Deshengmenwai St, Xicheng District. Beijing
100088
Securities registered or to be registered pursuant to Section 12(b)
of the Act:
Securities registered or to be registered pursuant to Section 12(g)
of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the Issuer’s
classes of capital or ordinary shares as of the close of the period covered by the annual report: 8,406,968 ordinary shares.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question indicate by check mark which financial statement item the registrant has elected to follow.
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Unless otherwise indicated and except where
the context otherwise requires,
This Annual Report on Form 20-F contains
forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Such forward-looking statements involve
risks and uncertainties. All statements other than statements of historical facts are forward-looking statements, and such statements
include information about our possible or assumed future results of operations or our performance. Words such as “expects,”
“intends,” “plans,” “believes,” “anticipates,” “estimates,” and variations
of such words and similar expressions are intended to identify the forward-looking statements.
The risk factors and cautionary language
referred to in this Annual Report provide examples of risks, uncertainties and events that may cause actual results to differ materially
from the expectations described by the Company in its forward-looking statements, including among other things:
You are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this report.
Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be
correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates, which are inherently
subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially
from those expressed or implied by such forward-looking statements.
We undertake no obligation to publicly update
or revise any forward-looking statements contained in this Annual Report, or the documents to which it refers you, to reflect any
change in our expectations with respect to such statements or any change in events, conditions or circumstances upon which any
statement is based.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated quarterly
financial and operating data is unaudited. The summary statement of cash flow data is derived from our audited consolidated financial
statements as of and for the years ended December 31,2012, December 31,2011, December 31,2010, August 31,2009, August 31,2008 and
the four month period ended December 31,2009 and 2008. The consolidated financial statements were prepared and presented in accordance
with U.S. generally accepted accounting principles, or GAAP. The summary statement of cash flow data for the four month period
ended December 31,2008 is unaudited.
Our results of operations in any past
period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors”
included elsewhere in this Annual Report. The summary consolidated financial information for those periods and as of those dates
should be read in conjunction with those consolidated financial statements and the accompanying notes, if available, and “Operating
and Financial Review and Prospects” included elsewhere in this Annual Report.
Summary of statement of operation data:
(unaudited)
(US$ in thousands except per share and operating
data)
|
|
Year ended
December 31,
|
|
|
Four months ended
December 31,
|
|
|
Year ended August 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
|
10,098
|
|
|
|
24,398
|
|
|
|
24,062
|
|
|
|
1,696
|
|
|
|
17,208
|
|
|
|
44,622
|
|
|
|
36,233
|
|
Gross profit
|
|
|
2,938
|
|
|
|
6,763
|
|
|
|
5,977
|
|
|
|
(4,469
|
)
|
|
|
4,918
|
|
|
|
13,323
|
|
|
|
6,055
|
|
Operating income
|
|
|
(4,308
|
)
|
|
|
2,058
|
|
|
|
637
|
|
|
|
(6,222
|
)
|
|
|
4,210
|
|
|
|
10,897
|
|
|
|
4,359
|
|
Net income
|
|
|
(3,858
|
)
|
|
|
1,188
|
|
|
|
424
|
|
|
|
(5,336
|
)
|
|
|
3,819
|
|
|
|
9,784
|
|
|
|
3,939
|
|
Basic net income per share(1)
|
|
|
(0.46
|
)
|
|
|
0.15
|
|
|
|
0.06
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Diluted net income per share(1)
|
|
|
(0.46
|
)
|
|
|
0.15
|
|
|
|
0.06
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Summary of
statement of operation data:
(US$ in thousands except per share and operating
data)
|
|
2012Q4
|
|
|
2012Q3
|
|
|
2012Q2
|
|
|
2012Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
6,040
|
|
|
|
1,510
|
|
|
|
1,358
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,635
|
|
|
|
446
|
|
|
|
445
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(1,584
|
)
|
|
|
(837
|
)
|
|
|
(843
|
)
|
|
|
(1,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(1,770
|
)
|
|
|
(823
|
)
|
|
|
(873
|
)
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(1)
|
|
|
(0.20
|
)
|
|
|
(0.10
|
)
|
|
|
(0.11
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share(1)
|
|
|
(0.20
|
)
|
|
|
(0.10
|
)
|
|
|
(0.11
|
)
|
|
|
(0.05
|
)
|
|
|
2011Q4
|
|
|
2011Q3
|
|
|
2011Q2
|
|
|
2011Q1
|
|
|
2010Q4
|
|
|
2010Q3
|
|
|
2010Q2
|
|
|
2010Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
4,011
|
|
|
|
5,355
|
|
|
|
8,416
|
|
|
|
6,616
|
|
|
|
11,028
|
|
|
|
8,740
|
|
|
|
2,562
|
|
|
|
1,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,591
|
|
|
|
1,329
|
|
|
|
2,436
|
|
|
|
1,407
|
|
|
|
3,170
|
|
|
|
1,928
|
|
|
|
596
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(100
|
)
|
|
|
297
|
|
|
|
1,516
|
|
|
|
345
|
|
|
|
1,538
|
|
|
|
424
|
|
|
|
(818
|
)
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(376
|
)
|
|
|
250
|
|
|
|
1,024
|
|
|
|
290
|
|
|
|
1,312
|
|
|
|
299
|
|
|
|
(762
|
)
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share(1)
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
0.13
|
|
|
|
0.04
|
|
|
|
0.17
|
|
|
|
0.04
|
|
|
|
(0.10
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share(1)
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
0.13
|
|
|
|
0.04
|
|
|
|
0.17
|
|
|
|
0.04
|
|
|
|
(0.10
|
)
|
|
|
(0.07
|
)
|
|
(1)
|
Earnings per share information is not presented for the periods prior to January 1, 2010, as its inclusion would not be meaningful as Wowjoint was a privately held company during those periods.
|
Summary of statement of cash flow data:
(US$ in thousands)
|
|
Year ended
December 31,
|
|
|
Four months ended
December 31,
|
|
|
Year ended August 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net cash provided by/(used in) operating activities
|
|
|
4,720
|
|
|
|
9,597
|
|
|
|
(3,898
|
)
|
|
|
(1,224
|
)
|
|
|
(522
|
)
|
|
|
763
|
|
|
|
1,905
|
|
Net cash provided by/(used in) investing activities
|
|
|
(6,167
|
)
|
|
|
(12,004
|
)
|
|
|
5,132
|
|
|
|
(50
|
)
|
|
|
(238
|
)
|
|
|
(347
|
)
|
|
|
(2,138
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
(1,486
|
)
|
|
|
3,973
|
|
|
|
24
|
|
|
|
19
|
|
|
|
260
|
|
|
|
(5
|
)
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of balance sheet data:
(US$ in thousands)
|
|
As of
December 31,
|
|
|
Year ended August 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Cash and cash equivalents
|
|
|
1,714
|
|
|
|
4,627
|
|
|
|
2,168
|
|
|
|
1,895
|
|
|
|
1,438
|
|
Working capital(1)
|
|
|
(1,515
|
)
|
|
|
7,982
|
|
|
|
16,033
|
|
|
|
14,978
|
|
|
|
5,532
|
|
Total assets
|
|
|
41,347
|
|
|
|
52,249
|
|
|
|
37,591
|
|
|
|
29,920
|
|
|
|
33,688
|
|
Total shareholders’ equity
|
|
|
18,690
|
|
|
|
22,527
|
|
|
|
20,387
|
|
|
|
17,943
|
|
|
|
8,151
|
|
Summary of balance sheet data:
US$ in thousands)
|
|
2012Q4
|
|
|
2012Q3
|
|
|
2012Q2
|
|
|
2012Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,714
|
|
|
|
723
|
|
|
|
2,271
|
|
|
|
1,484
|
|
Working capital(1)
|
|
|
(1,515
|
)
|
|
|
4,894
|
|
|
|
6,049
|
|
|
|
6,607
|
|
Total assets
|
|
|
41,347
|
|
|
|
46,141
|
|
|
|
48,054
|
|
|
|
46,247
|
|
Total shareholders’ equity
|
|
|
18,690
|
|
|
|
20,823
|
|
|
|
21,624
|
|
|
|
21,919
|
|
|
|
2011Q4
|
|
|
2011Q3
|
|
|
2011Q2
|
|
|
2011Q1
|
|
|
2010Q4
|
|
|
2010Q3
|
|
|
2010Q2
|
|
|
2010Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
4,627
|
|
|
|
3,762
|
|
|
|
4,324
|
|
|
|
3,009
|
|
|
|
2,168
|
|
|
|
2,026
|
|
|
|
7,242
|
|
|
|
7,554
|
|
Working capital(1)
|
|
|
7,982
|
|
|
|
10,113
|
|
|
|
15,100
|
|
|
|
15,682
|
|
|
|
16,033
|
|
|
|
15,216
|
|
|
|
15,110
|
|
|
|
15,985
|
|
Total assets
|
|
|
52,249
|
|
|
|
57,040
|
|
|
|
44,715
|
|
|
|
46,390
|
|
|
|
37,591
|
|
|
|
31,310
|
|
|
|
31,811
|
|
|
|
31,352
|
|
Total shareholders’ equity
|
|
|
22,527
|
|
|
|
22,817
|
|
|
|
22,157
|
|
|
|
20,746
|
|
|
|
20,387
|
|
|
|
18,816
|
|
|
|
18,281
|
|
|
|
18,951
|
|
|
(1)
|
Working capital is calculated as current assets minus current liabilities.
|
The following table sets forth information
concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your
convenience and are not necessarily the exchange rates that were used in this Annual Report or will use in the preparation of our
periodic reports or any other information to be provided to you.
|
|
|
Spot Exchange Rate
|
|
Period
|
|
|
Average (1)
|
|
|
|
|
(RMB per US$1.00)
|
|
2008
|
|
|
6.9477
|
|
2009
|
|
|
|
|
January
|
|
|
6.8360
|
|
February
|
|
|
6.8363
|
|
March
|
|
|
6.8360
|
|
April
|
|
|
6.8306
|
|
May
|
|
|
6.8235
|
|
June
|
|
|
6.8334
|
|
July
|
|
|
6.8317
|
|
August
|
|
|
6.8323
|
|
September
|
|
|
6.8277
|
|
October
|
|
|
6.8267
|
|
November
|
|
|
6.8271
|
|
December
|
|
|
6.8275
|
|
2010
|
|
|
|
|
January
|
|
|
6.8260
|
|
February
|
|
|
6.8274
|
|
March
|
|
|
6.8262
|
|
April
|
|
|
6.8256
|
|
May
|
|
|
6.8275
|
|
June
|
|
|
6.8127
|
|
July
|
|
|
6.7762
|
|
August
|
|
|
6.7873
|
|
September
|
|
|
6.7361
|
|
October
|
|
|
6.6675
|
|
November
|
|
|
6.6538
|
|
December
|
|
|
6.6497
|
|
2011
|
|
|
|
|
January
|
|
|
6.5964
|
|
February
|
|
|
6.5761
|
|
March
|
|
|
6.5645
|
|
April
|
|
|
6.5267
|
|
May
|
|
|
6.4948
|
|
June
|
|
|
6.4776
|
|
July
|
|
|
6.4575
|
|
August
|
|
|
6.4036
|
|
September
|
|
|
6.3884
|
|
October
|
|
|
6.3710
|
|
November
|
|
|
6.3564
|
|
December
|
|
|
6.3482
|
|
2012
|
|
|
|
|
January
|
|
|
6.3107
|
|
February
|
|
|
6.2997
|
|
March
|
|
|
6.3125
|
|
April
|
|
|
6.3043
|
|
May
|
|
|
6.3242
|
|
June
|
|
|
6.3632
|
|
July
|
|
|
6.3717
|
|
August
|
|
|
6.3593
|
|
September
|
|
|
6.3200
|
|
October
|
|
|
6.2627
|
|
November
|
|
|
6.2338
|
|
December
|
|
|
6.2328
|
|
2013
|
|
|
|
|
January
|
|
|
6.2215
|
|
February
|
|
|
6.2323
|
|
March
|
|
|
6.2154
|
|
April
|
|
|
6.1861
|
|
May
|
|
|
6.1416
|
|
June till June 5, 2013
|
|
|
6.1291
|
|
Source: Federal Reserve Statistical Release
|
(1)
|
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
|
B. Capitalization and Indebtedness
Not applicable
C. Reasons for the Offer and Use of Proceeds
Not applicable
D. Risk Factors
Risks Associated with Our Business and
Industry
We cannot assure you that we will be able to refinance
any indebtedness incurred under our rolling credit facilities or obtain additional debt financing.
We rely on lines of credit provide by several
banks in China. As of June 10, 2013, approximately US$3 million (RMB19 million) was outstanding under our revolving lines of credit.
As the lines are uncommitted working lines of credit, we cannot assure you that we will be able to continue rolling over these
lines of credit or to do so at an interest rate or on terms that are acceptable to us or at all. Our ability to obtain bank financing
or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing
or offering, including our actual or perceived credit quality, as well as by adverse market conditions resulting from, among other
things, general economic conditions in China. In addition, future disruptions in the financial markets, such as have been recently
experienced, could affect our ability to extend our existing loans or to obtain new or additional debt financing or on favorable
terms (or at all), which may have other adverse effects on us. The incurrence of debt under our credit facilities could adversely
affect our business by increasing our vulnerability to general adverse economic and industry conditions and requiring us to dedicate
a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our
cash flow for other purposes. See “Operating and Financial Review and Prospects – Liquidity and Capital Resources.”
Actual overall risks or costs of our
contracts may exceed our initial evaluation and lead to cost overruns, resulting in a reduction in revenues, lower profitability
or even losses on such contracts.
We base a number of contracts in part on
cost estimates that are subject to a number of assumptions, including assumptions about future economic conditions, cost and availability
of raw materials and labor. However, these assumptions may prove to be inaccurate. In addition, we may not be able to reduce our
costs through our cost management scheme. Any deficiencies in internal cost control or unreasonable price increases in raw materials
could result in cost overruns.
We currently generate, and expect to continue
to generate, a substantial portion of our revenues from fixed-price contracts. For the year ended August 31, 2008, and in
the period since then through June 10, 2013
,
a substantial majority (i.e. more than 90%) of our revenues were derived
from fixed-price contracts. The terms of these contracts require us to complete the delivery of equipment and machinery for a fixed
price and therefore expose us to cost overruns. Cost overruns, whether due to inefficiency, inaccurate estimates or other factors,
result in lower profit or a loss on a contract. As a result, we will only realize profits on these contracts if we successfully
estimate our costs and avoid cost overruns. Other variations and risks inherent in the performance of fixed price contracts, such
as delays caused by technical issues, any inability to obtain the requisite permits and approvals, may cause our actual overall
risks and costs to differ from our original estimates despite any buffer we may have built into our bids for increases in labor
and material costs. While there have only been two occasions involving small projects where our costs have equaled or exceeded
our revenues from the project, as a project based company, we anticipate, from time to time, encountering cost overruns or delays
on our current and future contracts. If such cost overruns or delays occur, we could experience an increase in costs exceeding
our budget or be subject to penalties with a consequent reduction in, or elimination of, the profits on our contracts.
Some of our contracts contain price adjustment
clauses, which allow us to recoup additional costs incurred as a result of unexpected increases in raw material costs. However,
we are typically required to bear a portion of the increased costs. From time to time, we may be required to perform extra or “change
order” work under our contracts despite the absence of prior agreements with our customers on the scope or price of the work
to be performed. Even though our contracts generally contain adjustment clauses for customers to pay for the extra work, we may
be required to fund the cost of such work until the change order is approved and funded by the customer. We account for the costs
of contract performance pending approval and funding of a change order by a customer by temporarily recording such costs as deferred
cost and then adjusting to cost of sales in the period when revisions to a sale contract are determined. In addition, the
performance of the extra work may cause delays in our other contract commitments and may have a negative impact on our ability
to meet specified deadlines.
We rely on third parties to complete
part of our equipment manufacturing, which may be adversely affected by the sub-standard performance or non-performance of such
third parties.
We typically engage third-party subcontractors
to perform a portion of the work under our contracts, in order to minimize the need to employ a large workforce that includes skilled
labor and semi-skilled labor, as well as to maximize our-cost efficiency and flexibility. However, we may not be able to monitor
the performance of these subcontractors as efficiently as our own in-house staff. In addition, our inability to engage qualified
subcontractors could affect our ability to maintain the quality of our products. Subcontracting exposes us to risks associated
with non-performance, delayed performance, or sub-standard performance by subcontractors. We may also suffer losses or a lesser
profit margin if the amounts we pay our subcontractors exceed our original estimates. As a result, we may experience deterioration
in quality or delays with respect to the delivery of our equipment, incur additional costs due to the delays or higher costs in
sourcing the services, or be subject to liability under the relevant contracts for our subcontractors’ performances. Such
events could impact upon our profitability, financial performance and reputation, and result in litigation or damage claims.
Delays in collecting accounts receivable,
progress payments or the release of retention money by our customers, or delays in the continued growth of our leasing business,
may affect our liquidity.
Like other companies in the construction
and construction equipment industry in China, we typically receive progress payments from our customers with reference to the value
of work completed at specified milestones, as well as receive final payments upon the delivery of complete equipment. We receive
installment payments in the process of equipment manufacturing, and usually a significant percentage of contract value would be
billed upon the delivery of the equipment to our customers.
Usually we are either requested by our customers
to secure a letter of credit issued by a licensed commercial bank or a portion of the contract value, normally 5% to 10%, is withheld
by the customer as retention money to be paid or released after the warranty period (generally one year after the completion of
the respective equipment and products).
In the past few years, we have experienced
some delay in collection of account receivables from state-owned companies, which are majority of our current customers. In the
event that we encounter delays or defaults in the payment of accounts receivable or progress payments by our customers, we may
be required to invest working capital to maintain our day-to-day operations. There is no assurance that amounts due pursuant to
accounts receivable, progress payments or retention money will be remitted by our customers on a timely basis or that those delays
or defaults in payment will not affect our financial condition and results of operations.
From 2010, we began leasing equipment to
several of our customers. As lease payments are received periodically over time, rather than in upfront payments, growth in our
leasing business could also affect our liquidity in the future.
We depend upon customers concentrated
in the infrastructure construction industry. A reduction in government spending in infrastructure development could adversely affect
our performance.
From a macro-economic perspective, a major
risk we face is the relatively large reliance on the PRC government's investment in transportation and infrastructure sectors.
The PRC government's judgment of the national economic conditions and expectations regarding economic development trends together
with the utilization status of existing infrastructures and the expected needs for future expansion may result in changes in public
budget for infrastructure development. This is especially true with respect to investments in transport infrastructure such as
railways and highways, and in the outsourcing volume of infrastructure construction projects by government bodies, changes in which
may have an adverse impact on our business volume.
The majority of our sales are generated
from customers involved in the construction of railways and highways. In particular, China Railway Construction Corporation (“CRCC”),
China Railway Group Limited (“CRG”), China Communications Company Limited (“CCC”), SinoHydro Corporation
(“SinoHydro”), Eden Technology s.r.l. (”Eden”) and BBE Solutions Sdn Bhd (“BBE”) have accounted
for a sizeable portion of our total revenues in recent years. For example, in the fiscal year ended August 31, 2008, CRCC, CCC
and CRG accounted for 35% (Bureau 16, 20%; Bureau 12, 15%), 26% and 13% of our total sales, respectively; in the fiscal year ended
August 31, 2009, CCC and CRG accounted for 46% and 16% of our total sales, respectively; in the four months from August 31, 2009
to December 31, 2009, SinoHydro Corporation ("SinoHydro"), a Chinese state-owned hydropower engineering and construction
company, accounted for 98% of our total sales; and in the year ended December 31, 2010, CRCC, CCC and CRG accounted for 37% (Bureau
16, 34%; Bureau 12, 3%), 20% and 19% of our total sales, respectively. In the year ended December 31, 2011, CRCC and
Eden accounted for 65% and 21% of our total sales, respectively. In the year ended December 31, 2012, BBE, CRG (Bureau 25) and
CCC (Bureau 1) accounted for 24%, 21% and 14% of our total sales, respectively.
Shifts in customer relationship from period
to period reflect our results in bidding for new infrastructure contracts, as well as an increase in international sales, which
accounted for approximately 26% of total sales in 2012, 26% of total sales in 2011 and 11.6% of total sales in 2010, respectively.
