other Information
None.
PART III.
ITEM 10
ITEM 10	 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Set forth below are the names of our directors, officers and significant employees, their age, all positions and offices that they hold with us, the period during which they have served as such, and their business experience during at least the last five years. Mr. Joel Paritz, our former independent director, resigned as a member of the Board of the Company and chairman of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee on September 1, 2011. We are currently in the process of seeking a replacement of his role on the Board.
Name
Age
Position
Jianzhong Zuo(2)
Chief Executive Officer, President and Chairman of the Board
Yong Zhao(2)
Chief Financial Officer
Hirofumi Kotoi(2)
Director
Xiaojun Li(1)(2)
Independent Director
Hongjie Chen(1)(2)
Independent Director
(1)Serves as a member of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.
(2)The directors will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified. Executive officers will serve at the board’s discretion.
Jianzhong Zuo, Chief Executive Officer, President and Chairman
Mr. Zuo has been our Chief Executive Officer, President and Chairman of the Board since February 26, 2010. Mr. Zuo founded our wholly-owned subsidiary, Hua Shen Trading (International) Ltd., and served as its President since 1999. From 1993 to 1996, Mr. Zuo worked at Shenzhen Huashen Shiye International and Beijing Huashen Automation Engineering, and from 1992 to 1993 he was at Beijing Nonferrous Metal Research Institute. He earned his M.S. degree from the University of Science and Technology, Beijing in 1992 and an Executive MBA from the Central European Business School in 2007. As our founder and Chief Executive Officer, Mr. Zuo’s deep experience and solid customer relationships in the petroleum and petrochemical industry, as well as his extensive management experience, enable him to provide significant insights into our business and make him qualified to be the Chairman of our Board of Directors.
Yong Zhao, Chief Financial Officer
Mr. Zhao was appointed as our Chief Financial Officer on February 26, 2010. Mr. Zhao joined our wholly owned subsidiary, Beijing JianXin Petrochemical Engineering Ltd., as the Chief Financial Officer in 2008. From 1998 to 2008, he served as a financial manager for Beijing Feite Tianyuan Environmental Protection, Ltd., Co., Beijing Huashen Huizheng System Engineering Technology, Ltd., Co. and Beijing Huashen Guotong Technology Development Ltd. Mr. Zhao earned his Certificate in Project Financial Analysis at Beijing Technology and Business University in 2004 and earned his Bachelor’s Degree in Finance from Capital University of Economics and Business in 1992.
Hirofumi Kotoi, Director
Mr. Kotoi has been a member of our Board of Directors since March 27, 2010. Mr. Kotoi is a Vice-President and Representative Director at SJI Inc. where he has worked since June 1990. He earned his master degree from Kyoto University and completed a Ph.D. course major in Computer science. He also studied at the University of Science and Technology of China. A Chinese native, he came to Japan as a government funded overseas student in 1981. Mr. Kotoi’s extensive experience in corporate management, and especially his experience as a member of senior management of SJI Inc. (a Jasdaq listed company), enable him to provide significant insights into the improvement of our internal controls and corporate governance related matters.
Xiaojun Li, Director
Mr. Li has been a member of our Board of Directors since May 17, 2010. Currently, Mr. Li is the president of ShengYuan Investment Company Ltd., an international investment and trading company, and vice president of Zhonghui Guohua Industrial Group Company Limited, a major Chinese mining company. He also serves as deputy secretary of the National Development and Reform Commission of China Industrial Development Association, and has served as general manager of China’s Overseas Economic Cooperation Corporation of State Foreign Trade, Central Asia branch. Mr. Li received his bachelor’s degree in economics from the Political Education Department of Xinjiang University. Mr.Li’s extensive experience in investment and management, as well as his special experience gained while serving the National Development and Reform Commission of the China Industrial Development Association, and China’s Overseas Economic Cooperation Corporation of State Foreign Trade, enable him to provide a unique and valuable perspective to the Board of Directors.
Hongjie Chen, Director
Mr. Chen has been a member of our Board of Directors since May 17, 2010. Since 1998, Mr. Chen has been a managing director of the investment banking firm Haitong Securities Co., Ltd. Previously, he was a financial manager with Lison International Ltd., a subsidiary of Sinopec Shanghai Engineering Co., Ltd. (“SSEC”) in Hong Kong, and a project financial analyst at SSEC. Mr. Chen received his Bachelor of Economics at Shanghai University of Engineering Science and his EMBA from China Europe International Business School. Mr.Chen’s extensive experience in investment banking and financial management, as well as his previous experiences in the petroleum and petrochemical industry, enable him to provide a unique and valuable perspective to the Board of Directors.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Code of Ethics
We adopted a Code of Business Conduct and Ethics on May 14, 2010. The Code of Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K, constitutes our Code of Ethics for our principal executive officer, our principal financial and accounting officer and our other senior financial officers. The Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. A printed copy of the Code of Ethics may be obtained free of charge by writing to LianDi Clean Technology Inc., Unit 401-405, 4/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China 100089.
Board Composition
The Board of Directors is currently composed of four members. All actions of the Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present. A quorum is a majority of the Board of Directors.
Committees of the Board of Directors
Audit Committee
Our Audit Committee consists of Xiaojun Li and Hongjie Chen, each of whom is independent. The Audit Committee assists the Board of Directors oversight of (i) the integrity of the our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of our internal audit function and independent auditor, and prepares the report that the SEC requires to be included in our annual proxy statement. The audit committee operates under a written charter. Mr. Joel Paritz was the Chairman of our audit committee before his resignation on September 1, 2011. Currently, we are in the process of seeking a replacement to serve as Chairman of our Audit Committee and we do not have an “audit committee financial expert” as defined by the rules and regulations of the SEC.
Nominating and Corporate Governance Committee
The purpose of the Nominating and Corporate Governance Committee is to assist the Board of Directors in identifying qualified individuals to become members of our Board of Directors, in determining the composition of the Board of Directors and in monitoring the process to assess Board effectiveness. Currently, Xiaojun Li and Hongjie Chen are members of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee operates under a written charter. Mr. Joel Paritz was the Chairman of the Nominating and Corporate Governance Committee before his resignation on September 1, 2011. Currently, we are in the process of seeking a replacement to serve as Chairman of our Nominating and Corporate Governance Committee.
Compensation Committee
The Compensation Committee is responsible for overseeing and, as appropriate, making recommendations to the Board of Directors regarding the annual salaries and other compensation of our executive officers and general employees and other policies, and for providing assistance and recommendations with respect to our compensation policies and practices. Currently, Xiaojun Li and Hongjie Chen are members of the Compensation Committee. The Compensation Committee operates under a written charter. Mr. Joel Paritz was the Chairman of Compensation Committee before his resignation on September 1, 2011. Currently, we are in the process of seeking a replacement to serve as Chairman of our Compensation Committee.
Policy Regarding Board Attendance
Our directors are expected to attend meetings of the Board of Directors as frequently as necessary to properly discharge their responsibilities and to spend the time needed to prepare for each such meeting. Our directors are expected to attend annual meetings of stockholders, but we do not have a formal policy requiring them to do so.
Shareholder Communications
We have a process for shareholders who wish to communicate with the Board of Directors. Shareholders who wish to communicate with the Board may write to it at our address given above. These communications will be reviewed by one or more of our employees designated by the Board, who will determine whether they should be presented to the Board. The purpose of this screening is to allow the Board to avoid having to consider irrelevant or inappropriate communications.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. These executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons.
Based solely on our review of such forms furnished to us, we believe that during the prior fiscal year, all of the executive officers and directors of the Company and every person who is directly or indirectly the beneficial owner of more than 10% of any class of security of the Company complied with the filing requirements of Section 16(a) of the Exchange Act.
Limitation of Liability and Indemnification of Officers and Directors
Our articles of incorporation limit the liability of our directors and officers under certain circumstances. Our articles of incorporation provide that the liability of directors or officers for monetary damages is limited to the fullest extent permitted by Nevada law. In addition, our directors and officers are indemnified as provided by our articles of incorporation, our bylaws and the Nevada Revised Statutes. Our bylaws and articles of incorporation provide that we will indemnify our directors, officers, employees, and agents, to the fullest extent to the extent required by the Nevada Revised Statutes and shall indemnify such individuals to the extent permitted by the Nevada Revised Statutes.
ITEM 11
ITEM 11	 EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all cash compensation paid by the Company, as well as certain other compensation paid or accrued, for each of the last two fiscal years of the Company to each named executive officer.
Summary Compensation of Named Executive Officers
During each of the last two fiscal years, none of our other officers had total compensation greater than $100,000. In addition, our executive officers and/or their respective affiliates will be reimbursed by us for any out-of-pocket expenses incurred in connection with activities conducted on our behalf. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of such expenses by anyone other than our Board of Directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged.
Employment Agreements
Jianzhong Zuo
Mr. Zuo’s employment agreement, effective June 15, 2008, provides that Mr. Zuo will be employed as President of Beijing JianXin for a two year term until June 14, 2010, which term has been extended to June 14, 2012 and further extended for an additional two years until June 14, 2014. During the term of the agreement, Mr. Zuo will devote substantially all of his time to the service of the Company and may not compete directly or indirectly with us. We may terminate Mr. Zuo for cause at any time, and without cause upon 30 days notice. Mr. Zuo may resign without good reason upon 30 days’ notice.
Mr. Zuo received total compensation of $14,390 and $6,258 for fiscal 2012 and 2011, respectively, based on a verbal agreement with management.
