SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2011
OR
¨
TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
From the transition period
from ___________ to ____________.
Commission File Number 000-52235
LIANDI CLEAN TECHNOLOGY
INC.
(Exact name of small business
issuer as specified in its charter)
Nevada
|
|
75-2834498
|
(State or other jurisdiction of incorporation or
organization)
|
|
(IRS Employer Identification No.)
|
4th Floor Tower B. Wanliuxingui
Building, No. 28
Wanquanzhuang Road, Haidian
District
Beijing, 100089, China
(Address of principal executive
offices)
+1 86-10-5872-0171
(Issuer's telephone number)
N/A
(Former name, former address
and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act:
Large accelerated filer
¨
|
|
Accelerated filer
¨
|
|
Non-accelerated filer
¨
(Do not check if a smaller
reporting company)
|
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
As of November 17, 2011, there
were 31,530,445 shares of common stock of the issuer outstanding.
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q is being filed as Amendment
No. 1 to our Quarterly Report on Form 10-Q which was originally filed on November 18, 2011 with the Securities and Exchange
Commission. We are amending and restating our financial statements to include the deferred income tax expense and
the corresponding deferred tax liability for the gain on deconsolidation of a subsidiary recognized for the three and six
months ended September 30, 2011. We have performed a thorough reassessment of the transaction with reference to the
guidance provided in ASC Topic 740, “Income Tax”. This reassessment has led to our conclusion that
deferred tax expenses and deferred tax liability need to be provided for the deconsolidation gain recognized as it is a
taxable gain under PRC income tax law upon disposal of the remaining interests in the former subsidiary, although it will
not result in any current income tax liability. We have also revised the disclosure under Part I, Item 4 regarding Controls
and Procedures.
In accordance with Rule 12b-15 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), this Amendment No. 1 is accompanied by currently dated
certifications on Exhibits 31.1, 31.2, 32.1 and 32.2 by our chief executive officer and chief financial officer. Except as
specifically referenced herein, this Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2011 does not reflect any event occurring subsequent to November 18, 2011, the filing date of the original report.
Accordingly, this Amendment No. 1 should be read in conjunction with our other filings with the Securities and Exchange
Commission.
TABLE OF CONTENTS
|
PART I. FINANCIAL INFORMATION
|
|
|
|
|
Item 1.
|
Financial Statements
|
F-1 - F-40
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
41-65
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
65
|
|
|
|
Item 4.
|
Controls and Procedures
|
65
|
|
|
|
|
PART II. OTHER INFORMATION
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
66
|
|
|
|
Item 1A.
|
Risk Factors
|
66
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
66
|
|
|
|
Item 3.
|
Default upon Senior Securities
|
66
|
|
|
|
Item 4.
|
[Removed and Reserved]
|
66
|
|
|
|
Item 5.
|
Other Information
|
66
|
|
|
|
Item 6.
|
Exhibits
|
66
|
|
|
|
Signatures
|
|
67
|
PART I. FINANCIAL
INFORMATION
Item 1. Financial
Statements
LIANDI CLEAN TECHNOLOGY
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(AMOUNTS EXPRESSED IN US DOLLAR)
(Unaudited)
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,269,170
|
|
|
$
|
73,242,735
|
|
Restricted cash
|
|
|
3,849,353
|
|
|
|
4,122,085
|
|
Notes receivable
|
|
|
-
|
|
|
|
545,519
|
|
Accounts receivable, net of $nil allowance
|
|
|
24,251,126
|
|
|
|
12,293,961
|
|
Inventories
|
|
|
959,695
|
|
|
|
5,920,514
|
|
Prepayments to suppliers
|
|
|
30,490,650
|
|
|
|
9,469,765
|
|
Prepaid expenses and deposits
|
|
|
1,331,637
|
|
|
|
1,612,736
|
|
Other receivables, net of $nil allowance
|
|
|
1,017,400
|
|
|
|
462,352
|
|
Pledged trading securities
|
|
|
11,592
|
|
|
|
11,592
|
|
Prepaid land use right – current portion
|
|
|
-
|
|
|
|
47,902
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
103,180,623
|
|
|
|
107,729,161
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
259,978
|
|
|
|
11,307,135
|
|
Intangible assets, net
|
|
|
4,609,351
|
|
|
|
4,787,175
|
|
Investment in and advance to equity method affiliate
|
|
|
38,208,600
|
|
|
|
-
|
|
Prepaid land use right – non-current portion
|
|
|
-
|
|
|
|
1,828,266
|
|
Deposit for land use rights
|
|
|
-
|
|
|
|
1,360,503
|
|
Construction in progress
|
|
|
3,222,716
|
|
|
|
860,738
|
|
Goodwill
|
|
|
-
|
|
|
|
365,528
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
149,481,268
|
|
|
$
|
128,238,506
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short term bank loans
|
|
$
|
3,182,403
|
|
|
$
|
2,678,187
|
|
Accounts payable
|
|
|
1,355,616
|
|
|
|
4,049,470
|
|
Deferred revenue
|
|
|
1,457,160
|
|
|
|
1,257,883
|
|
Other payables and accrued expenses
|
|
|
7,452,564
|
|
|
|
15,438,576
|
|
Provision for income tax
|
|
|
1,794,873
|
|
|
|
635,142
|
|
Due to shareholders
|
|
|
7,654,479
|
|
|
|
8,046,181
|
|
Due to non-controlling interests
|
|
|
-
|
|
|
|
4,141,332
|
|
Preferred stock dividend payable
|
|
|
718,000
|
|
|
|
416,696
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,615,095
|
|
|
|
36,663,467
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
7,725,288
|
|
|
|
675,258
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,340,383
|
|
|
|
37,338,725
|
|
Commitments and Contingencies
(Note 26)
LIANDI CLEAN TECHNOLOGY
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(AMOUNTS EXPRESSED IN US
DOLLAR)
(Unaudited)
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
8% Series A contingently redeemable convertible preferred stock (25,000,000 shares authorized; par value: $0.001 per share; 4,936,905 and 5,517,970 shares issued and outstanding, respectively; aggregate liquidation preference amount: $17,997,168 and $19,729,591, including accrued but unpaid dividend of $718,000 and $416,696 at September 30, 2011 and March 31, 2011, respectively)
|
|
|
12,589,108
|
|
|
|
14,068,693
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common stock (par value: $0.001 per share; 50,000,000 shares authorized; 31,507,945 and 30,926,880 shares issued and outstanding at September 30, 2011 and March 31, 2011, respectively)
|
|
|
31,508
|
|
|
|
30,927
|
|
Additional paid-in capital
|
|
|
25,869,196
|
|
|
|
24,294,437
|
|
Statutory reserves
|
|
|
1,190,690
|
|
|
|
1,190,690
|
|
Retained earnings
|
|
|
74,269,151
|
|
|
|
43,505,802
|
|
Accumulated other comprehensive income
|
|
|
4,191,232
|
|
|
|
1,879,286
|
|
|
|
|
|
|
|
|
|
|
Total LianDi Clean stockholders’ equity
|
|
|
105,551,777
|
|
|
|
70,901,142
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
-
|
|
|
|
5,929,946
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
105,551,777
|
|
|
|
76,831,088
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
149,481,268
|
|
|
$
|
128,238,506
|
|
The accompanying notes form
an integral part of these condensed consolidated financial statements.
LIANDI CLEAN TECHNOLOGY
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS EXPRESSED IN US DOLLAR)
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
NET REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and installation of equipment
|
|
$
|
18,349,157
|
|
|
$
|
33,682,153
|
|
|
$
|
22,389,066
|
|
|
$
|
40,031,287
|
|
Sales of software
|
|
|
3,622,740
|
|
|
|
-
|
|
|
|
8,892,617
|
|
|
|
2,805,799
|
|
Services
|
|
|
2,108,796
|
|
|
|
1,134,607
|
|
|
|
2,354,908
|
|
|
|
1,137,708
|
|
Sales of industrial chemicals
|
|
|
4,869,602
|
|
|
|
8,490,510
|
|
|
|
12,026,140
|
|
|
|
8,490,510
|
|
|
|
|
28,950,295
|
|
|
|
43,307,270
|
|
|
|
45,662,731
|
|
|
|
52,465,304
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment sold
|
|
|
(15,209,608
|
)
|
|
|
(26,303,920
|
)
|
|
|
(18,569,457
|
)
|
|
|
(31,335,336
|
)
|
Amortization of intangibles
|
|
|
(158,990
|
)
|
|
|
(150,631
|
)
|
|
|
(315,887
|
)
|
|
|
(300,115
|
)
|
Cost of software
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,670,046
|
)
|
|
|
-
|
|
Cost of industrial chemicals
|
|
|
(4,720,684
|
)
|
|
|
(7,797,118
|
)
|
|
|
(11,156,356
|
)
|
|
|
(7,797,118
|
)
|
|
|
|
(20,089,282
|
)
|
|
|
(34,251,669
|
)
|
|
|
(31,711,746
|
)
|
|
|
(39,432,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,861,013
|
|
|
|
9,055,601
|
|
|
|
13,950,985
|
|
|
|
13,032,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(471,272
|
)
|
|
|
(429,879
|
)
|
|
|
(1,065,159
|
)
|
|
|
(570,821
|
)
|
General and administrative expenses
|
|
|
(702,697
|
)
|
|
|
(1,248,683
|
)
|
|
|
(1,545,616
|
)
|
|
|
(1,795,056
|
)
|
Research and development cost
|
|
|
(114,125
|
)
|
|
|
(69,543
|
)
|
|
|
(222,199
|
)
|
|
|
(128,853
|
)
|
Total operating expenses
|
|
|
(1,288,094
|
)
|
|
|
(1,748,105
|
)
|
|
|
(2,832,974
|
)
|
|
|
(2,494,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,572,919
|
|
|
|
7,307,496
|
|
|
|
11,118,011
|
|
|
|
10,538,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,854
|
|
|
|
33,733
|
|
|
|
22,353
|
|
|
|
59,747
|
|
Interest and bank charges
|
|
|
(219,810
|
)
|
|
|
(114,702
|
)
|
|
|
(365,748
|
)
|
|
|
(260,333
|
)
|
Exchange gains (losses), net
|
|
|
(501,031
|
)
|
|
|
(57,170
|
)
|
|
|
(867,206
|
)
|
|
|
(126,938
|
)
|
Value added tax refund
|
|
|
-
|
|
|
|
1,428
|
|
|
|
-
|
|
|
|
370,611
|
|
Gain on deconsolidation of subsidiary
|
|
|
30,407,821
|
|
|
|
-
|
|
|
|
30,407,821
|
|
|
|
-
|
|
Other
|
|
|
50,859
|
|
|
|
296,283
|
|
|
|
118,236
|
|
|
|
299,090
|
|
Total other income (expenses), net
|
|
|
29,751,693
|
|
|
|
159,572
|
|
|
|
29,315,456
|
|
|
|
342,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
37,324,612
|
|
|
|
7,467,068
|
|
|
|
40,433,467
|
|
|
|
10,880,182
|
|
Income tax expense
|
|
|
(8,497,088
|
)
|
|
|
(84,646
|
)
|
|
|
(8,943,823
|
)
|
|
|
(84,646
|
)
|
Income before equity in earnings of equity method affiliate
|
|
|
28,827,524
|
|
|
|
7,382,422
|
|
|
|
31,489,644
|
|
|
|
10,795,536
|
|
Equity in earnings of equity method affiliate
|
|
|
(91,541
|
)
|
|
|
-
|
|
|
|
(91,541
|
)
|
|
|
-
|
|
NET INCOME
|
|
|
28,735,983
|
|
|
|
7,382,422
|
|
|
|
31,398,103
|
|
|
|
10,795,536
|
|
Losses (Income) attributable to noncontrolling
interests
|
|
|
126,132
|
|
|
|
(124,430
|
)
|
|
|
80,823
|
|
|
|
(124,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to LianDi Clean stockholders
|
|
|
28,862,115
|
|
|
|
7,257,992
|
|
|
|
31,478,926
|
|
|
|
10,671,106
|
|
Preferred stock deemed dividend
|
|
|
-
|
|
|
|
(809,331
|
)
|
|
|
-
|
|
|
|
(1,951,844
|
)
|
Preferred stock dividend
|
|
|
(351,641
|
)
|
|
|
(477,698
|
)
|
|
|
(715,577
|
)
|
|
|
(971,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
28,510,474
|
|
|
$
|
5,970,963
|
|
|
$
|
30,763,349
|
|
|
$
|
7,747,665
|
|
LIANDI CLEAN TECHNOLOGY
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS EXPRESSED IN US DOLLAR)
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
Net income attributable to LianDi Clean stockholders
|
|
$
|
28,862,115
|
|
|
$
|
7,257,992
|
|
|
$
|
31,478,926
|
|
|
$
|
10,671,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income attributable to LianDi Clean stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1,556,078
|
|
|
|
558,906
|
|
|
|
2,311,946
|
|
|
|
713,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to LianDi Clean Stockholders
|
|
|
30,418,193
|
|
|
|
7,816,898
|
|
|
|
33,790,872
|
|
|
|
11,384,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to non-controlling interests
|
|
|
(113,688
|
)
|
|
|
184,912
|
|
|
|
9,531
|
|
|
|
184,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$
|
30,304,505
|
|
|
$
|
8,001,810
|
|
|
$
|
33,800,403
|
|
|
$
|
11,569,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to LianDi Clean stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
0.20
|
|
|
$
|
0.98
|
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.79
|
|
|
$
|
0.20
|
|
|
$
|
0.86
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,463,425
|
|
|
|
29,679,646
|
|
|
|
31,350,723
|
|
|
|
29,526,643
|
|
Diluted
|
|
|
36,444,850
|
|
|
|
36,618,829
|
|
|
|
36,444,850
|
|
|
|
30,016,764
|
|
The accompanying notes form
an integral part of these condensed consolidated financial statements.