Although we have relatively few major customers,
we deal with many different bureaus and subsidiaries within these large PRC state-owned enterprises and often have a number individual
sales and service contracts with major customers. For example, CRG has approximately 10 separate bureaus, each with a number of
different subsidiaries, while CRCC has 15 bureaus, each with multiple subsidiaries at any point in time, including China Railway
16th Bureau Group Ltd. (No.4 Engineering Company Ltd., No. 5 Engineering Company Ltd.; and No. 1 Engineering Company Ltd.), China
Railway 3rd Bureau Group Co., Ltd (Bridge and Tunnel Engineering Company of the Third Engineering Group Co., Ltd. of China Railway;
China Railway No.3 Construction and Installation Engineering Co., Ltd; No.2 Engineering Company Ltd.; No.5 Engineering Company
Ltd.; and No.6 Engineering Company Ltd.), China Railway 12th Bureau Group Co., Ltd (No.1 Engineering Company Ltd.; No.3 Engineering
Company Ltd.; and No.4 Engineering Company Ltd.), and China Railway 1st Bureau Group Co., Ltd. All of these contracts have been
entered into in the ordinary course of business, were individually negotiated and are for equipment custom tailored for a specific
project. Any reduction or delay in the capital spending by these companies or in the PRC’s infrastructure development could
cause a significant decline in our sales and profitability.
Our revenues depend on gaining new
customers and we do not have long-term purchase commitments from our customers.
Our revenues result from individual equipment
sales, which produce a limited amount of ongoing revenues from equipment maintenance and other services. In order to maintain and
expand our business, we must be able to replenish new orders in our pipeline on a continuous basis. Our potential customers could
choose products of our competitors instead. Should they do so, we could suffer a decline in revenues and profitability.
We expect to rely increasingly on
our proprietary products and if we become involved in an intellectual property dispute, we may be forced to spend a significant
amount of time and financial resources to resolve such intellectual property dispute, diverting time and resources away from our
business and operations.
Our business is based on a number of proprietary
products, which are protected by patents filed in the PRC. We expect our future growth will rely on these proprietary products
to meet customers’ demands. For example, given the expansion of China’s rail system into mountainous and
heavily forested areas, we expect that sales of our integrated launching gantry, which is designed and well suited for such terrain,
to represent an increasing portion of our overall sales in the next several years. However, if third parties should infringe on
any of our patents on our integrated launching gantry or other products, as has happened on several occasions, we may need to devote
significant time and financial resources in legal actions brought through the China court system to attempt to halt the infringement.
For example, a lawsuit that we filed in connection with infringements of our patents ended in our favor in 2009, whereby the Beijing
court awarded us RMB 1.0 million, and a second lawsuit was also settled in Beijing court in 2010 for similar amount. Under the
terms of that settlement we agreed to grant the infringing party the use of our patent in return for it entering into a multi-year
contract with us. Conversely, in the event of an infringement claim by third parties against us, we may be required to spend a
significant amount of time and financial resources to defend against such claim. However we may not always be successful in
lawsuits that we initiate or in defending ourselves against claims made against us by others. Moreover, any litigation could
result in substantial costs and the diversion of our management resources and could materially and adversely affect our business
and operating results.
The slow down of general economy in
China in 2010, 2011 and 2012, and the reduction in government spending in railway sector due to the railway accident in 2011 could
adversely affect our results of operations.
China initiated a policy of fiscal constraint
in the latter part of 2009 to deliberately cool the country’s economy, including infrastructure investment, which resulted
in the suspension of spending on a number of major infrastructure projects, including several in which we were involved. As a result,
Chinese economic growth had slowed down noticeably in the past few years, as the Chinese GDP growth was 10.4%, 9.3%, 7.8% in 2010,
2011 and 2012, respectively. In particular, 2012 recorded the slowest growth rate since 1999.
China faced a highly complicated external
environment in 2012, as the economies of the EU countries and the United States remained sluggish, the global financial market
experienced turbulence and protectionism was on the rise. There were also a number of domestic negative factors affecting GDP growth,
including mid- and long-term upward price pressures in raw materials and labor, funding shortages for small businesses, as well
as structural changes intended to enhance energy-saving, emission reduction and other environmental protection measures already
in implementation or to be implemented. However, China's urbanization process, development of its market economy and industrialization
should continue to provide impetus for its mid- and long-term growth.
Some economists predicated that the international
economic situation will remain challenging in 2013, while in China the driving force for mid- and long-term economic growth has
not changed in 2013 while constraints in resources, environment and labor supply continued to increase. The government has shifted
its top priority from taming inflation to stabilizing growth. It has moderately eased its grip over lending, approved massive construction
projects, and stepped up tax reductions to buoy the economy in recent months.
Many of our customers are state-owned enterprises
which depend substantially on government funding of railway construction and other infrastructure projects. The high-speed
railway accident in July 23, 2011 together with the PRC government’s adopted measures designed to keep railway construction
from overheating have resulted in substantial slow-down on construction of high-speed rail lines across the country, which have
not recovered to pre-accident level yet.
As our business is closely tied to the global
infrastructure investments, and in particular such investments in China, our business was directly impacted by these trends. The
currently implemented 12
th
Five Year Plan (2011-2015) includes a significant allocation of government dollars (RMB 2.8
trillion, i.e. approximately US$456 billion) for large infrastructure projects which we anticipate will drive demand for our products
and services through the next few years. As the global economic climate continues to improve, the Chinese government may halt,
decrease or delay railway construction and maintenance as part of their macroeconomic policy.
Any decrease or delay in government funding
of railway construction and maintenance, other infrastructure projects and overall government spending could cause the number of
contracts up for bid to fall, traditional upfront payments of 20% - 40% to be lowered and payment terms to be stretched, adversely
affecting our results of operations.
Our business could be adversely affected
by claims by third parties for possible infringement of their intellectual property rights.
We may face claims from time to time that
our products infringe upon the intellectual property rights of third parties, including our competitors. If any legal proceedings
against us for infringement of intellectual property rights are successful, we may be ordered to be responsible for the losses
incurred by the claiming parties due to our infringement of their intellectual property rights. Further, if we are unable to obtain
a license for the usage of such intellectual property rights on acceptable terms, or at all, or unable to design around such intellectual
property rights, we may be prohibited from manufacturing or selling products which are dependent on the usage of such intellectual
property rights. In such cases, we may experience a material adverse effect on our business and reputation, and these types of
proceedings and their consequences could divert management’s attention from our business, all of which could have a material
adverse effect on our business and results of operations.
We rely upon receiving an adequate
supply of raw materials at acceptable prices and quality in a timely manner.
The success of our operations depends on
our ability to obtain sufficient quantities of raw materials and supplies at acceptable prices and quality in a timely manner.
We have historically relied on a few suppliers and should we subsequently lose any of these suppliers, we will be forced to seek
other suppliers. Such suppliers may be difficult to replace. We are exposed to the market risk of fluctuations in certain commodity
prices for raw materials and supplies, such as steel and electronic parts utilized in our products. The price and availability
of such raw materials and supplies may vary significantly from year to year due to factors such as China’s import restrictions,
consumer demand, producer capacity, market conditions and costs of materials. We do not have long-term contracts with our suppliers
or guarantees of supply. Should the prices of raw materials rise, we may experience lower than expected profit margins on our existing
contracts.
We may be exposed to potential product
liability claims that may affect our profitability and damage our reputation.
A majority of our products are large-scale
heavy-duty machines that require skilled labor to operate. Failures in the design, quality control, installation and assembly,
and operation of these machines, as well as accidents, geological catastrophes and other construction field hazards, may result
in injuries to personnel, loss of lives and damage to property despite repeated testing by us before and after delivery of these
machines to our customers. Existing PRC laws and regulations do not require us to maintain third party liability insurance to cover
product liability claims and we currently do not carry product liability insurance. In the event a product liability claim is brought
against us, the lawsuit may, regardless of merit or eventual outcome, result in damages to our reputation, result in loss of contracts,
inhibit our ability to win future contracts, and lead to substantial costs in litigation, product recalls and loss of revenue.
China’s financial markets are not
as sophisticated as markets in developed countries and regions such as the United States, European Union, Hong Kong, Taiwan and
Singapore. The choice and selection of insurance policies to cover the potential liability of our products may not be widely available,
which may result in our inability to obtain adequate insurance coverage against product liability risks.
Our success depends on stringent quality
controls and timely delivery of our products, and any related failure could adversely impact our financial performance and result
in damages to our reputation.
We design, manufacture and install our products
based on the specific requirements of each customer. Our ability in obtaining future orders depends upon our ability to maintain
and uphold the performance, reliability and quality standards required by our customers. We may experience delays in the collection
of accounts receivables, additional expenses resulting from warranty and maintenance services, and reduced, cancelled or discontinued
orders. Additionally, performance, reliability or quality claims by our customers, with or without merit, could result in costly
and time-consuming litigation, which would consume the time and attention of management and may result in significant monetary
damages.
The majority of our current products
are custom-made for specific projects, which provides no guarantee of future success.
We are a solution provider of customized
heavy-duty large-scale equipment for infrastructure construction projects. Each of our products is relatively unique to the construction
projects in which it is designed to operate. Although most designs provide flexibility and capacity to be modified, we are usually
engaged by our customer on a per project basis. Thus, a majority of our sales do not result in repetitive purchases of the same
piece of equipment, which may limit the extent to which our sales and profitability are sustainable in the future.
Our plans to enter the international
construction machinery and equipment market may not be successful.
Although we have conducted most of our business
within China, we have been exploring business opportunities in selected markets outside China and strategically expanding our global
footprint. Expansion into new markets outside China exposes us to substantial risks, such as risks related to currency fluctuations,
regulatory problems, punitive tariffs, trade embargoes, differences in general business environments, higher competition, costly
legal and regulatory requirements, adverse tax consequences, insufficient experience dealing with local payment and business practices,
and protectionism. In addition, the additional demands on our management from such expansion may detract from efforts in the domestic
Chinese market, causing our operating results in China to be adversely affected.
Our plans to enter into vertical markets
may not be successful.
In 2012, we made certain progress entering
new vertical markets by providing marine hoists to yacht manufacturer and wind tower hoist to wind turbine tower manufacturer and
building certain inspection equipment of the overhead concrete beams of the elevated pave way of China's high-speed railway. However,
these markets are new to us and there is no assurance that we will be successful in these markets.
We may not be able to retain,
recruit and train adequate management and engineering personnel, and our inability to attract and retain qualified personnel may
limit our development.
Our success is dependent to a large extent
on our ability to retain the services of our executive management personnel who have contributed to our growth and expansion. The
industry experience of our executive officers, directors and other members of our senior management is essential to our continuing
success. Accordingly, the loss of their services, particularly those of Mr. Yabin Liu and Mr. Fude Zhang, may be difficult to replace
and could have an adverse affect on our operations and future business prospects.
In addition, our continued operations are
dependent upon our ability to identify and recruit adequate engineering personnel in China. We require trained graduates of varying
levels of experience and a flexible work force of semi-skilled operators. Given the current rate of economic growth in China, competition
for qualified personnel will be substantial. Wage rates that we must offer our employees to retain qualified personnel may not
enable us to remain competitive.
Limitations on the ability of our
operating subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business and fund
our operations.
We are a holding company and conduct substantially
all of our business through our principal operating subsidiary, Beijing Wowjoint Machinery Co. Ltd. and affiliated entities. The
payment of dividends by entities organized in China is subject to limitations. In particular, regulations in China currently permit
payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations.
Beijing Wowjoint Machinery Co. Ltd. (“BWMC”) is also required to set aside at least 10% of its after-tax profit based
on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its
registered capital. These reserves are not distributable as cash dividends. In addition, it is required to allocate a portion of
its after-tax profit to its staff welfare and bonus fund at the discretion of its board of directors. Moreover, if Beijing Wowjoint
Machinery Co. Ltd. incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to
pay dividends or make other distributions to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends
and make other distributions to us could materially and adversely limit our ability to make investments or acquisitions that could
be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
Wowjoint currently enjoys certain
preferential tax treatment in China; there can be no assurance that this will continue.
Pursuant to the PRC Income Tax Laws, prior
to January 1, 2008, Chinese companies were subject to Enterprise Income Taxes (“EIT”) at a statutory rate of 33%, which
consisted of 30% national income tax and 3% local income tax. Beginning January 1, 2008, the new EIT law replaced the existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate
of 25% replaced the 33% rate currently applicable to both DES and FIEs, except for High Tech companies who pay a reduced rate of
15%. Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government until
the tax holiday term is completed, whichever is determined by local government.
We currently qualify as a High Technology
company, a classification which is available to companies that consistently invest in the research and development of new technology
or products or own proprietary intellectual property rights in key areas supported by the PRC government, and meet certain minimum
revenue and employment requirements. As a result, we are entitled to preferential tax treatment and enjoy the benefit of a reduced
income tax rate at 15%. We have received a 50% tax exemption (Tax Exemption Certificate) from the tax authorities in the PRC for
corporate enterprise income tax for the years ended August 31, 2007, 2008 and 2009. The approved income tax rate for the company
was 7.5%. The reduced income tax rate was applicable until December 31, 2009. Our current income tax rate has been 15% since 2009
Our business and financial performance
may be adversely affected if the PRC government reduces or postpones public spending on infrastructure construction.
Our largest customers are business entities
such as project and construction companies established and directed by the central and local governments of the PRC. The future
growth of the infrastructure construction industry in China depends primarily upon the continued need for major infrastructure
projects. The nature, extent and timing of those projects will, however, be determined by the interplay of a variety of factors,
including the PRC government’s spending on infrastructure in China, as well as the general conditions and prospects for China’s
economy. Since the majority of funding for infrastructure construction projects in China comes from governmental budgets, implementation
of the projects relies, to a significant degree, on the PRC government’s public policies and spending. Changes in public
policies or government budgets may therefore impact our business operations and financial performance.
The PRC government’s spending on infrastructure
has historically been, and will continue to be, cyclical in nature and vulnerable to China’s economic growth and direction.
The PRC government has, in recent years, implemented various policies in an effort to control the growth rate of certain industries
and to limit inflation, which has affected the level of public spending on infrastructure construction projects. A significant
decrease or delay in public spending on infrastructure construction in China could reduce the number of available construction
projects, which in turn could reduce the demand for heavy duty construction equipment, and thus reduce the market demand for our
core business.
If we cannot compete successfully
for market share against other non-standard construction equipment and machinery companies, we may not achieve sufficient revenues
and our business could suffer.
The market for our products and services
is characterized by intense competition and rapid technological advances. Our products and services compete with a multitude of
products and services developed, manufactured and marketed by others. We will also compete with new market entrants in the future.
Existing or future competing products may be of higher quality, contain more sophisticated technology, provide greater utility
or other benefits, or may offer comparable performance at a lower cost. We must therefore continue to develop innovative new
solutions and products for our customers to remain competitive. If our products fail to capture and maintain market share, we may
not achieve sufficient product revenues, and our business could suffer.
We are subject to increasing environmental
regulation
Our facilities, operations and products
are subject to increasingly stringent environmental laws and regulations, including laws and regulations governing air emissions,
discharges to water and the generation, handling, storage, transportation, treatment and disposal of waste materials. While we
believe we are in compliance in all material respects with these environmental laws and regulations, there can be no assurance
that we will not be adversely affected by costs, liabilities or claims with respect to existing or subsequently acquired operations
resulting from present laws and regulations or those that may be adopted or imposed in the future.
Risks Associated with
Conducting Business in China
Our results of operations, financial position
and prospects are subject to a certain degree to the economic, political and legal developments of the PRC.
Political and economic policies of
the PRC government could affect Wowjoint's business and results of operations.
The Chinese economy differs from the economies
of most developed countries in a number of respects, including:
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level of government involvement;
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level of capital reinvestment;
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control of capital reinvestment;
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control of foreign exchange; and
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allocation of resources.
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Prior to the PRC government’s adoption
of reform and the “Open Door” policies in 1978, China was a planned economy. Since then, the PRC government has implemented
a number of measures to encourage growth and to guide the allocation of resources, thus resulting in significant economic and social
development in the past 30 years. China has since transitioned into a more market-oriented economy.
Although the PRC government still owns a
significant portion of the productive assets in China, economic reform policies since the late 1970s have encouraged the development
of autonomous and privately owned businesses, the utilization of market forces and the establishment of good corporate governance
measures in China. We cannot predict whether changes resulting from these reforms in China’s political, economic and social
conditions and policies, or in relevant laws and regulations, will have any adverse effects on our current or future business,
operational results or financial condition.
In addition, our ability to continue to
sustain and expand our business is dependent on a number of factors, including general economic and capital market conditions and
credit availability from banks or other lenders. Recently, the PRC government has articulated a need to control the rate of economic
growth and has been reported to be tightening its monetary policies, including increasing interest rates on bank loans and deposits
and tightening the money supply to control growth in lending. We cannot give any assurance that further measures to control growth
in lending will not be implemented in a manner that may adversely affect its future growth and profitability. Furthermore, we cannot
assure that the historical economic and market conditions affecting our business will continue, or that we will be able to sustain
its growth.
Uncertainties with respect to the
PRC legal system could limit the legal protections available to Wowjoint and its shareholders.
Our operating subsidiaries and associated
companies are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for
reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced
the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations
and rules involve uncertainties that may limit legal protections available to our shareholders and us. In addition, any litigation
in China may be protracted and result in substantial costs and the diversion of resources and management attention.
Fluctuations in China's economy may
slow the growth of Wowjoint and reduce its profitability.
China has been one of the world’s
fastest growing economies as measured by GDP in recent years. It has also been one of the driving forces for the heightened demand
in the world’s construction equipment industry. However, China may not be able to sustain such a growth rate. In addition,
a slowdown in the economies of the United States, the European Union and certain Asian nations, with which China has important
trade relationships, may adversely affect the economic growth of China, which may in turn lead to a decrease in demand for China’s
construction equipment and correspondingly, demand for our services. We cannot assure that its financial condition and operational
results, as well as its future prospects, will not be adversely affected by an economic downturn in China.
Changes in the laws, regulations and policies adopted
by the PRC government, including in relation to the environment, labor and taxation, may adversely affect our business, growth
strategies, operating results and financial condition.
The political, economic and social conditions
in the PRC differ from those in more developed countries in many respects, including structure, government involvement, level
of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and
trade balance position. For the past three decades, the PRC government has implemented economic reform and measures emphasizing
the utilization of market forces in the development of the PRC economy. Although we believe these economic reforms and measures
will have a positive effect on the PRC’s overall and long-term development, the resulting changes may also have any adverse
effect on our current or future business, financial condition or results of operations. Despite these economic reforms and measures,
the PRC government continues to play a significant role in regulating industrial development, the allocation of natural resources,
production, pricing and management of currency, and there can be no assurance that the PRC government will continue to pursue
a policy of economic reform or that the current direction of reform will continue.
Our ability to successfully expand our
business operations in the PRC depends on a number of factors, including macroeconomic and other market conditions and credit
availability from lending institutions. Stricter lending policies in the PRC may affect our ability to obtain external financing,
which may reduce our ability to implement our expansion strategies. We cannot assure you that the PRC government will not
implement any additional measures to tighten lending standards or that, if any such measure is implemented, it will not adversely
affect our future results of operations or profitability.
Demand for our products and our business,
financial condition and results of operations may be adversely affected by the following factors:
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political instability or changes in social conditions in the PRC;
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changes in laws, regulations and administrative directives;
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measures which may be introduced to control inflation or deflation;
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changes in the rate or method of taxation; and
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reduction in tariff protection and other import and export restrictions.
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These factors are affected by a number
of variables that are beyond our control.
Changes in PRC tax laws may result
in Wowjoint being subject to a higher income tax rate.
Under the new PRC Enterprise Income Tax
Law that became effective on January 1, 2008 (the “New EIT Law”), enterprises organized under the laws of jurisdictions
outside the PRC with their de facto management bodies located within the PRC may be considered PRC resident enterprises and therefore
subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The New EIT Law, however, does not define the
term “de facto management bodies”. If, among other things, a portion of our management continues to be located in the
PRC, the Company may be considered a PRC resident enterprise by PRC tax administration and therefore subject to PRC enterprise
income tax at the rate of 25% on our worldwide income, which may have a material adverse effect on our financial results. In addition,
although the New EIT Law provides that “dividend income between qualified resident enterprises” is exempted income,
it is still unclear as to what is considered a “qualified resident enterprise” under the New EIT Law.
Almost all of Wowjoint's assets are
located in China and substantially all of its revenue are derived from its operations in China. Accordingly, Wowjoint’s
results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments
in China.