Yong Zhao
Mr. Zhao’s employment agreement, effective June 15, 2008, provides that Mr. Zuo will be employed as Chief Financial Officer of Beijing JianXin for a two year term, which term has been extended to June 14, 2012 and further extended for an additional two years until June 14, 2014. During the term of the agreement, Mr. Zhao will devote substantially all of his time to the service of the Company and may not compete directly or indirectly with us. We may terminate Mr. Zhao for cause at any time, and without cause upon 30 days notice. Mr. Zhao may resign without good reason upon 30 days’ notice.
Mr. Zhao received total compensation of $18,770 and $17,881 for fiscal 2012 and 2011, respectively, based on a verbal agreement with management.
Apart from as set forth above, our named executive officers are reimbursed for reasonable expenses incurred by them in connection with attending Board of Directors’ meetings, but they do not receive any other compensation for serving on the Board of Directors for fiscal 2012 and 2011.
Outstanding Equity Awards at Fiscal Year-end
None.
Director Compensation
The following table sets forth information regarding compensation of each director, other than named executive officers, for fiscal 2012 ended March 31, 2012.
* Mr. Paritz resigned on September 1, 2011.
(1) The aggregate grant date fair value of the options awarded computed in accordance with FASB ASC Topic 718.
Apart from as set forth above, our directors, other than named executive officers are reimbursed for reasonable expenses incurred by them in connection with attending Board of Directors’ meetings, but they do not receive any other compensation for serving on the Board of Directors for fiscal 2012.
Bonuses and Deferred Compensation
We do not have any bonus, deferred compensation or retirement plans. All decisions regarding compensation are determined by our Compensation Committee.
Options and Stock Appreciation Rights
We do not currently have a stock option or other equity incentive plan and do not intend to adopt any of such programs in the near future.
Payment of Post-Termination Compensation
The Company does not have change-in-control agreements with any of its directors or executive officers, and the Company is not obligated to pay severance or other enhanced benefits to executive officers upon termination of their employment.
ITEM 12
ITEM 12	 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of July 12, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise stated, the address of all persons in the table is c/o LianDi Clean Technology Inc., Unit 401-405, 4/F, Tower B, Wanliuxingui Building, 28 Wanquanzhuang Road, Haidian District, Beijing, China 100089.
As of July 12, 2012, an aggregate of 36,444,850 shares of our common stock were outstanding.
* Less than one percent.
(1)Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or or investment power within 60 days. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
(2)SJ Asia Pacific Ltd. is a wholly-owned subsidiary of SJI Inc., a Jasdaq listed company organized under the laws of Japan. Hirofumi Kotoi, one of our directors, and Jian Li are directors of SJ Asia Pacific Ltd. Its business address is Shinagawa Seaside, East Tower 4-12-8, Higashi-Shinagawa, Shinagawa-Ku, Tokyo, Japan.
(3)Consists of (1) 11,675,118 shares of our common stock held of record by SJ Asia Pacific Ltd.; (2) 6,838,620 shares of our common stock held of record by Hua Shen Trading (International) Ltd., whose sole shareholder is SJ Asia Pacific Ltd., which may be deemed to beneficially own the shares held by Hua Shen Trading (International) Ltd.; and (3) 1,367,725 shares of our common stock held of record by Rapid Capital Holdings Limited., whose sole shareholder is SJ Asia Pacific Ltd., which may be deemed to indirectly beneficially own the shares held by Rapid Capital Holdings Limited. Information regarding this beneficial owner is furnished in reliance upon its Schedule 13D/A filed by SJ Asia Pacific Ltd., Hua Shen Trading (International) Ltd., Hirofumi Kotoi and Jian Li, with the SEC on May 11, 2012.
(4)Mr. Jianzhong Zuo, our Chairman, Chief Executive Officer and President, is a director of China LianDi Energy Resources Engineering Technology Ltd. and holds voting and dispositive power over the shares held by it.
(5)Includes shares held of record by SJ Asia Pacific Ltd., Hua Shen Trading (International) Ltd., and Rapid Capital Holdings Limited. Mr. Kotoi is a director of SJ Asia Pacific Ltd. and shares voting and dispositive power over the shares beneficially owned by SJ Asia Pacific Ltd. directly and indirectly as stated in item (3), as a result of his position as a director of SJ Asia Pacific Ltd.
(6)Includes options to acquire 5,000 shares of our common stock that are exercisable within 60 days of July 12, 2012.
(7)Includes options to acquire 5,000 shares of our common stock that are exercisable within 60 days of July 12, 2012.
(8)This number includes (a) the following securities held by TriPoint Global Equities, LLC, our placement agent in the Private Placement: (i) 582,706 shares of common stock underlying Placement Agent Warrants, (ii) 148,955 shares underlying placement agent Series A Warrants and (iii) 148,955 shares underlying placement agent Series B Warrants; and (b) the following securities held by TriPoint Capital Advisors, LLC, our previous financial consultant: (i) 1,033,554 shares of common stock. Mark Elenowitz and Michael Boswell share voting and dispositive power over the securities held by TriPoint Global Equities, LLC. Mark Elenowitz and Michael Boswell, along with Louis Taubman, share voting and dispositive power over the securities held by TriPoint Capital Advisors, LLC. The principal address of TriPoint Global Equities, LLC is 17 State Street, 20th Floor, New York, New York 10004.
Changes in Control
Not Applicable.
ITEM 13
ITEM 13	 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Transactions
As of March 31, 2012, we borrowed approximately $8.3 million from SJ Asia Pacific Limited (a shareholder of the Company). The loans are unsecured, payable on demand and bear interest at 3% to 5% per annum.
As of March 31, 2012, we borrowed approximately $1.2 million from Mr. Zuo (our Chief Executive Officer, President and Chairman). This loan is unsecured, interest free, and is payable on demand.
Director Independence
Two of our directors, Messrs. Li and Chen, have been determined to be independent as defined by Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and Section 10A(m)(3) of the Exchange Act. No transactions, relationships or arrangements were considered by the board of directors in determining that these directors were independent. Our former director Mr. Paritz was determined to be independent as defined by Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and Section 10A(m)(3) of the Exchange Act when he served as a director with the Company.
ITEM 14
ITEM 14 	PRINCIPAL ACCOUNTANT FEE AND SERVICES
Fees for the fiscal years ended March 31, 2012 and
Audit Fees.
The audit services fees related to our engagement with Crowe Horwath (HK) CPA Limited for the audit of our annual financial statements for the fiscal years ended March 31, 2012 and 2011 was $314,000 and $281,300, respectively.
Audit-Related Fees.
None.
Tax Fees.
None.
All Other Fees .
None.
As provided for in our Audit Committee charter, the Audit Committee pre-approves all audit and non-audit services by the independent auditors as required by applicable law and the rules of any securities exchange upon which our securities may be listed.
PART IV.
ITEM 15
ITEM 15 	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2.1 Share Exchange Agreement dated February 26, 2010, by and among LianDi Clean Technology Inc. (f/k/a Remediation Services, Inc.), Reed Buley, China LianDi Clean Technology Engineering Ltd., and the shareholders of China LianDi Clean Technology Engineering Ltd. (1)
3.1 Articles of Incorporation of LianDi Clean Technology Inc., as amended (2)
3.3 Certificate of Designation (1)
3.4 By-laws (2)
4.1 Registration Rights Agreement dated February 26, 2010 by and among LianDi Clean Technology Inc. (f/k/a Remediation Services, Inc.) and certain investors listed therein (1)
4.2 Form of Series A Warrant (1)
4.3 Form of Series B Warrant (1)
10.1 Securities Purchase Agreement dated as of February 26, 2010 by and among LianDi Clean Technology Inc. (f/k/a Remediation Services, Inc.) and certain investors listed therein (1)
10.2 Securities Escrow Agreement dated as of February 26, 2010 by and among LianDi Clean Technology Inc. (f/k/a Remediation Services, Inc.), China LianDi Energy Resources Engineering Technology Ltd. and certain investors listed therein (1)
10.3 Lock-up Agreement dated February 26, 2010 by and among LianDi Clean Technology Inc. (f/k/a Remediation Services, Inc.) and China LianDi Energy Resources Engineering Technology Ltd. (1)
10.4 Placement Agent Agreement with TriPoint Global Equities, LLC (2)
10.5 Employment Agreement with Jianzhong Zuo (2)
10.6 Employment Agreement with Yong Zhao (2)
10.7 Sales Contract by and between Hua Shen Trading (International) Limited and China Petrochemical International Co. Ltd. dated as of September 28, 2007 (1)
10.8 Cooper Cameron Valves Authorization Letter dated as of September 6, 2006 (1)
10.9 Form of Rotork Authorization Letter (1)
10.10 International Distributor Agreement by and between Petrochemical Engineering Limited and DeltaValve dated as of February 12, 2010 (2)
10.11 Poyam Authorization Letter dated as of May 20, 2010 (2)
10.12 After-sale Services Agreement by and between Petrochemical Engineering Limited and AMPO S. Coop Poyam Valves dated as of January 20, 2010 (2)
10.13 Entrustment purchase agreement by and between Beijing JianXin Petrochemical Engineering Ltd. and Petrochemical Engineering Limited (1)
10.14 Loan Agreements from Shareholder (2)
10.15 Independent Director Agreement of Joel Paritz (3)
10.16 Independent Director Agreement of Xiaojun Li (3)
10.17 Independent Director Agreement of Hongjie Chen (3)
14.1 Code of Business Conduct and Ethics (3)
16.1 Letter from The Hall Group, CPAs dated May 10, 2010 regarding the change in the Registrant’s certifying accountant (4)
16.2 Letter from The Hall Group, CPAs dated May 13, 2010 regarding the change in the Registrant’s certifying accountant (5)
21.1 Subsidiaries of the Registrant (6)
31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
* Filed herewith
(1) Incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 4, 2010.