LIANDI CLEAN TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(AMOUNTS EXPRESSED IN US
DOLLAR)
(Unaudited)
|
|
For the Six Months
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
(As restated)
|
|
|
|
|
Net income
|
|
$
|
31,398,103
|
|
|
$
|
10,795,536
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
594,510
|
|
|
|
368,816
|
|
Amortization of intangible assets
|
|
|
343,987
|
|
|
|
321,325
|
|
Loss on disposal of fixed assets
|
|
|
2,308
|
|
|
|
-
|
|
Deferred tax liability
|
|
|
7,568,781
|
|
|
|
-
|
|
Equity in earnings of equity method affiliate
|
|
|
91,541
|
|
|
|
-
|
|
Gain on deconsolidation of subsidiary
|
|
|
(30,407,821
|
)
|
|
|
-
|
|
Share-based compensation costs
|
|
|
95,755
|
|
|
|
12,051
|
|
Decrease (increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(15,989,553
|
)
|
|
|
(709,176
|
)
|
Notes receivable
|
|
|
(161,382
|
)
|
|
|
(127,067
|
)
|
Inventories
|
|
|
(604,633
|
)
|
|
|
301,866
|
|
Prepayments to suppliers
|
|
|
(31,110,541
|
)
|
|
|
(9,269,517
|
)
|
Deferred costs, prepaid expenses and other current assets
|
|
|
(5,057,984
|
)
|
|
|
(1,018,594
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
3,222,118
|
|
|
|
(1,034,364
|
)
|
Deferred revenue and accruals
|
|
|
(86,338
|
)
|
|
|
1,220,755
|
|
Income tax payable
|
|
|
1,320,484
|
|
|
|
-
|
|
Net cash (used in) generated from operating activities
|
|
|
(38,780,665
|
)
|
|
|
861,631
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(560,692
|
)
|
|
|
(100,322
|
)
|
Payment for construction in progress
|
|
|
(4,427,630
|
)
|
|
|
-
|
|
Cash outflow due to deconsolidation of Anhui Jucheng (note 1)
|
|
|
(5,364,481
|
)
|
|
|
-
|
|
Acquisition of subsidiary, net of cash and cash equivalents acquired
|
|
|
-
|
|
|
|
2,325,060
|
|
Payment of deposit for land use rights
|
|
|
(2,114,587
|
)
|
|
|
(963,604
|
)
|
Advance to other entities
|
|
|
-
|
|
|
|
(5,245,995
|
)
|
Net cash used in investing activities
|
|
|
(12,467,390
|
)
|
|
|
(3,984,861
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
315,498
|
|
|
|
(5,291,511
|
)
|
Repayment of short term bank loans
|
|
|
(695,392
|
)
|
|
|
-
|
|
New bank loans
|
|
|
3,200,629
|
|
|
|
-
|
|
Capital contributions received in advance from new shareholders of Anhui Jucheng (note 1)
|
|
|
22,233,704
|
|
|
|
-
|
|
Repayment to non-controlling interests
|
|
|
(151,600
|
)
|
|
|
(665,797
|
)
|
Repayment from (Advance to) shareholders
|
|
|
(569,888
|
)
|
|
|
2,166,611
|
|
Repayment to other entities
|
|
|
(6,131,459
|
)
|
|
|
-
|
|
Payment of preferred stock dividend
|
|
|
(414,273
|
)
|
|
|
(577,176
|
)
|
Net cash generated from (used in) financing activities
|
|
|
17,787,219
|
|
|
|
(4,367,873
|
)
|
LIANDI CLEAN TECHNOLOGY
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLAR)
(Unaudited)
|
|
For the Six Months
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
Effect of foreign currency translation on cash
|
|
|
1,487,271
|
|
|
|
708,159
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(31,973,565
|
)
|
|
|
(6,782,944
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
73,242,735
|
|
|
|
59,238,428
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
41,269,170
|
|
|
$
|
52,455,484
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
133,661
|
|
|
$
|
190,597
|
|
Cash paid for income tax
|
|
$
|
49,805
|
|
|
$
|
-
|
|
Non-cash activities
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of preferred stock
|
|
$
|
1,479,585
|
|
|
$
|
1,019,388
|
|
The accompanying notes form
an integral part of these condensed consolidated financial statements.
LIANDI CLEAN TECHNOLOGY
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(AMOUNTS EXPRESSED IN US DOLLAR)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
|
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserves
|
|
|
Earnings
|
|
|
Income
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
Balance, March 31, 2011
|
|
|
30,926,880
|
|
|
$
|
30,927
|
|
|
$
|
24,294,437
|
|
|
$
|
1,190,690
|
|
|
$
|
43,505,802
|
|
|
$
|
1,879,286
|
|
|
$
|
5,929,946
|
|
|
$
|
76,831,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,478,926
|
|
|
|
|
|
|
|
(80,823
|
)
|
|
|
31,398,103
|
|
Foreign currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,311,946
|
|
|
|
90,354
|
|
|
|
2,402,300
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,531
|
|
|
|
33,800,403
|
|
Share-based payments to independent
directors
|
|
|
-
|
|
|
|
-
|
|
|
|
14,790
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,790
|
|
Share-based payments to consultancy
services provider
|
|
|
-
|
|
|
|
-
|
|
|
|
80,965
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,965
|
|
Preferred stock converted into common stock
|
|
|
581,065
|
|
|
|
581
|
|
|
|
1,479,004
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,479,585
|
|
Preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(715,577
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(715,577
|
)
|
Deconsolidation of Anhui
Jucheng
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,939,477
|
)
|
|
|
(5,939,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011
(Unaudited)
|
|
|
31,507,945
|
|
|
$
|
31,508
|
|
|
$
|
25,869,196
|
|
|
$
|
1,190,690
|
|
|
$
|
74,269,151
|
|
|
$
|
4,191,232
|
|
|
$
|
-
|
|
|
$
|
105,551,777
|
|
The accompanying notes form
an integral part of these condensed consolidated financial statements.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 1 DESCRIPTION
OF BUSINESS AND ORGANIZATION
Nature of operations
LianDi Clean Technology Inc.
(formerly known as Remediation Services 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 an equity method affiliate of the Company, Anhui Jucheng Fine
Chemicals Co., Ltd. (“Anhui Jucheng”), who 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, owner of the cancelled shares, 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
caused to be formed a corporation under the laws of the State of Nevada called 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.
Details of LianDi Clean’s
subsidiaries as of September 30, 2011 are as follows:
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 1 DESCRIPTION
OF BUSINESS AND ORGANIZATION (CONTINUED)
Corporate organization
(continued)
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 optimization software for polymerization processes, and provision of delayed coking solutions for petrochemical, petroleum and other energy companies
|
In July 2004, China LianDi was
founded and owned as to 60% by Mr. Jianzhong Zuo (“Mr. Zuo,” the Chief Executive Officer and Chairman of the Company)
and 40% by another third-party 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. in Japan) 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 had been 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, 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 transfers of 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
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.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 1 DESCRIPTION
OF BUSINESS AND ORGANIZATION (CONTINUED)
Corporate organization
(continued)
Hua Shen HK was founded by Mr.
Zuo in 1999. On January 8, 2008, China LianDi acquired 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 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.
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.
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.
Pursuant to an investment agreement
signed on August 3, 2011, and approved by the shareholders of Anhui Jucheng, six independent 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 up on August 9, 2011, of which RMB7.74 million was credited
as registered capital (the enlarged registered capital became RMB33.25 million) and RMB134,260,000 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 1 DESCRIPTION
OF BUSINESS AND ORGANIZATION (CONTINUED)
Corporate organization
(continued)
Net assets of Anhui Jucheng as of July 5, 2010 (date of
acquisition as a subsidiary of the Company)
|
|
Book value
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
Prepaid land use right
|
|
$
|
102,831
|
|
|
$
|
1,850,864
|
|
Inventories
|
|
|
2,632,798
|
|
|
|
2,590,922
|
|
Property, plant and equipment, net (including buildings)
|
|
|
10,255,673
|
|
|
|
11,282,723
|
|
Cash and cash equivalents
|
|
|
2,325,060
|
|
|
|
2,325,060
|
|
Other current assets
|
|
|
7,036,246
|
|
|
|
7,038,678
|
|
Deferred tax liability
|
|
|
-
|
|
|
|
(693,771
|
)
|
Amount due to shareholder
|
|
|
(6,074,352
|
)
|
|
|
(6,074,352
|
)
|
Other current liabilities
|
|
|
(12,011,494
|
)
|
|
|
(13,226,465
|
)
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
4,266,762
|
|
|
$
|
5,093,659
|
|
Cash injection by Beijing JianXin
|
|
|
|
|
|
|
6,023,652
|
|
|
|
|
|
|
|
|
11,117,311
|
|
Non-controlling interest’s share of net assets
|
|
|
|
|
|
|
(5,447,482
|
)
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
5,669,829
|
|
Total purchase consideration
|
|
|
|
|
|
|
6,023,652
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
353,823
|
|
Net assets of Anhui Jucheng as of August 30, 2011 (date of deconsolidation as a
subsidiary of the Company):
|
|
Book value
|
|
|
|
|
|
Prepaid land use rights
|
|
$
|
4,044,281
|
|
Inventories
|
|
|
5,670,984
|
|
Property, plant and equipment, net (including buildings)
|
|
|
15,387,489
|
|
Cash and cash equivalents
|
|
|
5,364,481
|
|
Other current assets
|
|
|
19,115,229
|
|
Deferred tax liability
|
|
|
(666,666
|
)
|
Amount due to shareholder
|
|
|
(4,052,833
|
)
|
Capital contributions received in advance from new shareholders (note)
|
|
|
(22,233,704
|
)
|
Other current liabilities
|
|
|
(10,372,558
|
)
|
|
|
|
|
|
Net assets of Anhui Jucheng as of August 30, 2011
|
|
|
12,256,703
|
|
Goodwill (note 15)
|
|
|
371,098
|
|
|
|
|
12,627,801
|
|
|
|
|
|
|
Non-controlling interest’s share of net assets as of August 30, 2011
|
|
|
6,005,784
|
|
Fair value of the Company’s retained non-controlling interests in Anhui Jucheng (note 14)
|
|
|
37,373,448
|
|
Exchange realignment
|
|
|
(343,610
|
)
|
|
|
|
43,035,622
|
|
|
|
|
|
|
Gain on deconsolidation of Anhui Jucheng
|
|
$
|
30,407,821
|
|
Note:
|
Capital injection of RMB142 million (approximately US$22.23 million) by the six new independent third party investors were paid to Anhui Jucheng in cash on August 8, 2011. The capital injection was approved by the PRC bureau and the new business license of Anhui Jucheng was issued on August 30, 2011.
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 1 DESCRIPTION
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 owns an aggregate of 18,513,738 shares of the Company’s
common stock, which constitutes approximately 59% of the outstanding common shares of the Company as of September 30, 2011. 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 remains 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 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.
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation and
consolidation
These interim condensed consolidated
financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair
presentation of these interim condensed consolidated financial statements, which are of a normal and recurring nature, have been
included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily
indicative of the results that may be reported for the entire year. The following (a) condensed consolidated balance
sheet as of March 31, 2011, which was derived from audited financial statements, and (b) the unaudited interim condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, though the Company
believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of the
Company for the year ended March 31, 2011.
The condensed 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 condensed
consolidated financial statements in conformity with generally accepted accounting principles 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 condensed 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 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.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 September 30, 2011 and March 31, 2011, approximately $21.16 million and $16.2 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.
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 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 to 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 and equipment
Property 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 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:
|
Useful Life
|
Leasehold improvements
|
5 years
|
Buildings
|
30 years
|
Plant and machinery
|
10 years
|
Office equipment
|
2-5 years
|
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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
The excess of the purchase price
over the fair value of net assets acquired 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 six and three months ended September 30, 2011 and 2010.
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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
Revenue is recognized when the
following four criteria are met as prescribed by the SEC Staff Accounting Bulletin No. 104 (“SAB 104”): (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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
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 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
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 (formerly Statement of Position, or SOP 97-2, Software Revenue Recognition, as amended), and in accordance
with SAB 104. 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 SAB 104.
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 six and three months ended September 30, 2011 and 2010.
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 condensed consolidated statements of 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 six and three months ended September 30, 2011 and 2010, 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 statements
of income and comprehensive income and amounted to $219,503 and $152,247 for the six months ended September 30, 2011 and 2010,
and $123,578 and $148,786 for the three months ended September 30, 2011 and 2010, respectively. Typically, the Company does not
charge back customers for these costs.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
The Company accounts for income
taxes in accordance with FASB ASC Topic 740. 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 locations
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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
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:
|
|
For the three months
|
|
|
For the six months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
NET INCOME ATTRUBUTABLE TO LIANDI CLEAN STOCKHOLDERS
|
|
$
|
28,862,115
|
|
|
$
|
7,257,992
|
|
|
$
|
31,478,926
|
|
|
$
|
10,671,106
|
|
Preferred stock deemed dividend
|
|
|
-
|
|
|
|
(809,331
|
)
|
|
|
-
|
|
|
|
(1,951,844
|
)
|
Preferred stock dividend
|
|
|
(351,641
|
)
|
|
|
(477,698
|
)
|
|
|
(715,577
|
)
|
|
|
(971,597
|
)
|
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS-BASIC
|
|
$
|
28,510,474
|
|
|
$
|
5,970,963
|
|
|
$
|
30,763,349
|
|
|
$
|
7,747,665
|
|
Preferred stock deemed dividend
|
|
|
|
|
|
|
809,331
|
|
|
|
-
|
|
|
_
|
|
Preferred stock dividend
|
|
|
351,641
|
|
|
|
477,698
|
|
|
|
715,577
|
|
|
_
|
|
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS – DILUTED
|
|
$
|
28,862,115
|
|
|
$
|
7,257,992
|
|
|
$
|
31,478,926
|
|
|
$
|
7,747,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,463,425
|
|
|
|
29,679,646
|
|
|
|
31,350,723
|
|
|
|
29,526,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of preferred stock
|
|
|
4,981,425
|
|
|
|
6,765,204
|
|
|
|
5,094,127
|
|
|
|
-
|
|
Effect of dilutive warrants
|
|
|
-
|
|
|
|
173,979
|
|
|
|
-
|
|
|
|
490,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
36,444,850
|
|
|
|
36,618,829
|
|
|
|
36,444,850
|
|
|
|
30,016,764
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
0.20
|
|
|
$
|
0.98
|
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.79
|
|
|
$
|
0.20
|
|
|
$
|
0.86
|
|
|
$
|
0.26
|
|
The diluted earnings per share
calculation for the six and three months ended September 30, 2011 did not include the warrants and options to purchase up to 5,117,740
and 334,000 shares of common stock, respectively, because their effect was anti-dilutive.
The diluted earnings per share
calculation for the six months ended September 30, 2010 did not include the warrants and options to purchase up to 2,165,199 and
34,000 shares of common stock, respectively, and the effect of convertible preferred stock, because their effect was anti-dilutive.
The diluted earnings per share
calculation for the three months ended September 30, 2010 did not include the warrants and options to purchase up to 4,330,398
and 34,000 shares of common stock, respectively, because their effect was anti-dilutive.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Foreign currency
The Company has evaluated the
determination of its functional currency based on the guidance in ASC Topic, “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, Hua Shen HK, PEL HK and Bright Flow have substantially been denominated
and settled in the U.S. dollar. Therefore, Hua Shen HK, PEL HK and Bright Flow generate and expend their cash predominately in
the U.S. dollar. Accordingly, it has been determined that the functional currency of Hua Shen HK, PEL HK and Bright Flow is the
U.S. dollar.
Historically, the sales and
purchase contracts of Beijing JianXin and Anhui Jucheng have predominantly been denominated and settled in Renminbi (the lawful
currency of Mainland China). Accordingly, it has been determined that the functional currency of Beijing JianXin and Anhui Jucheng
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 which is a wholly foreign-owned enterprise 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:
|
September 30, 2011
|
|
March 31, 2011
|
Balance sheet items, except for equity accounts
|
US$1=RMB 6.3549
|
|
US$1=RMB6.5564
|
|
Three months ended September 30,
|
|
2011
|
|
2010
|
Items in the statements of income and cash flows
|
US$1=RMB 6.4176
|
|
US$1=RMB 6.7725
|
|
Six months ended September 30,
|
|
2011
|
|
2010
|
Items in the statements of income and cash flows
|
US$1=RMB 6.4580
|
|
US$1=RMB 6.7974
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2
SUMMAR
Y
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency (Continued)
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.