The PRC’s economic, political and
social conditions, as well as government policies, could affect our business. The PRC economy differs from the economies of most
developed countries in many respects.
Since 1978, China has been one of the world’s
fastest-growing economies in terms of gross domestic product (GDP) growth. There can be no assurance, however, that such growth
will be sustained in the future. If in the future China’s economy experiences a downturn or grows at a slower rate than expected,
there may be less demand for spending in certain industries. The PRC’s economic growth has been uneven, both geographically
and among various sectors of the economy. The PRC government has implemented various measures to encourage sustainable economic
growth and guide the allocation of resources. The PRC government has also begun to use macroeconomic tools to decelerate the rate
of Chinese economic growth. Some of these measures benefit the overall PRC economy, but may also have a negative effect on our
business.
The PRC economy has been transitioning from
a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing
the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government.
In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial
policies. It also exercises significant control over PRC economic growth through the allocation of resources, and by controlling
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. We cannot assure that China’s economic, political or legal systems will not develop in a way that
becomes detrimental to our business prospects, financial conditions and results of operations.
If the PRC government finds that Wowjoint’s
organizational structure does not comply with PRC governmental restrictions on foreign investment, or if these regulations or the
interpretation of existing regulations change in the future, it could be subject to significant penalties or be forced to
relinquish its interests in those operations.
If Wowjoint or any of its potential
future subsidiaries or affiliated entities are found to be in violation of any existing or future PRC laws or regulations, the
relevant PRC regulatory authorities might have the discretion to:
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revoke
the business and operating licenses of possible future PRC subsidiaries or affiliates;
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confiscate
relevant income and impose fines and other penalties;
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discontinue
or restrict possible future PRC subsidiaries’ or affiliates’ operations;
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require
Wowjoint or possible future PRC subsidiaries or affiliates to restructure the relevant ownership structure or operations;
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restrict or prohibit remittance of any profits or dividends
abroad by our PRC subsidiaries or affiliates;
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impose
conditions or requirements with which Wowjoint or possible future PRC subsidiaries or affiliates may be not be able to comply.
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The imposition if any of these penalties
could have a material adverse effect on our ability to conduct business.
In addition, the relevant PRC regulatory
authorities may impose further penalties. Any of these consequences could have a material adverse effect on our operations.
In many cases, existing regulations with
regard to investments from foreign investors and domestic private capital investors lack detailed explanations and operational
procedures, and are subject to interpretations that may change over time. We thus cannot be certain how the regulations will
be applied to its business, either currently or in the future. Moreover, new regulations may be adopted or the interpretation of
existing regulations may change, any of which could result in similar penalties and have a material adverse effect upon our ability
to conduct our business.
Because Chinese law governs most
of Wowjoint's current material agreements, it may not be able to enforce its rights within the PRC or elsewhere, which could
result in a significant loss of business, business opportunities or capital.
We cannot assure you that we will be
able to enforce any of our material agreements or that remedies will be available outside of the PRC. The Chinese legal system
is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases
have little precedential value. Although legislation in China over the past 25 years has significantly improved the protection
afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements
are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since
their enactments, the discrete understanding of the judges or government agencies of the same legal provision, the inconsistent
professional abilities of the judicators, and the inclination to protect local interests, interpretation and enforcement of PRC
laws and regulations involve uncertainties which could limit the legal protection available to Wowjoint and foreign investors.
The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business,
business opportunities or capital and could have a material adverse impact on our business prospects, financial condition,
and results of operations. In addition, the PRC legal system is based in part on government policies and internal rules (some of
which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware
of its violation of these policies and rules until sometime after the violation. In addition, any litigation in China, regardless
of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.
If the PRC imposes restrictions to
reduce inflation, future economic growth in the PRC could be severely curtailed, which could lead to a significant decrease in
Wowjoint’s profitability.
While the economy of the PRC has experienced
rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country.
Rapid economic growth can lead to growth in the supply of money and rising inflation. In order to control inflation, in the past
the PRC has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. If similar
restrictions are imposed, it may lead to a slowing of economic growth and decrease interest in the services or products we may
ultimately offer, leading to a decline in our profitability.
As a result of merger and acquisition
regulations which became effective on September 8, 2006 relating to acquisitions of assets and equity interests of Chinese companies
by foreign persons, it is expected that acquisitions will take longer and be subject to economic scrutiny by the PRC government
authorities such that Wowjoint may not be able to complete a transaction, negotiate a transaction that is acceptable to its shareholders,
or sufficiently protect shareholder’s interests in a transaction.
On August 8, 2006, six PRC regulatory agencies,
namely, the Ministry of Commerce (“MOFCOM”), the State Assets Supervision and Administration Commission (“SASAC”),
the State Administration for Taxation, the State Administration for Industry and Commerce (“SAIC”), the China Securities
Regulatory Committee (“CSRC”), and the PRC State Administration of Foreign Exchange (“SAFE”), jointly adopted
the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8,
2006 (the “M&A Rules”). These comprehensive rules govern the approval process by which a Chinese company may participate
in an acquisition of its assets or its equity interests and by which a Chinese company may obtain public trading of its securities
on a securities exchange outside the PRC.
Although prior to September 8, 2006 there
was a complex series of regulations administered by a combination of provincial and centralized agencies for approval of acquisitions
of Chinese enterprises by foreign investors, the M&A Rules have largely centralized and expanded the approval process to MOFCOM,
SAIC, SAFE or its branch offices, SASAC, and the CSRC. The M&A Rules established, among other things, additional procedures
and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including
the requirement in some instances that the MOFCOM be notified in advance when a foreign investor acquires equity or assets of a
PRC domestic enterprise. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming
and involves significant uncertainty, and any required approval processes, including obtaining approval from the MOFCOM, may delay
or inhibit our ability to complete such transactions, which could affect our ability to expand its business or maintain its market
share.
Depending on the structure of the transaction,
these regulations will require the Chinese parties to make a series of applications and supplemental applications to the aforementioned
agencies, some of which must be made within strict time limits and require approvals from one or more of the aforementioned agencies.
The application process has been supplemented to require the presentation of economic data concerning a transaction, the economic
and substantive analysis of the target business and the acquirer and the terms of the transaction by MOFCOM and the other governing
agencies, as well as an evaluation of compliance with legal requirements. The application process for approval now includes submissions
of an appraisal report, an evaluation report and the acquisition agreement, depending on the structure of the transaction. An employee
settlement plan for the target company shall also be included in the application.
The M&A Rules also prohibit a transaction
at an acquisition price obviously lower than the appraised value of the Chinese business or assets. The regulations require that
in certain transaction structures, the consideration must be paid within strict time periods, generally not in excess of a year.
In the agreement reached by the foreign acquirer, target, creditors and other parties, there must be no harm to third parties and
the public interest in the allocation of assets and liabilities being assumed or acquired.
It is expected that compliance with the
regulations will be more time consuming than in the past, will be more costly for the Chinese parties and will permit the government
to conduct a much more extensive evaluation and exercise much greater control over the terms of the transaction. Therefore, acquisitions
in China may not be able to be completed because the terms of the transaction may not satisfy aspects of the approval process or,
even if approved, because they are not consummated within the time permitted.
Ambiguities in the M&A Rules may
make it difficult for Wowjoint to properly comply with all applicable rules and may affect Wowjoint's ability to consummate
an acquisition.
Although the M&A Rules set forth many
requirements that have to be followed, there are many ambiguities with respect to the meaning of many provisions of the M&A
Rules. Moreover, the ambiguities give regulators wide latitude in the enforcement of regulations and approval of transactions.
Therefore, we cannot predict the extent to which the M&A Rules will apply to any acquisition transition in connection
with Wowjoint, and therefore, there may be uncertainty in whether or not the transaction that has or will be completed by us will
violate the M&A Rules.
Exchange controls that exist in the
PRC may limit Wowjoint's ability to utilize its cash flow.
We are subject to the PRC’s rules
and regulations on currency conversion. In the PRC, the SAFE regulates the conversion of the Renminbi into foreign currencies.
Under PRC regulations, Renminbi may be converted into foreign currency for payments relating to “current account transactions,”
which include among other things dividend payments and payments for the import of goods and services, by complying with certain
procedural requirements. our PRC subsidiaries may also retain foreign exchange in their respective current bank accounts, subject
to a cap set by SAFE or its local counterpart, for use in payment of international current account transactions.
However, conversion of Renminbi into foreign
currencies, and vice versa, for payments relating to “capital account transactions,” which principally includes investments
and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility
of the Renminbi for capital account transactions could affect the ability of our PRC subsidiaries to make investments overseas
or to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from the parent
entity.
Any existing and future restrictions on
currency exchange may affect the ability of our PRC subsidiaries or affiliated entities to obtain foreign currencies, limit our
ability to utilize revenues generated in Renminbi to fund our business activities outside China that are denominated in foreign
currencies, or otherwise materially and adversely affect our business.
A failure by Wowjoint’s shareholders
or beneficial owners who are PRC citizens or residents to comply with certain PRC foreign exchange regulations could restrict Wowjoint’s
ability to distribute profits, restrict Wowjoint’s overseas and cross-border investment activities or subject the combined
company to liability under PRC laws, which could adversely affect Wowjoint’s business and financial condition.
In October 2005, SAFE issued the Notice
on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Round-trip Investments
via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 75 states that PRC citizens or residents must register
with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose
of overseas equity financing involving a round-trip investment whereby the offshore entity acquires or controls onshore assets
or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update their SAFE registrations
when the offshore SPV undergoes material events relating to increases or decreases in investment amount, transfers or exchanges
of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not
involve round-trip investments. To further clarify the implementation of SAFE Circular 75, SAFE issued SAFE Circular 106 on May
29, 2007. Under SAFE Circular 106, PRC subsidiaries of an offshore company governed by SAFE Circular 75 are required to coordinate
and supervise the filing of SAFE registrations in a timely manner by the offshore holding company’s shareholders who are
PRC residents.
We were aware of the relevant requirements
of SAFE Circulars 75 and 106 when the acquisition of Beijing Wowjoint by China Fundamental was completed on February 22, 2010.
For this purpose, Beijing Wowjoint retained a PRC legal counsel to certify the compliance with the requirements of SAFE Circulars
75 and 106 by the PRC subsidiaries at the closing of the acquisition. Consequently, a PRC law firm was retained by the Wowjoint
Group to issue a PRC legal opinion on February 22, 2010 for the benefit of China Fundamental. According to the PRC legal opinion
for the benefit of China Fundamental, neither Circular 75 nor any of its implementing rules are applicable to the acquisition of
February 22, 2010, since at the time of the completion of the acquisition, Giant Nova did not legally own any interest in any of
the PRC subsidiaries despite the fact that its ultimate beneficial shareholders were also the majority shareholders of Beijing
Wowjoint Machinery Company. As such, the acquisition of Giant Nova should not be treated as an acquisition of an offshore entity
with substantial PRC assets or business. China Fundamental Acquisition Corp acquired the Beijing Wowjoint Machinery assets and
business through acquiring Authentic Genius Limited (Hong Kong) and its subsidiary through a VIE structure. Authentic Genius Limited
had no PRC shareholders at the time of acquisition. Based upon such facts, our PRC counsel concluded that neither Circular 75 nor
any of its implementing rules are applicable to the acquisition. Upon the strength of such PRC legal opinion, our management concluded
that the shareholders of the PRC subsidiaries were not required to make a SAFE Circular 75 filing prior to or on the closing of
the acquisition. Further, in March 2010, our PRC resident shareholders inquired through the local SAFE branch about the relevant
SAFE regulations. However, the local SAFE branch was not certain about whether the registration requirements applied to our PRC
resident shareholders with our corporate structure. If shareholders who are subject to the SAFE regulations fail to comply, the
PRC subsidiaries are required to report such failure to the local SAFE authorities. Our management believes that the shareholders
of the PRC subsidiaries were not required to make a SAFE Circular 75 filing prior to or upon the closing of the acquisition, or
upon the transfer of the ownership interests from Beijing Wowjoint Machinery Co., Ltd. to BXFI.
Despite various interpretations issued by
SAFE, some of the terms and provisions in the SAFE regulations remain unclear and implementation by central SAFE and local SAFE
branches of the SAFE regulations has been inconsistent since its adoption in 2005. Because of uncertainty over how the SAFE regulations
will be interpreted and implemented, and how SAFE will apply them to us, we cannot predict how these regulations will affect our
business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign
exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance
with the SAFE regulations by our PRC resident shareholders. In addition, in some cases, we may have little control over either
our present or prospective direct or indirect PRC resident shareholders or the outcome of such registration procedures. A failure
by our PRC resident shareholders or future PRC resident shareholders to comply with the SAFE regulations, if SAFE requires it,
could subject us or our PRC resident shareholders to penalties or other legal sanctions, restrict our cross-border investment activities,
restrict our ability to contribute additional capital into our PRC subsidiaries, including the transfer of the proceeds from this
offering into our PRC subsidiaries, or limit our subsidiary’s ability to make distributions or pay dividends, affect our
ownership structure, or result in liability under PCR law for evasion of applicable foreign exchange restrictions, which could
adversely affect our business and prospects.
We are committed to complying, and to ensuring
that our shareholders, who are PRC citizens or residents, comply with the SAFE Circular 75 requirements after the acquisition.
However, we cannot assure that we, or our owners, will be able to complete the necessary filings and registrations with SAFE for
the proposed business combination on a timely basis.
Dividends payable by us to our foreign investors and profits
on the sale of our shares may be subject to tax under PRC tax laws.
Under the
Implementing Regulations for
the Corporate Income Tax Law
, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident
enterprises,” not having an establishment or place of business in the PRC, or which do have such establishment or place of
business but the relevant income is not effectively connected with the establishment or place of business, to the extent that such
dividends have their sources within the PRC. Similarly, any profits realized through the transfer of shares by such investors are
also subject to 10% PRC income tax if such profits are regarded as income derived from sources within the PRC. If we are considered
a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our share, or the profits you may
realize from the transfer of our shares, would be treated as income derived from sources within the PRC and be subject to PRC tax.
If we are required under the
Implementing Regulations for the Corporate Income Tax Law
to withhold PRC income tax on dividends
payable to our non-PRC investors that are “non-resident enterprises,” or if you are required to pay PRC income tax
on the transfer of our shares, the value of your investment in our shares may be materially and adversely affected.
We may be classified as a “resident
enterprise” under PRC Enterprise Income Tax Law, or “EIT Law,” and be subject to PRC taxation on our worldwide
income.
China passed a new EIT Law effective on
January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise
established outside of China with its “de facto management bodies” located within China is considered a “resident
enterprise,” meaning it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The
implementation rules to the EIT law define “de facto management bodies.” Further, on April 22, 2009, the PRC State
Administration of Taxation issued the Notice of the State Administration of Taxation on Issues about the Determination of Chinese-controlled
Enterprises Registered Abroad as Resident Enterprises on the Basis of their De Facto Management Bodies (“Notice 82”).
However it remains unclear how the PRC tax authorities will interpret and implement such rules. Our senior management are primarily
located in the PRC, and almost all of our revenues currently arise from our operations in China.
Under the law, a Tax Resident Enterprise
(“TRE”) refers to an enterprise that is established in accordance with the laws in China, or an enterprise that is
established in accordance with the laws of foreign countries but with "a place of effective management" located with
China. The “place of effective management” refers to an establishment that exercises, in substance, overall
management and control over the production and business, personnel, accounting and property of an enterprise.
Wowjoint Holdings mainly serves as a vehicle
to hold the operating entities and to obtain finance from international capital markets, and only generates passive interest income.
Our senior management, assets and financial accounting books are primarily located in the PRC, as are three of our five directors.
Most of our in-person regular/quarterly board meetings are held in China, and major strategic business decisions are generally
made in China.
Based on the above factors, we are likely
to be recognized as a resident enterprise by PRC tax authorities. In accordance with the EIT Law, dividends, which arise from tax
resident enterprise to non-tax resident enterprise, are subject to a 10% withholding income tax, while dividends which arise from
tax resident enterprise to a tax resident enterprise, are tax free. Therefore, if we are recognized as a resident enterprise, withholding
tax is zero when it receives dividends from its subsidiaries incorporated in PRC.
If the PRC tax authorities determine that
we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income, as well as PRC
enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, as well as Notice 82, dividends
paid to us are each treated as a “resident enterprise” under EIT Law and may qualify as “tax-exempt income,”
and withholding tax may be exempted in this case. However, due to the uncertainty about how the PRC tax authorities will interpret
and implement the above-mentioned new rules, such dividends may be subject to withholding tax (generally at a rate of 10% or, if
the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with respect to Taxes on Income is applicable, 5%). Finally, the new “resident enterprise”
classification could result in a 10% PRC tax being imposed on dividends we pay to our non-PRC security holders that are not PRC
tax “resident enterprises” and gains derived by them from transferring our securities, if such income is considered
PRC-sourced income by the relevant PRC tax authorities.
It is unclear how the relevant governmental
authorities will interpret and implement the laws and regulations pertaining to offshore and cross-border taxes. Given this uncertainty,
there is a risk that we could be subject to unfavorable tax treatment.
If any such PRC taxes apply, a non-PRC
security holder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit
against such security holder’s domestic income tax liability (subject to applicable conditions and limitations). You should
consult with your own tax advisors regarding the applicability of any taxes, the effects of any applicable income tax treaties,
and any available foreign tax credits.
Risks Related to Our Organization
Affiliates of Realink Group Limited,
which is controlled by the Company’s executive officers, beneficially own a majority of our voting shares.
Affiliates of Realink Group Limited, or
Realink, may be deemed to beneficially own approximately 54.8% of our voting power. Realink is controlled by our executive officers.
Mr. Yabin Liu, our Chief Executive Officer and Chairman is a 44.4% holder of Realink, a British Virgin Island company. Mr.
Fude Zhang, our Chief Technical Officer and director, is a 39.5% holder of Realink, and Mr. Liguo Liu is a 5.4% holder of Realink.
Mr. Yasheng Liu, former Senior Vice President and the younger brother of Mr. Yabin Liu, who passed away in May 2011, was a 10.7%
owner. The shareholders of Realink have agreed that approximately 3.7 million of the ordinary shares held by them will be
held in escrow until February 22, 2014. In addition, pursuant to an earn-out provision in the Share Purchase Agreement,
we have agreed to issue to Realink up to 500,000 additional shares if certain performance targets are achieved by the company.
Because of its control of our voting power,
Realink is able to indirectly exert considerable control over us and is able to influence the appointment of management and the
outcome of all matters requiring shareholder approval. Realink’s affiliates may be able to cause, prevent or delay a change
of control of us or a change in the composition of our board of directors and could preclude any unsolicited acquisition of us.
In addition, because affiliates of Realink may substantially determine the outcome of a shareholder vote, Realink’s affiliates
could deprive shareholders of an opportunity to receive a premium for their shares as part of a sale of Wowjoint, and that voting
control could ultimately affect the market price of our ordinary shares.
As a result, our executive officers have
substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially
all of our assets, election of directors and other significant corporate actions. They may take actions that are not in the best
interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control
of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company and may reduce the price of our shares. These actions may be taken even if they are opposed by our other shareholders.
For more information regarding our principal shareholders and their affiliated entities, see “Item 7. Major Shareholders
and Related Party Transactions.”
The SEC investigation, should such
investigation results in enforcement action could hurt our business significantly.
As disclosed previously, on December 23,
2011, we received two subpoenas from the Securities and Exchange Commission . The subpoenas require that Wowjoint provide certain
categories of documents to the SEC and that a representative of Wowjoint testify before the SEC.
As stated in the SEC correspondence that
accompanied the subpoenas, the investigation and subpoenas should not be construed as an indication that violations of laws have
occurred. The investigation is a non-public fact-finding inquiry. It is not possible at this time to predict the outcome of the
SEC investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what, if
any, penalties or other remedies may be imposed. Wowjoint is committed to cooperating with the SEC.
The investigation
may require considerable legal expense and management’s time and attention. Moreover, if the SEC were to initiate an enforcement
proceeding against us or our officers or both, an enforcement proceeding could subject us or our management to injunctions, fines,
and other penalties or sanctions or result in private civil actions, loss of key personnel, or other adverse consequences.
The disclosures in our reports and
other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies
in the PRC.
We are regulated by the SEC and our reports and other filings
with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities
Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny
of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review
by China Securities Regulatory Commission , a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly,
you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has
done any review of our company, our SEC reports, other filings or any of our other public pronouncements.