(2) Incorporated by reference herein to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on May 24, 2010.
(3) Incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 2010.
(4) Incorporated by reference herein to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2010.
(5) Incorporated by reference herein to the Company’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on May 13, 2010.
(6) Incorporated by reference herein to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 29, 2011.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Capacity
Date
/s/ Jianzhong Zuo
Chief Executive Officer, President and Chairman (Principal Executive Officer)
July 13, 2012
Jianzhong Zuo
/s/ Yong Zhao
Chief Financial Officer (Principal Accounting Officer)
July 13, 2012
Yong Zhao
/s/ Hirofumi Kotoi
Director
July 13, 2012
Hirofumi Kotoi
/s/ Hongjie Chen
Director
July 13, 2012
Hongjie Chen
/s/ Xiaojun Li
Director
July 13, 2012
Xiaojun Li
LIANDI CLEAN TECHNOLOGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LianDi Clean Technology Inc.
We have audited the accompanying consolidated balance sheets of LianDi Clean Technology Inc. (“Company”) and subsidiaries as of March 31, 2012 and 2011 and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended March 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries as of March 31, 2012 and 2011 and the consolidated results of their operations and cash flows for each of the two years in the period ended March 31, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Horwath (HK) CPA Limited
Hong Kong, China	
July 13, 2012
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS EXPRESSED IN US DOLLAR)
Commitments and Contingencies (Notes 20 and 27)
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLAR)
The accompanying notes form an integral part of these consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS EXPRESSED IN US DOLLAR)
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLAR)
The accompanying notes form an integral part of these consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN US DOLLAR)
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLAR)
Deconsolidation of Anhui Jucheng (note 1)
The accompanying notes form an integral part of these consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(AMOUNTS EXPRESSED IN US DOLLAR)
The accompanying notes form an integral part of these consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
nOTE 1description of business AND ORGANIZATION
Nature of operations
LianDi Clean Technology Inc. (“LianDi Clean” or the “Company”) is a holding company and, through its subsidiaries, primarily engages in the distribution of clean technology for refineries (unheading units for the delayed coking process), the distribution of a wide range of petroleum and petrochemical valves and equipment, providing systems integration, developing and marketing optimization software for the polymerization process and providing related technical and engineering services to large domestic Chinese petroleum and petrochemical companies and other energy companies. The Company is also engaged in manufacturing and selling industrial chemical products, which is operated through its equity method affiliate, Anhui Jucheng Fine Chemicals Co., Ltd. (“Anhui Jucheng”), that is engaged in the business of developing, manufacturing and selling organic and inorganic chemical products and high polymer fine chemical products, as well as providing chemical professional services.
Corporate organization
LianDi Clean was incorporated in the State of Texas on June 25, 1999 under the name Slopestyle Corporation. On December 12, 2007, the Company changed its name from Slopestyle Corporation to Remediation Services, Inc. (“Remediation”) and re-domiciled from Texas to Nevada. On February 26, 2010, Remediation completed a reverse acquisition of China LianDi Clean Technology Engineering Ltd. (“China LianDi”), which is further described below. The reverse acquisition of China LianDi resulted in a change-in-control of Remediation.
On February 26, 2010, Remediation consummated the transactions contemplated by the Share Exchange Agreement (the “Exchange Agreement”), by and among (i) China LianDi and China LianDi’s shareholders, (collectively, the “China LianDi Shareholders”), who together owned shares constituting 100% of the issued and outstanding ordinary shares of China LianDi (the “China LianDi Shares”) and (ii) the former principal stockholder of Remediation. Immediately prior to the Share Exchange, 4,690,000 shares of Remediation’s common stock then outstanding were cancelled and retired, so that immediately prior to the Share Exchange, Remediation had 28,571,430 shares issued and outstanding. Pursuant to the terms of the Exchange Agreement, the China LianDi Shareholders transferred to Remediation all of the China LianDi Shares in exchange for the issuance of 27,354,480 shares of Remediation’s common stock, par value $0.001 per share (such transaction, the “Share Exchange”), representing approximately 96% of Remediation’s shares of common stock then issued and outstanding. The Share Exchange resulted in a change in control of Remediation. China LianDi also paid $275,000 to Remediation’s former principal shareholder, as a result of the Share Exchange having been consummated.
As a result, the Share Exchange has been accounted for as a reverse acquisition whereby China LianDi is deemed to be the accounting acquirer (legal acquiree) and Remediation to be the accounting acquiree (legal acquirer). The financial statements before the Share Exchange are those of China LianDi with the results of Remediation being consolidated from the closing date. The equity section and earnings per share of the Company have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded as a result of this transaction.
On March 17, 2010, Remediation formed a corporation under the laws of the State of Nevada named LianDi Clean Technology Inc. ("Merger Sub") and on the same day, acquired one hundred shares of Merger Sub's common stock for cash. Accordingly, Merger Sub became a wholly-owned subsidiary of Remediation.
Effective as of April 1, 2010, Merger Sub was merged with and into Remediation. As a result of the merger, the Company’s corporate name was changed to “LianDi Clean Technology Inc.” Prior to the merger, Merger Sub had no liabilities and nominal assets and, as a result of the merger, the separate existence of the Merger Sub ceased. LianDi Clean was the surviving corporation in the merger and, except for the name change provided for in the Agreement and Plan of Merger, there was no change in the directors, officers, capital structure or business of the Company.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
nOTE 1description of business AND ORGANIZATION (CONTINUED)
Corporate organization (continued)
Details of LianDi Clean’s subsidiaries as of March 31, 2012 are as follows:
Subsidiaries’ names
Place and date of
incorporation
Percentage of
ownership
Principal activities
China LianDi Clean Technology Engineering Ltd. (“China LianDi”)
British Virgin Islands
July 28, 2004
100%
(directly by the Company)
Holding company of the other subsidiaries
Hua Shen Trading (International) Limited (“Hua Shen HK”)
Hong Kong
January 20, 1999
100%
(through China LianDi)
Delivering of industrial valves and other equipment with the related integration and technical services
Petrochemical Engineering Limited (“PEL HK”)
Hong Kong
September 13, 2007
100%
(through China LianDi)
Delivering of industrial valves and other equipment with the related integration and technical services, and investment holding
Bright Flow Control Ltd. (“Bright Flow”)
Hong Kong
December 17, 2007
100%
(through China LianDi)
Delivering of industrial valves and other equipment with the related integration and technical services
Beijing JianXin Petrochemical Engineering Ltd. (“Beijing JianXin”)
People’s Republic of China (“PRC”)
May 6, 2008
100%
(through PEL HK)
Delivering of industrial valves and other equipment with the related integration and technical services, developing and marketing optimization software for polymerization processes, and provision of delayed coking solutions for petrochemical, petroleum and other energy companies
Hongteng Technology Limited (“Hongteng HK”)
Hong Kong,
February 12, 2009
100%
(through China LianDi)
Investment holding company
Beijing Hongteng Weitong Technology Co., Ltd (“Beijing Honteng”)
PRC
January 12, 2010
100%
(through Honteng (HK) )
Delivering of industrial valves and other equipment with the related integration and technical services, developing and marketing software, and provision of other technical consultancy services for petrochemical, petroleum and other energy companies
In July 2004, China LianDi was founded with 60% owned by Mr. Jianzhong Zuo (“Mr. Zuo,” the Chief Executive Officer and Chairman of the Company) and 40% owned by another minority shareholder. On October 2, 2007, Mr. Zuo acquired from such minority shareholder the remaining 40% interest in China LianDi for US$1, and accordingly became the sole shareholder of China LianDi. On March 6, 2008, SJ Asia Pacific Limited (a company incorporated in the British Virgin Islands and wholly owned by SJI Inc., a company incorporated in Japan and whose shares are listed on the Jasdaq Securities Exchange, Inc.) acquired a 51% interest in China LianDi from Mr. Zuo in exchange for: (i) US$1.00; (ii) the commitment to investing HK$60,000,000 (or approximately $7.7 million) in China LianDi; and (iii) the provision of financial support for China LianDi by way of an unlimited shareholder’s loan bearing interest at a rate not exceeding 5% per annum. As a result, China LianDi was owned 51% by SJ Asia Pacific Limited and 49% by Mr. Zuo.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
nOTE 1description of business AND ORGANIZATION (CONTINUED)
Corporate organization (continued)
On January 8, 2010, Mr. Zuo transferred a 25%, 14% and 10% interest in China LianDi to China LianDi Energy Resources Engineering Technology Ltd. (“LianDi Energy,” a company wholly owned by Mr. Zuo), Hua Shen Trading (International) Ltd. (“Hua Shen BVI,” a company incorporated in the British Virgin Islands and wholly owned by SJ Asia Pacific Limited, and of which Mr. Zuo is a director and holds voting and dispositive power over the shares held by it) and Rapid Capital Holdings Ltd (“Rapid Capital”), respectively. On February 10, 2010, SJ Asia Pacific Limited and LianDi Energy transferred 28.06% and 1.47% interest in China LianDi to Rapid Capital (26.53%) and TriPoint Capital Advisors, LLC (“TriPoint”) (3%), respectively. On February 12, 2010, Rapid Capital transferred its 31.53% interest in China LianDi to LianDi Energy (15.53%), Hua Shen BVI (11%) and Dragon Excel Holdings Ltd (5%), respectively. As a result, immediately before the Share Exchange as defined below, China LianDi was owned 48% by SJ Asia Pacific Limited (including 25% through Hua Shen BVI) and 39% by Mr. Zuo through LianDi Energy. The remaining 13% was held as to 5% by Dragon Excel Holdings Limited (“Dragon Excel”), 5% by Rapid Capital and 3% by TriPoint.