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, trading securities, accounts receivable, other receivables,
accounts payable, other payables and due to shareholders.
As of the balance sheet dates,
the estimated fair values of the 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 and Disclosures
, 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.
The carrying values of cash
and cash equivalents, trade and other receivables and payables, and short-term debts approximate fair values due to their short
maturities.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value measurements
(Continued)
Assets and liabilities measured
at fair value on a recurring basis are summarized as follows:
|
|
As of September 30, 2011
|
|
|
|
Fair value measurement using inputs
|
|
|
Carrying
|
|
Financial instruments
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
11,592
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,592
|
|
Total
|
|
$
|
11,592
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,592
|
|
|
|
As of March 31, 2011
|
|
|
|
Fair value measurement using inputs
|
|
|
Carrying
|
|
Financial instruments
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
amount
|
|
Short-term investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
11,592
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,592
|
|
Total
|
|
$
|
11,592
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,592
|
|
There was no asset or liability
measured at fair value on a non-recurring basis as of September 30, 2011 and March 31, 2011.
Recent accounting pronouncements
In January 2011, the FASB issued
ASU No. 2011-01- Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update
No. 2010-20. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings
in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes
a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities
and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. This deferral will have
no material impact on the Company’s consolidated financial statements.
In January 2011, the FASB issued
ASU No. 2011-02- Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.
The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable
meets the criteria to be considered a trouble debt restructuring For public companies, the new guidance is effective for interim
and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the
beginning of the fiscal year of adoption. Early application is permitted. The adoption of the provisions in ASU 2011-02 will have
no material impact on the Company’s consolidated financial statements.
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 US 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 condensed consolidated financial statements.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements
(Continued)
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 condensed 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 3 RESTRICTED
CASH
Restricted cash as of September
30, 2011 and March 31, 2011 represented the Company’s bank deposits held as collateral for the Company’s credit facilities
as discussed in Note 19.
NOTE 4 ACCOUNTS
RECEIVABLE AND NOTES RECEIVABLE, NET
ACCOUNTS RECEIVABLE
The Company’s accounts
receivable at September 30, 2011 and March 31, 2011 are summarized as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
24,251,126
|
|
|
$
|
12,293,961
|
|
Less: Allowance for doubtful debts
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,251,126
|
|
|
$
|
12,293,961
|
|
As of September 30, 2011 and
March 31, 2011, the balance of accounts receivable included $1,445,914 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 September 30, 2011 and March 31,
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:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
$
|
-
|
|
|
$
|
545,519
|
|
Less: Allowance for doubtful debts
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
545,519
|
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 5 INVENTORIES
The Company’s inventories
at September 30, 2011 and March 31, 2011 consisted of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
989,498
|
|
Work in process
|
|
|
-
|
|
|
|
242,100
|
|
Finished goods
|
|
|
-
|
|
|
|
4,187,689
|
|
Parts
|
|
|
990,495
|
|
|
|
532,027
|
|
Less: Allowance for stock obsolescence
|
|
|
(30,800
|
)
|
|
|
(30,800
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
959,695
|
|
|
$
|
5,920,514
|
|
NOTE 6 PREPAYMENTS
TO SUPPLIERS
Prepayments to suppliers as
of September 30, 2011 and March 31, 2011 represented deposits or advance payments of $30.49 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 September 30, 2011 and March 31, 2011 consisted of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Prepaid operating expenses
|
|
$
|
664,100
|
|
|
$
|
158,312
|
|
Tender deposits
|
|
|
516,215
|
|
|
|
1,194,221
|
|
Rental deposits
|
|
|
54,455
|
|
|
|
64,017
|
|
Advances to staff and unrelated party
|
|
|
96,867
|
|
|
|
196,186
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,331,637
|
|
|
$
|
1,612,736
|
|
Tender deposits represented
deposit payments made to bid for contracts.
NOTE 8 OTHER
RECEIVABLES
The Company’s other receivables
at September 30, 2011 and March 31, 2011 are summarized as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Other receivables from unrelated entities
|
|
$
|
1,017,400
|
|
|
$
|
462,352
|
|
Less: Allowance for doubtful debts
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,017,400
|
|
|
$
|
462,352
|
|
Other receivables from unrelated
entities represented temporary loans advanced to unrelated entities, which were unsecured, non-interest bearing and repayable on
demand.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 9 PLEDGED
TRADING SECURITIES
The Company’s pledged
trading securities at September 30, 2011 and March 31, 2011 are summarized as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
11,592
|
|
|
$
|
11,592
|
|
As of September 30, 2011 and
March 31, 2011, all of the Company’s trading securities were pledged as collateral for the Company’s credit facilities
(see Note 19). 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.
NOTE 10
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 six months ended September 30, 2011 and 2010 was $19,712 and $14,302, respectively. The
amortization expense on prepaid land use rights for the three months ended September 30, 2011 and 2010 was $11,115 and $14,302,
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 a parcel of land which will be used for expansion of its manufacturing facilities.
NOTE 11
PROPERTY AND EQUIPMENT, NET
The Company’s property
and equipment at September 30, 2011 and March 31, 2011 are summarized as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
328,490
|
|
|
$
|
818,592
|
|
Buildings
|
|
|
-
|
|
|
|
4,805,953
|
|
Plant and machinery
|
|
|
-
|
|
|
|
8,803,075
|
|
Office equipment
|
|
|
131,078
|
|
|
|
351,240
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
459,568
|
|
|
|
14,778,860
|
|
Less: Accumulated depreciation
|
|
|
(199,590
|
)
|
|
|
(3,471,725
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
259,978
|
|
|
$
|
11,307,135
|
|
Depreciation expenses in the
aggregate for the six months ended September 30, 2011 and 2010 were $594,510 and $368,816, respectively. Depreciation
expenses in the aggregate for the three months ended September 30, 2011 and 2010 were $246,051 and $353,037, respectively.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 12
|
CONSTRUCTION IN PROGRESS
|
Construction in progress, amounting
to $3,222,716 and $860,738 as of September 30, 2011 and March 31, 2011, respectively, comprised (i) capital expenditures of $3,222,716
and $639,316, respectively, for machinery which were either under installation or undergoing quality inspection and thus not yet
put into use as of September 30, 2011 and March 31, 2011; and (ii) capital expenditures for construction of a new factory of Anhui
Jucheng of nil and $221,422, respectively, as of September 30, 2011 and March 31, 2011.
NOTE 13 INTANGIBLE
ASSETS
The Company’s intangible
assets at September 30, 2011 and March 31, 2011 are summarized as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Computer software and program
|
|
$
|
40,528
|
|
|
$
|
39,359
|
|
Software copyright
|
|
|
6,420,243
|
|
|
|
6,222,927
|
|
Less: Accumulated amortization
|
|
|
(1,851,420
|
)
|
|
|
(1,475,111
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
4,609,351
|
|
|
$
|
4,787,175
|
|
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
six months ended September 30, 2011 and 2010 were $324,275 and $307,023, respectively. Amortization expenses for the three months
ended September 30, 2011 and 2010 were $163,098 and $155,047, respectively.
The estimated amortization expense
of software copyright over each of the next five years and thereafter will be $659,075 per annum.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 14
INVESTMENT IN 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 two directors out of a
total of five to the board of directors. Accordingly, the Company exercises significant influence on Anhui Jucheng and thus Anhi
Jucheng is accounted for as an equity method affiliate since August 30, 2011. The Company initially measured (i.e. 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 paragraphs 810-10-40-3A through 40-5.
Investment in equity method
affiliate as of September 30, 2011:-
|
|
Amount
|
|
|
|
|
|
Company’s share of retained investment in Anhui Jucheng at fair value on August 30, 2011 (note 1)
|
|
$
|
37,373,448
|
|
Equity in loss of equity method affiliate
|
|
|
(91,541
|
)
|
Exchange realignment
|
|
|
185,532
|
|
Company’s share of retained investment in Anhui Jucheng at September 30, 2011
|
|
|
37,467,439
|
|
|
|
|
|
|
Amount due from Anhui Jucheng – long term
|
|
|
741,161
|
|
|
|
|
|
|
Investment in equity method affiliate as of September 30, 2011
|
|
|
38,208,600
|
|
The amount due from the affiliate
is interest free and the Company will not demand repayment within one year from the respective balance sheet dates and the amount
is therefore considered non-current.
Summarized financial information
of the investment affiliate:
|
|
For the period from
August 30, 2011 to
September 30, 2011
|
|
|
|
|
|
Revenues
|
|
$
|
2,603,496
|
|
|
|
|
|
|
Net loss
|
|
$
|
233,940
|
|
Company’s equity interest
|
|
|
39.13
|
%
|
Equity in loss of equity method affiliate
|
|
$
|
(91,541
|
)
|
At book value of Anhui Jucheng
|
|
As of September 30,
2011
|
|
|
|
|
|
Current assets
|
|
$
|
25,698,287
|
|
Non-current assets
|
|
|
21,782,822
|
|
Current liabilities
|
|
|
(14,864,268
|
)
|
Non-current liabilities
|
|
|
-
|
|
Total equity
|
|
$
|
32,616,841
|
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 15 GOODWILL
The Company’s goodwill
at September 30, 2011 and March 31, 2011 is summarized as follows:
|
|
Amount
|
|
Balance as of March 31, 2011
|
|
$
|
365,528
|
|
Exchange realignment
|
|
|
5,570
|
|
Reversal during the period due to the deconsolidation of Anhui Jucheng (note 1)
|
|
|
(371,098
|
)
|
Balance as of September 30, 2011 (Unaudited)
|
|
$
|
-
|
|
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.”
NOTE 16 SHORT
TERM BANK LOANS
The Company’s short-term
bank loans at September 30, 2011 and March 31, 2011 consisted of the following:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Bank loan granted to Anhui Jucheng by HuiShang Bank Huaibei Suixi Branch, with interest rate of 6.67% per annum, guaranteed by a third party, Bangbu Tongli Automobile Co., Limited, and maturing on March 17, 2012
|
|
$
|
-
|
|
|
$
|
1,982,795
|
|
|
|
|
|
|
|
|
|
|
Bank loan granted by Sumitomo Mitsui Banking Corporation, with interest rate of 1.46% per annum, secured by a standby letter of credit issued by a bank which in turn is guaranteed by SJI Inc., and repaid on April 18, 2011
|
|
|
-
|
|
|
|
115,498
|
|
|
|
|
|
|
|
|
|
|
Bank loan granted by Sumitomo Mitsui Banking Corporation, with interest rate of 1.47% per annum, secured by a standby letter of credit issued by a bank which in turn is guaranteed by SJI Inc., and repaid on April 26, 2011
|
|
|
-
|
|
|
|
579,894
|
|
|
|
|
|
|
|
|
|
|
Bank loan granted by Sumitomo Mitsui Banking Corporation, with interest rate of 1.59% per annum, secured by a standby letter of credit issued by a bank which in turn is guaranteed by SJI Inc., and maturing on October 31, 2011
|
|
|
1,417,990
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
A revolving line of credit granted by HSBC Bank, with interest rate of 3% p.a. over the HKD prime lending rate, which is 5% p.a. at September 30, 2011 (see Note 19 for details of security terms)
|
|
|
1,733
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
A revolving line of credit granted by Standard Chartered Bank, with interest rate of 1.25% per annum over HIBOR for HKD or 1.25% per annum over LIBOR for USD (see Note 19 for details of security terms)
|
|
|
1,762,680
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,182,403
|
|
|
$
|
2,678,187
|
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 17 OTHER
PAYABLES AND ACCRUED EXPENSES
The Company’s other payables
and accrued expenses at September 30, 2011 and March 31, 2011 are summarized as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Business tax and value added tax payable
|
|
$
|
3,019,508
|
|
|
$
|
3,408,190
|
|
Accrued operating expenses
|
|
|
81,765
|
|
|
|
266,507
|
|
Advance from customers
|
|
|
3,832,752
|
|
|
|
4,908,256
|
|
Salary payables
|
|
|
91,652
|
|
|
|
104,290
|
|
Other payables
|
|
|
426,887
|
|
|
|
6,751,333
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,452,564
|
|
|
$
|
15,438,576
|
|
Other payables at March 31,
2011 included advances of $6.03 million from independent 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 18 DUE
TO SHAREHOLDERS AND NON-CONTROLLING INTERESTS
The Company’s due to shareholders
and non-controlling interests at September 30, 2011 and March 31, 2011 are summarized as follows:
Due to shareholders
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Due to Mr. Zuo (shareholder, CEO and chairman of the Company, see Note 1)
|
|
$
|
125,988
|
|
|
$
|
666,800
|
|
Due to SJ Asia Pacific Limited (shareholder of the Company, see Note 1)
|
|
|
7,528,491
|
|
|
|
7,379,381
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,654,479
|
|
|
$
|
8,046,181
|
|
The amount due to Mr. Zuo is
unsecured, bears interest at 3% per annum 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.
Amount due to non-controlling interests
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Due to Mr. Fang (Auhui Jucheng non-controlling shareholder)
|
|
$
|
-
|
|
|
$
|
4,141,332
|
|
Amount due to non-controlling
interests was unsecured, interest free and payable on demand.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 19 CREDIT
FACILITIES
As of June 30, 2011, the Company
had available banking facilities (“General Facilities”), which consisted of overdraft, guarantee line and import trade
finance and facilities for negotiation of export documentary credit discrepant bills against letters of indemnity, up to an aggregate
amount of HK$135.3 million (equivalent to approximately $17.39 million) and EURO 1 million (equivalent to approximately $1.45 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$110 million (or approximately $14.14 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 expired
in July 2011 and the Company is negotiating with the banks to renew them. Management expects that these facilities will be formally
renewed by the end of December 2011.
As of September 30, 2011, there
were outstanding contract performance guarantees of $ 2,669,635 issued by the banks on behalf of the Company, of which no guarantees
were granted under the General Facilities. There was no other borrowing under the General Facilities as of September 30, 2011.
On August 6, 2009, the Company
obtained a banking facility for import facilities up to HK$6 million (equivalent to approximately $774,000) 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 include a guarantee for HK$6 million from China LianDi. As of
September 30, 2011, there was no borrowing under the Government Sponsored Facility.
NOTE 20 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.
During the six months ended
September 30, 2011, 581,065 shares of preferred stock were converted into 581,065 shares of common stock.
At September 30, 2011, 31,507,945
shares of common stock were issued and outstanding.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 20 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.
At September 30, 2011, 4,936,905
preferred shares were outstanding with an aggregate liquidation preference of $17,997,168.