Legal risks re SEC investigation
We become directly subject to the
recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies at the end of 2011, we have expended
significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation
significantly and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved
favorably.
Recently, U.S. public companies that have
substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity,
the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually
worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal
and external investigations into the allegations.
On December 23, 2011, we received two subpoenas
from the Securities and Exchange Commission. The subpoenas require that Wowjoint provide certain categories of documents to the
SEC and that a representative of Wowjoint testify before the SEC. As stated in the SEC correspondence that accompanied the subpoenas,
the investigation and subpoenas should not be construed as an indication that violations of laws have occurred. The investigation
is a non-public fact finding inquiry. It is not possible at this time to predict the outcome of the SEC investigation, including
whether or when any proceedings might be initiated, when these matters may be resolved or what, if any, penalties or other remedies
may be imposed. Wowjoint is committed to cooperating with the SEC.
This sector-wide scrutiny, criticism and
negative publicity have had a negative effect on our Company, our business and our stock price. We have had to expend significant
resources to investigate the matter and try to resolve the SEC investigation. This situation has been costly and time consuming
and distracted our management from growing our company. If the SEC investigation cannot be resolved favorably, our company and
business operations will be severely impacted and your investment in our stock could be rendered worthless.
Prior to China Fundamental’s
acquisition of Beijing Wowjoint in February 2010, China Fundamental had no operations, and Beijing Wowjoint had not operated as
a public company. Fulfilling our obligations incidental to being a public company will be expensive and time consuming.
Prior to China Fundamental’s acquisition
of Beijing Wowjoint in February 2010, China Fundamental had no operations, and Beijing Wowjoint had not operated as a public company.
Each of China Fundamental and Beijing Wowjoint had maintained relatively small finance and accounting staffs. Although China Fundamental
had maintained disclosure controls and procedures and internal control over financial reporting as required under the Federal securities
laws with respect to its very limited activities, it has not been required to maintain and establish these disclosure controls
and procedures and internal control as will be required with respect to a business such as Beijing Wowjoint with its substantial
operations. Under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the U.S. Securities and Exchange Commission
(“SEC”), we have been implementing additional corporate governance practices and adhering to a variety of reporting
requirements and complex accounting rules. Compliance with these obligations has required significant management time, placed significant
additional demands on our finance and accounting staffs and on our financial, accounting and information systems, and has significantly
increased our insurance, legal and financial compliance costs and other expenses. In addition, we have also been implementing corporate
governance practices of public companies. We expect these and other rules and regulations applicable to public companies to increase
our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. While
we cannot yet accurately predict the full extent of the additional costs we may incur or the timing of such costs, we anticipate
that our additional annual cash needs as a result of being a public company will exceed US$1 million per annum. We have also
been required to hire additional accounting and financial staff since the acquisition, including a new chief financial officer
and comptroller, with appropriate public company experience and technical accounting knowledge, resulting in higher expenses.
If we are unable to comply with the requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the reports from
our independent registered public accountant required by the Sarbanes-Oxley Act, which may preclude us from keeping our filings
with the SEC current. Non-current reporting companies are subject to various restrictions and penalties.
We must comply with Section 404
of the Sarbanes-Oxley Act, which requires us to document and test our internal controls over financial reporting. Any delays or
difficulty in satisfying these requirements could adversely affect our future results of operations and stock price.
Section 404 of the Sarbanes-Oxley Act
requires us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established
control framework and to report on our management’s conclusion as to the effectiveness of these internal controls over financial
reporting beginning with the fiscal year 2012. Any delays or difficulty in satisfying these requirements could adversely affect
future results of operations and our share price. We may also incur significant costs to comply with these requirements.
We may in the future discover areas of internal
controls over financial reporting that need improvement. There can be no assurance that remedial measures will result in adequate
internal controls over financial processes and reporting in the future. Any failure to implement the required new or improved controls,
or difficulties encountered in their implementation, could have a material adverse affect on our results of operations or could
cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over
financial reporting as required by Section 404 of the Sarbanes-Oxley Act, investors may lose confidence in the reliability
of our financial statements, which could result in a decrease in the value of our securities. In addition, failure to comply with
Section 404 of the Sarbanes-Oxley Act could potentially subject us to sanctions or investigation by the SEC or other regulatory
authorities.
The Company may be classified as a
passive foreign investment company for United States federal income tax purposes, which could subject United States investors in
our ordinary shares to adverse tax consequences.
Depending upon the value of our ordinary
shares and the nature of our assets and income over time, we could be classified as a passive foreign investment company (a "PFIC")
for United States federal income tax purposes. Because there are uncertainties in the application of the relevant rules
and PFIC status is a fact-intensive determination made on an annual basis, there can be no assurance that we are not or will not
become classified as a PFIC. If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in
"Taxation – United States Federal Income Tax Considerations) would be subject to special rules generally intended to
reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing
in a non-United States corporation that does not distribute all of its earnings on a current basis. Further, if we are
classified as a PFIC for any year during which a U.S. Holder holds our ordinary shares, we generally will continue to be treated
as a PFIC for all succeeding years during which such U.S. Holder holds our ordinary shares. For more information see
the section titled “Taxation – Certain U.S. Federal Income Tax Considerations”.
Risks Related to Our Securities
The price of our securities may continue
to be volatile and may decrease in response to various factors, which could adversely affect our business and cause our shareholders
to suffer significant losses.
Our securities are illiquid, and the prices
of such securities have been and may continue to be volatile in the indefinite future. Only a limited market has developed for
the purchase and sale of our securities. We cannot predict how liquid the market for our securities might become. Therefore, the
purchase of our securities must be considered a long-term investment acceptable only for prospective investors who are willing
and can afford to accept and bear the substantial risk of the investment for an indefinite period of time. Because there is a limited
public market for the resale of our securities, investors in our securities may not be able to liquidate their investments and
our securities may not be acceptable as collateral for a loan.
Since trading of our ordinary shares began
on May 16, 2008, the high and low sale prices of our ordinary shares through June 10, 2013 were $7.98 and $0.10,. The price of
our securities could fluctuate widely in response to various factors, many of which are beyond our control, including the following:
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changes in our industry;
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competitive pricing pressures;
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our ability to obtain working capital or financing;
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additions or departures of key personnel;
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limited “public float” in the hands of a small number
of persons, whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our shares;
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our ability to execute our business plan;
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operating results which fall below expectations due to lower than
expected revenues, higher than anticipated expenses or other factors;
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loss of any strategic relationship;
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economic and other external factors; and
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period-to-period fluctuations in our financial results.
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In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular
companies. These market fluctuations may also materially and adversely affect the market price of our securities.
Because we do not intend to pay dividends
on our shares, shareholders will benefit from an investment in our shares only if our shares appreciate in value.
We intend to retain all future earnings,
if any, for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our
board of directors and will depend on factors our board of directors deem relevant, including among others, our results of operations,
financial condition and cash requirements, business prospects, and the terms of our credit facilities and other financing arrangements.
Accordingly, realization of a gain on shareholders’ investments will depend on the appreciation of the price of our shares.
There is no guarantee that our shares will appreciate in value.
Offers or availability for sale of
a substantial number of our ordinary shares may cause the price of our securities to decline.
The ability of our security holders to sell
substantial amounts of our securities in the public market creates a circumstance commonly referred to as an “overhang,”
and in anticipation of significant sales the market price of our securities could fall. The existence of an overhang, whether or
not sales have occurred or are occurring, also could make it more difficult for us to raise additional financing through the sale
of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
If certain performance targets are
met, up to 500,000 earn-out shares will be issuable. “Market overhang” from these ordinary shares as a result
of that potential dilution could reduce the market price of the ordinary shares.
If certain performance targets are met,
up to 500,000 earn-out shares will be issuable to the shareholders of Realink. In particular,
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200,000 earn-out shares will be issued in the event that our
closing price per share is at or above $10.00 for 180 days out of 360 days during the period from the acquisition closing date,
February 22, 2010, to the second anniversary of the closing date.
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200,000 earn-out shares will be issued in the event that our
closing price per share is at or above $13.80 for 180 days out of 360 days during the period from the acquisition closing date
to the third anniversary of the closing date.
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100,000 earn-out shares will be issued in the event that our
average daily trading volume is no less than 200,000 ordinary shares for three consecutive months during the period from the
closing date of the acquisition to the second anniversary of the closing date.
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For example, if the per share closing price
is above the target price for 180 days in any consecutive 360 days in the two or three year period from the closing date of the
business combination, February 22, 2010, the performance target will have been met, and the respective incentive shares will be
issued.
Once issued, the earn out shares are not
returnable or otherwise cancelable if certain conditions are not met.
If these shares are issued, a
substantial additional number of our ordinary shares will be eligible for resale in the public market, which may reduce the market
price for our securities.
We
may choose to redeem our outstanding warrants at a time that is disadvantageous to the warrant holders
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Subject to there being a current prospectus
under the U.S. Securities Act of 1933, we may redeem all of our outstanding warrants at any time at a price of $.01 per warrant,
upon a minimum of 30 days prior written notice of redemption if, and only if, the last sale price of our shares equals or exceeds
$10.00 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of
redemption. Calling all of our outstanding warrants for redemption could force the warrant holders:
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to exercise the warrants and pay the exercise price for such warrants
at a time when it may be disadvantageous for the holders to do so;
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to sell the warrants at the then current market price when they might
otherwise wish to hold the warrants; or
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to accept the nominal redemption price which, at the time the warrants
are called for redemption, is likely to be substantially less than the market value of the warrants.
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ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Description of the Business Combination of Beijing Wowjoint
and its Affiliates with CFAC
Wowjoint Holdings Limited, formerly known
as China Fundamental Acquisition Corporation (“CFAC”), is a Cayman Islands company, originally organized as a blank
check company on December 12, 2007, for the purpose of acquiring, through a stock exchange, asset acquisition or other similar
business combination, or controlling, through contractual arrangements, an operating business that has its principal operations
in Asia. Following the business combination, our business operations are now conducted through Beijing Wowjoint.
In May 2008, CFAC completed a private placement
of 1,944,444 warrants to certain private placement investors, as a result of which CFAC received net proceeds of $1.75 million. On
May 21, 2008, CFAC consummated its initial public offering of 3,750,000 units. Each unit in the offering consisted of one ordinary
share and one share purchase warrant, entitling the holder to purchase one ordinary share at an exercise price of $5.00. On May
27, 2008, the underwriters of CFAC’s initial public offering exercised their over-allotment option for an offering of an
additional 506,250 units. CFAC received total net proceeds of approximately $33.9 million from its initial public offering. CFAC’s
ordinary shares and warrants started trading separately as of July 23, 2008. Other than its private placement, initial
public offering and the pursuit of business combination opportunities, CFAC did not engage in any other business until November
2009.
Prior to China Fundamental’s acquisition
of Beijing Wowjoint on February 22, 2010, Authentic Genius Limited (“AGL”) was a private company in Hong Kong which
was solely owned by Ms. Zhang Hui, who is the first cousin of Mr. Yabin Liu, the current chairman and chief executive officer of
Wowjoint. AGL had one wholly owned subsidiary, Beijing Xin Fu Industry Consulting Co., Ltd.(“BXFI”), a wholly foreign
owned enterprise registered in China. The scope of BXFI’s business license includes business consulting, technical and engineering
advice and technical services. AGL has limited capitalization and no operations other than its holdings in BXFI.
Prior to China Fundamental’s acquisition
of Beijing Wowjoint, Giant Nova Holdings Limited (“Giant Nova”) was a private company registered in the British Virgin
Islands with no subsidiaries. It is a company with limited capitalization that formerly held the interests of the shareholders
of Beijing Wowjoint Machinery Co. Ltd. (“BWMC”), with the majority of its ultimate shareholders being the shareholders
and key management of BWMC though it served no business purpose prior to China Fundamental’s acquisition of Beijing Wowjoint.
Giant Nova was formed with the intention to help expand Wowjoint’s equipment sales in international markets, and we expect
that it will engage in the sales and marketing of Wowjoint equipment in the near future. There were and are no contractual agreements
or other arrangements between Giant Nova Holdings Limited and the shareholders of Beijing Wowjoint. In connection with China Fundamental’s
acquisition of Beijing Wowjoint on February 22, 2010, the shareholders of Giant Nova and AGL received 5,691,450 shares and 8,550
shares, respectively. Following that acquisition, Giant Nova’s shareholders held a majority of the outstanding shares of
the combined company.
BWMC was a private enterprise in China with
no subsidiaries prior to China Fundamental’s acquisition of Beijing Wowjoint. Investors in BWMC at that time consisted of
our chairman and chief executive officer, Yabin Liu (37.8%); our chief technical officer and director, Fude Zhang (33.6%); our
former senior vice president of logistics and administration, Yasheng Liu (8.2%); our senior vice president of marketing and sales,
Liguo Liu (4.1%); Anning Li (0.7%); Pingyi Wang (0.7%); Ting Ding (9.0%); and Beijing Wan Qiao Mechanical and Electrical Equipment
Co., owned by non-executive management members of the company (6.0%). Giant Nova was owned by Realink Group Limited (76.4%), Wowjoint
International Limited (5.9%), PJ Landscape Co., Limited (4.6%), Mui Hoo Lui Chung (4.6%), Red Stone Investment Group Limited (4.6%)
and Willing Co., Limited (3.9%). Mr. Yabin Liu served both as a director of BWMC and of Giant Nova.
On November 30, 2009, CFAC entered into
a share purchase agreement with AGL and its consolidated subsidiary, Beijing Xin Fu Industry Consulting Co., Ltd. (“BXFI”)
and its variable interest entity ("VIE"), Beijing Wowjoint Machinery Co., Ltd. (“BWMC”) and Giant Nova Holdings
Limited. On February 22, 2010, pursuant to the terms of the Share Purchase Agreement dated November 30, 2009, China
Fundamental acquired all of the issued and outstanding shares of Beijing Wowjoint held by its shareholders in exchange for 5,700,000
ordinary shares of China Fundamental. 3,696,735 of these shares were placed in escrow for a four-year period ending February 22,
2014. In addition, shareholders of Beijing Wowjoint will be issued up to 500,000 additional ordinary shares if certain incentive
targets are met. In connection with the acquisition, the holders of 1,374,089 of the ordinary shares sold in China Fundamental's
initial public offering properly elected to redeem their shares for cash at $7.96 per share, for an aggregate of approximately
$10.9 million. China Fundamental also entered into "forward contracts" to purchase 1,696,258 ordinary shares in privately
negotiated transactions from shareholders who would otherwise have voted against the business combination, for an aggregate of
approximately $13.6 million. The redemptions and the closing of such purchase were subsequently effected using funds that were
held in China Fundamental's trust account. After payment of redeeming shareholders and forward contracts, and payment
of transaction related expenses including deferred underwriting commissions and legal fees and other expenses, approximately $7.1
million will be retained by the surviving company which will be used for working capital purposes. The acquisition of AGL
and Giant Nova, including the payment of the majority of the consideration to the shareholders, was structured, in part, to avoid
falling within the scope of SAFE Circular 75.
We subsequently filed our Second Amended
and Restated Memorandum and Articles of Association in the Cayman Islands that removed provisions that, giving effect to the business
combination with Beijing Wowjoint, were no longer applicable. We also changed our name to Wowjoint Holdings Limited. Following
the acquisition of Beijing Wowjoint, our principal place of business is now located at its offices at 1108 A Block Tiancheng Mansion,
#2 Xinfeng Road, Deshengmenwai Street, Xicheng District Beijing, and our telephone number is +86 (010) 8957-9330.
In a reorganization conducted in mid-2010,
shareholders of Beijing Wowjoint Machinery Co. Ltd. transferred their share ownership to BXFI. At the time when deciding to conduct
the recent reorganization, the company had already completed its business combination with China Fundamental and had secured a
specific investment. The company believed that a 100% equity ownership in Beijing Wowjoint Machinery Co. Ltd. provided more protection
to its shareholder interests, given that the contractual relationship between BXFI and BWMC was not an actual equity ownership
and as the arrangements would have needed to be renewed at the end of the term.
There were eight shareholders of BWMC at
the time when its outstanding shares were transferred to BXFI. The share transfer was structured so that BXFI provided RMB1.0
million to the shareholders of BWMC, the consideration was loaned back to company, and repayment was immediately waived. None
of the RMB1.0 million ever changed hands. The share transfer was structured in this manner in order to meet the PRC requirements
that consideration be paid for the share transfer and in order to register the share transfer with SAIC. These shareholders held
a special shareholders meeting on April 25, 2010 to vote on a resolution to transfer all outstanding shares to BXFI and to amend
BWMC’s articles of association accordingly. The resolution was passed unanimously and each of the shareholders signed and
dated the share transfer agreement to BXFI on April 25, 2010. The stock transfer agreements involved nominal consideration of RMB1
million paid in connection with the transfer. The stock transfer agreement was registered with the local state administration for
Industry and Commerce (“SAIC”) office, effective June 9, 2010. The former shareholders agreed to loan the entire amount
of the stock transfer proceeds to the company for general working capital purposes. Messrs. Yabin Liu, Fude Zhang, Liguo Liu and
the late Yasheng Liu held a total of 89.6% of proceeds from Stock Purchase Agreement. They were also officers of Wowjoint Holdings.
In their good faith to ensure Wowjoint has more cashflow for its operations, they agreed to and were able to convince all the other
recipients to loan the 1 million RMB back to Wowjoint and subsequently waive the loan. On August 4, 2010, we announced that the
replacement of the variable interest entity contractual arrangement discussed above between BWMC and BXFI had been finalized. BXFI
now directly owns 100% of BWMC. We believe that this direct ownership structure eliminates the risk that the previous contractual
arrangements may not have been as effective in providing us with operational control over BWMC as we anticipate our new direct
ownership structure will provide. We also believe that our new direct ownership structure increases our overall transparency and
removes any confusion with respect to, our corporate ownership structure.
Beijing Wowjoint Xingyun Co. ("BWXC"),
another wholly owned subsidiary of the company, was incorporated on May 10, 2010 and is engaged in leasing equipment to our customers
across China and in subcontracting construction and engineering work from our customers involved in the transporting, carrying,
lifting, placing and erection of bridge segments used in the construction of high-speed railways, expressways, and bridges. BWXC
has currently seven employees and is headquartered in Beijing, China. The subcontracting work conducted by BWXC mainly involves
using Wowjoint’s products, primarily large heavy lifting equipment to perform certain construction work in connection with
infrastructure projects – for example, by using Wowjoint’s lifting machines to lift and move beams for its customers.
There is no material difference between the subcontracting work conducted by BWMC and BWXC. Going forward, the company intends
to allocate subcontracting work mainly to BWXC.
Recent Developments
Entry into new vertical markets
We entered new vertical markets during 2011
and 2012. In February 2011, we announced a contract with Sunbird Yacht Company, China's largest yacht manufacturer, to provide
two marine hoists. In July, the marine hoist segment expanded through a contract with Shenzhen Land Investment & Development
Center. We signed a contract with British Green (Tongliao) Wind Power Equipment Co., Ltd, a wind turbine tower manufacturer and
a subsidiary of Greens Holdings Ltd (HK: 01318.HK), to provide a 100-ton wind tower hoist. In addition, we entered the bridge inspection
and maintenance industry by being awarded a contract by China's Ministry of Railway to build the first ever equipment for inspection
of the overhead concrete beams of the elevated pave way of China's high-speed railway.
In 2012, Wowjoint entered into a contract
with Zhejiang Xiangshan Fishing Trade Development Co., Ltd. for the sale of a 25-ton marine hoist. This hoist will be used for
lifting smaller boats and is an extension of the yacht market that Wowjoint entered last year. The contract value is approximately
$250,000 (RMB 1,600,000).
We continue to pursue additional verticals
where our knowledge and expertise can be utilized and believe that we will make further progress in new vertical markets during
2013.
Sales and Marketing Expansion
We seek to increase our market penetration
by expanding the geographic reach of our products, with special emphasis on those countries that are planning high-speed railways,
such as the United States, Korea, Brazil, and developing regions including Southeast Asia, India, Russia, the Middle East and South
America. In this regard, in March 2010 we were awarded our first contract in the U.S. to provide customized mobile lifters for
utilization in a highway construction project in Florida. In August 2010, we were awarded a new contract in Italy to provide Special
Launching Carriers for EDEN to be used in Korea.