Dragon Excel and Rapid Capital are held by two individuals unaffiliated to China LianDi at the time of the transfers. The transfer of a 5% interest in China LianDi from Mr. Zuo to each of Dragon Excel and Rapid Capital was effected for Mr. Zuo’s own personal reasons. The transfer of a 3% interest of China LianDi from the principal shareholder, SJ Asia Pacific Limited to TriPoint was entered into for consulting services related to facilitating the private placement.
Hua Shen HK was founded by Mr. Zuo in 1999. On January 8, 2008, China LianDi acquired a 100% ownership interest in Hua Shen HK from Mr. Zuo. As Hua Shen HK and China LianDi had been under common control, the acquisition of Hua Shen HK by China LianDi has been accounted for using the “as if” pooling method of accounting.
In 2007, China LianDi established PEL HK and Bright Flow, as wholly-owned subsidiaries, in Hong Kong. In 2008, PEL HK established Beijing JianXin, as a wholly-owned subsidiary, in the PRC.
On February 26, 2010 and immediately following the Share Exchange, the Company completed a private placement transaction pursuant to a securities purchase agreement with certain investors (collectively, the “Investors”) and sold 787,342 units at a purchase price of $35 per unit, consisting of, in the aggregate, (a) 7,086,078 shares of Series A convertible preferred stock, par value $0.001 per share (the “Series A Preferred Stock”) convertible into the same number of shares of common stock, (b) 787,342 shares of common stock, (c) Series A Warrants to purchase up to 1,968,363 shares of common stock, at an exercise price of $4.50 per share for a three-year period, and (d) Series B Warrants to purchase up to 1,968,363 shares of common stock, at an exercise price of $5.75 per share for a three-year period. The Company also issued to the placement agent in the private placement (i) warrants to purchase 787,342 shares of common stock at an exercise price of $3.50, (ii) Series A Warrants to purchase 196,836 shares of common stock, and (iii) Series B Warrants to purchase 196,836 shares of common stock, which expire in three years on February 26, 2013. The Company received aggregate gross proceeds of approximately $27.56 million from the private placement.
On December 31, 2010, China LianDi acquired a 100% equity interest in Hongteng Technology Limited together with its wholly-owned subsidiary in the PRC, Beijing Hongteng Weitong Technology Co., Ltd., from Mr. Zuo, CEO of the Company, for cash consideration of $2,272.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
nOTE 1description of business AND ORGANIZATION (CONTINUED)
Corporate organization (continued)
On July 5, 2010, Beijing Jianxin acquired a 51% equity interest of Anhui Jucheng. Anhui Jucheng is primarily engaged in developing, manufacturing and selling of organic and inorganic chemicals and high polymer fine chemicals with related technical services, and recycle and sales of discarded product or used packing.
Pursuant to an investment agreement signed on August 3, 2011, and approved by the shareholders of Anhui Jucheng, six unaffiliated third party investors, invested cash in the aggregate of RMB142 million (approximately US$22.23 million) in exchange for a 23.28% interest in the enlarged registered capital. The total capital injection of RMB142 million was paid on August 9, 2011, of which RMB7.74 million was credited as registered capital (the enlarged registered capital became RMB33.25 million) and RMB134.26 million was credited as additional paid-in capital. The capital injection was approved by the PRC bureau and the new business licence of Anhui Jucheng was issued on August 30, 2011. As such, effective from August 30, 2011, the Company’s equity interest in Anhui Jucheng decreased from 51% to 39.13%, and the Company ceased to have a controlling financial interest in Anhui Jucheng, but still retains significant influence over Anhui Jucheng.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
nOTE 1description of business AND ORGANIZATION (CONTINUED)
Corporate organization (continued)
On September 27, 2011, two of the Company’s existing stockholders, SJ Asia Pacific Limited ("SJ Asia") and LianDi Energy, and Jianzhong Zuo, a director and the sole stockholder of LianDi Energy and the Chairman and Chief Executive Officer of the Company, consummated the transactions contemplated by the Share Purchase Agreement (the "Share Purchase Agreement") dated as of September 22, 2011 relating to the purchase by SJ Asia from LianDi Energy of 5,400,000 shares of the Company’s common stock in exchange for an aggregate purchase price of $25,920,000 ($4.80 per share). As a result, SJ Asia beneficially owned an aggregate of 18,513,738 shares of the Company’s common stock, which constituted approximately 51% of the outstanding common shares of the Company as of March 31, 2012. The source of funds used for this investment was the capital increase of SJI, Inc., which is the sole shareholder of SJ Asia. The purpose of the Share Purchase Agreement and the transactions contemplated thereby was for SJ Asia to acquire in excess of 51% of the outstanding common shares of the Company and consolidate the Company's business with that of SJI, Inc., the parent company of SJ Asia. Following the transactions contemplated by the Share Purchase Agreement, Mr. Zuo remained the Chairman and Chief Executive Officer of the Company with the backing of SJ Asia. In addition to the Share Purchase Agreement described above, SJ Asia entered into a joinder agreement to a lock-up agreement with the Company whereby SJ Asia agreed that it may only sell up to one-twelfth (1/12) of SJ Asia's holdings every month through February 26, 2012.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
nOTE 1description of business AND ORGANIZATION (CONTINUED)
Corporate organization (continued)
On March 30, 2012, SJ Asia signed an Accord and Satisfaction Agreement pursuant to which it agreed to accept on May 9, 2012 (the “Transfer Date”), in lieu of an outstanding debt in the amount of Japanese Yen (J¥) 539,255,277 (approximately US$6,763,518 at an exchange rate of US$1.00 = J¥80.00 on May 10, 2012), 100% of the shares of Rapid Capital Holdings Limited, a corporation organized under the laws of the British Virgin Islands (“Rapid Capital”), who in turn, owns 1,367,725 shares of our common stock. Therefore, SJ Asia indirectly, beneficially owns 1,367,725 shares of Common Stock of the Company through Rapid Capital.
As a result, SJ Asia beneficially owns an aggregate of 19,881,463 shares of our common stock, which constitutes approximately 54.6% of the outstanding common shares of our company as of the date of this report on Form 10-K. Following the above transactions contemplated, Mr. Zuo remains the Chairman and Chief Executive Officer of the Company with the backing of SJ Asia.
SJ Asia and SJI, Inc. become the Company’s immediate holding and ultimate holding companies since September 27, 2011.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation and consolidation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
Use of estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates under different assumptions or conditions. Significant estimates for the years ended March 31, 2012 and 2011 include the useful lives of property and equipment and intangible assets, assumptions used in assessing impairment for long-term assets and goodwill, and the fair value of share-based payments and warrants granted in connection with the private placement of preferred stock.
Cash and cash equivalents
Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents. As of March 31, 2012 and 2011, approximately $7.65 million and $16.23 million of the Company’s cash and cash equivalents were denominated in Chinese Renminbi (“RMB”) and were placed with banks in the PRC. The convertibility of RMB into other currencies and the remittance of these funds out of the PRC are subject to exchange control restrictions imposed by the PRC government.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts and other receivables
Accounts and other receivables are stated at cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts and other receivables on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends.
Inventories
Inventories are stated at the lower of cost or market. Cost of equipment and software inventory is determined on a specific identification basis and the cost of industrial chemical inventory is determined on a weighted average basis. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or management’s estimates based on prevailing market conditions. Management will write down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:
Intangible assets
Purchased software and copyrights are initially recorded at cost and amortized on a straight-line basis over the shorter of the contractual terms or estimated useful economic life of 2 to 10 years.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
The excess of the purchase price over the fair value of net assets acquired in a business combination is recorded on the consolidated balance sheet as goodwill. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Company performs its annual goodwill impairment test at the end of each fiscal year for all reporting units. Goodwill is tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The Company recognized no impairment loss on goodwill for the two years ended March 31, 2012 and 2011.
Investment in equity method affiliate
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting in accordance to ASC Topic 323 “Equity Method and Joint Ventures”. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee companies’ board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee companies.
Under the equity method of accounting, the Company’s share of the earnings or losses of the equity method affiliate is reflected in the caption “Equity in earnings of equity method affiliate” in the consolidated statements of income and comprehensive income. The amount recorded in income is adjusted to eliminate intercompany gains and losses. The Company’s carrying value (including advance to the investee) in equity method affiliate is reflected in the caption “Investment in and advance to equity method affiliate” in the Company’s consolidated balance sheets. Dividends received from the unconsolidated subsidiaries reduce the carrying amount of the investment.
When the Company’s carrying value in an equity method affiliate is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guarantees obligations of the equity method affiliate or has committed additional funding. When the equity method affiliate subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Impairment of long-lived assets
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
Revenue is recognized when the following four criteria are met as prescribed by Accounting Standard Codification (“ASC”) Topic 605, “Revenue Recognition” issued by the Financial Accounting Standard Board (“FASB”): (i) persuasive evidence of an arrangement exists, (ii) product delivery has occurred or the services have been rendered, (iii) the fees are fixed or determinable, and (iv) collectibility is reasonably assured.