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.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 20 COMMON
STOCK, PREFERRED STOCK AND WARRANTS (CONTINUED)
(b) Preferred
Stock (continued)
The Series A Preferred Stock
holder may request redemption of the preferred stock in the event that the Company cannot issue shares of common stock registered
for resale under the registration statement. However, according to the registration rights agreement between the Company and the
investors (who are also the preferred stock holders), the Company is contractually permitted to prepare, file and cause the registration
statement to be declared effective within 180 calendar days after the closing date of the private placement on February 26, 2010.
The registration statement was declared effective on August 20, 2010 and remained effective as of September 30, 2011. Therefore,
the Company has determined that the Series A Preferred Stock is not currently redeemable. Accordingly, as of September 30, 2011,
the Company has not adjusted the carrying value of the Series A Preferred Stock to its redemption value or recognized any accretion
charges as it is considered not probable that the Series A Preferred Stock will become redeemable, in accordance with the requirements
of SEC Staff Guidance on redeemable preferred stock in ASC 480-10-S99.
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.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 20
COMMON
STOCK, PREFERRED STOCK AND WARRANTS (CONTINUED)
(b) Preferred
Stock (continued)
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:
|
|
Net proceeds of
private
placement
allocated to
|
|
|
Allocation of
escrow shares
|
|
Discount on common stock
|
|
$
|
1,309,380
|
|
|
$
|
373,260
|
|
Dividend on preferred stock
|
|
|
14,059,018
|
|
|
|
4,007,745
|
|
Discount on warrants
|
|
|
1,911,156
|
|
|
|
544,805
|
|
Total
|
|
$
|
17,279,554
|
|
|
$
|
4,925,810
|
|
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 September 30, 2011,
using the effective interest method. Accretion of such preferred stock deemed dividend for the six months ended September
30, 2011 and 2010 was nil and $1,951,844, respectively, and nil and $809,331 for the three months ended September 30, 2011 and
2010, respectively.
(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.
Warrants issued and outstanding
at September 30, 2011 and changes during the six months then ended, are as follows:
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
Number of
underlying
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life (years)
|
|
|
Number of
underlying
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life (years)
|
|
Balance, March 31, 2011
|
|
|
5,117,740
|
|
|
$
|
4.88
|
|
|
|
1.91
|
|
|
|
5,117,740
|
|
|
$
|
4.88
|
|
|
|
1.91
|
|
Granted / Vested
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011 (Unaudited)
|
|
|
5,117,740
|
|
|
$
|
4.88
|
|
|
|
1.41
|
|
|
|
5,117,740
|
|
|
$
|
4.88
|
|
|
|
1.41
|
|
The Company has evaluated the
terms of the warrants issued in the private placement 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 21 SHARE-BASED
COMPENSATION
(a)
|
Options granted to Independent Directors
|
On August 10, 2010, the Company
granted options to three of its 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 September 30, 2010, 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 $12,051 as stock-based professional fees during the six months ended September 30, 2011 and 2010, respectively,
and $nil and $12,051 during the three months ended September 30, 2011 and 2010, respectively.
|
|
At grant date
|
|
|
At grant date
|
|
|
At grant date
|
|
|
At grant date
|
|
Number of options
|
|
|
8,500
|
|
|
|
8,500
|
|
|
|
8,500
|
|
|
|
8,500
|
|
Risk-free interest rate
|
|
|
0.63
|
%
|
|
|
0.67
|
%
|
|
|
0.69
|
%
|
|
|
0.72
|
%
|
Expected life
|
|
2.50 years
|
|
|
2.64 years
|
|
|
2.76 years
|
|
|
2.88 years
|
|
Volatility
|
|
|
60.09
|
%
|
|
|
59.49
|
%
|
|
|
58.30
|
%
|
|
|
57.63
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Value per option
|
|
$
|
2.2187
|
|
|
$
|
2.2538
|
|
|
$
|
2.2630
|
|
|
$
|
2.2869
|
|
(a)
|
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:
Date
|
|
Number of
options vested
|
|
December 6, 2010
|
|
|
100,000
|
|
January 6, 2011
|
|
|
40,000
|
|
February 6, 2011
|
|
|
40,000
|
|
Mach 6, 2011
|
|
|
40,000
|
|
April 6, 2011
|
|
|
40,000
|
|
May 6, 2011
|
|
|
40,000
|
|
These options will expire December
6, 2014.
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 nil as stock-based professional
fees during the six and three months ended September 30, 2011, respectively.
|
|
At grant date
|
|
Risk-free interest rate
|
|
|
1.10
|
%
|
Expected life
|
|
4 years
|
|
Volatility
|
|
|
51.81
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 21 SHARE-BASED
COMPENSATION (CONTINUED)
Options issued and outstanding
at September 30, 2011 and their movements during the six months then ended are as follows:
|
|
Number of
underlying
shares
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
|
Aggregate
Intrinsic
Value
(1)
|
|
|
Weighted-
Average
Contractual Life
Remaining in
Years
|
|
Outstanding at March 31, 2011
|
|
|
334,000
|
|
|
$
|
3.75
|
|
|
$
|
-
|
|
|
|
3.76
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2011 (Unaudited)
|
|
|
334,000
|
|
|
$
|
3.75
|
|
|
$
|
-
|
|
|
|
3.25
|
|
Exercisable at September 30, 2011 (Unaudited)
|
|
|
334,000
|
|
|
$
|
3.75
|
|
|
$
|
-
|
|
|
|
3.25
|
|
(1)
|
The intrinsic value of the stock option at September 30, 2011 is the amount by which the market value of the Company’s common stock of $2.11 as of September 30, 2011 exceeds the exercise price of the option.
|
NOTE 22 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 since March 31, 2010 because the statutory reserves of $1,138,733 at March 31, 2010 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
six and three months ended September 30, 2011 and 2010.
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.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 23
|
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.
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, Hua Shen HK, PEL HK and Bright Flow 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. Anhui
Jucheng and Beijing Hongteng are subject to an EIT rate of 25% for 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 September 30, 2011 and March 31, 2011. Total undistributed earnings of these PRC subsidiaries
at September 30, 2011 and March 31, 2011 were RMB599,987,988 ($94,413,443) and RMB345,042,882 ($52,626,881).
The Company’s income
tax expense consisted of:
|
|
For the three months
|
|
|
For the six months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
Current – PRC
|
|
$
|
(914,281
|
)
|
|
$
|
(94,116
|
)
|
|
$
|
(1,375,043
|
)
|
|
$
|
(94,116
|
)
|
Deferred
|
|
|
(7,582,807
|
)
|
|
|
9,470
|
|
|
|
(7,568,780
|
)
|
|
|
9,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,497,088
|
)
|
|
$
|
(84,646
|
)
|
|
$
|
(8,943,823
|
)
|
|
$
|
(84,646
|
)
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 24
|
INCOME TAXES (CONTINUED)
|
A reconciliation of the provision
for income taxes to the Company’s effective income tax is as follows:
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
Pre-tax income
|
|
$
|
37,324,612
|
|
|
$
|
7,467,068
|
|
|
$
|
40,433,467
|
|
|
$
|
10,880,182
|
|
United States federal corporate income tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Income tax computed at United States statutory corporate income tax rate
|
|
|
13,063,614
|
|
|
|
2,613,474
|
|
|
|
14,151,713
|
|
|
|
3,808,064
|
|
Rate differential for domestic earnings
|
|
|
(3,777,238
|
)
|
|
|
(722,576
|
)
|
|
|
(4,089,010
|
)
|
|
|
(1,082,565
|
)
|
Impact of tax holiday of Beijing JianXin
|
|
|
(889,344
|
)
|
|
|
(1,887,322
|
)
|
|
|
(1,305,115
|
)
|
|
|
(2,772,308
|
)
|
Loss not recognized as deferred tax asset
|
|
|
56,988
|
|
|
|
-
|
|
|
|
125,847
|
|
|
|
-
|
|
Non-deductible expenses and non-taxable income
|
|
|
43,068
|
|
|
|
81,070
|
|
|
|
60,388
|
|
|
|
131,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
8,497,088
|
|
|
$
|
84,646
|
|
|
$
|
8,943,823
|
|
|
$
|
84,646
|
|
The Company’s deferred
income tax assets at September 30, 2011 and March 31, 2011 were as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Tax effect of net operating losses carried forward
|
|
$
|
677,042
|
|
|
$
|
551,194
|
|
Less: Valuation allowance
|
|
|
(677,042
|
)
|
|
|
(551,194
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The net operating losses carried
forward of the U.S. entity, LianDi Clean Technology Inc., were $1,934,405 and $1,574,841 at September 30, 2011 and March 31, 2011,
respectively, which will expire in years through 2030. 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.
The Company’s deferred
income tax liabilities at September 30, 2011 and March 31, 2011 were as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(As restated)
|
|
|
|
|
Tax effect of acquisition revaluation(1)
|
|
$
|
675,258
|
|
|
$
|
693,771
|
|
Reversal during the period
|
|
|
(33,175
|
)
|
|
|
(40,508
|
)
|
Reversal during the period due to the deconsolidation of Anhui Jucheng (note 1)
|
|
|
(666,666
|
)
|
|
|
-
|
|
Tax effect of gain on deconsolidation of Anhui Jucheng (note 1)(2)
|
|
|
7,601,955
|
|
|
|
-
|
|
Exchange realignment
|
|
|
147,916
|
|
|
|
21,995
|
|
Net deferred tax liabilities – non-current portion
|
|
$
|
7,725,288
|
|
|
$
|
675,258
|
|
(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 subsidiary upon 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 September 30, 2011 and
March 31, 2011, the Company did not have any other significant temporary differences and carryforwards that may result in deferred
tax assets or liabilities.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 24
|
INCOME TAXES (CONTINUED)
|
As of
S
eptember 30, 2011
and March 31, 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 six and three months ended September 30, 2011 and 2010, and no provision for interest and penalties is deemed necessary as
of September 30, 2011 and March 31, 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.
NOTE 25
|
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 September 30, 2011 and March 31, 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 September 30, 2011, two customers individually accounted for 71% and 26% of the accounts receivables of the Company, respectively. As of March 31, 2011, two customers individually accounted for 76% and 10% of the accounts receivables 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 September 30, 2011 or March 31, 2011.
|
·
|
During the six months ended September 30, 2011, two customers individually accounted for 42% and 30% of the Company’s net revenue, respectively. During the six months ended September 30, 2010, three customers individually accounted for 30%, 28%, and 10% 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 six months ended September 30, 2011 or 2010.
|
·
|
During the three months ended September 30, 2011, two customers individually accounted for 59% and 24% of the Company’s net revenue, respectively. During the three months ended September 30, 2010, three customers individually accounted for 32%, 32% and 12% 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 three months ended September 30, 2011 or 2010.
|
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 25
|
CERTAIN RISKS AND CONCENTRATION (CONTINUED)
|
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 the six months ended September 30, 2011, two suppliers altogether accounted for 39% of the Company’s costs of revenue (27% and 12% individually). During the six months ended September 30, 2010, three suppliers altogether accounted for 70% of the Company’s costs of revenue (34%, 23% and 13% individually).
|
·
|
During the three months ended September 30, 2011, two suppliers altogether accounted for 63% of the Company’s costs of revenue (43% and 20% individually). During the three months ended September 30, 2010, three suppliers altogether accounted for 70% of the Company’s costs of revenue (39%, 16% and 15% 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.
NOTE 26
|
COMMITMENTS AND CONTINGENCIES
|
In the normal course of business,
the Company entered into operating lease agreements for the rental of offices and equipment purchase agreements. The Company was
obligated under operating leases and purchase agreements requiring minimum amounts as of September 30, 2011 as follows:
|
|
|
|
|
Purchase of
|
|
|
|
Office rental
|
|
|
equipment
|
|
Payable within fiscal year ending March 31,
|
|
|
|
|
|
|
- 2012
|
|
$
|
158,209
|
|
|
$
|
3,139,491
|
|
- 2013
|
|
|
262,462
|
|
|
|
-
|
|
- 2014
|
|
|
14,820
|
|
|
|
-
|
|
- Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
435,491
|
|
|
$
|
3,139,491
|
|
During the six months ended
September 30, 2011 and 2010, rental expenses under operating leases amounted to $180,930 and $246,149, respectively.
During the three months ended
September 30, 2011 and 2010, rental expenses under operating leases amounted to $70,539 and $37,806, respectively.
LIANDI CLEAN TECHNOLOGY
INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
The Company follows FASB ASC
Topic 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2011 AND 2010
(Unaudited)
NOTE 27
|
SEGMENT DATA (CONTINUED)
|
|
|
For the three months
ended September 30,
|
|
|
For the six months
ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Revenues:
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
$
|
24,080,693
|
|
|
$
|
34,816,760
|
|
|
$
|
33,636,591
|
|
|
$
|
43,974,794
|
|
Chemical products
|
|
|
4,869,602
|
|
|
|
8,490,510
|
|
|
|
12,026,140
|
|
|
|
8,490,510
|
|
Total
|
|
$
|
28,950,295
|
|
|
$
|
43,307,270
|
|
|
$
|
45,662,731
|
|
|
$
|
52,465,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
$
|
25,492
|
|
|
$
|
10,155
|
|
|
$
|
50,118
|
|
|
$
|
25,934
|
|
Chemical products
|
|
|
220,559
|
|
|
|
342,882
|
|
|
|
544,392
|
|
|
|
342,882
|
|
Total
|
|
$
|
246,051
|
|
|
$
|
353,037
|
|
|
$
|
594,510
|
|
|
$
|
368,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
$
|
163,098
|
|
|
$
|
155,047
|
|
|
$
|
324,275
|
|
|
$
|
307,023
|
|
Chemical products
|
|
|
11,115
|
|
|
|
14,302
|
|
|
|
19,712
|
|
|
|
14,302
|
|
Total
|
|
$
|
174,213
|
|
|
$
|
169,349
|
|
|
$
|
343,987
|
|
|
$
|
321,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
$
|
90,807
|
|
|
$
|
61,714
|
|
|
$
|
205,199
|
|
|
$
|
142,041
|
|
Chemical products
|
|
|
22,948
|
|
|
|
48,556
|
|
|
|
54,494
|
|
|
|
48,556
|
|
Total
|
|
$
|
113,755
|
|
|
$
|
110,270
|
|
|
$
|
259,693
|
|
|
$
|
190,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
$
|
6,350,355
|
|
|
$
|
7,338,648
|
|
|
$
|
9,116,746
|
|
|
$
|
10,932,763
|
|
Chemical products
|
|
|
22,548,452
|
|
|
|
253,939
|
|
|
|
22,640,921
|
|
|
|
253,939
|
|
Other (a)
|
|
|
(162,824
|
)
|
|
|
(210,165
|
)
|
|
|
(359,564
|
)
|
|
|
(391,166
|
)
|
|
|
$
|
28,735,983
|
|
|
$
|
7,382,422
|
|
|
$
|
31,398,103
|
|
|
$
|
10,795,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for identifiable long-lived tangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
$
|
1,164,805
|
|
|
$
|
-
|
|
|
$
|
2,096,148
|
|
|
$
|
61,281
|
|
Chemical products
|
|
|
2,393,030
|
|
|
|
39,041
|
|
|
|
2,892,174
|
|
|
|
39,041
|
|
Total
|
|
$
|
3,557,835
|
|
|
$
|
39,041
|
|
|
$
|
4,988,322
|
|
|
$
|
100,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
March 31,
2011
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and petrochemical equipment and related services
|
|
|
|
|
|
|
|
|
|
$
|
94,401,204
|
|
|
$
|
78,775,083
|
|
Chemical products
|
|
|
|
|
|
|
|
|
|
|
38,208,600
|
|
|
|
27,229,880
|
|
Corporate unallocated
|
|
|
|
|
|
|
|
|
|
|
16,871,464
|
|
|
|
22,233,543
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
149,481,268
|
|
|
$
|
128,238,506
|
|
|
(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.
|
Item 2.