We entered an agreement to provide two Movable
Scaffolding Systems ("MSS") for a highway bridge construction project with BBE in Malaysia in March 2012. The value of
the agreement is approximately $2.6 million. Production began in April. The first equipment was delivered in September 2012 and
the second in January 2013, and will finish installation by end of June 2013. This is a new type of equipment for us. We further
expanded our product range in construction machinery from providing not only machines for the precast arena, but now also non-prefabricated
girder/beam bridge construction. The MSS is a piece of equipment that will initially be marketed for the Southeast Asian markets
and we anticipate the demand for the equipment to be significant once the initial machine is deployed.
We entered into a sales contract with Titan
Peru S.A.C., an import/export company in the construction industry, for a 50-ton Rubber Tire Gantry in May 2012. The equipment
is used for transporting precast concrete beams from the yard to the project site. The value of the contract was $258,000.
We delivered the equipment in October 2012 and finished installation in December 2012. This is an initial contract with Titan Peru
and we expect to have future contracts to export other Wowjoint products to Peru.
We established new sales offices in the
USA and Italy in the past few years to actively pursue international sales opportunities. We also recently added new partners to
enhance our sales force outreach in regions around the world, specifically in areas of Europe, South America and Southeast Asia.
One of these partners will jointly market our handling machines, the Mobilift and Marine Hoist, in Europe and the Mediterranean
regions. We have begun pursuing joint bids with this partner on port construction projects and hope to enter the new field of port
machinery soon.
We have an organized and dedicated team
focusing on R&D and project development. In addition to developing machines for the bridge construction industry, this team
has been developing technology and products relating to the renewable energy sector including items such as a wind turbine hoist,
and other large lifting equipment that can be utilized by wind turbine, solar power and biomass power generation device manufacturers.
We are working on a joint venture in Europe to develop projects that can take advantage of the current preferential policies provided
to the renewable energy industry in various European countries. We believe that we can utilize our Chinese manufacturing advantages
and our high-quality design and production capability to invest in this industry development both in China and in Europe, thereby
ultimately having a large entry into the green energy industry.
Because of our expansion into new verticals
and international markets, we expect that our customer group to gradually shift from primarily blue chip state owned companies
to private companies. Such a change could also affect our product mix.
New R&D and manufacturing facilities
We signed an agreement to build a new R&D
and manufacturing facilities in Zhenjiang City, which is located in Eastern China, about 2-3 hours northwest of Shanghai, in early
2012. The new manufacturing facility under Zhenjiang Wowjoint Heavy-duty Machinery Co. Ltd. ("Zhenjiang Wowjoint"),
a subsidiary established in 2011, will cover 2 million square feet of land, including 140,000 square feet of production workshop,
70,000 square feet of office space, shipping field and testing ground. Zhenjiang Wowjoint presently owns 480,000 square feet of
the land and may purchase the remaining land in stages over the next two years. Construction will be split into two phases, with
construction commenced in mid 2012. Phase one has been completed and put into use in early May 2013. The new manufacturing
facility will be focused on producing large equipment and providing maintenance services for our launch gantries, lifting equipment,
railway transportation equipment and railway testing equipment. Going forward more manufacturing activities will be moved from
Beijing to this new facility.
In addition, we established a new R&D
center in Zhenjiang in conjunction with Beijing Jiaotong University's Yangtze River Delta R&D Transportation Institute in December
2011. The Zhenjiang City New District government provided 8,600 square feet of office building space at no cost to us. The
new R&D center will work with the new manufacturing facility to supply enhanced equipment and services to our customers. It
will specifically service customers around the Eastern China Yangtze River Delta area, Southern China and international market
customers.
Stock Dividend
On April 8, 2012, a special 6% stock dividend
was paid to all holders of ordinary shares, and holders of units consisting one ordinary share and one warrant as of record date
of March 31, 2012. Shareholders entitled to receive fractional shares received the number of shares as rounded up to the nearest
whole share.
Open Market Stock Purchase by Senior Executives
Yabin Liu, Chief Executive Officer &
Director; Fude Zhang, Chief Technology Officer & Director; and Liguo Liu, Senior Vice President of Marketing conducted open
market purchases of the Company’s ordinary shares, predominantly through 10b5-1 programs adopted pursuant to Rule 10b5-1
of the Securities Exchange Act of 1934, as amended. The purchases were conducted beginning in January 2012 and were concluded in
July 2012. The three executives purchased a total of 37,810 ordinary shares during the period.
Terminated Warrant Exchange
On November 26, 2012, we terminated the
previously announced exchange offer for 7,700,642 outstanding warrants. No warrants were exchanged for ordinary shares pursuant
to the exchange offer, and all warrants tendered to us had been returned.
B. Business Overview
Overview
We believe that Wowjoint is one of the leading
providers in the design, engineering and manufacturing of customized infrastructure equipment and machinery used in the construction
of railways, highways, metro subways, bridges and viaducts in China, based on the range of major railway projects in which we have
been involved or have been asked to bid on. We provide end-to-end solutions in various engineering applications involving the lifting,
carrying and transporting of large-scale and heavy precast concrete beams, and other heavy goods.
Our management and engineering team has
significant experience in the transportation and transportation equipment industry. The same team has participated in providing
solutions to the lifting, carrying and transporting pre-fabricated construction material for the construction of the well-known
Hangzhou Bay Bridge, the longest cross-sea bridge in the world. Our equipment and services have been deployed and utilized
in railway construction, including some of the most well-known high speed railways in China. From 2005 to 2008, our equipment has
been deployed in the construction of the Guangdong express railway, the Beijing to Tianjin intercity high-speed passenger train
line, the Shijiazhuang to Taiyuan express railway, the Fuzhou to Xiamen high-speed railway, the Zhengxi intercity train line, the
Wuhan to Guangzhou high-speed railway, the Beijing-Shanghai railway and the Harbin to Dalian high-speed railway, the Shijiazhuang
to Wuhan railway, the Beijing to Shijiazhuang railway, the Shanghai-Hangzhou railway and the Chang-Jiu intercity railway projects.
We have also recently begun to export our equipment to the United States, the Middle East and the European markets in relatively
small volume.
Since the middle of 2010, we have also engaged
in the leasing of equipment, with 12 leases having been signed with our long-term customers such as CRCC, CCC and CRG. Equipment
available for leasing includes straddle carriers, special purpose lifting/carrying equipment and integrated launching carriers.
Leases are directly negotiated with our clients, and the terms are vary considerably. Typically, the equipment is leased for a
period of one to two years. Under the terms of the existing leases we provide technical service, maintenance, operating, and other
ancillary agreements or services, and we sometimes operate the machine over the lease term on behalf of our customers. We believe
that entry into the leasing business, as well as the expansion of our technical services business, will allow us to have relatively
smoother revenues over extended periods of time, and will better serve the needs of the our clients.
We believe we made significant progress
entering new vertical markets during 2011 and 2012. We continue to pursue additional verticals where our knowledge and expertise
can be utilized and believe that we will make further progress in new vertical markets during 2013.
We established new sales offices in the
USA and Italy in the past few years to actively pursue international sales opportunities. We have made good progress in our international
sales and marketing efforts.
We signed an agreement to build a new R&D
and a new manufacturing facilities in Zhenjiang City, which is located in Eastern China, about 2-3 hours northwest of Shanghai,
in early 2012. The new manufacturing facility under Zhenjiang Wowjoint Heavy-duty Machinery Co. Ltd. ("Zhenjiang Wowjoint"),
a subsidiary established in 2011, will cover 2 million square feet of land, including 140,000 square feet of production workshop,
70,000 square feet of office space, shipping field and testing ground. Zhenjiang Wowjoint presently owns 480,000 square feet of
the land and may purchase the remaining land in stages over the next couple of years. Construction will be split into two phases,
with construction commenced in mid 2012. Phase one has been completed and put into use in early May 2013. The new manufacturing
facility will be focused on producing large equipment and providing maintenance services for our launch gantries, lifting equipment,
railway transportation equipment and railway testing equipment. Going forward more manufacturing activities will be moved from
Beijing to this new facility.
Our customer group will be changed from
primarily blue chip state owned companies to private companies gradually. This change could also affect our product mix.
Our main product lines include launching
gantries, tyre trolleys, special carriers, integrated launching carriers, marine hoists and special purpose equipment. Our equipment
and machinery are designed to overcome specific construction obstacles by meeting our customers’ stringent engineering requirements
wherever our products are deployed regardless of terrain, soil and climate conditions. We added a new product, Movable Scaffolding
Systems ("MSS") for a highway bridge construction, in 2012.
Our diverse and cost efficient product offerings
incorporate proprietary designs which are recognized in China for their high levels of versatility, reliability and performance.
Our products are marketed under the “Wowjoint” brand name both domestically and internationally. Our core strategy
is to leverage our expertise in research and development of customized products by providing solutions to our customers’
unique needs, as evidenced by our continuous introduction of new product lines since our inception. We handle all aspects of market
research, product design, engineering, manufacturing, sales and marketing, and conduct most of our manufacturing operations in
our ISO 9001 manufacturing facilities near Beijing, China.
Competitive Advantages
Based on our existing patents and technology,
we believe that our founders were among the first in China to introduce and promote the use of precast segmental concrete beam
in the construction of elevated pavement in railways and highways. This construction technology, developed and practiced in Europe
prior to being adopted by China, provides high efficiency and low cost to the construction of elevated pavement. Our management
believes that the following competitive strengths differentiate us from other domestic and international competitors and are the
key factors to our success.
Leading Provider of Customized Heavy-lifting and Carrying
Equipment
In 2012, based on our best estimate, we
held a market share of approximately 15% or more in three of our product lines: special carriers, tyre trolleys, launching gantries,
and a significant market share in the integrated launching carrier. We also estimate that we held approximately 65% of market
share in the technical services market and approximately 80% share in the leasing market for such equipment. According to the 12th
Five Year Plan (2011 - 2015), China will continue to invest heavily in transportation infrastructure including railways, highways,
and urban metro transit systems, with the aggregate investment expected to reach RMB2.8 trillion (approximately $456 billion) according
to the National Bureau of Statistics of China. Our management anticipates a growing demand for such infrastructure equipment and
machinery the next few years.
Strong In-House Design Capabilities
We employ an innovative and systematic approach
to engineering solutions and product design and manufacturing oversight. Our design and engineering team consists of members educated
in top universities in China, with 10-15 years of industry experience on average. Based on our success in winning project bids,
we believe that we have built a recognized brand name in the industry by introducing innovative solutions to the infrastructure
construction industry in China. Our engineering team works closely with our customers in order to understand their technical and
engineering requirements. We have been able to continuously introduce new equipment to enhance cost saving and time reduction in
the construction of elevated pavement in highways and railways.
Well Established Relationship with Blue Chip Customer
We have well-established relationships with
Chinese blue chip customers, including China Railway Construction Corporation Limited (CRCC) (Hong Kong Exchange: 1186.HK), China
Railway Group Limited (CRG) (Hong Kong Exchange: 0390.HK; Shanghai Exchange: 601390.SS), China Communications Company Limited (Hong
Kong Exchange: 1800.HK), all of whom are current customers.
Business Strategy
Our strategy is to further strengthen our
position as a leading solution provider to China’s rapidly developing infrastructure construction industry by providing customized
lifting and carrying solutions to our customers. Outside China, we intend to build on the strengths that have made us successful
in China. We intend to focus upon the following strategic initiatives for growth:
Product Innovation
– Our product innovation is
vital to sustaining our future success. We have successfully introduced new products in the application of lifting and carrying
equipment and have a pipeline of new products, including marine hoist, a railway and elevated road maintenance and inspection vehicle
and self-loading container carriers in 2011 and Movable Scaffolding Systems ("MSS") in 2012, and we are seeking to develop
new products to widen our customer base and expand our market share.
Increase of Production Capacity
– We intend to
expand our production capacity by investing in additional workshops and production lines and by working closely with existing outsourcing
partners to increase their production capacity. We also intend to invest in technological upgrades to increase the efficiency of
our current production process, while also reducing manufacturing costs.
Expand Market Presence and Penetration
– We seek
to increase our market penetration by expanding the geographic reach of our products, with special emphasis on those countries
that are planning high-speed railways, such as the United States, Korea, Brazil, and developing regions including India, Russia,
the Middle East and Latin America. In this regard, in March 2010 we were awarded our first contract in the U.S. to provide customized
mobile lifters for utilization in a highway construction project in Florida. In August 2010, we were awarded a new contract in
Italy to provide Special Launching Carriers for EDEN to be used in Korea. In March 2012, we were awarded a new contract in Malaysia,
which is a new market in Southeast Asia. In May 2012, we entered into a new contract in Peru, which is a new market in South America.
We believe that these initiatives will help to reduce potential cyclical performances in one particular product category or geographic
market.
Selective Acquisition Strategy
–We plan to broaden
our market reach and reduce the cyclical nature of our business through selective acquisitions, joint ventures and strategic alliances.
In particular, we intend to consider potential acquisitions of railway maintenance and service related companies to expand our
product offerings in the railroad and bridge maintenance equipment segment.
Product and Services
We provide solutions to different construction
projects by designing, engineering and manufacturing customized large scale equipment for the lifting, carrying, transportation
and installation of heavy objects and precast materials. We offer a wide variety of product lines of modular, re-locatable and
stationary custom heavy duty construction equipment and machinery and our products are used in various engineering fields such
as the construction of railways, highway, viaducts and ports, as well as in the lifting and transporting of concrete beams and
other heavy goods. Our products incorporate innovative, patented designs and are marketed under the “Wowjoint” brand
name both domestically and internationally. Since the middle of 2010, we have also engaged in the leasing of equipment to certain
of our customers. During 2011, we further expanded our special purpose equipment offering and, in response to our marketing effort
to enter into new vertical market, we began to produce more kinds of equipment with lifting and moving functions, such as marine
hoist, wind tower hoist and etc. Our major product categories include:
Production line
|
|
Sales for the year
ended December 31,
2012
|
|
|
Percentage
of sales
|
|
|
Sales for the
year
ended
December 31,
2011
|
|
|
Percentage
of sales
|
|
Launching gantry
|
|
$
|
|
|
|
|
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Special carrier
|
|
|
469,414
|
|
|
|
4.6
|
|
|
|
288,677
|
|
|
|
1.2
|
|
Special launching carrier
|
|
|
778,969
|
|
|
|
7.7
|
|
|
|
16,759,319
|
|
|
|
68.7
|
|
Special purpose equipment
|
|
|
2,245,052
|
|
|
|
22.2
|
|
|
|
1,143,202
|
|
|
|
4.7
|
|
Tyre trolley
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
After-sales service
|
|
|
|
|
|
|
|
|
|
|
1,408,437
|
|
|
|
5.8
|
|
Service revenue
|
|
|
301,427
|
|
|
|
3.0
|
|
|
|
1,274,661
|
|
|
|
5.2
|
|
Lease revenue
|
|
|
6,303,340
|
|
|
|
62.4
|
|
|
|
3,524,125
|
|
|
|
14.4
|
|
Total sales
|
|
$
|
10,098,202
|
|
|
|
100
|
%
|
|
$
|
24,398,421
|
|
|
|
100
|
%
|
Production line
|
|
Sales for the
year
ended
December 31,
2010
|
|
|
Percentage
of sales
|
|
|
Sales for the year
ended August 31,
2009
|
|
|
Percentage
of sales
|
|
Launching gantry
|
|
$
|
-
|
|
|
|
-
|
|
|
|
15,133,798
|
|
|
|
33.9
|
%
|
Special carrier
|
|
|
1,071,497
|
|
|
|
4.5
|
%
|
|
|
10,620,441
|
|
|
|
23.8
|
|
Special launching carrier
|
|
|
14,067,412
|
|
|
|
58.5
|
|
|
|
4,263,381
|
|
|
|
9.6
|
|
Special purpose equipment
|
|
|
2,196,397
|
|
|
|
9.1
|
|
|
|
3,148,412
|
|
|
|
7.1
|
|
Tyre trolley
|
|
|
859,192
|
|
|
|
3.6
|
|
|
|
7,324,482
|
|
|
|
16.4
|
|
After-sales service
|
|
|
1,388,904
|
|
|
|
5.8
|
|
|
|
1,558,797
|
|
|
|
3.5
|
|
Service revenue
|
|
|
3,735,225
|
|
|
|
15.5
|
|
|
|
2,572,848
|
|
|
|
5.8
|
|
Lease revenue
|
|
|
743,548
|
|
|
|
3.0
|
|
|
|
-
|
|
|
|
-
|
|
Total sales
|
|
$
|
24,062,174
|
|
|
|
100
|
%
|
|
|
44,622,159
|
|
|
|
100
|
%
|
Launching Gantry
– We manufacture a wide variety
of heavy duty launching gantries that are used for the erection of bridges and viaducts. They are designed to place precast reinforced
concrete segments or beams on piers and are used for the construction of (1) segmental cantilevers, (2) segmental one in span by
span, (3) T or hollow beams, and (4) complete box beams road viaducts and bridges. Each product is designed to solve certain construction
obstacles and problems encountered by our customers in order to increase construction efficiency, reduce construction costs and
shorten the construction period. Our gantries can carry weight from 80 metric ton to 1600 metric tons.
Tyre Trolley
– We design and manufacture a wide
variety of heavy duty tyre trolleys that move prefabricated concrete segments or beams and provide enhanced maneuverability in
erected pavement construction sites. The tyre trolleys provide flexibility to move prefabricated concrete beams into tightly
confined spaces within the pavement surface and work well in tandem with our launching gantry. Our tyre trolleys can transport
weight from 40 metric ton to 1600 metric ton.
Special Carrier
– Our straddle carriers/Mobilifts
offer an economical solution to handle bulky loads inside large sheltered places. They are also suitable for loading and unloading
cargos in container terminals or steel plants.
Integrated Launching Carrier
– We design and manufacture
a variety of integrated launching carriers which combine the functions of the launching gantry, the tyre trolley, and the special
carriers depending on the needs of our clients. These integrated platforms provide a cost saving to our customers and
are often designed to work in mountainous or other more difficult conditions.
Marine Hoist
– Our marine hoists are capable of
lifting a 20 metric ton to 1,500 metric ton boat or yacht out of the water and maneuvering them onto dry land for service or long-term
storage, or for the transporting of boats and ships over dams. Our marine hoists feature easy maintenance and minimum downtime,
and provide flexibility to move boats into tightly confined spaces within a boat yard or marina.
Special Purpose Equipment
– We manufacture a wide
variety of special purpose lifting and carrying equipment according to each customer’s specific requirements. The container
lifting equipment is designed to hoist, stack and transport any material or 60 metric ton ISO standard containers. The straddle
carrier loads and unloads the container utilizing a pair of hydraulic powered cranes mounted at each end of the vehicle chassis.
The special purpose equipment series includes telescopic spreaders for straddle carriers and straddle carriers for handling containers.
Our products can be shipped worldwide to
our international customers. Our products can be dismantled into smaller components and fitted into any standard shipping container
for shipping. Upon arrival at the destination construction site, the components can then be assembled back onsite by our experienced
engineers.
Since the middle of 2010, we have also engaged
in the leasing of equipment, which has become a big part of our business, with 12 leases signed so far with our long-term customers,
CRG, CCC and CRCC. Equipment available for leasing includes straddle carriers, special purpose lifting/carrying equipment
and integrated launching carriers. Leases are directly negotiated with our clients, and the terms are vary considerably. Typically,
the equipment is leased for a period of one to two years. Under the terms of the existing leases we provide technical service,
maintenance, operating, and other ancillary agreements or services, and we operate the machine over the lease term on behalf of
our customers. We believe that entry into the leasing business, as well as the expansion of our technical services business, will
allow us to have relatively smoother revenues over extended periods of time, and will better serve the needs of the our clients.
Our contract backlog as at various periods was as follows:
Reporting date
|
|
Number of active contracts
|
|
|
Contract backlog
|
|
August 31, 2008
|
|
5
|
|
|
US$
|
19,299,398.00
|
|
August 31, 2009
|
|
2
|
|
|
|
6,911,554.00
|
|
December 31, 2009
|
|
11
|
|
|
|
2,519,067.00
|
|
June 30, 2010
|
|
17
|
|
|
|
20,207,166.00
|
|
September 30, 2010
|
|
17
|
|
|
|
22,846,796.00
|
|
December 31, 2010
|
|
16
|
|
|
|
20,449,869.00
|
|
March 24, 2011
|
|
22
|
|
|
|
25,280,306.00
|
|
May 19, 2011
|
|
17
|
|
|
|
29,032,618.68
|
|
June 30, 2011
|
|
18
|
|
|
|
22,342,831.27
|
|
September 30, 2011
|
|
22
|
|
|
|
21,323,823.15
|
|
December 31, 2011
|
|
11
|
|
|
|
16,312,243.00
|
|
March 31,2012
|
|
15
|
|
|
|
18,735,981.00
|
|
June 30,2012
|
|
14
|
|
|
|
17,778,950.00
|
|
September 30,2012
|
|
15
|
|
|
|
19,740,188.00
|
|
December 31,2012
|
|
10
|
|
|
|
14,059,510.00
|
|
Our backlog refers to contracts which have
been signed and for which revenue has not been recognized. Substantially all of our backlog orders are expected to be filled within
one year, although there can be no assurance that all such backlog orders will be filled within that time. Our backlog is not firm
or funded and is cancelable, and in practice, we typically have limited rights in the event of a cancellation of a contract by
our customers.