Multiple-deliverable arrangements
The Company derives revenue from fixed-price sale contracts with customers that may provide for the Company to deliver equipment with varied performance specifications specific to each customer and provide the technical services for installation, integration and testing of the equipment. In instances where the contract price is inclusive of the technical services, the sale contracts include multiple deliverables. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:
•The delivered item(s) has value to the customer on a stand-alone basis;
•There is objective and reliable evidence of the fair value of the undelivered item(s); and
•If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.
The Company’s multiple-element contracts generally include customer-acceptance provisions which provide for the Company to carry out installation, test runs and performance tests at the Company’s cost until the equipment can meet the performance specifications within a specified period (“acceptance period”) stated in the contracts. These contracts generally provide the customers with the right to deduct certain percentages of the contract value as compensation or liquidated damages from the balance payment stipulated in the contracts, if the performance specifications cannot be met within the acceptance period. There is generally no provision giving the customers a right of return, cancellation or termination with respect to any uninstalled equipment.
The delivered equipment has no standalone value to the customer until it is installed, integrated and tested at the customer’s site by the Company in accordance with the performance specifications specific to each customer. In addition, under these multiple-element contracts, the Company has not sold the equipment separately from the installation, integration and testing services, and hence there is no objective and reliable evidence of the fair value for each deliverable included in the arrangement. As a result, the equipment and the technical services for installation, integration and testing of the equipment are considered a single unit of accounting pursuant to ASC Subtopic 605-25, Revenue Recognition - Multiple-Element Arrangements. In addition, the arrangement generally includes customer acceptance criteria that cannot be tested before installation and integration at the customer’s site. Accordingly, revenue recognition is deferred until customer acceptance, indicated by an acceptance certificate signed off by the customer.
The Company may also provide its customers with a warranty for one year following the customer’s acceptance of the installed equipment. Some contracts require that 5% to 15% of the contract price be held as retainage for the warranty and only due for payment by the customer upon expiration of the warranty period. For those contracts with retainage clauses, the Company defers the recognition of the amounts retained as revenue until expiration of the warranty period when collectibility can reasonably be assured. The Company has not provided for warranty costs for those contracts without retainage clauses, as the relevant estimated costs were insignificant based on historical experience.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition (continued)
Product only
Revenue derived from sales contracts that require delivery of products only is recognized when the title to the products passes to customers. Titles to the products pass to the customers when the products are delivered and accepted by the customers.
Software sale
The Company recognizes revenue from the delivery of data processing platform software when the software is delivered to and accepted by the customer, pursuant to ASC Topic 985, “Software” and ASC Topic 605, “Revenue Recognition”. Costs of software revenue include amortization of software copyrights.
Service
The Company recognizes revenue from provision of services when the service has been performed, in accordance with ASC Topic 605, “Revenue Recognition”.
The Company is subject to business tax of 5% and value added tax of 17% on the revenues earned for services provided and products sold in the PRC, respectively. The Company presents its revenue net of business tax and related surcharges and value added tax, as well as discounts and returns. There were no product returns for the two years ended March 31, 2012 and 2011.
Deferred revenue and costs
Deferred revenue represents payments received from customers on equipment delivery and installation contracts prior to customer acceptance. As revenues are deferred, the related costs of equipment paid to suppliers are also deferred. The deferred revenue and costs are recognized in the consolidated statements of income and comprehensive income in the period in which the criteria for revenue recognition are satisfied as discussed above.
Research and development expenses
Research and development costs are charged to expense when incurred.
Advertising and promotion costs
Advertising and promotion costs are charged to expense when incurred. During the two years ended March 31, 2012 and 2011, advertising and promotion costs were insignificant.
Shipping and handling cost
Shipping and handling costs are charged to expense when incurred. Shipping and handling costs were included in selling expenses in the consolidated statements of income and comprehensive income and amounted to $945,937 and $761,177 for the two years ended March 31, 2012 and 2011, respectively. Typically, the Company does not charge customers for these costs.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income taxes”. ASC Topic 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the tax jurisdictions where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13. The interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
Comprehensive income
FASB ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income arose from foreign currency translation adjustments.
Stock based compensation
The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation - Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.
The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as expense as the goods or services are received.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share
The Company reports earnings per share in accordance with the provisions of FASB ASC Topic 260, “Earnings per Share”. FASB ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilutive effects of convertible securities (using the as-if converted method), and options and warrants and their equivalents (using the treasury stock method).
The following table is a reconciliation of the net income and the weighted average shares used in the computation of basic and diluted earnings per share for the periods presented:
The diluted earnings per share calculation for the year ended March 31, 2012 did not include the warrants and options to purchase up to 5,184,352 and 334,000 shares of common stock, respectively, because their effect was anti-dilutive.
The diluted earnings per share calculation for the year ended March 31, 2011 did not include the warrants and options to purchase up to 3,438,972 and 107,973 shares of common stock, respectively, and the effect of convertible preferred stock, because their effect was anti-dilutive.
Commitments and contingencies
The Company follows ASC Subtopic 450-20, “Loss Contingencies” in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency
The Company has evaluated the determination of its functional currency based on the guidance in FASB ASC Topic 830, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash.
Historically, the sales and purchase contracts of the Company’s Hong Kong subsidiaries have substantially been denominated and settled in the U.S. dollar. Therefore, the Company’s Hong Kong subsidiaries generate and expend their cash predominately in the U.S. dollar. Accordingly, it has been determined that the functional currency of the Company’s Hong Kong subsidiaries is the U.S. dollar.
Historically, the sales and purchase contracts of the Company’s PRC subsidiaries have predominantly been denominated and settled in Renminbi (the lawful currency of Mainland China). Accordingly, it has been determined that the functional currency of the Company’s PRC subsidiaries is Renminbi.
On its own, the Company raises finances in the U.S. dollar, pays its own operating expenses primarily in the U.S. dollar, and expects to receive a dividend if and when declared by its subsidiaries (including Beijing JianXin and Beijing Hongteng, which are wholly foreign-owned enterprises with a registered capital denominated in the U.S. dollar) in U.S. dollars.
Therefore, it has been determined that the Company’s functional currency is the U.S. dollar based on the sales price, expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.
The Company uses the United States dollar (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, being the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of a subsidiary with functional currency other than the U.S. Dollar are translated into the U.S. Dollar using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.
The Company’s PRC subsidiaries maintain their books and records in Renminbi (“RMB”), the lawful currency in the PRC, which may not be freely convertible into foreign currencies. The exchange rates used to translate amounts in RMB into the U.S. Dollar for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of People’s Bank of China and are as follows:
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the above rates.
The value of RMB against U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments
The Company values its financial instruments as required by FASB ASC 320-12-65. The estimated fair value amounts have been determined by the Company using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Fair value measurements
The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, other receivables, prepayments to suppliers, short term bank loans, accounts payable, other payables and due to shareholders.
As of the balance sheet dates, the estimated fair values of these financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at the respective reporting periods.
ASC Topic 820, “Fair Value Measurement”, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 -Quoted prices in active markets for identical assets or liabilities.
Level 2 -Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 -Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value measurements (Continued)
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
There was no asset or liability measured at fair value on a non-recurring basis as of March 31, 2012 and 2011.
Recent accounting pronouncements
In May 2011, the FASB issued ASU No. 2011-04 - Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update intend to converge requirements for how to measure fair value and for disclosing information about fair value measurements in U.S. GAAP with International Financial Reporting Standards. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of the provisions in ASU 2011-04 will have no material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05 - Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this update require (i) that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements (the current option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity is eliminated); and (ii) presentation of reclassification adjustments from OCI to net income on the face of the financial statements. For public entities, the amendments in this ASU are effective for years, and interim periods within those years, beginning after December 15, 2011. The amendments in this update should be applied retrospectively. Early adoption is permitted. The adoption of the provisions in ASU 2011-05 will have no material impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08 -Intangibles -Goodwill and Other (Topic 350). The amendments in this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of the provisions in ASU 2011-08 will have no material impact on the Company’s consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (Continued)
In December 2011, the FASB issued ASU No. 2011-11 -Balance Sheet (Topic 210). The objective of this update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either 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 either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the provisions in ASU 2011-11 will have no material impact on the Company’s consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 -Comprehensive Income (Topic 220). The amendments in this update supersede certain pending paragraphs in ASU No. 2011-05, to effectively defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of the provisions in ASU 2011-12 will have no material impact on the Company’s consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
NOTE 3RESTRICTED CASH
Restricted cash as of March 31, 2012 and 2011 represented the Company’s bank deposits held as collateral for the Company’s credit facilities as discussed in Note 20.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 4 ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE, NET
ACCOUNTS RECEIVABLE
The Company’s accounts receivable at March 31, 2012 and 2011 are summarized as follows:
As of March 31, 2012 and 2011, the balance of accounts receivable included $2,208,356 and $1,257,883, respectively, of amounts billed but not paid by customers under retainage provisions in contracts.
Based on the Company’s assessment of collectibility, there has been no allowance for doubtful accounts recognized as of March 31, 2012 and 2011.
NOTES RECEIVABLE
Notes receivable arose from sale of goods and represent commercial drafts issued by customers to the Company that were guaranteed by bankers of the customers. Notes receivable are interest-free with maturity dates of 3 to 6 months from date of issuance. Notes receivable consisted of the following:
NOTE 5 INVENTORIES
The Company’s inventories at March 31, 2012 and 2011 consisted of the following:
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 6 PREPAYMENTS TO SUPPLIERS
Prepayments to suppliers as of March 31, 2012 and 2011 represented deposits or advance payments of $6.92 million and $4.36 million, respectively, for the purchases of equipment for sales to customers, and nil and $5.11 million, respectively, for the purchases of raw materials for the production and sales of chemical products.