Management’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 consolidated financial statements
and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance
with U.S. GAAP. Our consolidated financial statements and the financial data included in this interim report 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” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.
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 to us all of the China
LianDi Shares 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, owner of the cancelled shares, 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
us to be the accounting acquiree (legal acquirer). The financial statements before the Share Exchange are those of China LianDi
with the results of us 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 caused
a corporation to be formed under the laws of the State of Nevada called 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 us.
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 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 our company.
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
2012, which will be operated through our subsidiary, Beijing Hongteng Weitong Technology Co., Ltd.
Details of our company’s
subsidiaries as of September 30, 2011 were 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 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 holding
|
|
|
|
|
|
|
|
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 and leasing oil sludge cleaning equipment, providing oil tank sludge cleaning service, and providing Hazard and Operability Analysis (“HAZOP”) technical consultancy services
|
In July 2004, China LianDi
was founded and owned as to 60% by Mr. Jianzhong Zuo, the Chief Executive Officer and Chairman of our company, and 40% by another
third-party 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. in Japan) acquired a 51% interest in China LianDi from Mr. Zuo in exchange for:
(i) US$1.00; (ii) the 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’s 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 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% 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 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 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 the 5% interests 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 3% interest of China LianDi from our principal shareholder, SJ Asia Pacific Limited to TriPoint was entered into for consulting
services to facilitate 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 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 a cash consideration of $2,272. This company has a wholly owned subsidiary incorporated in China,
Beijing Hongteng Weitong Technology Co., Ltd. Beijing Hongteng is engaged in delivering and leasing oil sludge cleaning equipment,
providing oil sludge cleaning services and providing Hazard and Operability Analysis (“HAZOP”) technical consultancy
services.
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 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). As a result, SJ Asia beneficially owns an aggregate
of 18,513,738 shares of our common stock, which constitutes approximately 59% of the outstanding common shares of our company as
of September 30, 2011. 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 our company and consolidate our 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 remains the Chairman
and Chief Executive Officer of our 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 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.
We are also engaged in manufacturing
and selling industrial chemical products, which is operated through our equity method affiliate company, Anhui Jucheng Fine Chemicals
Co., Ltd. (“Anhui Jucheng”), who 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 founded
on January 28, 2005 and was wholly owned by a third party individual. On July 5, 2010, Beijing JianXin, our wholly-owned subsidiary,
injected capital of RMB40.8 million (approximately US$6,023,652) into Anhui Jucheng in the form of cash and as a result, we indirectly
became an owner of a 51% equity interest in Anhui Jucheng.
In August 2011, the shareholders
of Anhui Jucheng, Beijing Jianxin and Mr. Hui Fang (the 49% noncontrolling interest of Anhui Jucheng), together with six independent
third party investors, entered into an investment agreement, in accordance with which the six independent 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 the enlarged registered capital. Upon consummating this transaction, the equity interest holding percentages
of Beijing Jianxin and Mr. Hui Fang decreased from 51% to 39.13% and from 49% to 37.59%, respectively. At the same time, the paid-in
capital of Anhui Jucheng increased from RMB 25.51 million to RMB 33.25 million. On August 30, 2011, this transaction was approved
and registered by the State Administration for Industry and Commence (“SAIC”) of Suixi County, Huaibei City, Anhui
Province, the PRC, where Anhui Jucheng’s registered office is located. On the same date, we ceased to have a controlling
financial interest in Anhui Jucheng, but still retained an investment in and significant influence over Anhui Jucheng. Anhui Jucheng
then became an equity method affiliate company of us.
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 interim condensed consolidated
financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation
of these interim condensed consolidated financial statements, which are of a normal and recurring nature, have been included. The
results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the
results that may be reported for the entire year. The condensed consolidated balance sheet as of March 31, 2011 was derived from
audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations, though we believe that the disclosures made are adequate to make
the information not misleading. The unaudited condensed financial statements should be read in conjunction with our consolidated
financial statements and accompanying footnotes for the year ended March 31, 2011.
Our condensed interim 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.
Critical Accounting Policies
and Estimates
The following discussion
and analysis is based upon our consolidated financial statements, which have been prepared in conformity with US GAAP. Certain
accounting policies and estimates are particularly important to the understanding of our financial position and results of operations
and require the application of significant judgment by our management or can be materially affected by changes from period to period
in economic factors or conditions that are outside of the control of management. As a result, they are subject to an inherent degree
of uncertainty. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. Those estimates are based 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. Refer to note 2 to the unaudited consolidated financial
statements contained herein for a detail discussion of our critical accounting polices. The following discusses our most significant
accounting policies and estimates.
•
|
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.
Revenue is recognized when
the following four criteria are met as prescribed by the SEC Staff Accounting Bulletin No. 104 (“SAB 104”): (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 provide for us 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.
|
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 have 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.
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 (formerly
Statement of Position, or SOP 97-2, Software Revenue Recognition, as amended) and in accordance with SAB 104. 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 SAB 104.
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 six and three months ended September 30, 2011 and 2010.
We account for income taxes
in accordance with FASB ASC Topic 740. 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 locations where it
operates. 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.
We have evaluated the determination
of our functional currency based on the guidance in ASC Topic, “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:
|
As of September 30, 2011
|
|
As of March 31, 2011
|
Balance sheet items, except for equity accounts
|
US$1=RMB6.3549
|
|
US$1=RMB6.5564
|
|
|
|
|
|
Six months ended
September 30, 2011
|
|
Six months ended
September 30, 2010
|
Items in statements of income and cash flows
|
US$1=RMB6.4580
|
|
US$1=RMB6.7974
|
|
|
|
|
|
Three months ended
September 30, 2011
|
|
Three months ended
September 30, 2010
|
Items in statements of income and cash flows
|
US$1=RMB6.4176
|
|
US$1=RMB6.7725
|
A. Results
of Operations for the Three and Six Months Ended September 30, 2011 and 2010
The following table sets
forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are
not necessarily indicative of the results that may be expected for any future period. All amounts are presented in US$.
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and installation of equipment
|
|
$
|
18,349,157
|
|
|
$
|
33,682,153
|
|
|
$
|
22,389,066
|
|
|
$
|
40,031,287
|
|
Sales of software
|
|
|
3,622,740
|
|
|
|
-
|
|
|
|
8,892,617
|
|
|
|
2,805,799
|
|
Services
|
|
|
2,108,796
|
|
|
|
1,134,607
|
|
|
|
2,354,908
|
|
|
|
1,137,708
|
|
Sales of chemical products
|
|
|
4,869,602
|
|
|
|
8,490,510
|
|
|
|
12,026,140
|
|
|
|
8,490,510
|
|
|
|
|
28,950,295
|
|
|
|
43,307,270
|
|
|
|
45,662,731
|
|
|
|
52,465,304
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment sold
|
|
|
(15,209,608
|
)
|
|
|
(26,303,920
|
)
|
|
|
(18,569,457
|
)
|
|
|
(31,335,336
|
)
|
Amortization of intangibles
|
|
|
(158,990
|
)
|
|
|
(150,631
|
)
|
|
|
(315,887
|
)
|
|
|
(300,115
|
)
|
Cost of software
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,670,046
|
)
|
|
|
-
|
|
Cost of sales of chemical products
|
|
|
(4,720,684
|
)
|
|
|
(7,797,118
|
)
|
|
|
(11,156,356
|
)
|
|
|
(7,797,118
|
)
|
|
|
|
(20,089,282
|
)
|
|
|
(34,251,669
|
)
|
|
|
(31,711,746
|
)
|
|
|
(39,432,569
|
)
|
Gross profit
|
|
|
8,861,013
|
|
|
|
9,055,601
|
|
|
|
13,950,985
|
|
|
|
13,032,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
(471,272
|
)
|
|
|
(429,879
|
)
|
|
|
(1,065,159
|
)
|
|
|
(570,821
|
)
|
General and administrative
|
|
|
(702,697
|
)
|
|
|
(1,248,683
|
)
|
|
|
(1,545,616
|
)
|
|
|
(1,795,056
|
)
|
Research and development
|
|
|
(114,125
|
)
|
|
|
(69,543
|
)
|
|
|
(222,199
|
)
|
|
|
(128,853
|
)
|
Total operating expenses
|
|
|
(1,288,094
|
)
|
|
|
(1,748,105
|
)
|
|
|
(2,832,974
|
)
|
|
|
(2,494,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,572,919
|
|
|
|
7,307,496
|
|
|
|
11,118,011
|
|
|
|
10,538,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,854
|
|
|
|
33,733
|
|
|
|
22,353
|
|
|
|
59,747
|
|
Interest and bank charges
|
|
|
(219,810
|
)
|
|
|
(114,702
|
)
|
|
|
(365,748
|
)
|
|
|
(260,333
|
)
|
Exchange gains (losses), net
|
|
|
(501,031
|
)
|
|
|
(57,170
|
)
|
|
|
(867,206
|
)
|
|
|
(126,938
|
)
|
Value added tax refund
|
|
|
-
|
|
|
|
1,428
|
|
|
|
|
|
|
|
370,611
|
|
Gain on deconsolidation of a subsidiary
|
|
|
30,407,821
|
|
|
|
-
|
|
|
|
30,407,821
|
|
|
|
-
|
|
Other
|
|
|
50,859
|
|
|
|
296,283
|
|
|
|
118,236
|
|
|
|
299,090
|
|
Total other income (expenses), net
|
|
|
29,751,693
|
|
|
|
159,572
|
|
|
|
29,315,456
|
|
|
|
342,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
37,324,612
|
|
|
|
7,467,068
|
|
|
|
40,433,467
|
|
|
|
10,880,182
|
|
Income tax expense
|
|
|
(8,497,088
|
)
|
|
|
(84,646
|
)
|
|
|
(8,943,823
|
)
|
|
|
(84,646
|
)
|
Income before equity in earnings of equity method affiliate
|
|
|
28,827,524
|
|
|
|
7,382,422
|
|
|
|
31,489,644
|
|
|
|
10,795,536
|
|
Equity in earnings of equity method affiliate
|
|
|
(91,541
|
)
|
|
|
-
|
|
|
|
(91,541
|
)
|
|
|
-
|
|
NET INCOME
|
|
|
28,735,983
|
|
|
|
7,382,422
|
|
|
|
31,398,103
|
|
|
|
10,795,536
|
|
Losses (income) attributable to noncontrolling interest
|
|
|
126,132
|
|
|
|
(124,430
|
)
|
|
|
80,823
|
|
|
|
(124,430
|
)
|
NET INCOME ATTRIBUTABLE TO LIANDI CLEAN STOCKHOLDERS
|
|
|
28,862,115
|
|
|
|
7,257,992
|
|
|
|
31,478,926
|
|
|
|
10,671,106
|
|
Preferred stock deemed dividend
|
|
|
-
|
|
|
|
(809,331
|
)
|
|
|
-
|
|
|
|
(1,951,844
|
)
|
Preferred stock dividend
|
|
|
(351,641
|
)
|
|
|
(477,698
|
)
|
|
|
(715,577
|
)
|
|
|
(971,597
|
)
|
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS OF LIANDI CLEAN
|
|
|
28,510,474
|
|
|
|
5,970,963
|
|
|
|
30,763,349
|
|
|
|
7,747,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
0.20
|
|
|
$
|
0.98
|
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.79
|
|
|
$
|
0.20
|
|
|
$
|
0.86
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,463,425
|
|
|
|
29,679,646
|
|
|
|
31,350,723
|
|
|
|
29,526,643
|
|
Diluted
|
|
|
36,444,850
|
|
|
|
36,618,829
|
|
|
|
36,444,850
|
|
|
|
30,016,764
|
|
Non-GAAP Measures
To supplement
the unaudited condensed consolidated statement of income and comprehensive income presented in accordance with the
Accounting Principles Generally Accepted in the United States of America ("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 three and six months ended September 30, 2011 and 2010, which are adjusted from results based on GAAP to
exclude the non-cash gain and the related deferred tax expense recorded, which are related to the gain on deconsolidation of
Anhui Jucheng for the six and three months ended September 30, 2011, and the non-cash charge recorded, which related to the
fair value of the escrow share allocated to the Series A preferred stock, treated as a deemed dividend, and a deduction of
net income available to common stockholders for the six and three months ended September 30, 2010. 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 GAAP, but should not be considered a substitute for or superior to GAAP results. We use both 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
reconciliation of our non-GAAP financial measures to the unaudited condensed consolidated statements of income and comprehensive
income for the three and six months ended September 30, 2011: (All amounts in US dollar)
|
|
Three months ended
September 30, 2011
|
|
|
Six months ended
September 30, 2011
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
GAAP
|
|
|
NON GAAP
|
|
|
GAAP
|
|
|
NON GAAP
|
|
|
|
(As restated)
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,572,919
|
|
|
|
7,572,919
|
|
|
|
11,118,011
|
|
|
|
11,118,011
|
|
Total other income (expenses), net
|
|
|
29,751,693
|
|
|
|
(656,128
|
)
|
|
|
29,315,456
|
|
|
|
(1,092,365
|
)
|
Income before income tax
|
|
|
37,324,612
|
|
|
|
6,916,791
|
|
|
|
40,433,467
|
|
|
|
10,025,646
|
|
Income tax expense
|
|
|
(8,497,088
|
)
|
|
|
(895,133
|
)
|
|
|
(8,943,823
|
)
|
|
|
(1,341,868
|
)
|
Equity in earnings of equity method affiliate
|
|
|
(91,541
|
)
|
|
|
(91,541
|
)
|
|
|
(91,541
|
)
|
|
|
(91,541
|
)
|
NET INCOME
|
|
|
28,735,983
|
|
|
|
5,930,117
|
|
|
|
31,398,103
|
|
|
|
8,592,237
|
|
Losses (income) attributable to noncontrolling interest
|
|
|
126,132
|
|
|
|
126,132
|
|
|
|
80,823
|
|
|
|
80,823
|
|
Net income attributable to LianDi Clean stockholders
|
|
|
28,862,115
|
|
|
|
6,056,249
|
|
|
|
31,478,926
|
|
|
|
8,673,060
|
|
Preferred stock dividend
|
|
|
(351,641
|
)
|
|
|
(351,641
|
)
|
|
|
(715,577
|
)
|
|
|
(715,577
|
)
|
Net income attributable to common stockholders-Basic
|
|
|
28,510,474
|
|
|
|
5,704,608
|
|
|
|
30,763,349
|
|
|
|
7,957,483
|
|
Preferred stock dividend
|
|
|
351,641
|
|
|
|
351,641
|
|
|
|
715,577
|
|
|
|
715,577
|
|
Net income attributable to common stockholders-Diluted
|
|
|
28,862,115
|
|
|
|
6,056,249
|
|
|
|
31,478,926
|
|
|
|
8,673,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
0.18
|
|
|
$
|
0.98
|
|
|
$
|
0.25
|
|
Diluted
|
|
$
|
0.79
|
|
|
$
|
0.17
|
|
|
$
|
0.86
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,463,425
|
|
|
|
31,463,425
|
|
|
|
31,350,723
|
|
|
|
31,350,723
|
|
Diluted
|
|
|
36,444,850
|
|
|
|
36,444,850
|
|
|
|
36,444,850
|
|
|
|
36,444,850
|
|
The following table presents
reconciliation of our non-GAAP financial measures to the unaudited condensed consolidated statements of income and comprehensive
income for the three and six months ended September 30, 2010: (All amounts in US dollar)
|
|
Three months ended
September 30, 2010
|
|
|
Six months ended
September 30, 2010
|
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
(US $)
|
|
|
|
GAAP
|
|
|
NON GAAP
|
|
|
GAAP
|
|
|
NON GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to LianDi Clean stockholders
|
|
|
7,257,992
|
|
|
|
7,257,992
|
|
|
|
10,671,106
|
|
|
|
10,671,106
|
|
Preferred stock deemed dividend
|
|
|
(809,331
|
)
|
|
|
-
|
|
|
|
(1,951,844
|
)
|
|
|
-
|
|
Preferred stock dividend
|
|
|
(477,698
|
)
|
|
|
(477,698
|
)
|
|
|
(971,597
|
)
|
|
|
(971,597
|
)
|
Net income attributable to common stockholders-Basic
|
|
|
5,970,963
|
|
|
|
6,780,294
|
|
|
|
7,747,665
|
|
|
|
9,699,509
|
|
Preferred stock deemed dividend
|
|
|
809,331
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Preferred stock dividend
|
|
|
477,698
|
|
|
|
477,698
|
|
|
|
-
|
|
|
|
971,597
|
|
Net income attributable to common stockholders-Diluted
|
|
|
7,257,992
|
|
|
|
7,257,992
|
|
|
|
7,747,665
|
|
|
|
10,671,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
$
|
0.33
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,679,646
|
|
|
|
29,679,646
|
|
|
|
29,526,643
|
|
|
|
29,526,643
|
|
Diluted
|
|
|
36,618,829
|
(1)
|
|
|
36,618,829
|
(1)
|
|
|
30,016,764
|
(2)
|
|
|
36,934,971
|
(3)
|
(1)
|
For the three months ended September 30, 2010, the effect of the potential dilutive convertible preferred stock was included under both GAAP and NON-GAAP measures, because the effect is dilutive with and without recognition of the deemed dividend.