Of the December 31, 2012 backlog of just
over US$14 million, approximately 66% is expected to be recognized in 2013 revenue and the remainder 34% in 2014, although there
can be no assurance that this level will be achieved.
Our management views backlog as one of many
indicators of the performance of our business. Because many variables can cause changes in backlog, and these changes may or may
not be of any significance, we consequently view backlog as an important, but not necessarily determinative, indicator of future
results.
In addition to selling heavy duty construction
equipment, we also provide technical services to our customers. The average selling price for heavy duty construction equipment
is approximately $2 million to $5 million per piece of equipment, while the size of technical service contracts is much lower,
varying from approximately $60,000 to $300,000 per contract.
It is common for us to have a number of
service contracts and equipment sales contracts in place with our major customers at any one time, often spread among different
bureaus and subsidiaries of our customer groups.
Active contracts are defined as sales and
service contracts which have been entered into by the Company with its customers and where performance of such contracts is still
in progress and has not been completed – for example, where the equipment is still under construction or the services have
not yet been completed as of the relevant reporting date.
As we recognize revenue using the percentage
of completion method, backlog is calculated by contract value less the revenue recognized based on completion percentage.
Technical and After-Sale Services
Our team of experienced engineers and technician
provides after-sales services to our customers. After the installation and testing of our equipment, our engineers train our customers
to operate the equipment and identify and address safety and maintenance concerns. Under the standard warranty attached to
the sales of its equipment, we address any system or operational problems that may occur within the first year of the sales. In
addition, we also provide technical services and consultation to our customers upon the expiration of the warranty. Revenues attributable
to technical and after-sales services represented 3% of our revenues for the year ended December 31, 2012, 5% of our fiscal 2011
revenues, 22.2% of our fiscal 2010 revenues and 9.3% of our fiscal 2009 revenue.
Marketing, Sales, Leasing and Customer Support
Our customers include the leading names
in the infrastructure construction industry in China. Our management has developed long-standing relationships with target customers
in the railway, subway and highway construction. We also maintain relationships with central and local municipal governments
which normally sponsor new infrastructure projects that can utilize our products. We have well-established relationships with Chinese
blue chip customers, including China Railway Construction Corporation Limited (“CRCC”) (Hong Kong Exchange: 1186.HK),
China Railway Group Limited (“CRG”) (Hong Kong Exchange: 0390.HK; Shanghai Exchange: 601390.SS), China Communications
Company Limited (“CCC”) (Hong Kong Exchange: 1800.HK) and SinoHydro Corporation. Of these, all are current customers
or past customers with whom we maintain an active dialogue. In recent years, as we diversify into international markets, our customer
mix has migrated towards having more non-Chinese, non government customers.
For example, in the fiscal year ended August
31, 2008, CRCC, CCC and CRG accounted for 35% (Bureau 16, 20%; Bureau 12, 15%), 26% and 13% of our total sales, respectively; in
the fiscal year ended August 31, 2009, CCC and CRG accounted for 46% and 16% of our total sales, respectively; in the four months
from August 31, 2009 to December 31, 2009, SinoHydro Corporation ("SinoHydro"), a Chinese state-owned hydropower engineering
and construction company, accounted for 98% of our total sales; and in the year ended December 31, 2010, CRCC, CCC and CRG accounted
for 37% (Bureau 16,34%; Bureau 12, 3%), 20% and 19% of our total sales, respectively. In the year ended December 31,
2011, CRCC, and Eden Technology s.r.l. (”Eden”, Italy customer) accounted for 65% and 26% of our total sales, respectively.
In the year ended December 31, 2012, BBE (Malaysia customer), CRG (Bureau 25) and CCC (Bureau 1) accounted for 24%, 21% and 14%
of our total sales, respectively.
Shifts in the customer relationships from
period to period reflect our results in its bidding for new infrastructure contracts, as well as an increase in international sales,
which accounted for approximately 26%, 26% and 11.6% of total sales in 2012, 2011 and 2010, respectively. Our blue chip customer
base demonstrates our ability to deliver in large-scale demanding infrastructure projects.
Typically each contract is for the sale
of a specific piece of machinery for use in a particular project (
e.g.,
the Beijing-Shanghai high speed rail line). As
such, there is no “renewal” or “non-renewal” of our contracts given the specific nature of each individual
infrastructure project. Our contracts do not include any provisions concerning a change of control or ownership.
We have signed sales and service contracts
with blue chip, large state-owned enterprises in China with good credit, such as CRCC and CRG. Our contracts are not
conditioned upon the related funding by the PRC government or upon our customers’ receipt of payment by the PRC government.
However, if our customers have not received funds from the government, they may delay payment to us due to their own working capital
constraints. To date we have not experienced significant problems due to bad debts. Recent shifts in Chinese government
macro-economic policies following the global financial crisis have not led to the cancellation of any major projects in which we
are involved, including other major high speed rail projects. As such, we do not expect any losses of such contracts. However,
in some cases, delays have occurred in the implementation of the project plans, in releasing funds to the state-owned enterprises
who are our customers. As a result, we have experienced delay in collection of our account receivables from these customers.
Our sales contracts typically do not
include detailed indemnification provisions, but they do generally contain a general clause stating that if one party cancels the
contract, such party is liable under the law for breach of contract. If our products or services cannot meet the requirements specified
in governing contracts, we will be responsible for rectification within a reasonable period of time. If a customer is still not
satisfied after the rectification, the customer has the right to cancel the contract, and we are required to compensate the customer
for any losses. While our contracts do not permit our customers to terminate the agreement without penalty if their
projects are not funded by the PRC government, our sales contracts typically do not specify how much money the breaching party
shall pay, and, to date, no penalties have been assessed the few times customers have cancelled their contracts under such circumstances.
We are not named as a subcontractor in our customers’ contracts with the PRC and local governments, nor does our deployment
by our customers require such end customers’ approval.
Since the middle of 2010, we have also engaged
in the leasing of equipment. We have signed 12 leasing contracts to date of which one lease was completed in 2011, two were completed
in 2012, six leases are expected to conclude in 2013, two leases are expected to begin in second half of 2013 and one to begin
in 2014. Lease revenue made up 62% of total revenue for the year ended December 30, 2012, 14% of 2011 fiscal year revenue and 3%
of 2010 fiscal year revenue, respectively. A slow-down of Chinese government’s spending in railway sector in the past few
years resulted in cancellation of some railway projects as well as slow-down in construction of some projects. Therefore some of
our Chinese state-owned customers decided to switch from purchasing to leasing of equipment in order to reduce upfront costs, which
led to a big jump of leasing revenue in our revenue mix from 2010 to 2011 and 2012.
Equipment available for leasing includes
straddle carriers, special purpose lifting/carrying equipment and integrated launching carriers. Leases are directly negotiated
with our clients, and the terms vary considerably from one client to another. Equipment is typically leased for a period of
one to two years. Under the terms of the existing leases we provide technical service, maintenance, operating, and other ancillary
agreements or services, and we operate the machine over the lease term on behalf of its customers. We believe that entry into the
leasing business, as well as the expansion of its technical services business, will allow it to have relatively smoother revenues
over extended periods of time, and will better serve the needs of customers.
As of June 10, 2013, we had a dedicated
marketing and sales team of 23 employees (including 1 based in the US and 3 based in Italy), which proactively follow up on new
sales leads. Upon receiving an expression of interest from potential customers, our sales team works closely with our engineering
staff to address the customer’s specific engineering and technical requirements. Our sales team provides a price quote with
inputs from our engineering and procurement teams. We have begun to recruit sales agents outside China to promote our products
in the United States and Europe. We have begun to recruit sales agents outside of China to promote our products in the United States
and Europe.
We entered new vertical markets during 2011
and 2012. In February 2011, we announced a contract with Sunbird Yacht Company, China's largest yacht manufacturer, to provide
two marine hoists. In July, the marine hoist segment expanded through a contract with Shenzhen Land Investment & Development
Center. We signed a contract with British Green (Tongliao) Wind Power Equipment Co., Ltd, a wind turbine tower manufacturer and
a subsidiary of Greens Holdings Ltd (HK: 01318.HK), to provide a wind tower hoist. In addition, we entered the bridge inspection
and maintenance industry by being awarded a contract by China's Ministry of Railway to build the first ever equipment for inspection
of the overhead concrete beams of the elevated pave way of China's high-speed railway.
In 2012, Wowjoint entered into a contract
with Zhejiang Xiangshan Fishing Trade Development Co., Ltd. for the sale of a 25-ton marine hoist. This hoist will be used for
lifting smaller boats and is an extension of the yacht market that Wowjoint entered last year. The contract value is approximately
$250,000 (RMB 1,600,000).
We continue to pursue additional verticals
where our knowledge and expertise can be utilized and believe that we will make further progress in new vertical markets during
2013.
We entered an agreement to provide two Movable
Scaffolding Systems ("MSS") for a highway bridge construction project with BBE in Malaysia in March 2012. The value of
the agreement is approximately $2.6 million. Production began in April. The first equipment was delivered in September 2012 and
the second in January 2013, and will finish installation by end of June 2013. This is a new type of equipment for us. We further
expanded our product range in construction machinery from providing not only machines for the precast arena, but now also non-prefabricated
girder/beam bridge construction. The MSS is equipment that will initially be marketed for the Southeast Asian markets and we anticipate
the demand for the equipment to be significant once the initial machine is deployed.
We entered into a sales contract with Titan
Peru S.A.C., an import/export company in the construction industry, for a 50-ton Rubber Tire Gantry in May 2012. The equipment
is used for transporting precast concrete beams from the yard to the project site. The value of the contract was $258,000.
We delivered the equipment in October 2012 and finished installation in December 2012. This is an initial contract with Titan Peru
and we expect to have future contracts to export other Wowjoint products to Peru.
We established new sales offices in the
USA and Italy in the past few years to actively pursue international sales opportunities. We also added new partners to enhance
our sales force outreach in regions around the world, specifically in areas of Europe, South America and Southeast Asia. One of
these partners will jointly market our handling machines, the Mobilift and Marine Hoist, in Europe and the Mediterranean regions.
We have begun pursuing joint bids with this partner on port construction projects and hope to enter the new field of port machinery
soon.
Research and Development
We rely upon our innovative in-house R&D
and project development team for the introduction of new products. We had 69 engineers and technicians as of June 10,
2012, and this high concentration of engineering and technical talent is needed to sustain our growth and execute our business
strategy.
We also work closely with Beijing Jiaotong
University, a well-respected academic institution with strong research and engineering capabilities in the fields of transportation
engineering and construction in China.
In addition to developing machines for the
bridge construction industry, our R&D team has been developing technology and products relating to the renewable energy sector
including items such as a wind turbine hoist, and other large lifting equipment that can be utilized by wind turbine, solar power
and biomass power generation device manufacturers.
We recently established a new R&D center
in conjunction with Beijing Jiaotong University's Yangtze River Delta R&D Transportation Institute in December 2011. The
new R&D center will concentrate on working with the new Zhenjiang manufacturing facility to supply enhanced equipment and services
to our customers.
Competition
Our competition comes mainly from China.
Our main competitors are Qinhuangdao Tianye Tonglian Heavy Industry Co., Ltd., China Railway Engineering Machinery Research &
Design Institute, Zhengzhou Dafang Bridge-Machine Co., Ltd. and Zhengzhou Huazhong Building Machinery Co., Ltd. The principal competitive
factors affecting our business include price, customer service and support, product availability, performance, functionality, brand
reputation, reliability and product maintenance costs.
The engineering and manufacturing of heavy
equipment is regulated by various agencies in China, and the relatively strict licensing standards help to limit new entrants
into the industry.
Intellectual Property
All of our products are sold under the brands
“Wowjoint” (“Beijing Wowjoint Bridge Industrial”), “Beijing Wowjoint” and “Wowjoint”,
which are widely known in the industry in China. We have registered the
www.wowjoint.com
domain name.
Patents and Licenses
The following table sets forth our registered patents as of
June10, 2013:
Country
|
|
Patent Nature
|
|
Filing Date
|
|
Patent No.
|
|
Patent
Owner
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Special Launching Carrier with Bridge
|
|
November 29, 2004
|
|
ZL 2004 2 0115944.5
|
|
Wowjoint
|
|
November 29, 2014
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Special Carrier
|
|
August 12, 2005
|
|
ZL 2005 2 0103809.3
|
|
Wowjoint
|
|
August 12, 2015
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Slab Mobilift
|
|
October 8, 2005
|
|
ZL 2005 2 0127691.8
|
|
Wowjoint
|
|
October 8, 2015
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Launching Gantry Suitable for Going Through Tunnel
|
|
May 19, 2006
|
|
ZL 2006 2 0115344.8
|
|
Wowjoint
|
|
May 19, 2016
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Portable Beam Launcher
|
|
September 19, 2008
|
|
ZL 2008 2 0122562.3
|
|
Wowjoint
|
|
September 19, 2018
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Transforming Mobilift
|
|
September 19, 2008
|
|
ZL 2008 20122564.2
|
|
Wowjoint
|
|
September 19, 2018
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Cantilever Folding Slab Mobilift
|
|
May 31, 2009
|
|
ZL 2009 20108328.X
|
|
Wowjoint
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Bi-Directional Driving Transporter (Invention)
|
|
September 3, 2009
|
|
ZL 2009 10092201.8
|
|
Wowjoint
|
|
September 3, 2029
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Prefastening double turnable levels device for fixing on pier
|
|
November 13, 2009
|
|
ZL 2009 20279144.X
|
|
Wowjoint
|
|
November 13, 2019
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Prefastening double cam device for fixing on pier
|
|
November 13, 2009
|
|
ZL 2009 20279145.4
|
|
Wowjoint
|
|
November 13, 2019
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Adjustable divided lifting device (Invention)
|
|
November 20, 2009
|
|
ZL 2009 10221555.8
|
|
Wowjoint
|
|
November 20, 2029
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Embracing device for fixing on pier (Invention)
|
|
November 27, 2009
|
|
ZL 2009 10250127.8
|
|
Wowjoint
|
|
November 27, 2029
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Movable supported launching carrier and its erection method (invention)
|
|
March 5, 2010
|
|
ZL 2010 10119289.0
|
|
Wowjoint
|
|
March 5, 2020
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Special Launching machine with setting platform
|
|
May 19, 2010
|
|
ZL 2010 20205815.0
|
|
Wowjoint
|
|
May 19, 2020
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Special launching carrier with movable platform
|
|
Aug. 5, 2010
|
|
ZL 2010 20286817.7
|
|
Wowjoint
|
|
August 5, 2020
|
PRC
|
|
Turning device for Launching Machine
|
|
September 29, 2010
|
|
ZL 2010 20561809.9
|
|
Wowjoint
|
|
September 29, 2020
|
PRC
|
|
Self-guided beam bridge inspection maintenance machine
|
|
December 31, 2010
|
|
ZL 2010 20699805.7
|
|
Wowjoint
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Launching machine transport stand
|
|
May 4, 2012
|
|
ZL 2012 20209991.0
|
|
Wowjoint
|
|
May 4, 2022
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Tower tube transporter
|
|
May 15, 2012
|
|
ZL 2012 20231665.X
|
|
Wowjoint
|
|
May 15, 2022
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth Wowjoint’s patent applications
as of June10, 2013:
Country
|
|
Patent
|
|
Application
Type (1)
|
|
Filing Date
|
|
Application No.
|
|
Patent
|
|
Expected
Approval
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Special Launching machine with setting platform and its erection method
|
|
Invention
|
|
May 19, 2010
|
|
2010 10185308.X
|
|
Wowjoint
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Special launching carrier with movable platform and its erection method
|
|
Invention
|
|
August 5, 2010
|
|
2010 10249633.8
|
|
Wowjoint
|
|
August 5, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
Bridge Deck Replacement Machine and the Method of Bridge Deck Replacement Using the Same
|
|
Patent
|
|
April 30, 2010
|
|
12/771,370
|
|
Wowjoint
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Straddle passenger cars
|
|
Invention
|
|
December 16, 2010
|
|
2010 10601840.5
|
|
Wowjoint
|
|
December 26, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Self-guided beam bridge inspection maintenance machine
|
|
Invention
|
|
December 31, 2010
|
|
2010 10623234.X
|
|
Wowjoint
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
Special Launching machine with setting platform and its erection method
|
|
Patent
|
|
March 28, 2011
|
|
PCT/CN2011/000528
|
|
Wowjoint
|
|
March 28, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Narrow wheelbase segment transporter
|
|
Invention
|
|
November 6, 2012
|
|
2012 10450976.X
|
|
Wowjoint
|
|
November 6, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
Narrow wheelbase segment transporter
|
|
Utility model
|
|
November 6, 2012
|
|
2012 20605972.X
|
|
Wowjoint
|
|
November 6, 2013
|
|
(1)
|
The patent applications relate to improvements on existing products either in appearance, structure or a combination of appearance and structure, to allow the product to be utilized more efficiently and effectively.
|
Regulation
Like other large-scale machinery and infrastructure
design and construction companies in China, we are subject to extensive regulations and policies by governmental agencies such
as the Ministry of Rail and the Ministry of Communications, and including national, provincial, and local authorities. Our operations
are subject to numerous environmental, health and safety laws and regulations as well as quality control standards. These rules,
regulations, policies and standards may be onerous and may require us to use substantial financial or other resources to meet their
requirements. Failure to comply may result in substantial penalties or fines, suspensions of our licenses, failed evaluations of
our machines, and termination of our contracts.
We are subject to extensive work safety
laws and regulations, such as the PRC's "Labor Law," "Work Safety Law," "Building Construction Law"
and "Manufacturing Safety, Accident, Reporting and Investigation Regulations," which require us to implement national
or industrial standards prescribed for the purpose of ensuring work safety. Failure to comply with these rules may result in significant
fines or penalties. We are also subject to extensive and increasingly stringent environmental protection laws and regulations by
the Chinese government, including the PRC's "Environment Law" and its "Environmental and Pollution Prevention Law,"
as well as the rules and regulations of provincial and local government authorities. The national, provincial, or local government
authorities may choose to shut down any facility that fails to comply with orders requiring such facility to correct any work safety,
industrial, or environmental concerns.
For projects that are subcontracted to us,
we are responsible to the general contractor for the quality of the work and jointly responsible with the general contractor for
compliance with the standards promulgated by the Ministry of Rail. Failure to meet such standards may require us to take corrective
action or subject us to administrative penalties, restrictions on future participation in projects, or criminal prosecution.
Occasionally we subcontract work out to
various contractors, and such subcontractors are also required to adhere to relevant rules and regulations. In the event that they
are not compliant, we may be liable for their violations.
PRC regulations currently prohibit or restrict
foreign ownership in certain industries. If we or any of our subsidiaries or affiliated entities are found to be in violation
of any PRC laws or regulations, the relevant PRC regulatory authorities might have the discretion to:
|
■
|
revoke the business and operating licenses of PRC subsidiaries or affiliates;
|
|
|
|
|
■
|
confiscate relevant income and impose fines and other penalties;
|
|
|
|
|
■
|
discontinue or restrict PRC subsidiaries’ or affiliates’ operations;
|
|
|
|
|
■
|
require Wowjoint or PRC subsidiaries or affiliates to restructure the relevant ownership structure or operations;
|
|
|
|
|
■
|
restrict or prohibit remittance of any profits or dividends abroad by Wowjoint's PRC subsidiaries or affiliates; or
|
|
|
|
|
■
|
impose conditions or requirements with which Wowjoint or PRC subsidiaries or affiliates may not be able to comply.
|
In addition to those listed above, the relevant
PRC regulatory authorities may impose further penalties. Any of these penalties could have a material adverse effect on our
operations.
We are subject to the PRC’s rules
and regulations on currency conversion. In the PRC, the SAFE regulates the conversion of the Renminbi into foreign currencies.