NOTE 7 PREPAID EXPENSES AND DEPOSITS
The Company’s prepaid expenses and deposits at March 31, 2012 and 2011 consisted of the following:
Tender deposits represented deposit payments made to bid for contracts.
NOTE 8 OTHER RECEIVABLES
The Company’s other receivables at March 31, 2012 and 2011 are summarized as follows:
Other receivables from unrelated entities represented temporary loans advanced to unrelated entities, which were unsecured, non-interest bearing and repayable on demand.
NOTE 9 PLEDGED TRADING SECURITIES
The Company’s pledged trading securities at March 31, 2012 and 2011 are summarized as follows:
As of March 31, 2012 and 2011, all of the Company’s trading securities were pledged as collateral for the Company’s credit facilities (see Note 20). Marketable equity securities are reported at fair value based on quoted market prices in active markets (Level 1 inputs), with gains or losses resulting from changes in fair value recognized currently in earnings.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 10 DUE FROM A RELATED PARTY
Due from a related party amounting to $401,820 at March 31, 2012 represented a short-term temporary loan advanced to a wholly-owned PRC subsidiary of SJI, Inc. (see Note 1). The loan is interest bearing at 3% per annum, unsecured and repayable on demand. During the year ended March 31, 2012, interest of $4,564 was earned from this related party.
NOTE 11 PREPAID LAND USE RIGHTS AND DEPOSIT FOR LAND USE RIGHTS
The Company had recorded as prepaid land use rights the lump sum payments paid by Anhui Jucheng to acquire long-term rights to utilize the land underlying its building and production facility. This type of arrangement is common for the use of land in the PRC. The prepaid land use rights are expensed on the straight-line basis over the term of the land use rights of 50 years.
The amortization expense on prepaid land use rights for the two years ended March 31, 2012 and 2011 was $19,712 and $35,098, respectively.
As of March 31, 2011, the deposit for land use rights of $1,360,503 represented the payment made by Anhui Jucheng to a local authority to acquire 50-year right to use two parcels of land which will be used for expansion of its manufacturing facilities.
NOTE 12 PROPERTY, PLANT AND EQUIPMENT, NET
The Company’s property, plant and equipment at March 31, 2012 and 2011 are summarized as follows:
Depreciation expenses in the aggregate for the two years ended March 31, 2012 and 2011 were $654,269 and $958,332, respectively.
As of March 31, 2011, buildings and plant and machinery included assets held by Anhui Jucheng.
NOTE 13 CONSTRUCTION IN PROGRESS
Construction in progress, amounting to $860,738 as of March 31, 2011, comprised (i) capital expenditures of $639,316 for machinery which were either under installation or undergoing quality inspection and thus not yet put into use; and (ii) capital expenditures for construction of a new factory of Anhui Jucheng of $221,422.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 14 INTANGIBLE ASSETS
The Company’s intangible assets at March 31, 2012 and 2011 are summarized as follows:
In December 2008, the Company’s subsidiary, Beijing JianXin, purchased a software copyright on data processing platform software for application in petrochemical production pursuant to an agreement dated October 1, 2008 from a company unaffiliated to the Company at the time of the agreement. The agreement provides that the purchase price shall be based on the valuation of RMB40,800,000 (or $5,941,459). The agreement stipulates that the seller shall provide assistance for the registration of the software copyright in the name of Beijing JianXin. The agreement also provides that the seller shall dismiss all human resources for the business activities related to the software from the date Beijing JianXin is granted the software copyright and at the same time, provide assistance for Beijing JianXin to re-employ the necessary staff from the seller to ensure a smooth transitioning of the activities related to the software. The agreement provides for Beijing JianXin to pay the purchase price within 1 year from the date it obtains the software copyright, but no later than March 31, 2010. The purchase price for the software copyright was fully paid before March 31, 2010.
This software copyright has been registered with the National Copyright Administration of the People’s Republic of China in the name of Beijing JianXin and is protected under the relevant copyright law of the PRC for 50 years from November 11, 2008, the date of first publication of the software. This software copyright is amortized over its estimated useful life of ten years using the straight-line method.
Amortization expenses for the two years ended March 31, 2012 and 2011 were $651,208 and $623,208, respectively.
The estimated amortization expense of intangible assets over each of the next five years and thereafter will be $661,451 per annum.
NOTE 15 INVESTMENT IN AND ADVANCE TO EQUITY METHOD AFFILIATE
As explained in Note 1, since August 30, 2011, the Company owns a 39.13% equity interest in Anhui Jucheng and has the right to appoint one director out of a total of five to the board of directors. Accordingly, the Company exercises significant influence on Anhui Jucheng and thus Anhui Jucheng is accounted for as an equity method affiliate since August 30, 2011. The Company initially measured ( at August 30, 2011), its retained investment in the common stock of the investee at fair value in the deconsolidation transaction mentioned above in accordance with ASC Topic 810, “Consolidation”, paragraphs 810-10-40-3A through 40-5.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 15 INVESTMENT IN AND ADVANCE TO EQUITY METHOD AFFILIATE (CONTINUED)
Investment in equity method affiliate as of March 31, 2012:
The amount due from the equity method affiliate is interest free and the Company will not demand repayment within one year from the respective balance sheet date and the amount is therefore considered non-current.
Summarized financial information of the equity method affiliate:
NOTE 16 GOODWILL
The Company’s goodwill at March 31, 2012 and 2011 is summarized as follows:
Goodwill at March 31, 2011 arose from the Company’s acquisition of Anhui Jucheng on July 5, 2010. Impairment of goodwill is tested at least annually at the reporting unit. The test consists of two steps. First, the Company identifies potential impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Topic 805,”Business Combinations.”
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 17 SHORT TERM BANK LOANS
The Company’s short-term bank loans at March 31, 2012 and 2011 consisted of the following:
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 18 OTHER PAYABLES AND ACCRUED EXPENSES
The Company’s other payables and accrued expenses at March 31, 2012 and 2011 are summarized as follows:
Other payables at March 31, 2011 included advances of $6.03 million from unaffiliated third parties for the short term RMB financing needs of Beijing JianXin, primarily for its tender bidding purposes. The advances from these companies were unsecured, interest free and were fully repaid in April 2011.
NOTE 19 DUE TO SHAREHOLDERS AND NONCONTROLLING INTERESTS
The Company’s due to shareholders and noncontrolling interests at March 31, 2012 and 2011 are summarized as follows:
The amount due to Mr. Zuo is unsecured, interest free and is payable on demand.
The amount due to SJ Asia Pacific Limited is also unsecured, bears interest at 3% to 5% per annum and is payable on demand. During the years ended March 31, 2012 and 2011, interest of $0.25 million and $0.24 million was payable to SJ Asia Pacific Limited, respectively.
Amount due to noncontrolling interests was unsecured, interest free and payable on demand.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 20 CREDIT FACILITIES
As of March 31, 2012, the Company had available banking facilities (“General Facilities”), which consisted of overdraft, guarantee, trade finance and short term money market loan facilities up to an aggregate amount of HK$79.5 million (equivalent to approximately $10.24 million). Collateral for the General Facilities include the Company’s bank deposits classified as restricted cash and trading securities as described in Notes 3 and 9, respectively, an unlimited guarantee from Mr. Jianzhong Zuo (CEO and Chairman of the Company), a standby letter of credit of not less than HK$45 million (or approximately $5.80 million) issued by a bank which is in turn guaranteed by SJI Inc. (the holding company of SJ Asia Pacific Ltd., a stockholder of the Company) and an undertaking from Hua Shen HK to maintain a tangible net worth of not less than HK$5 million (or approximately $0.64 million).
The General Facilities are available to the Company until July 15, 2012. As of March 31, 2012, the General Facilities were utilized to the extent of $4,599,266 and $4,395,564 in relation to contract performance guarantees and short-term bank loans (Note 17), respectively.
As of March 31, 2012, total outstanding contract performance guarantees were $5,880,476 issued by banks on behalf of the Company.
On November 11, 2011, the Company obtained a banking facility for import facilities up to HK$6 million (equivalent to approximately $773,000) under a Special Loan Guarantee Scheme sponsored and guaranteed by the Government of the Hong Kong Special Administrative Region (“Government Sponsored Facility”). Collateral for the Government Sponsored Facility includes a guarantee for HK$6 million from China LianDi. As of March 31, 2012, there was no borrowing under the Government Sponsored Facility.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 21 COMMON STOCK, PREFERRED STOCK AND WARRANTS
(a) Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, $0.001 par value. The Company had 1,216,950 shares of common stock outstanding prior to the Share Exchange with China LianDi, and, as described in Note 1, and issued 27,354,480 shares of common stock to the shareholders of China LianDi in connection with the Share Exchange. For accounting purposes, the shares issued to the shareholders of China LianDi are assumed to have been outstanding on April 1, 2008 and the 1,216,950 shares held by the existing shareholders of the Company prior to the Share Exchange on February 26, 2010 are assumed to have been issued on that date in exchange for the net assets of the Company.