|
(2)
|
For the six months ended September 30, 2010, 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 US GAAP.
|
(3)
|
For the six months ended September 30, 2010, 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 six and three months ended September 30, 2011 and 2010.
The following tables
set forth the analysis of our net revenue:
|
|
Three months ended
September 30
|
|
|
Six months ended
September 30
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
US$ M
|
|
|
US$ M
|
|
|
US$ M
|
|
|
US$ M
|
|
Sales and installation of equipment
|
|
|
18.35
|
|
|
|
33.68
|
|
|
|
22.39
|
|
|
|
40.03
|
|
Sales of software
|
|
|
3.62
|
|
|
|
-
|
|
|
|
8.89
|
|
|
|
2.81
|
|
Technical services
|
|
|
2.11
|
|
|
|
1.14
|
|
|
|
2.35
|
|
|
|
1.14
|
|
Sales of chemical products
|
|
|
4.87
|
|
|
|
8.49
|
|
|
|
12.03
|
|
|
|
8.49
|
|
|
|
|
28.95
|
|
|
|
43.31
|
|
|
|
45.66
|
|
|
|
52.47
|
|
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 our optimization software, 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 six months ended
September 30, 2011, our total net revenue decreased to US$45.66 million from US$52.47 million for the same period of 2010. Without
regard to the US$12.03 million and US$8.49 million of net revenue generated from sales of chemical products, which were operated
by Anhui Jucheng, and are discussed separately below, our total net revenue decreased to US$33.63 million for the six months ended
September 30, 2011 from US$43.98 million for the same period of 2010.
For the three months ended
September 30, 2011, our total net revenue decreased to US$28.95 million from US$43.31 million for the same period of 2010. Without
regard to the US$4.87 million and US$8.49 million of net revenue generated from sales of chemical products which were operated
by Anhui Jucheng, and are discussed separately below, our total revenue decreased to US$24.08 million for the three months ended
September 30, 2011 as compared to US$34.82 million for the same period of 2010.
The decrease in the total
net revenue for the six and three months ended September 30, 2011 was mainly 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
during the periods as compared to the same periods of last year.
For the six months ended
September 30, 2011, we achieved approximately US$22.39 million of equipment sales and installation revenue, as compared to US$40.03
million for the same period of 2010. We completed thirty-nine projects related to sales and installation of equipment for the six
months ended September 30, 2011, as compared to twenty-six projects for the same period of 2010. During the six months ended September
30, 2011, one of these completed projects had a contract value greater than US$6 million, one had a contract value greater than
US$3 million, one had a contract value greater than US$2 million, two had a contract value greater than US$1 million and five had
a contract value close to US$1 million. For the same period of 2010, one of these completed projects had a contract value greater
than US$3 million, ten had a contract value greater than US$2 million and six had contract values of more than US$1 million.
For the three months ended
September 30, 2011, we achieved approximately US$18.35 million of equipment sales and installation revenue, as compared to US$33.68
million for the same period of 2010. We completed twenty-five projects related to sales and installation of equipment for the three
months ended September 30, 2011, as compared to nineteen projects for the same period of 2010.
For the six months ended
September 30, 2011 and 2010, we sold 65 sets and 32 sets of our data processing software and provided the related implementation
services, and achieved approximately US$6.60 million and US$2.81 million of software revenue, respectively. In addition we also
achieved approximately US$2.29 million from software sales and technical consultancy services, which was related to a purchased
software use right and the related training and application program. For the three months ended September 30, 2011, we sold 35
sets of our data processing software and provided the related implementation services, and achieved approximately US$3.62 million
of software revenue. No software revenue was achieved for the three months ended September 30, 2010.
For the six months ended
September 30, 2011 and 2010, we achieved approximately US$2.35 million and US$1.14 million of technical consultancy services revenue,
respectively. For the three months ended September 30, 2011 and 2010, we achieved approximately US$2.11 million and US$1.14 million
of technical consultancy services revenue, respectively. For the six and three months ended September 30, 2011, our technical consultancy
services revenue achieved were the Hazard and Operability Analysis (“HAZOP”) consultancy services revenue.
As of September 30, 2011
and 2010, we had 37 and 30 signed but uncompleted contracts, respectively, with total contract amounts of approximately US$50.95
million and US$56 million, respectively. In addition, we have signed 3 new contracts with total amounts of approximately US$11.63
million after September 30, 2011. We have served the Chinese petroleum and petrochemical industries since 2004 through our operating
subsidiaries. We worked for approximately one year to establish 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 to 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 with solid backlog contacts.
Recently, we successfully developed our relationship with several new suppliers, such as ABB, Sandvik, MAC-Clyde, GE and Finder
Pompes S.A.S. to distribute their products to the large Chinese petroleum and petrochemical companies, which expanded our ability
to bid for a broader range of products and services while meeting more of our customers’ needs.
Our equity method affiliate
company, Anhui Jucheng, is primarily engaged in manufacturing and selling the industrial chemical product, Polyacrylamide. Polyacrylaminde
is mainly 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 $22.23 million) contributed
by six independent Chinese Equity Funds, who in the aggregate obtained a 23.28% equity interest of Anhui Jucheng. We then ceased
to have a controlling interest in Anhui Jucheng. Therefore, 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 1, 2011 through August 30, 2011, Anhui Jucheng sold approximately 2,059
tons of Polyacrylamide products and achieved approximately US$4.87 million of net revenue. For the period from July 5, 2010 through
September 30, 2010, Anhui Jucheng sold approximately 4,203 tons of Polyacrylamide products and achieved approximately US$8.49 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 use right and software training courses related to the software sales and technical services
contract we signed with our customer. 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 mainly consists of raw material
cost (mainly acrylonitrile, acrylic acid and acrylamide solution), salary cost of our manufacturing department and other manufacturing
overhead such as electricity, water, depreciation and other manufacturing supplies.
For the six months ended
September 30, 2011, our total cost of sales decreased to US$31.71 million from US$39.43 million for the same period of 2010. Without
regard to the cost of sales of US$11.15 million and US$7.80 million incurred by Anhui Jucheng for the six months ended September
30, 2011 and 2010, respectively, our total cost of sales decreased to US$20.56 million for the six months ended September 30, 2011
as compared to US$31.64 million for the same period of 2010.
For the three months ended
September 30, 2011, our total cost of sales decreased to US$20.09 million from US$34.25 million for the same period of 2010. Without
regard to the cost of sales of US$4.72 million and US$7.80 million incurred by Anhui Jucheng for the three months ended September
30, 2011, our total cost of sales decreased to US$15.37 million for the three months ended September 30, 2011 as compared to US$26.45
million for the same period of 2010.
The decrease of the cost
of sales for the six and three months ended September 30, 2011 was mainly due to the decrease of the cost associated with the equipment
sales and installation contracts and was consistent with the decrease of our net revenue as compared to the same period of 2010.
Gross margin:
|
|
Three months ended
September 30
|
|
|
Six months ended
September 30
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
US$ M
|
|
|
US$ M
|
|
|
US$ M
|
|
|
US$ M
|
|
Equipment sales and installation, software sales and technical services
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
24.08
|
|
|
|
34.82
|
|
|
|
33.64
|
|
|
|
43.97
|
|
Cost of sales
|
|
|
15.37
|
|
|
|
26.45
|
|
|
|
20.56
|
|
|
|
31.64
|
|
Gross margin
|
|
|
8.71
|
|
|
|
8.37
|
|
|
|
13.08
|
|
|
|
12.33
|
|
Overall gross margin (%)
|
|
|
36.2
|
%
|
|
|
24.0
|
%
|
|
|
38.9
|
%
|
|
|
28.0
|
%
|
Without regard to the gross
profit generated by Anhui Jucheng, which is discussed separately below, for the six months ended September 30, 2011, our gross
profit increased to US$13.08 million as compared to US$12.33 million for the same period of 2010. For the three months ended September
30, 2011, our gross profit increased to US$8.71 million as compared to US$8.37 million for the same period of 2010. The level of
our overall gross margin was mainly 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 the 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 38.9% and 36.2% for the six and three months ended September 30, 2011 as compared to 28.0% and 24.0% for the same periods
of 2010. The increase of our overall gross margins for the six and three months ended September 30, 2011 was mainly due to the
increase of the relative percentages of our separate software and technical consultancy services revenue achieved over the total
revenue recognized for these periods as compared to the same periods of 2010.
For the six and three months
ended September 30, 2011, the gross margin for our equipment sales and installation contacts was both 17% as compared to 22% for
the same periods of 2010, which was considered normal and stable based on our historical experiences, as compared with the overall
average gross margins of our equipment sales and installation projects for fiscal year 2011 and 2010, which was 19% and 18%, respectively.
The relative percentage
of our separate software sales and technical consultancy services volume over the total net revenue we achieved (excluding the
sales of Anhui Jucheng) were 33% and 9% for the six months ended September 30, 2011 and 2010, respectively, and the overall gross
margin for our separate software sales and technical services were 82% and 92%, respectively. For the three months ended September
30, 2011 and 2010, the percentage of our separate software sales and technical consultancy services volume over the total net revenue
we achieved (excluding the sales of Anhui Jucheng) were 24% and 3%, respectively, and the overall gross margin for our separate
software sales and technical services were 97% and 87%, respectively. For the data processing software revenue, the gross profit
is normally between 85%-95%, depending on the volume of software packages sold during each reporting period. As for the purchased
software use right and the related technical consultancy services project, which was approximately US$2.29 million recognized in
the first quarter of our fiscal 2012 (approximately 20% of the total software sales and technical consultancy services revenue
for the six months ended September 30, 2011), the overall margin of this project was about 27%, which is the main reason for the
decrease of the overall software sales and technical consultancy services gross profit margin for the six months ended September
30, 2011 as compared to the same period of 2010.
We believe that our
overall gross margin is typically between 20%-30% on equipment sales and installation, software sales and technical services on
a fiscal year basis, based on our existing business models. As discussed above, on a quarterly basis, our overall gross margin
might not be stable and comparable to each other, which was mainly because of the different percentage of the software and technical
services revenue and the equipment sales and installation revenue recognized in each quarter (reporting period), which contribute
a very different gross margin as compared with each other. As of September 30, 2011, we do not have any material uncompleted equipment
sales and installation contracts signed with gross margin significantly below our average gross margin, which was 15%-20%. Therefore,
we believe that these existing uncompleted contracts will not have an adverse impact on our future gross margin. We will continue
to monitor and review our sales contracts to determine if there will be any adverse impact on our gross margin in future reporting
periods.
|
|
July 1, -
August 30,
2011
|
|
|
July 5, -
September 30,
2010
|
|
|
April 1, –
August 30,
2011
|
|
|
July 5, -
September 30,
2010
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
US$ M
|
|
|
US$ M
|
|
|
US$ M
|
|
|
US$ M
|
|
Sale of chemical products
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
4.87
|
|
|
|
8.49
|
|
|
|
12.03
|
|
|
|
8.49
|
|
Cost of sales
|
|
|
4.72
|
|
|
|
7.80
|
|
|
|
11.16
|
|
|
|
7.80
|
|
Gross margin
|
|
|
0.15
|
|
|
|
0.69
|
|
|
|
0.87
|
|
|
|
0.69
|
|
Overall gross margin (%)
|
|
|
3
|
%
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
As stated above, 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 achieved a 7% gross margin. Starting from the second half of calendar year 2011, the raw
material cost for the production of polyacrylamide started to drop significantly as compared with a year ago, therefore, Anhui
Jucheng’s customers started to purchase this chemical product from suppliers with a lower selling price and weakened the
competitive advantage of Anhui Jucheng. Therefore, Anhui Jucheng had to decrease their selling price accordingly to reduce its
inventories and prevent further losses. Therefore, the gross margin of Anhui Jucheng decreased significantly to 3% for the period
from July 1, 2011 through August 30, 2011.