Under PRC regulations, Renminbi may be converted into foreign currency for payments relating to “current account transactions”
by complying with certain procedural requirements. “Current account transactions” include, among other things, dividend
payments and payments for the import of goods and services, Our PRC subsidiaries may also retain foreign exchange in their respective
current bank accounts, subject to a cap set by SAFE or its local counterpart, for use in payment of international current account
transactions.
In many cases, existing regulations with
regard to investments from foreign investors and domestic private capital lack detailed explanations and operational procedures
and are subject to interpretations which may change over time. We thus cannot be certain how the regulations will be applied
to its business currently or in the future. Moreover, new regulations may be adopted or the interpretation of existing regulations
may change, any of which could result in material adverse effects on our ability to conduct business.
PRC authorities may refuse to grant licenses to
us. For companies that exceed the scope of their business licenses or permitted activities or that operate without a license, the
relevant PRC authorities have the authority to impose fines or other penalties, sometimes as much as five to ten times the amount
of the illegal revenues, and may require the disgorgement of profits or the revocation of the business license.
Pursuant to PRC laws and regulations, our
breach or non-compliance with such laws and regulations may result in the PRC authorities suspending, withdrawing or terminating
our business license or licenses and permits for heavy equipment and machinery, causing us to cease production of some or all of
our products, and having a material adverse effect on our business and financial performance. For additional details regarding
risks related to PRC regulations, see "Risk Factors – Risks Associated with Conducting Business in China."
We believe that we are in compliance with
the material regulations governing the Company and our operations.
Permits and Licenses
The industry of engineering and manufacturing
of heavy duty equipment is regulated for safety reasons. All companies involved in the engineering and manufacturing of heavy duty
equipment are required to be licensed. The government agencies overseeing the issuance of licenses are the Committee of Safety
for the Special Equipment of the State Quality Supervision Inspection and Quarantine and the Supervisor of Technical Quality.
We have obtained all the necessary permits
and licenses necessary to conduct our current businesses, including our production, technical service and leasing businesses. As
of December 31, 2010, we had been granted six licenses to manufacture heavy duty lifting and carrying equipment, one license to
install heavy duty lifting and carrying equipment, one license to maintain and repair heavy duty lifting and carrying equipment,
and one license to alter heavy duty lifting and carrying equipment. There was no new license granted to us in 2011 and 2012.
The business license for BXFI covers business
consulting, technical advice and technical service. The business license for BWMC is for the production of hoisting and transport
equipment, imports and exports of goods and technology, technological development and consulting, machinery and equipment rental
services. The business license for BWXC is for engineering technology development, consulting service, equipment rental services
and mechanical equipment wholesale. Each of these companies is operating within the scope of its respective business licenses.
Environmental and Other Regulations
We are subject to Chinese national and local
environmental protection regulations which currently impose fees for the discharge of any waste substance, charge fines for pollution,
and provide for the closure by the Chinese government of any facility that fails to comply with orders requiring it to cease or
improve upon certain activities causing environmental damage. Due to the nature of our business, we produce waste water, gas, and
solid waste materials during the course of our production. We believe that our environmental protection facilities and systems
are adequate for us to comply with the existing national, provincial and local environmental protection regulations. However, Chinese
national, provincial or local authorities may impose additional or more stringent regulations which would require additional expenditure
on environmental matters or changes in our processes or systems.
Legal Proceedings
On December 23, 2011, we received two subpoenas
from the Securities and Exchange Commission. The subpoenas require that Wowjoint provide certain categories of documents to the
SEC and that a representative of Wowjoint testify before the SEC. As stated in the SEC correspondence that accompanied the subpoenas,
the investigation and subpoenas should not be construed as an indication that violations of laws have occurred. The investigation
is a non-public fact finding inquiry. It is not possible at this time to predict the outcome of the SEC investigation, including
whether or when any proceedings might be initiated, when these matters may be resolved or what, if any, penalties or other remedies
may be imposed. Wowjoint is committed to cooperating with the SEC.
Eden, one of our customers, claimed that
we supplied poor quality products to four projects in Korea in 2011, on which Eden did the design work and sub-contracted manufacturing
to us. We previously issued four performance bonds to Eden amounting to a total of Euro 552,000 via ICBC Beijing (1 bond for each
project in the amount of Euro 138,000). In December 2012 Eden made the claims under these four performance bonds and ICBC Beijing
paid accordingly. We disagreed strongly with Eden on the claims. We believed that the problem arose from poor design from Eden,
and not from our manufacturing. We are currently appealing and seeking to recover Euro 552,000 through arbitration in Italy. We
expect that the court will find in our favor, although we can give no assurance on the outcome.
In addition, in January 2013 Eden made the
same claims under quality bonds in the total amount of Euro 500,000, which we issued via ICBC Beijing in connection with the above-mentioned
four projects in Korea. We disagreed strongly with Eden on the claims. We believed that the problem arose from poor design from
Eden, and not from our manufacturing. In addition, Eden had made the claims past the one-year time limit, which was specified in
the quality bonds.
Therefore we engaged local Chinese lawyers
and applied to court in Beijing to stop ICBC from paying to Eden. The Beijing court issued the stop payment order to ICBC Beijing.
We are now in a lawsuit with Eden, which may take up to one year for the court to issue a final ruling. We were required to put
up a cash deposit of Euro 500,000 equivalent of RMB with the Beijing court. However the cash deposit will be replaced by a collateral
backed by an apartment, which is owned by one of our senior employees in May 2013. As a result the cash deposit will be released
back to us no later than end of June 2013. We expect that the court will find in our favor, although we can give no assurance on
the outcome.
Our previous landlord from whom we rented
approximately 160,000 square feet of production and office facility in Beijing for 3 years with RMB900,000 annual rent, had filed
a lawsuit against us. Since we built a new manufacturing facility in Zhenjiang, we decided not to renew this Beijing lease at the
end of its term in January 2013. The Landlord claimed that we damaged the floors and walls during rental period and sought an RMB
2 million monetary compensation. At present, the case is pending in Beijing court and the court will likely issue a ruling by end
of 2013. We expect that the court will find in our favor, although we can give no assurance on the outcome.
C. Organizational structure
Wowjoint Corporate Structure
Wowjoint and our associated companies together
form the corporate operating structure. Giant Nova Holdings Limited is a British Virgin Island company, Authentic Genius Limited
(“AGL”) is a Hong Kong incorporated company which became a wholly owned subsidiary of Wowjoint following the business
combination, and BXFI is a China incorporated Wholly Foreign Owned Enterprise (“WFOE”). The scope of BXFI’s business
license includes business consulting, technical and engineering advice and technical services. Beijing Wowjoint is a China incorporated
domestic enterprise. Giant Nova Holdings Limited is a company with limited capitalization that conducts no business operations.
The following diagram illustrates the current corporate structure and the places of incorporation of Wowjoint and our associated
companies:
Most of our business operations are conducted
through Beijing Wowjoint. Until 2010, we did not have an equity interest in the business of Beijing Wowjoint, but rather our business
was operated through contractual arrangements with Beijing Wowjoint, which were not as effective in providing operational control
as direct ownership. On August 4, 2010, we announced that we had replaced the variable interest entity contractual arrangement
discussed above between our PRC operating subsidiary, Beijing Wowjoint and our offshore holding company, BXFI with a direct equity
ownership structure whereby BXFI now directly owns 100% of Beijing Wowjoint. Prior to the completion of the reorganization
of our ownership structure, we did not have an equity interest in the business of Beijing Wowjoint and our business was operated
through contractual arrangements with Beijing Wowjoint. We believe that this direct ownership structure eliminates the
risk that the previous contractual arrangements may not have been as effective in providing us with the operational control of
Beijing Wowjoint as we anticipate our new direct ownership structure will provide and that our new direct ownership structure increases
the overall transparency of, and removes any confusion with respect to, our corporate ownership structure. On March 28, 2011, Beijing Xin Fu Industry Consulting Co. Ltd transferred its 100% ownership of
Beijing Wowjoint Machinery Co. Ltd to Beijing Wowjoint Xingyun Co. Ltd.
AGL has limited capitalization and no operations
other than its holdings in BXFI, the sole shareholder of Beijing Wowjoint, and Bright Bridge Construction Inc. (“Bright Bridge).
Bright Bridge was incorporated in Nevada, USA on April 29, 2009 and is 100% owned by AGL. Bright Bridge primarily covers sales
and marketing activities primarily in the North American market. Bright Bridge in turn 100% owns BWI Consulting s.r.l., which was
incorporated in Italy on March 22, 2012 and covers sales and marketing activities primarily in Europe, Southeast Asia and South
America.
Giant Nova Holdings Limited is a company
with limited capitalization which formerly was a private company registered in the British Virgin Islands with no subsidiaries.
It previously held the interests of the shareholders of Beijing Wowjoint Machinery Co. Ltd., with the majority of its ultimate
shareholders being the shareholders and key management of Beijing Wowjoint Machinery Co. Ltd., though it served no business purpose
prior to the acquisition. It was formed with the intention to help expand Wowjoint’s equipment sales in international markets,
and we expect that it will engage in the sales and marketing of Wowjoint equipment in the near future. There were and are no contractual
agreements or other arrangements between Giant Nova Holdings Limited and the shareholders of Beijing Wowjoint. In connection with
the Share Purchase Agreement, the shareholders of Giant Nova and AGL received 5,691,450 shares and 8,550 shares, respectively.
Following the Acquisition, Giant Nova’s shareholders held a majority of the outstanding shares of the combined company. All
of the beneficial shareholders of Beijing Wowjoint Machinery Co. Ltd. noted in the chart below are also the ultimate beneficial
shareholders of Giant Nova.
The shareholders of Giant Nova Holding Limited
consist of Realink Group Limited (76.4%), Wowjoint International Limited (5.9%), PJ Landscape Co., Limited (4.6%), Mui Hoo Lui
Chung (4.6%), Red Stone Investment Group Limited (4.6%) and Willing Co., Limited (3.9%).
All shares in AGL are held by Zhang Hui,
a first cousin of Mr. Yabin Liu, our chief executive officer and chairman of the board of directors.
Investors in Beijing Wowjoint consist of
our Chairman and chief executive officer, Yabin Liu (37.8%); our chief technical officer and director, Fude Zhang (33.6%); Huijing
Liu, the son of our former senior vice president of logistics and administration, Yasheng Liu, recently deceased (8.2%);
our senior vice president of marketing and sales, Liguo Liu (4.1%); Anning Li (0.7%); Pingyi Wang (0.7%); Ting Ding (9.0%); and
Beijing Wan Qiao Mechanical and Electrical Equipment Co., owned by non-executive management members of the company (6.0%).
D. Property, plants and equipment
Our executive offices are located at Wowjoint
Holdings Limited, 1108 A Block Tiancheng Mansion, #2 Xinfeng Rd. Deshengmenwai St, Xicheng Dist. Beijing 100088. We currently own
and occupy facilities with an aggregate area of 173,659 square feet in Beijing, China. Our operation location in Beijing,
10 miles from Beijing Capital Airport in China, is where design, engineering, manufacturing, marketing and sales activities take
place. Our research and development teams are housed in another building in the western district of Beijing. We hold the appropriate
land use rights for all of our facilities. We terminated a lease for a production and office facility of approximately 160,000
square feet in Beijing in January 2013.
We signed an agreement to build a new R&D
and manufacturing facilities in Zhenjiang City, which is located in Eastern China, about 2-3 hours northwest of Shanghai in early
2012. The new manufacturing facility under Zhenjiang Wowjoint Heavy-duty Machinery Co. Ltd. ("Zhenjiang Wowjoint"),
a subsidiary established in 2011, will cover 2 million square feet of land, including 140,000 square feet of production workshop,
70,000 square feet of office space, shipping field and testing ground. Zhenjiang Wowjoint presently owns 48,000 square meters
of the land and may purchase the remaining land in stages over the next two years. Construction will be split into two phases,
with construction commenced in mid 2012. Phase one has been completed and put into use in early May 2013. The new manufacturing
facility will be focused on producing large equipment and providing maintenance services for our launch gantries, lifting equipment,
railway transportation equipment and railway testing equipment. Going forward more manufacturing activities will be moved from
Beijing to this new facility.
In addition, we established a new R&D
center in Zhenjiang in conjunction with Beijing Jiaotong University's Yangtze River Delta R&D Transportation Institute in December
2011. The Zhenjiang City New District government provided 8,600 square feet of office building space at no cost to us. The
new R&D center will work with the new manufacturing facility to supply enhanced equipment and services to our customers. It
will specifically service customers around the Eastern China Yangtze River Delta area, Southern China and international market
customers.
Our Italian subsidiary, BWI, also rented
an office of approximately 323 square feet in Conegliano, northeastern Italy.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not required for smaller reporting issuers.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results
of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes
included in this Annual Report on Form 20-F. This Annual Report 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 Annual Report
are based on information available to us on the date hereof, and we assume no obligation to update any such forward — looking
statements. Actual results could differ materially from those projected in the forward — looking statements.
Overview
Wowjoint Holdings Limited, or Wowjoint,
is a holding company whose primary business operations are conducted through Beijing Wowjoint Machinery Co. Ltd. (“BWMC”).
Wowjoint, a Cayman Islands limited life company, was organized on December 12, 2007, as a blank check company under the name China
Fundamental Acquisition Corporation for the purpose of acquiring, through a stock exchange, asset acquisition or other similar
business combination, or controlling, through contractual arrangements, an operating business, that had its principal operations
in the People’s Republic of China, or PRC. To avoid being required to liquidate, as provided in its charter, CFAC needed
to consummate a business combination by May 21, 2010.
Pursuant to the terms of the Share Purchase
Agreement, China Fundamental acquired all of the outstanding securities of Beijing Wowjoint on February 22, 2010, and China Fundamental
Acquisition Corporation was renamed Wowjoint Holdings Limited.
Prior to the business combination with Beijing
Wowjoint, China Fundamental had no operating business, and Beijing Wowjoint had not operated as a public company.
We believe that we are one of the leading
solution providers in the construction of transportation infrastructure, specializing in the design, engineering and manufacturing
of customized lifting and carrying equipment for the construction of railway, highway, subway and ports. Its diverse products are
manufactured with proprietary designs and are marketed under the brand name of “Wowjoint”. Since its inception in March
2004, we have experienced significant growth. Revenues for the year ended December 31, 2011 were $24.4 million as compared to $24.1
million for the year ended December 31, 2010, For the year ending December 31, 2011, we reported a net income of $1.2 million compared
to net income of $0.4 million for the year ended December 31, 2010, due to the control of additional cost and business expanding
process.
We believe that we have maintained a strong
market share in China with leading market positions in its four main product lines in the past three years. Its product mix includes
special carriers and Special launching carriers collectively representing 70% of its total net revenue for the fiscal year ended
December 31, 2011. The market demand for these products has been growing in China due to rapid development of railway networks
in China. Major routes will include Shanghai-Kunming, Datong-Xian, and Lanzhou-Xinjiang. We see strong demand for its patented
proprietary product, the integrated launching carrier, a compact model made for deployment in mountainous and hazardous regions.
The integrated launching carrier offers the combined functions of the launching gantry, trye trolley and special carrier with the
additional ability to go through tunnels while carrying precast concrete road segments. We believe the upcoming railway construction
already planned in China’s mountainous southwest and northwest regions, which is due to be completed by 2020 at the latest
will create a strong demand for our integrated launching carrier, which we believe is well suited for such projects as it is specially
designed for more mountainous and forested terrain of southwest China, and provides substantial cost savings versus purchasing
a launcher, trolley, and carrier separately.
Our strategy is to maintain and enhance
its market penetration in railway construction and other key infrastructure development projects in China, such as highway, subways,
ports, yacht and wind power equipment , while expanding its sales internationally. From the middle of 2010 till June 10, 2013,
we have been engaged in equipment leasing with 12 equipment leases signed so far. Leasing has become a big part of our business,
with our long-term customers such as CRG, CCC and CRCC. Equipment available for leasing includes straddle carriers, special purpose
lifting/carrying equipment and integrated launching carriers. Leases are directly negotiated with our clients, and the terms vary
considerably. Typically, the equipment is leased for a period of one to two years. Under the terms of the existing leases we provide
technical service, maintenance, operating, and other ancillary agreements or services, and we operate the machine over the lease
term on behalf of our customers. We believe that entry into the leasing business, as well as the expansion of our technical services
business, will allow us to have relatively smoother revenues over extended periods of time, and will better serve the needs of
the our clients.
Our projects include special carriers and
other large infrastructure equipment with typical production cycles of about six to eight months. We sell to blue chip state-owned
enterprise customers in China with whom we have maintained long-standing relationships. Therefore, we sometimes deliver equipment
without receiving corresponding progress payments. At times our customers experience short term working capital constraints due
to delays in payments from the Chinese government. As a result they in turn may also delay payments to us.
We entered new vertical markets during 2011
and 2012. In February 2011, we announced a contract with Sunbird Yacht Company, China's largest yacht manufacturer, to provide
two marine hoists. In July, the marine hoist segment expanded through a contract with Shenzhen Land Investment & Development
Center. We signed a contract with British Green (Tongliao) Wind Power Equipment Co., Ltd, a wind turbine tower manufacturer and
a subsidiary of Greens Holdings Ltd (HK: 01318.HK), to provide a 100-ton wind tower hoist. In addition, we entered the bridge inspection
and maintenance industry by being awarded a contract by China's Ministry of Railway to build the first ever equipment for inspection
of the overhead concrete beams of the elevated pave way of China's high-speed railway.
In 2012, Wowjoint entered into a contract
with Zhejiang Xiangshan Fishing Trade Development Co., Ltd. for the sale of a 25-ton marine hoist. This hoist will be used for
lifting smaller boats and is an extension of the yacht market that Wowjoint entered last year. The contract value is approximately
$250,000 (RMB 1,600,000).
We continue to pursue additional verticals
where our knowledge and expertise can be utilized and believe that we will make further progress in new vertical markets during
2013.
We seek to increase our market penetration
by expanding the geographic reach of our products, with special emphasis on those countries that are planning high-speed railways,
such as the United States, Korea, Brazil, and developing regions including Southeast Asia, India, Russia, the Middle East and Latin
America. In this regard, in March 2010 we were awarded our first contract in the U.S. to provide customized mobile lifters for
utilization in a highway construction project in Florida, with a total contract value of $3.5 million, of which $2.8 million was
recognized in 2011 and made up 11.6% of total revenue in 2010.
In 2011, we finished production of four
Special launching carriers and sold to our customer-Eden, an Italian based customers, and the equipment was delivered to South
Korea in June 2011. We recognized $6.35 million revenue for this project that made up 26% of our total revenue in 2011.
We entered an agreement to provide two Movable
Scaffolding Systems ("MSS") for a highway bridge construction project with BBE in Malaysia in March 2012. The value of
the agreement is approximately $2.6 million. Production began in April. The first equipment was delivered in September 2012 and
the second in January 2013, and will finish installation by end of June 2013. This is a new type of equipment for us. We further
expanded our product range in construction machinery from providing not only machines for the precast arena, but now also non-prefabricated
girder/beam bridge construction. The MSS is a piece of equipment that will initially be marketed for the Southeast Asian markets
and we anticipate the demand for the equipment to be significant once the initial machine is deployed.
We entered into a sales contract with Titan
Peru S.A.C., an import/export company in the construction industry, for a 50-ton Rubber Tire Gantry in May 2012. The equipment
is used for transporting precast concrete beams from the yard to the project site. The value of the contract was $258,000.
We delivered the equipment in October 2012 and finished installation in December 2012. This is an initial contract with Titan Peru
and we expect to have future contracts to export other Wowjoint products to Peru.
We established new sales offices in the
USA and Italy in the past few years to actively pursue international sales opportunities. We also recently added new partners to
enhance our sales force outreach in regions around the world, specifically in areas of Europe, South America and Southeast Asia.
One of these partners will jointly market our handling machines, the Mobilift and Marine Hoist, in Europe and the Mediterranean
regions. We have begun pursuing joint bids with this partner on port construction projects and hope to enter the new field of port
machinery soon.
We are also continuing our efforts
to increase sales of new equipment, realize sales at higher prices and reinforce our product support operations. As increased commodity
prices pushed up the prices of materials used to produce our products, such as steel materials and other purchased parts, we are
working to absorb such increased costs by slightly increasing the sale prices of our products.