On February 26, 2010 and immediately following the Share Exchange, the Company completed a private placement transaction pursuant to a securities purchase agreement with certain investors (collectively, the “Investors”) and sold 787,342 units at a purchase price of $35 per unit, consisting of, in the aggregate, (a) 7,086,078 shares of Series A convertible preferred stock, par value $0.001 per share (the “Series A Preferred Stock”) convertible into the same number of shares of common stock, (b) 787,342 shares of common stock, (c) Series A Warrants to purchase up to 1,968,363 shares of common stock, at an exercise price of $4.50 per share for a three-year period, and (d) Series B Warrants to purchase up to 1,968,363 shares of common stock, at an exercise price of $5.75 per share for a three-year period. The Company also issued to the placement agent in the private placement (i) warrants to purchase 787,342 shares of common stock at an exercise price of $3.50, (ii) Series A Warrants to purchase 196,836 shares of common stock, and (iii) Series B Warrants to purchase 196,836 shares of common stock, which expire in three years on February 26, 2013. The Company received aggregate gross proceeds of approximately $27.56 million from the private placement.
For the year ended March 31, 2011, 1,568,108 shares of preferred stock were converted into 1,568,108 shares of common stock.
For the year ended March 31, 2012, 5,517,970 shares of preferred stock were converted into 5,517,970 shares of common stock.
At March 31, 2012, 36,444,850 shares of common stock were issued and outstanding.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 21 COMMON STOCK, PREFERRED STOCK AND WARRANTS (CONTINUED)
(b) Preferred Stock
The Company is authorized to issue 25,000,000 shares of preferred stock, $0.001 par value, of which one series of preferred stock has been designated as Series A Preferred Stock, or the preferred shares, of which the Company issued 7,086,078 shares to certain accredited investors in a private placement on February 26, 2010. Each preferred share is convertible into one share of common stock, at a conversion price of $3.50 per share (subject to certain adjustments) at any time at the holder’s option, and will automatically convert at the earlier to occur of the following: (i) twenty-four (24) months following February 26, 2010, and (ii) such time that the volume weighted average price of the common stock is no less than $5.00 for a period of ten (10) consecutive trading days with the daily volume of the common stock equal to at least 50,000 shares per day. The designation, rights, preferences and other terms and provisions of the preferred shares are set forth in the Certificate of Designation filed with the Nevada Secretary of State on March 4, 2010. The preferred shares are entitled to a cumulative dividend at an annual rate of 8%, payable quarterly, at the Company’s option, in cash or in additional shares of Series A Preferred Stock. The Series A Preferred Stock has class voting rights such that the Company, prior to taking certain corporate actions (including certain issuances or redemptions of its securities or changes in its organizational documents), is required to obtain the affirmative vote or consent of the holders of a majority of the shares of the Series A Preferred Stock then issued and outstanding. The Series A Preferred Stock has no other voting rights with the common stock or other equity securities of the Company. The preferred shares have a liquidation preference of $3.50 per share, plus any accrued but unpaid dividends. If the Company cannot issue shares of common stock registered for resale under the registration statement for any reasons, holders of the Series A Preferred Stock, solely at the holder’s option, can require the Company to redeem from such holder those Series A Preferred Stock for which the Company is unable to issue registered shares of common stock at a price equal the Series A liquidation preference amount, provided that the Company shall have the sole option to pay such redemption price in cash or restricted shares of common stock.
On February 26, 2012, 4,675,766 shares of the Company’s outstanding Series A preferred stock, which had not been voluntarily converted into the Company’s common shares, were fully converted to the Company’s common shares under the Mandatory Conversion clause described above.
The Company has evaluated the terms of the Series A Preferred Stock and determined that the Series A Preferred Stock, without embodying an obligation for the Company to repurchase or to settle by transferring assets, is not a liability in accordance with the guidance provided in ASC Topic 480, Distinguishing Liabilities from Equity.
Because the event that may trigger redemption of the Series A Preferred Stock, the delivery of registered shares, is not solely within the Company’s control, the Series A Preferred Stock has been classified as mezzanine equity (out of permanent equity) in accordance with the requirement of ASC 480-10-S99 until they are converted into the Company’s common stock.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 21 COMMON STOCK, PREFERRED STOCK AND WARRANTS (CONTINUED)
(b) Preferred Stock (continued)
In conjunction with the private placement on February 26, 2010, the Company entered into a make good escrow agreement with the investors pursuant to which LianDi Energy delivered into an escrow account 1,722,311 shares of common stock to be used as a share escrow for the achievement of a fiscal year 2011 net income performance threshold of $20.5 million. The Company has evaluated the terms of this escrow arrangement based on the guidance provided in ASC 718-10S99 and concluded that because the escrow shares would be released to the Company’s principal stockholder or distributed to the investors without regard to the continued employment of any of the Company’s directors or officers, the escrow arrangement is in substance an inducement to facilitate the private placement, rather than compensatory.
Because the fiscal 2011 performance threshold has been met, 1,722,311 shares were released to LianDi Energy, the principal stockholder, on August 24, 2011.
In accordance to ASC Topic 718 and ASU No. 2010-05-Compensation-Stock Compensation: Escrowed Share Arrangements and the Presumption of Compensation, the Company evaluated the substance of this arrangement and whether the presumption of compensation has been overcome. According to the Security Escrow Agreement signed between the Company and its investors, the release of these escrow shares to the principal stockholder was not contingent on continued employment, and this arrangement is in substance an inducement made to facilitate the financing transaction on behalf of the Company, rather than as compensatory. Therefore, the Company has accounted for the escrowed share arrangement according to its nature, and therefore did not recognize a non-cash compensation charge as a result of the Company satisfying the 2011 performance thresholds.
Accordingly, the Company has accounted for the escrow share arrangement according to its nature and reflected it as a reduction of the proceeds allocated to the newly issued securities in the private placement, based on its at fair value of $4,925,810 as of February 26, 2010.
The aggregate fair value of the escrow shares as of February 26, 2010 is allocated to the different securities issued in the private placement according to their respective allocated net proceeds as follows:
The amount of the escrow shares allocated to preferred stock is accreted similar to a dividend to the preferred stock, regardless of the probability of meeting 2011 net income targets, over the period from the date of issuance of securities in the private placement to March 31, 2011, using the effective interest method. Accretion of such preferred stock deemed dividend for the year ended March 31, 2011 was $4,007,745. No further accretion was required after March 31, 2011.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 21 COMMON STOCK, PREFERRED STOCK AND WARRANTS (CONTINUED)
(c) Warrants
On February 26, 2010, the Company issued Series A Warrants to purchase up to 1,968,363 shares of common stock at an exercise price of $4.50 and Series B Warrants to purchase up to 1,968,363 shares of common stock at an exercise price of $5.75, for cash. These warrants are exercisable at any time for three years from February 26, 2010.
Also on February 26, 2010, the Company issued (i) warrants to purchase 787,342 shares of common stock at an exercise price of $3.50, (ii) Series A Warrants to purchase 196,836 shares of common stock, and (iii) Series B Warrants to purchase 196,836 shares of common stock, which were issued to the placement agent in connection with the private placement and expire in three years on February 26, 2013.
On December 16, 2011, the Company issued 230,000 shares of warrants to an investor to purchase up to 230,000 shares of common stock at an exercise price of $2.25 for cash. These warrants are exercisable at any time from December 16, 2011 through September 30, 2014. The compensation costs associated with these warrants are recognized, based on the grant-date fair values of these warrants. The Company valued these options utilizing the Black-Scholes options pricing model using the following assumptions, and recorded $106,158 as stock-based compensation costs for the year ended March 31, 2012.
Warrants issued and outstanding at March 31, 2012 and changes during the year then ended, are as follows:
The Company has evaluated the terms of the warrants with reference to the guidance provided in ASC 815-40-15. The Company has concluded that these warrants are indexed to the Company’s own stock, because the warrants have no contingent exercise provision and fixed strike prices which are only subject to adjustments in the event of stock splits, combinations, dividends, mergers or other customary corporate events. Therefore, these warrants have been classified as equity.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 22 SHARE-BASED COMPENSATION
(a)Options granted to Independent Directors
On August 10, 2010, the Company granted options to three of its then independent directors, Mr. Joel Paritz, Mr. Hongjie Chen and Mr. Xiaojun Li, to purchase 24,000, 5,000 and 5,000 shares of the Company’s common stock, respectively, at a strike price of $5.99 per share, in consideration for their services to the Company.
As of March 31, 2012, all options are exercisable. Unexercised options will expire on August 10, 2015.
The compensation costs associated with these options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting period. The Company valued these options utilizing the Black-Scholes options pricing model using the following assumptions, and recorded $14,790 and $61,900 as stock-based professional fees during the two years ended March 31, 2012 and 2011, respectively.
(b)Options granted for consultancy services
On December 6, 2010, the Company granted options to a consultancy service company, to purchase 300,000 shares of the Company’s common stock, at a strike price of $3.50 per share, in consideration for its consultancy services to the Company for five months. There options shall become vested and exercisable pursuant to the following vesting schedule:
These options will expire December 6, 2014.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 22 SHARE-BASED COMPENSATION (CONTINUED)
(b)Options granted for consultancy services (continued)
The Company records and reports stock-based compensation by measuring the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which services are received. Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. The Company valued these options utilizing the Black-Scholes options pricing model using the following assumptions at approximately $1.42 per option, and recorded $80,965 and $344,103 as stock-based professional fees during the two years ended March 31, 2012 and 2011, respectively.
Options issued and outstanding at March 31, 2012 and their movements during the year then ended are as follows:
(1) The intrinsic value of the stock option at March 31, 2012 is the amount by which the market value of the Company’s common stock of $1.49 as of March 31, 2012 exceeds the exercise price of the option.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 23 STATUTORY RESERVES
The Company’s subsidiaries, Beijing JianXin and Beijing HongTeng, as PRC companies, are required on an annual basis to make appropriations of retained earnings to statutory reserves at a certain percentage of after-tax profit determined in accordance with PRC accounting standards and regulations (“PRC GAAP”).