With the RMB142 million
of cash investment contributed by the six independent third party investors, Anhui Jucheng is now in the progress of expanding
its production facilities, which is expected to be completed in early 2012. According to management’s expectation, Anhui
Jucheng’s total production capacities will be increased to 60,000 metric tons per annum from its current production capacities
of 18,000 metric tons per annum. Meanwhile, management is also making efforts to sell Anhui Jucheng’s products to end users
directly in the future, instead of selling through distributors. If this can be achieved, we believe Anhui Jucheng’s gross
margin will improve to approximately 15%-20%.
Operating expense
Our operating expenses include:
selling expenses, general and administrative expenses and research and development expenses.
The following tables set
forth the analysis of our operating expenses (excluding those of Anhui Jucheng):
|
|
For the three months ended
September 30,
|
|
|
For the six months
ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
24.08
|
|
|
|
100
|
%
|
|
|
34.82
|
|
|
|
100
|
%
|
|
|
33.64
|
|
|
|
100
|
%
|
|
|
43.97
|
|
|
|
100
|
%
|
– Selling expenses
|
|
|
0.24
|
|
|
|
1.0
|
%
|
|
|
0.12
|
|
|
|
0.3
|
%
|
|
|
0.51
|
|
|
|
1.5
|
%
|
|
|
0.26
|
|
|
|
0.6
|
%
|
– G&A expenses
|
|
|
0.48
|
|
|
|
2.0
|
%
|
|
|
0.96
|
|
|
|
2.8
|
%
|
|
|
1.05
|
|
|
|
3.1
|
%
|
|
|
1.51
|
|
|
|
3.4
|
%
|
– R&D expenses
|
|
|
0.11
|
|
|
|
0.5
|
%
|
|
|
0.07
|
|
|
|
0.2
|
%
|
|
|
0.17
|
|
|
|
0.5
|
%
|
|
|
0.13
|
|
|
|
0.3
|
%
|
Total operating expenses
|
|
|
0.83
|
|
|
|
3.5
|
%
|
|
|
1.15
|
|
|
|
3.3
|
%
|
|
|
1.73
|
|
|
|
5.1
|
%
|
|
|
1.90
|
|
|
|
4.3
|
%
|
The following tables set
forth the analysis of the operating expenses of Anhui Jucheng:
|
|
July 1, -
August 30, 2011
|
|
|
July 5, -
September 30, 2010
|
|
|
April 1, –
August 30, 2011
|
|
|
July 5, -
September 30, 2010
|
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
US
$
M
|
|
|
% of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
4.87
|
|
|
|
100
|
%
|
|
|
8.49
|
|
|
|
100
|
%
|
|
|
12.03
|
|
|
|
100
|
%
|
|
|
8.49
|
|
|
|
100
|
%
|
– Selling expenses
|
|
|
0.23
|
|
|
|
4.7
|
%
|
|
|
0.31
|
|
|
|
3.7
|
%
|
|
|
0.55
|
|
|
|
4.6
|
%
|
|
|
0.31
|
|
|
|
3.7
|
%
|
– G&A expenses
|
|
|
0.23
|
|
|
|
4.7
|
%
|
|
|
0.29
|
|
|
|
3.4
|
%
|
|
|
0.50
|
|
|
|
4.2
|
%
|
|
|
0.29
|
|
|
|
3.4
|
%
|
– R&D expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.05
|
|
|
|
0.4
|
%
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
0.46
|
|
|
|
9.4
|
%
|
|
|
0.60
|
|
|
|
7.1
|
%
|
|
|
1.10
|
|
|
|
9.2
|
%
|
|
|
0.60
|
|
|
|
7.1
|
%
|
1.
|
Equipment sales and installation, software sales and technical services
|
Selling expenses:
Our selling expenses increased
to US$0.51 million for the six months ended September 30, 2011 from US$0.26 million for the same period of 2010. For the three
months ended September 30, 2011, our selling expenses increased to US$0.24 million from US$0.12 million for the same period of
2010. Our selling expenses mainly include freight, marketing research and development expenses, salary expenses and traveling expenses
of our sales department.
For the six months ended
September 30, 2011: (1) salary expenses and other staff related benefits increased by approximately US$0.09 million, which was
mainly due to the inclusion of Beijing Hongteng, the newly acquired subsidiary from January 2011; (2) traveling expenses, entertainment
expenses, communication expenses and other general office expenses of our sales department also increased by approximately US$0.08
million for the same reason; (3) freight increased by approximately US$0.02 million; and (4) marketing research and development
expenses increased by approximately US$0.06 million as compared to the same period of 2010, as we participated in more research
project and contract bidding activities as compared with the same period of 2010.
The increase of the selling
expenses for the three months ended September 30, 2011 as compared with the same period of 2010 was mainly due to the inclusion
of the selling expense incurred by the newly acquired subsidiary of Beijing Hongteng from January 2011.
According to our past experiences,
we believe that the percentage of our total selling expenses compared to the total net revenue recognized for the corresponding
period for each reporting period is immaterial (normally less than 3%-5% of the total net revenue) and may not be stable and comparable
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 GAAP, our expenses for the “pre-contract” stage were expensed and recorded in earnings when they occurred. Therefore,
the amount of “pre-contract” expenses directly related to the marketing activities and number of contracts we participated
in during each reporting period, but not to the corresponding contract revenue being recognized.
General and administrative
expenses:
Our general and administrative
expenses decreased to US$1.05 million for the six months ended September 30, 2011 from US$1.51 million for the same period of 2010.
For the three months ended September 30, 2011, our general and administrative expenses decreased to US$0.48 million from US$0.96
million for the same period of 2010. Our general and administrative expenses mainly 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, audits, financial consultancy and investor relations). We expect that our
general and administrative expenses will increase in future periods as we hire additional personnel and incur additional costs
in connection with the expansion of our business.
For the six months ended
September 30, 2011, (1) rental expenses decreased by approximately US$0.06 million mainly due to the decrease of office space leased
for our HK subsidiaries from September 2010; (2) salary expenses and the related staff welfare increased by approximately US$0.06
million mainly due to the inclusion of Beijing Hongteng, our newly acquired subsidiary from January 2011; (3) general office administration
expenses decreased by approximately US$0.07 million mainly due to the decease of general office expenses of our HK subsidiaries,
because we engaged a third party service provider to help us handle the contract settlement transactions with the commercial banks
in HK. However, for the six months ended September 30, 2011, we handled most of these transactions with our HK banks without any
assistance from third parties; (4) bank handling charges related to the contract settlement transaction also decreased by approximately
US$0.16 million, due to the decrease of our equipment sales and installation contracts for the six months ended September 30, 2011
as compared with the same period of 2010; and (5) professional services charges and share based compensation expenses decreased
by approximately US$0.23 million, as we gradually trained our own staff to handle more duties in relation to these matters and
decreased the related out-sourced professional service charges as compared with the same period of last year. For the three months
ended September 30, 2011, the reasons for the decrease of our general and administrative expenses as compared with the same period
of 2010 were similar to those as discussed above for the six months ended September 30, 2011.
Research and development
expenses:
Research and development
expenses represent the salary expenses and other related expenses of our research and development department. Our research and
development expenses increased to US$0.17 million for the six months ended September 30, 2011 from US$0.13 million for the same
period of 2010. For the three months ended September 30, 2011, our research and development expenses increased to US$0.11 million
from US$0.07 million for the same period of 2010. The increase of our research and development expenses was mainly due to the increase
of such expenses of 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 R&D 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 chemical products
|
As stated above, Anhui Jucheng’s
results of operations were consolidated with ours from July 5, 2010 through August 30, 2011.
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 mainly 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
1, 2011 through August 30, 2011, Anhui Jucheng incurred approximately US$0.23 million of selling expenses, which mainly consisted
of (1) freight expenses of approximately US$0.07 million; (2) product packing material costs and other supplies of approximately
US$0.03 million; (3) salary and bonus for the sales department of approximately US$0.07 million; and (4) other general expenses
incurred by the sales department, such as traveling expenses, communication expenses and other similar expenses of approximately
US$0.06 million.
For the period from July
5, 2010 through September 30, 2010, Anhui Jucheng incurred approximately US$0.31 million of selling expenses, which mainly consist
of (1) freight expense of approximately US$0.12 million; (2) salary expense of sales department of approximately US$0.07 million;
(3) products packing material cost of approximately US$0.07 million; and (4) other general expenses incurred by the sales department,
such as traveling expenses, communication expenses and other similar expenses of approximately US$0.05 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
mainly 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
1, 2011 through August 30, 2011, Anhui Jucheng incurred approximately US$0.23 million of general and administrative expenses, which
mainly consisted of (1) salary and welfare of management and administrative staff of approximately US$0.04 million; (2) traveling
and entertainment expenses of approximately US$0.02 million; (3) insurance and other taxes of approximately US$0.03 million; (4)
office administration expenses, such as communication, utilities, depreciation and other office supplies, of approximately US$0.09
million; and (5) bad debts provision of approximately US$0.05 million.
For the period from July
5, 2010 through September 30, 2010, Anhui Jucheng incurred approximately US$0.29 million of general and administrative expenses,
which mainly consist of (1) salary and welfare of management and administrative staff of approximately US$0.13 million; (2) traveling
expenses of approximately US$0.05 million; (3) insurance and other taxes of approximately US$0.03 million; and (4) office administration
expenses, such as communication, utilities, depreciation and other office supplies, of approximately US$0.08 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 1, 2011 through August 30, 2011.
Operating profits
As a result of the foregoing,
for the six months ended September 30, 2011, our operating profit increased to US$11.12 million, of which approximately US$11.35
million was generated from our equipment sales and installation, software sales and technical services, and our sales of chemical
products incurred an approximately US$0.23 million operating loss for the six months ended September 30, 2011, as compared to US$10.54
million of operating profits we achieved for the six months ended September 30, 2010, of which US$10.44 million was generated from
our equipment sales and installation, software sales and technical services and US$0.1 million was generated from our sales of
chemical products.
For the three months ended
September 30, 2011, our operating profit increased to US$7.57 million, of which approximately US$7.89 million was generated from
our equipment sales and installation, software sales and technical services, and our sales of chemical products incurred an approximately
US$0.32 million operating loss for the three months ended September 30, 2011, as compared to US$7.31 million of operating profits
we achieved for the three months ended September 30, 2010, of which US$7.21 million was generated from our equipment sales and
installation, software sales and technical services and US$0.1 million was generated from our sales of chemical products.
Other income and expenses
Our other income and expenses
mainly include interest income, interest expenses and bank charges for credit facilities, exchange gains or losses, value added
tax refund, gain on deconsolidation of subsidiary, 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:
•
|
Interest income represents the interest income we earned from cash deposits we kept in the commercial banks.
|
•
|
Interest expenses represented the interest expenses incurred for the working capital loans we borrowed from our shareholders (annual interest rate of 3% to 5%), the short-term working capital bank loans borrowed by Anhui Jucheng, short-term bank loans borrowed for the exportation of the oil sludge cleaning equipment and the bank overdraft charges. For the six months ended September 30, 2011, we incurred approximately US$0.12 million in interest expenses for the shareholder loans, approximately US$0.07 million in interest expenses for the short-term bank loans, of which approximately US$0.05 million was for the working capital loans borrowed by Anhui Jucheng and approximately US$0.02 million for the short-term bank loan borrowed for importation of the oil sludge cleaning equipment. We also incurred approximately US$0.07 million of bank overdraft charges. For the six months ended September 30, 2011, we also incurred approximately US$0.11 million in bank charges for the credit facilities granted by our banks for the importation of equipment for our equipment sales and installation contracts.
|
•
|
Exchange loss incurred for the six and three months ended September 30, 2011 and 2010 were mainly due to the devaluation of the US dollar against Renminbi, Japanese Yen and Euro. Exchange loss increased for the six and three months ended September 30, 2011 mainly due to the continual devaluation of the US dollar against Renminbi recently.
|
Value added tax refund:
Our PRC subsidiary, Beijing
JianXin, has been recognized by the PRC government as a software enterprise. The standard value added tax rate for sales of products
of PRC enterprises is 17%. Under the PRC government’s preferential policies for software enterprises, Beijing JianXin is
entitled to a refund of 14% value added tax in respect to sales of software products. We pay 17% value added tax for our software
sales and the tax authorities will refund us 14% of the value added tax that we paid normally within about 1-2 months. This refund
is regarded as subsidy income granted by the PRC government and we recognize the value added tax refund as other income only when
it has been received. There is no condition to the use of the refund received. We received approximately US$nil and US$0.37 million
of value added tax refund for the six months ended September 30, 2011 and 2010, respectively.
Gain on deconsolidation
of a subsidiary:
The deconsolidation of Anhui
Jucheng occurred on August 30, 2011 was accounted for in accordance with ASC Topic 810 “Consolidation”. We recognized
a non-cash gain of approximately US$30.41 million upon deconsolidation of Anhui Jucheng in our consolidated statements of income
and comprehensive income with a corresponding increase to the carrying value of the 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 periods from April
1, 2011 and July 1, 2011 through August 30, 2011, Anhui Jucheng achieved approximately US$0.12 million and US$0.05 million of other
income from selling of scrap raw materials and other supplies. For the period from July 5, 2010 through September 30, 2010, Anhui
Jucheng received approximately US$0.28 million subsidy income and awards from its provincial and regional governments for its technology
contribution and development in the polyacrylamide production field and achieved approximately US$0.01 million other income from
selling of scrap raw materials and other supplies.
Income before income tax
As a result of the foregoing,
for the six months ended September 30, 2011, our income before income tax increased to US$40.43 million. Without regard to the
US$30.41 million non-cash gain recognized upon deconsolidation of Anhui Jucheng, for the six months ended September 30, 2011, our
income before income tax decreased to US$10.02 million, of which approximately US$10.16 million was generated from our equipment
sales and installation, software sales and technical services, and our sales of chemical products incurred an approximately US$0.14
million loss before income tax for the six months ended September 30, 2011, as compared to US$10.88 million of income before income
tax for the six months ended September 30, 2010, US$10.54 million of which was generated from our equipment sales and installation,
software sales and technical services, and US$0.34 million was generated from our sale of chemical products.
For the three months ended
September 30, 2011, our income before income tax increased to US$37.32 million. Without regard to the US$30.41 million non-cash
gain recognized upon deconsolidation of Anhui Jucheng, for the three months ended September 30, 2011, our income before income
tax decreased to US$6.91 million, of which approximately US$7.17 million was generated from our equipment sales and installation,
software sales and technical services, and our sales of chemical products incurred an approximately US$0.26 million loss before
income tax for the three months ended September 30, 2011, as compared to US$7.47 million of income before income tax for the three
months ended September 30, 2010, US$7.13 million of which was generated from our equipment sales and installation, software sales
and technical services, and US$0.34 million was generated from our sale of chemical products.
Income tax expenses
The entities within our
company file separate tax returns in the 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 six and three months ended September
30, 2011 and 2010, respectively.
Beijing JianXin, being 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 is subject
to 25% income tax for the six and three months ended September 30, 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 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 the 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 September 30, 2011 and March 31, 2011. Total undistributed earnings of these PRC subsidiaries
at September 30, 2011 and March 31, 2011 were RMB599,987,988 ($94,413,443) and RMB345,042,882 ($52,626,881), respectively.