The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end and after setting off against any accumulated losses from prior years) until such fund has reached 50% of registered capital, whereas the enterprise expansion fund appropriation is at its discretion. Appropriation to the general reserve must be made before distribution of dividends to stockholders. The general reserve fund and statutory reserve fund can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital. The enterprise expansion fund was mainly used to expand production and operation; it also may be used for increasing the registered capital. There was no transfer from retained earnings of Beijing JianXin to statutory reserves during the two years ended March 31, 2012 and 2011 because its statutory reserves of $1,138,733 at March 31, 2009 already reached 50% of Beijing JianXin’s registered capital of $2,200,000. Therefore, any further transfer to the statutory reserves is at the Company’s discretion and Beijing JianXin decided not to make any appropriations to the statutory reserves during the two years ended March 31, 2012 and 2011. Beijing HongTeng incurred a net loss for its PRC fiscal year ended December 31, 2011, therefore, no statutory reserves were provided.
There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company has not done so.
NOTE 24 OTHER INCOME - VALUE ADDED TAX REFUND
Beijing JianXin has been recognized by the PRC government as a software enterprise with its own software copyright. Under the PRC government’s preferential policies for software enterprises, Beijing JianXin is entitled to a refund of 14% value added tax in respect of its sales of self-developed software products. The Company recognizes the value added tax refund as revenue only when it has been received and there is no condition to the use of the refund received.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 25INCOME TAXES
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.
Under the Inland Revenue Ordinance of Hong Kong, only profits arising in or derived from Hong Kong are chargeable to Hong Kong profits tax, whereas the residence of a taxpayer is not relevant. Therefore, the Company’s Hong Kong subsidiaries are generally subject to Hong Kong income tax on their taxable income derived from the trade or businesses carried out by them in Hong Kong at 16.5% for the years ended March 31, 2012 and 2011.
In March 2007, the PRC government enacted the PRC Enterprise Income Tax Law, or the New EIT Law, and promulgated related regulations, Implementing Regulations for the PRC Enterprise Income Tax Law. The law and regulations became effective from January 1, 2008. The PRC Enterprise Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises registered in the PRC.
Beijing JianXin, Beijing Hongteng and Anhui Jucheng, being established in the PRC, are generally subject to PRC enterprise income tax (“EIT”). Beijing JianXin has been recognized by the relevant PRC tax authority as a software enterprise with its own software copyright and is entitled to tax preferential treatment - a two-year tax holiday through EIT exemption for the calendar years ended December 31, 2009 and 2010, and a 50% reduction on its EIT rate for the three ensuing calendar years ending December 31, 2011, 2012 and 2013. Beijing Hongteng and Anhui Jucheng are subject to an EIT rate of 25% for the two years ended March 31, 2012 and 2011.
No provision for other overseas taxes is made as neither LianDi Clean or China LianDi has any taxable income in the U.S. or the British Virgin Islands.
The new Tax Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China for distribution of earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings generated prior to January 1, 2008 is exempt from the withholding tax. As the Company’s subsidiaries in the PRC will not be distributing earnings to the Company for the years ended March 31, 2012 and 2011, no deferred tax liability has been recognized for the undistributed earnings of these PRC subsidiaries at March 31, 2012 and 2011. Total undistributed earnings of these PRC subsidiaries at March 31, 2012 and 2011 were RMB635,873,058 ($101,023,634) and RMB346,109,423 ($52,789,552).
The Company’s income tax expense consisted of:
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 25 INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the Company’s effective income tax is as follows:
The Company’s deferred income tax assets at March 31, 2012 and 2011 were as follows:
The net operating losses carried forward of the U.S. entity, LianDi Clean Technology Inc., were $2,260,032 and $1,574,841 at March 31, 2012 and 2011, respectively, which will expire in years through 2031. A full valuation allowance has been recorded because it is considered more likely than not that the deferred tax assets will not be realized as the Company’s U.S. operations will not generate sufficient future earnings to which the operating losses relate.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 25 INCOME TAXES (CONTINUED)
The Company’s deferred income tax liabilities at March 31, 2012 and 2011 were as follows:
(1)Deferred tax liabilities arose on the revaluation of Anhui Jucheng’s properties, plant and equipment and land use right upon the acquisition of Anhui Jucheng on July 5, 2010.
(2)Deferred tax liability arose on the gain on deconsolidation of Anhui Jucheng on August 30, 2011, which was calculated based on the approximate $30.41 million deconsolidation gain and an income tax rate of 25%, the enacted tax rate that will be in effect in the period in which the differences are expected to reverse.
As of March 31, 2012 and 2011, the Company did not have any other significant temporary differences and carry forwards that may result in deferred tax assets or liabilities.
As of March 31, 2012 and 2011, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the two years ended March 31, 2012 and 2011, and no provision for interest and penalties is deemed necessary as of March 31, 2012 and 2011.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 26 CERTAIN RISKS AND CONCENTRATION
Credit risk and concentration of customers
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, trading securities, accounts receivable, and prepayments and other current assets. As of March 31, 2012 and 2011, substantially all of the Company’s cash and cash equivalents and trading securities were held by major financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality.
The Company primarily derived its revenue from petroleum, petrochemical and energy companies operating in the PRC and had certain risk of concentration of customers as follows:
· As of March 31, 2012, one customer individually accounted for 87% of the accounts receivable of the Company. As of March 31, 2011, two customers individually accounted for 76% and 10% of the accounts receivable of the Company, respectively. Except for the aforementioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of March 31, 2012 or 2011.
· During the year ended March 31, 2012, two customers individually accounted for 49% and 27% of the Company’s net revenue, respectively. During the year ended March 31, 2011, two customers individually accounted for 35% and 32% of the Company’s net revenue, respectively. Except for the aforementioned, there was no other single customer who accounted for more than 10% of the Company’s net revenue for the years ended March 31, 2012 or 2011.
Concentration of suppliers
The Company sourced industrial valves and other equipment from a few suppliers who individually accounted for more than 10% of the Company’s costs of revenue:
· During year ended March 31, 2012, two suppliers together accounted for 61% of the Company’s costs of revenue (37% and 24% individually). During the year ended March 31, 2011, two suppliers together accounted for 53% of the Company’s costs of revenue (33% and 20% individually).
The majority of the Company’s operations are conducted within the PRC. The Company’s operations in the PRC are subject to various political, economic, and other risks and uncertainties inherent in the PRC. Among other risks, the Company’s operations in the PRC are subject to the risks of restrictions on transfer of funds, export duties, quotas, and embargoes, domestic and international customs and tariffs, changing taxation policies, foreign exchange restrictions and political conditions and governmental regulations.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 27 LEASE COMMITMENTS
In the normal course of business, the Company entered into operating lease agreements for the rental of offices. The Company was obligated under operating leases requiring minimum amounts as of March 31, 2012 as follows:
During the two years ended March 31, 2012 and 2011, rental expenses under operating leases amounted to $437,221 and $377,299, respectively.
NOTE 28SEGMENT DATA
The Company follows FASB ASC Topic 280, “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. Reportable operating segments include components of an entity about which separate financial information is available and which operating results are regularly reviewed by the chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess each operating segment’s performance. Before the acquisition of Anhui Jucheng in July 2010, the Company operated in one reportable business segment - the delivering of petroleum and petrochemical equipment and provision of related technical services using the Company’s proprietary technology and know-how, as well as selling of data processing software for petrochemical, petroleum and other energy companies. Upon the acquisition of Anhui Jucheng, the Company operated in one more reportable business segment - the developing, manufacturing and selling of organic and inorganic chemicals and high polymer fine chemicals with related technical services, and recycle and sales of discarded product or used packing.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 28 SEGMENT DATA (CONTINUED)
(a)The Company does not allocate its general and administrative expenses of its U.S. activities to its reportable segments because these activities are managed at a corporate level.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 29 RESTRICTED NET ASSETS
The Company’s subsidiaries in the PRC may only pay dividends out of their retained earnings determined in accordance with the accounting standards and regulations in the PRC and after it has met the PRC requirements for appropriation to statutory reserves (see Note 23).
In addition, the business transactions and assets of Beijing JianXin, Beijing Hongteng and Anhui Jucheng are primarily denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control measures imposed by the PRC government may restrict the ability of Beijing JianXin, Beijing Hongteng and Anhui Jucheng to transfer their net assets to the Company through loans, advances or cash dividends. The net assets of Beijing JianXin, Beijing Hongteng and Anhui Jucheng in aggregate exceeded 25% of the Company’s consolidated net assets. Accordingly, condensed parent company financial statements have been prepared in accordance with Rule 5.04 and Rule 12-04 of SEC Regulation S-X.
The Company records its investment in subsidiaries under the equity method of accounting. Such investment and long-term loans to subsidiaries are presented on the balance sheet as “Investments in subsidiaries” and the income of the subsidiaries is presented as “Equity in earnings of subsidiaries” on the statement of income.
These supplemental condensed parent company’s financial statements should be read in conjunction with the notes to the Company’s consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
As of March 31, 2012 and 2011 there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately disclosed in the consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 29 RESTRICTED NET ASSETS (CONTINUED)
Condensed Balance Sheets
LIANDI CLEAN TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2012 AND
NOTE 29 RESTRICTED NET ASSETS (CONTINUED)
Condensed Statements of Income
Condensed Statements of Cash Flows