Income tax expenses increased
for the six and three months ended September 30, 2011, 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.
We
also recognized an approximate US$7.60 million deferred income tax expense for the deconsolidation gain recognized upon deconsolidation
of Anhui Jucheng on August 30, 2011, which was calculated based on the approximate US$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.
Equity in earnings of
equity method affiliate
Upon deconsolidation of
Anhui Jucheng, which occurred on August 30, 2011, we ceased to have a controlling financial interest in Anhui Jucheng and Anhui
Jucheng became an equity method affiliate company of us. Therefore, in accordance with ASC Topic 323 “Equity Method and Joint
Ventures”, for the three months ended September 30, 2011, we recognized our pro-rata share of losses incurred by Anhui Jucheng
for the period from August 31, 2011 through September 30, 2011, which was approximately US$0.09 million in our consolidated statement
of income and comprehensive income, with a corresponding decrease to the carrying value of the long-term investment in Anhui Jucheng
in our consolidated balance sheet.
Net income
As a result of
the foregoing, for the six months ended September 30, 2011, our net income increased to US$31.40 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
deconsolidation of Anhui Jucheng, for the six months ended September 30, 2011, our net income decreased to US$8.59 million,
of which approximately US$8.75 million was generated from our equipment sales and installation, software sales and technical
services, and our sales of chemical products incurred an approximately US$0.16 million net loss for the six months ended
September 30, 2011, as compared to US$10.80 million of net income for the six months ended September 30, 2010, US$10.55
million of which was generated from our equipment sales and installation, software sales and technical services and US$0.25
million was generated from our sale of chemical products.
For the three months
ended September 30, 2011, our net income increased to US$28.74 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 deconsolidation of Anhui Jucheng, for the three
months ended September 30, 2011, our net income decreased to US$5.93 million, of which approximately US$6.18 million was
generated from our equipment sales and installation, software sales and technical services, and our sales of
chemical products incurred an approximately US$0.25 million net loss for the three months ended September 30, 2011, as
compared to US$7.38 million of net income for the three months ended September 30, 2010, US$7.13 million of which was
generated from our equipment sales and installation, software sales and technical services and US$0.25 million was generated
from our sale of chemical products.
Income attributable to
non-controlling 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 was consolidated by us, net income or loss generated from Anhui Jucheng was allocated to the non-controlling
shareholder of Anhui Jucheng based on his respective percentage of the ownership in the entity , which was 49%, during that period.
Therefore, for the period from April 1, 2011 and July 1, 2011 through August 30, 2011, approximately US$0.08 million and US$0.13
million of Anhui Jucheng’s net loss incurred was attributable to the 49% noncontrolling interest shareholder of Anhui Jucheng,
respectively. For the period from July 1, 2010 through September 30, 2010, approximately US$0.12 million of Anhui Jucheng’s
net income was attributable to the 49% noncontrolling interest 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 six months
ended September 30, 2011 and 2010, net income available to LianDI Clean stockholders was US$31.48 million and US$10.67
million, respectively. For the three months ended September 30, 2011 and 2010, net income available to LianDi Clean
stockholders was US$28.86 million and US$7.26 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 deconsolidation of Anhui Jucheng, for the six
and three months ended September 30, 2011, the net income available to LianDi Clean stockholders was approximately
US$8.67 million and US$6.05 million, respectively.
Preferred stock deemed
dividend
The fair value of the escrow
shares is attributed to the different newly issued securities in the private placement and was allocated according to the newly
issued securities’ respective fair value at February 26, 2010:
|
|
Allocation of
escrow shares
|
|
|
|
|
|
Discount on common stock
|
|
$
|
373,260
|
|
Dividend on preferred stock
|
|
|
4,007,745
|
|
Discount on warrants
|
|
|
544,805
|
|
Total
|
|
$
|
4,925,810
|
|
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 six and three months ended
September 30, 2010 was approximately US$1.95 million and US$0.81 million, respectively, which was recorded as a deduction to the
net income available to common stockholders of LianDi Clean for the six and three months ended September 30, 2010. 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, the holders of the 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. Total preferred stock dividend accrued was approximately US$0.72 million and US$0.97 million for the
six months ended September 31, 2011 and 2010, respectively. For the three months ended September 30, 2011 and 2010, total preferred
stock dividend accrued was approximately US$0.35 million and US$0.48 million, respectively.
Net income available to
common stockholders of LianDi Clean
Net income available
to LianDi Clean stockholders minus preferred stock deemed dividend and preferred stock cash dividend is net income available
to common stockholders of LianDi Clean. For the six months ended September 30, 2011 and 2010, net income available to common
stockholders of LianDi Clean was approximately US$30.76 million and US$7.75 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 deconsolidation of
Anhui Jucheng, for the six months ended September 30, 2011, and the US$1.95 million preferred stock deemed dividend
recognized for the six months ended September 30, 2010, our net income available to common stockholders of LianDi Clean was
US$7.96 million and US$9.70 million, respectively. For the three months ended September 30, 2011 and 2010, net income
available to common stockholders of LianDi Clean was approximately US$28.51 million and US$5.97 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 deconsolidation of Anhui Jucheng, for the three months ended September 30, 2011, and the US$0.81 million preferred
stock deemed dividend recognized for the three months ended September 30, 2010, our net income available to common
stockholders of LianDi Clean was US$5.70 million and US$6.78 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 September 30, 2011, we had cash and cash equivalents of approximately US$41.27 million.
Our liquidity needs include:
net cash used in operating activities, which mainly 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 mainly consists of the investments in computers and other office
equipment, investment in purchasing of the oil sludge cleaning equipment and upgrading and enhancing the existing manufacturing
facilities for our majority owned subsidiary, Anhui Jucheng, before Anhui Jucheng was deconsolidated. For the six months ended
September 30, 2011 and 2010, 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:
|
|
Six months ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Amount in thousands of US dollar)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(38,781
|
)
|
|
|
862
|
|
Net cash used in investing activities
|
|
|
(12,467
|
)
|
|
|
(3,985
|
)
|
Net cash provided by (used in) financing actives
|
|
|
17,787
|
|
|
|
(4,368
|
)
|
Effect of foreign currency exchange rate changes
|
|
|
1,487
|
|
|
|
708
|
|
Net decrease in cash and cash equivalents
|
|
|
(31,974
|
)
|
|
|
(6,783
|
)
|
Net cash used in/provided
by operating activities:
For the six months ended
September 30, 2011, net cash used in operating activities of US$38.78 million was primarily attributable to:
|
(1)
|
net income of US$9.69 million (excluding an approximately US$1.10 million
of non-cash expenses of depreciation, amortization, equity of loss in equity method affiliate and share-based compensation
expenses, and an approximately US$30.41 million non-cash gain and a related approximately US$7.60 million deferred income
tax expense recognized for 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$3.22 million; and
|
|
-
|
income tax payable increased by approximately US$1.32 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$16.15 million;
|
|
-
|
we spent approximately US$31.11 million as prepayments to our equipment suppliers for the uncompleted contracts and to our raw material suppliers for purchasing of raw materials of chemical products and at the same time, inventory balances increased by approximately US$0.60 million; and
|
|
-
|
tender deposits and other prepaid expenses increased by approximately US$5.06 million, all of which represent a cash outflow of the period.
|
For the six months ended
September 30, 2010, net cash provided by operating activities of US$0.86 million was primarily attributable to:
|
(1)
|
net income of approximately US$11.50 million (excluding an approximately US$0.70 million of non-cash expenses of depreciation and amortization);
|
|
(2)
|
the receipt of cash from operations from changes in operating assets and liabilities such as increase in deferred revenue and accruals balance by approximately US$1.22 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$0.84 million;
|
|
-
|
we spent approximately US$9.27 million in prepayments, which was mainly paid to our equipment suppliers for the uncompleted projects of our equipment sales and installation contracts, and to our raw material suppliers for purchasing raw materials of chemical products offset by a decrease of inventory balance of approximately US$0.30 million;
|
|
-
|
tender deposits and other prepaid expenses increased by approximately US$1.02 million; and
|
|
-
|
we also spent approximately US$1.03 million to settle other operating liabilities during the period, all of which represent a cash outflow of the period.
|
Net cash used in investing
activities:
For the six months ended
September 30, 2011, our net cash used in investing activities mainly consisted of the following transactions: (1) we spent approximately
US$2.07 million for purchasing the oil sludge cleaning equipment and approximately US$0.02 million for purchasing other general
office equipment; (2) Anhui Jucheng spent approximately US$2.89 million to purchase equipment for upgrading of its current manufacturing
facilities, and spent approximately US$2.11 million as a deposit for land use rights; ; and (3) the cash outflow effect of 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 deconsolidation. In aggregate, these transactions resulted in a net cash outflow from investing activities of approximately
US$12.47 million for the six months ended September 30, 2011.
For the six months ended
September 30, 2010, our net cash used in investing activities included three noteworthy transactions. Firstly, we had an approximately
US$2.33 million net cash inflow in connection with the Anhui Jucheng acquisition incurred 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 its 51% equity interest. Anhui Jucheng then became a subsidiary of us and thus the
capital contribution has no impact on our consolidated cash flows. Secondly, during the six months ended September 30, 2010, our
newly acquired subsidiary, Anhui Jucheng spent approximately US$0.10 million cash to purchase the equipment for the upgrading of
its current manufacturing facilities and incurred approximately US$0.96 million as a deposit for land use rights to further upgrade
its manufacturing facilities. Third, during the six months ended September 30, 2010, we lent approximately US$5.25 million to other
third party entities. In the aggregate, these transactions resulted in a net cash outflow from investing activities of approximately
US$3.98 million for the six months ended September 30, 2010.
Net cash provided by/used
in financing activities:
Our net cash used in or
provided by 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 the 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 six months ended
September 30, 2011, (1) we paid approximately US$0.41 million cash for the dividends on our convertible preferred stock; (2) as
of September 30, 2011, the restricted cash balance decreased by approximately US$0.32 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$0.15 million to the noncontrolling shareholder of Anhui Jucheng and approximately US$0.57
million of the shareholder’s loan to Mr. Zuo, President and CEO of our company; (4) we borrowed approximately US$3.20 million
short-term bank loans for the importation of the oil sludge cleaning equipment and revolving lines of credit and repaid approximately
US$0.70 million of the short-term bank loans we borrowed previously; (5) we also repaid approximately US$6.13 million of third
party loans we borrowed temporarily in the last quarter of fiscal 2011 for our short RMB financing needs for the tender bidding
purposes; and (6) capital contributions received in advance from new shareholders of Anhui Jucheng of US$22.23 million. Capital
injection of RMB142 million (approximately US$22.23 million) by the six new independent third party investors were paid to Anhui
Jucheng in cash on August 8, 2011. The capital injection was approved by the PRC bureau and the new business license of Anhui Jucheng
was issued on August 30, 2011, and Anhui Jucheng was deconsolidated from our financial statements since August 30, 2011. In aggregate,
these transactions resulted in a net cash inflow from financing activities of approximately US$17.79 million for the six months
ended September 30, 2011.
For the six months ended
September 30, 2010, (1) we paid approximately US$0.58 million cash for the dividend of convertible preferred stock; (2) as of September
30, 2010, the restricted cash balance increased by approximately US$5.29 million as collateral for issuance of letters of credit
to our suppliers as compared to that of March 31, 2010, which was recorded as a cash outflow of our financing activities; (3) Mr.
Zuo temporarily deposited approximately US$2.17 million into our bank account, which temporarily increased the amount due to him;
and (4) we also repaid approximately US$0.67 million to the noncontrolling shareholder of Anhui Jucheng. In aggregate, this resulted
in a net cash outflow from financing activities of approximately US$4.37 million for the six months ended September 30, 2010.
As of September 30, 2011,
we still owe our Japanese shareholder approximately US$7.53 million. Based on the loan agreements we signed with our Japanese shareholder,
these outstanding loans bear interest at 3%-5% per annum. Any delayed repayment of these loans without the prior consent from our
Japanese shareholder is subject to a 1% penalty. Although we did not receive any commitment from our Japanese shareholder not to
demand repayment of the loan, we believe that, along with the rapid growth of our revenue, our financial position has improved
to the point which allows us to repay our shareholders’ loan using money earned from operations on demand without having
any significant adverse impact on our financial position and operations.
Credit Facilities:
The General Facilities discussed
in our quarterly report for the quarter ended June 30, 2011 expired in July 2011 and we are negotiating with the banks to renew
the facilities. Management expects that these facilities will be formally renewed by the end of calendar year 2011.
C. Off-Balance
Sheet Arrangements
We did not have any significant
off-balance sheet arrangements as of September 30, 2011.
D. Tabular Disclosure
of Contractual Obligations
The following table sets
forth our contractual obligations as of September 30, 2011:
|
|
Purchase of
equipment
|
|
|
Office rental
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Six months ending March, 31, 2012
|
|
|
3,139,491
|
|
|
|
158,209
|
|
|
|
3,297,700
|
|
Fiscal year ending March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
-2013
|
|
|
-
|
|
|
|
262,462
|
|
|
|
262,462
|
|
-2014
|
|
|
-
|
|
|
|
14,820
|
|
|
|
14,820
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total payments
|
|
|
3,139,491
|
|
|
|
435,491
|
|
|
|
3,574,982
|
|
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Not Applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure
Controls and Procedures
Under the supervision and
with the participation of our management, including our principal executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September
30, 2011, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
In
connection with the preparation of our Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2011, we carried
out a re-evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2011. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal
executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Based
on this re-evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls
and procedures were not effective as of September 30, 2011 because of the following material weakness in our internal control
over financial reporting has been identified: We did not have appropriate policies and procedures in place to properly
account for the deferred tax expense and deferred tax liability in relation to the gain recognized upon deconsolidation of a
subsidiary.
In
response to the above-identified material weakness and to strengthen our internal control over financial reporting, we plan to
make necessary changes by providing training to our finance team and our other relevant personnel on
the U.S. GAAP accounting guidance applicable to our financial statements.
Changes in Internal Control
over Financial Reporting
There was no change in our
internal control over financial reporting that occurred during the second fiscal quarter of 2011 covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material
changes in the Company’s risk factors from those previously disclosed in the Company’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2011.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults
Upon Senior Securities
None.
Item 4. [Removed and
Reserved]
Item 5. Other Information
None.
Item 6. Exhibits.
(b) Exhibits
Exhibit No.
|
|
Description
|
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 Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
101
|
|
Interactive Data Files
|
SIGNATURES
Pursuant to the requirements
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.
|
LIANDICLEAN TECHNOLOGY INC.
|
|
|
|
Date: February 21, 2012
|
By:
|
/s/ Jianzhong Zuo
|
|
Jianzhong Zuo, Chief Executive Officer and President
|
|
(Principal Executive Officer)
|
|
|
Date: February 21, 2012
|
By:
|
/s/ Yong Zhao
|
|
Yong Zhao, Chief Financial Officer
|
|
(Principal Financial Officer)
|
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
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 Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
101
|
|
Interactive Data Files
|
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