To partially offset some of the risks associated
with the amount of revenues derived from our fixed price contracts, we are also looking to enter into service contracts to provide
additional services to our clients, which they are increasingly demanding. In addition, we are actively seeking to expand in international
markets to help offset any fluctuations in domestic Chinese market activities.
China initiated a policy of fiscal constraint
in the latter part of 2009 to deliberately cool the country’s economy, including infrastructure investment, which resulted
in the suspension of spending on a number of major infrastructure projects, including several in which we were involved. As a result,
Chinese economic growth had slowed down noticeably in the past few years, as the Chinese GDP growth was 10.4%, 9.3%, 7.8% in 2010,
2011 and 2012, respectively. In particular, 2012 recorded the slowest growth rate since 1999.
China faced a highly complicated external
environment in 2012, as the economies of the EU countries and the United States remained sluggish, the global financial market
experienced turbulence and protectionism was on the rise. There were also a number of domestic negative factors affecting GDP growth,
including mid- and long-term upward price pressures in raw materials and labor, funding shortages for small businesses, as well
as structural changes intended to enhance energy-saving, emission reduction and other environmental protection measures already
in implementation or to be implemented. However, China's urbanization process, development of its market economy and industrialization
should continue to provide impetus for its mid- and long-term growth.
Some economists predicated that the international
economic situation will remain challenging in 2013, while in China the driving force for mid- and long-term economic growth has
not changed in 2013 while constraints in resources, environment and labor supply continued to increase. The government has shifted
its top priority from taming inflation to stabilizing growth. It has moderately eased its grip over lending, approved massive construction
projects, and stepped up tax reductions to buoy the economy in recent months.
Many of our customers are state-owned enterprises
which depend substantially on government funding of railway construction and other infrastructure projects. The high-speed
railway accident in July 23, 2011 together with the PRC government’s adopted measures designed to keep railway construction
from overheating have resulted in substantial slow-down on construction of high-speed rail lines across the country, which have
not recovered to pre-accident level yet.
As our business is closely tied to the global
infrastructure investments, and in particular such investments in China, our business was directly impacted by these trends. The
currently implemented 12
th
Five Year Plan (2011-2015) includes a significant allocation of government dollars (RMB 2.8
trillion, i.e. approximately US$456 billion) for large infrastructure projects which we anticipate will drive demand for our products
and services through the next few years. As the global economic climate continues to improve, the Chinese government may halt,
decrease or delay railway construction and maintenance as part of their macroeconomic policy.
Any decrease or delay in government funding
of railway construction and maintenance, other infrastructure projects and overall government spending could cause the number of
contracts up for bid to fall, traditional upfront payments of 20% - 40% to be lowered and payment terms to be stretched, adversely
affecting our results of operations.
Principal materials and components that
we use in our various manufacturing processes include steel, castings, engines, tires, hydraulics, cylinders, drive trains, electric
controls and motors, and a variety of other commodities and fabricated or manufactured items. Extreme movements in the cost and
availability of these materials and components may affect its financial performance. We have been able to successfully reduce input
costs for many of its materials, although it remains concerned by the potential for steel prices to rise. With the move of the
major mining companies to reprice ore on a quarterly basis rather than annually, this will make steel purchasing more volatile.
At this point, it is difficult to predict the impact that such pricing actions may have on its business.
Basis of Presentation
The following discussion and analysis of
our financial condition and results of operations has been prepared based on the financial statements of the companies comprising
AGL, its consolidated subsidiaries, BXFI and direct ownership, Beijing Wowjoint, Bright Bridge and BWI, after elimination of inter-company
transactions. This information should be read in conjunction with the financial information and notes thereto included in the consolidated
financial statements and notes thereto included elsewhere in this Annual Report.
On August 25, 2009, AGL, via its wholly
owned subsidiary, BXFI, entered into contractual agreements with Beijing Wowjoint and its shareholders, by which BXFI is deemed
the primary beneficiary of Beijing Wowjoint, and Beijing Wowjoint being a variable interested entity of AGL, is deemed a subsidiary
of AGL under the requirements of the U.S. generally accepted accounting principles (“GAAP”); as further described in
“Wowjoint Corporate Structure”. According to GAAP, a variable interest entity is required to be consolidated by a company
if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s
residual returns. The financial and operational results of Beijing Wowjoint and its branch are included in the consolidated
statements of operations from the effective date of acquisition.
The assets, liabilities, and non-controlling
interest of a consolidated variable interest entity are accounted for as if the entities were consolidated based on voting interests
and the usual accounting rules for which the VIE operates are applied as they would to a consolidated subsidiary as follows:
|
·
|
Carrying amounts of Beijing Wowjoint Machinery Co. Ltd. and its branches, (the “VIE”) are consolidated into the financial statements of BXFI as the primary beneficiary (the “Primary Beneficiary” or “PB”);
|
|
·
|
Inter-company transactions and balances, such as revenues and costs, and receivables and payables, between or among the Primary Beneficiary and the VIE, are eliminated in their entirety;
|
|
·
|
There is no direct ownership interest by the Primary Beneficiary in the VIE, equity of the VIE is eliminated with an offsetting credit to minority interest.
|
In mid-2010, the ownership of Beijing Wowjoint
Machinery Co., Ltd. was transferred to BXFI. After the transfer was completed, we directly owned 100% of BWMC, our operating entity.
The accompanying consolidated financial
statements have been prepared in accordance with U.S. GAAP. The basis of accounting differs from that used in the statutory accounts
of Beijing Wowjoint, which are prepared in accordance with the accounting principles of PRC (“PRC GAAP”). Beijing Wowjoint’s
functional currency is the Chinese Renminbi (“RMB”); however, the accompanying consolidated financial statements have
been translated and presented in United States Dollars (“USD”).
Consolidated Income Statements
In May 2010 the Company changed its fiscal
year-end from August 31st to December 31st.
The following table sets forth our financial results for the
years ended 2008, 2009, 2010, 2011 and 2012.
Summary of statement of operation data:
(unaudited)
(US$ in thousands except per share and operating
data)
|
|
Year ended
December 31,
|
|
|
Four months ended
December 31,
|
|
|
Year ended August 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
|
10,098
|
|
|
|
24,398
|
|
|
|
24,062
|
|
|
|
1,696
|
|
|
|
17,208
|
|
|
|
44,622
|
|
|
|
36,233
|
|
Gross profit
|
|
|
2,938
|
|
|
|
6,763
|
|
|
|
5,977
|
|
|
|
(4,469
|
)
|
|
|
4,918
|
|
|
|
13,323
|
|
|
|
6,055
|
|
Operating income
|
|
|
(4,308
|
)
|
|
|
2,058
|
|
|
|
637
|
|
|
|
(6,222
|
)
|
|
|
4,210
|
|
|
|
10,897
|
|
|
|
4,359
|
|
Net income
|
|
|
(3,858
|
)
|
|
|
1,188
|
|
|
|
424
|
|
|
|
(5,336
|
)
|
|
|
3,819
|
|
|
|
9,784
|
|
|
|
3,939
|
|
Basic net income per share(1)
|
|
|
(0.46
|
)
|
|
|
0.15
|
|
|
|
0.06
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Diluted net income per share(1)
|
|
|
(0.46
|
)
|
|
|
0.15
|
|
|
|
0.06
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Factors Affecting Beijing Wowjoint’s Results of
Operations and Financial Condition
Our financial condition and results of operations
have been and will continue to be affected by a number of factors, including those set forth below.
The PRC’s economic growth
We have benefited significantly from the
overall economic growth and the demand for railway and highway construction equipment in the PRC. During the fiscal years ended
December 2012, 2011 and 2010, we derived 78%, 74% and 88.4%, respectively of our revenue from domestic sales in the PRC.
Any adverse changes in economic
conditions or regulatory environment in China may have a material adverse effect on our future performances. For example, the high-speed
railway train accident occurred on July,23, 2011 together with the PRC government’s adopted measures designed to keep railway
construction from overheating have resulted in substantial slow-down on construction of high-speed rail lines across the country,
which have not recovered to pre-accident level yet. China initiated a policy of fiscal constraint in the latter part of 2009 to
deliberately cool the country’s economy, including infrastructure investment, which resulted in the suspension of spending
on a number of major infrastructure projects, including several in which we were involved. As a result, Chinese economic growth
had slowed down noticeably in the past few years, as the Chinese GDP growth was 10.4%, 9.3%, 7.8% in 2010, 2011 and 2012, respectively.
In particular, 2012 recorded the slowest growth rate since 1999. Although we did not lose any customers during this period, we
suffered a contraction of our business due to these temporary shifts in China’s macroeconomic policies. The nature of our
business inherently means that our results will be “volatile” and we will have certain quarters where our revenues and
income are high and other quarters where revenues and income are low.
Entry into International markets
We established new sales offices in the
USA and Italy in the past few years to actively pursue international sales opportunities. We successfully entered the US market
in 2010, Korea in 2011, Malaysia and Peru in 2012. We also recently added new partners to enhance our sales force outreach in regions
around the world, specifically in areas of Europe, South America and Southeast Asia. One of these partners will jointly market
our handling machines, the Mobilift and Marine Hoist, in Europe and the Mediterranean regions. We have been pursuing joint bids
with this partner on port construction projects and hope to enter the new field of port machinery.
Competitive pricing of Beijing Wowjoint’s products
We have been able to increase our gross
profit margin through competitive pricing of its products and effective cost management. To increase sales volumes, our pricing
policy is to offer competitive pricing with relatively lower gross profit margin on certain product lines, if those product lines
have higher competition and lower technical innovation. We may also price our newly introduced products competitively in their
first year of introduction in order to promote the market awareness of such products. In order to maintain price competitiveness
and sales volumes, we review our pricing strategy regularly to make adjustments based on various factors, including the market
response, the expected product margin, the prices of its competitors’ products and the expected demand from customers.
Customer base consisting predominantly of large state-owned
enterprises
Our customer base consists predominantly
of large entities, many of whom are state-owned enterprises. Due to our need to maintain ongoing relationships with
these large customers and their strong bargaining power, these companies may not settle the outstanding receivable balances on
a timely basis even after we have fulfilled all of our performance milestones, including customer acceptance and inspections. For
large projects, this could result in delays in payment of a few months to as much as several years.
Relationship with quality outsource contract manufacturers
In 2012, we outsourced approximately 28.9%
of components used in our machinery production by amount of cost of goods sold to contract manufacturers in comparison to approximately
28.2% and 27.6% of amount of cost of goods sold to contract manufacturers in 2011 and 2010, respectively. We were able to
establish long term relationships with a number of outsource contract manufacturers over the years and has been selective in choosing
outsource contract manufacturers capable of supplying quality products on a timely manner at more competitive prices. For
risks relating to reliance on outsource contract manufacturing, see “Risk Factors – Risks Associated with Our Business
and Industry.”
Effective cost management
The major raw materials used in the manufacturing
of our products are steel, electric control systems and hydraulic systems, such as hydraulics, cylinders and engines. To
meet its production requirements and maintain a reasonable profit margin, we must obtain sufficient quantities of good quality
materials from our suppliers in a timely manner and at commercially reasonable prices. We believe that we will be able to
offset a portion of any such increased costs through improvement in our production efficiency and improved economies of scale.
Historically, we gave been successful in reducing the cost of raw materials as a percentage of the cost of sales. We seek to capitalize
on our purchasing and bargaining power to continue to obtain favorable prices from our major suppliers. We use a cost-plus pricing
policy to determine the sales prices of our products. We have a formal job cost accounting system in place which allocates costs
to different projects through this system. During semi-monthly meetings, a management team evaluates the progress of each project
by reviewing the revenues and costs incurred. At times, the management team approves costs over budget or contract values for certain
projects based on strategic and other considerations.
Level of income tax and preferential tax treatment
Our profit is affected by the income tax
that it pays and any preferential tax treatment that it is able to receive. Pursuant to the PRC Income Tax Laws, beginning
January 1, 2008, the new EIT law replaced the existing laws for DES and the FIEs. The new standard EIT rate of 25% replaced the
33% rate currently applicable to both DES and FIEs, except for High Tech companies which pay a reduced rate of 15%. We are qualified
as a high tech company and received tax holiday treatment for a reduced rate of 7.5% for both fiscal year 2008 and 2009. This rate
ended on December 31, 2009. Starting January 1, 2010, we became subject to a tax rate of 15% for three calendar years until December
31, 2012.
Costs of being a public company
Prior to the business combination, Beijing
Wowjoint had not operated as a public company. Beijing Wowjoint has incurred significant accounting, legal and other expenses in
connection with the business combination since its year ended August 31, 2009, and it expects that compliance with its obligations
as a public company will require significant management time and continued increases in general administrative expenses, including
insurance, legal and financial compliance costs.
Entry into leasing business and technical service business
Since the middle of 2010, we have engaged
in the leasing of equipment. Until June 10, 2013, 12 leases having been signed with our customers CRCCC, CCC and CRG. A slow-down
of Chinese government’s spending in railway sector in the past few years resulted in cancellation of some railway projects
as well as slow-down in construction of some projects. Therefore some of our Chinese state-owned customers decided to switch from
purchasing to leasing of equipment in order to reduce upfront costs, which led to a big jump of leasing revenue in our revenue
mix from 2010 to 2011 and 2012.
Equipment available for leasing includes
straddle carriers, special purpose lifting/carrying equipment and integrated launching carriers. Leases are directly negotiated
with our clients, and the terms vary considerably. Typically, the equipment is leased for a period of one to two years. Under the
terms of the existing leases we provides technical service, maintenance, operating, and other ancillary agreements or services,
and we sometimes operate the machine over the lease term on behalf of our customers. We believe that entry into the leasing business,
as well as the expansion of its technical services business, will allow us to have relatively smoother revenues over extended periods
of time, and will better serve the needs of customers.
On the other hand, lease payments are normally
monthly throughout the leasing duration rather than upfront payments. As lease payments are received periodically over time, rather
than in upfront payments, growth in our leasing business could also affect our liquidity in the future. Our leasing business will
be carefully managed in accordance with our liquidity situation, as we may be expected to up-front the cost in manufacturing the
equipment intended for lease.
We recognize revenues from our leasing contracts
as the fulfillment of our obligations as the lease term occurs. Our limited entry into leasing is not expected to have any significant
effect on our business, including sales of our equipment. The lease arrangements do not contain any specific termination or indemnification
provisions, except that in some cases, there is general language providing that if a client does not pay, or if a delay or shutdown
is caused by the customer, liquidated damages must be paid to us. If we are responsible for a delay in the project, we may be forced
to pay liquidated damages.
Results of operations for the year ended December 31,
2012 compared to the year ended December 31, 2011
Sales
. Revenues for the year ended December 31,
2012 were $10.1 million, a 59% decline from the $24.4 million reported for 2011, due to sharp decrease in equipment sales, international
revenue and technical service revenue, which was somewhat offset by solid increase in leasing revenue. We built and completed 6
machines during 2012 which represented $3.5 million, or 35% of total revenue, vs. 12 machines sold in 2011 (80% of total revenue).
Equipment sales fell by 82% in 2012. Technical service sales were $0.3 million, a 76% decline from $1.3 million in 2011, for the
demand of service decreased due to the railway sector construction slow-down in China. Lease income for 2012, which began as a
segment of revenue in 2010, represented $6.3 million, or 62% of total revenues, a solid growth from $3.5 million in 2011. We recognized
lease income for 8, 5 and 3 lease contracts in 2012, 2011 and 2010, respectively. A slow-down of Chinese government’s spending
in railway sector in the past few years resulted in cancellation of some railway projects as well as slow-down in construction
of some other projects. Therefore some of our Chinese state-owned customers decided to switch from purchasing to leasing of equipment
in order to reduce upfront costs, which led to a big jump of leasing revenue in our revenue mix from 2010 to 2011 and 2012. International-based
revenues accounted for approximately 26% of total sales in 2012 vs. 26% in 2011. International revenue on an absolute basis fell
by $3.7 million (58% drop) to $2.6 million in 2012, due to smaller international contracts in 2012 (Malaysia and Peru) vs. 2011
(4 large Korean contracts).
Gross margin
. Gross profit for 2012 was $2.9
million, compared to gross profit of $6.8 million in 2011, representing a 57% decrease year over year, which was primarily due
to a 59% decline in sales. Gross margins increased to 29.1%, from 27.7% in 2011. The 138 basis points gross margin increase was
due to higher lease income and a higher margin product mix.
Operating expenses
. Operating expenses for 2012
increased by 54% to approximately $7.2 million, compared to $4.7 million in 2011. Selling expenses grew by 88% to $2.2 million
and general and administrative expenses grew by 43% to $5 million in 2012, respectively, due to set-up of a new sales office in
Italy, increased sales effort in international markets, as well as expenses related to warrant exchange, change in stock listing
exchange and SEC investigation occurred in 2012.
Operating margin
. Operating margin in 2012 was negative
42.7% vs. positive 8.4% in 2011, which was primarily due to the above-mentioned sharp increases in operating expenses.
Net income
. Net loss in 2012 was $3.86 million, or negative
$0.46 per share based on 8.34 million weighted average shares outstanding, compared to net income of $1.2 million, or $0.15 per
share based on 7.97 million weighted average shares outstanding for the full year 2011. Net loss in 2012 was somewhat offset by
a $1 million one-time Beijing city free government subsidy given to companies in high-tech industries, such as us.
Results of operations for the year ended December 31,
2011 compared to the year ended December 31, 2010
Sales
. Revenues for the year ended December 31,
2011 were $24.4 million, a slight increase from the $24.1 million reported for 2010. We built and completed 12 machines during
2011, which represented $19.6 million, or 80% of total revenues, vs. 14 machines sold during 2010. Technical service sales were
$1.3 million, a decrease from the $5.1 million in FY 2010,for the demanding of service decreases due to the construction slow-down.
Lease income for FY 2011, which began as a segment of revenue a year ago, represented $3.5 million, or 14.4% of total revenues,
an increase from $0.7 million in 2010. International-based revenues accounted for approximately 26% of total sales in 2011 vs.
3% in 2010.
Gross margin
. Gross profit for 2011 was $6.7
million, compared to gross profit of $6.0 million in 2010, representing an 11% increase year over year. Gross margins increased
to 27.7%, from 24.8% in the same period 2010. The 250 basis points gross margin increase was due to higher lease income and a higher
margin product mix.
Operating expenses
. Operating expenses for 2011 were
reduced to approximately $4.7 million, compared to $5.3 million in the same period of 2010. Selling expenses were flat year over
year at $1.2 million. General and administrative expenses were $3.5 million and $4.2 million for the 2011 and 2010 years, respectively,
with the decrease due to our stringent focus on reducing costs.
Operating margin
. Operating margin increased substantially
to 8.4% compared to 2.6% in the prior year. During the year we entered into new markets and added staffing to enhance our internal
systems and control, yet we were able to control costs and achieve an increase in operating profit.
Net income
. Net income was US$1.2 million, or US$0.15
per share based on 7.9 million weighted average shares outstanding, compared to net income of US$0.4 million, or US$0.06 per share
based on 7.5 million weighted average shares outstanding for the full year 2010.
Analysis of Cash Flow
The following table presents a summary of Beijing Wowjoint’s
cash flows and beginning and ending cash balances for the periods indicated:
Summary of statement of cash flow data:
(US$ in thousands)
|
|
Year ended
December 31,
|
|
|
Four months ended
December 31,
|
|
|
Year ended August 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net cash provided by/(used in) operating activities
|
|
|
4,720
|
|
|
|
9,597
|
|
|
|
(3,898
|
)
|
|
|
(1,224
|
)
|
|
|
(522
|
)
|
|
|
763
|
|
|
|
1,905
|
|
Net cash provided by/(used in) investing activities
|
|
|
(6,167
|
)
|
|
|
(12,004
|
)
|
|
|
5,132
|
|
|
|
(50
|
)
|
|
|
(238
|
)
|
|
|
(347
|
)
|
|
|
(2,138
|
)
|
Net cash provided by/(used in) financing activities
|
|
|
(1,486
|
)
|
|
|
3,973
|
|
|
|
24
|
|
|
|
19
|
|
|
|
260
|
|
|
|
(5
|
)
|
|
|
537
|
|
Analysis of cash flow for the year ended December 31,
2012 compared to the year ended December 31, 2011
Net cash provided by operating activities was $4.7 million for
2012, compared with net cash provided by operating activities of $9.6 million for 2011. The decrease in net cash provided by operating
activities was mainly due to lower revenue in 2012.
Net cash used in investing activities was $6.2 million during
2012 compared to net cash used in investing activities of $12 million during 2011. Net cash used in investing activities in both
2011 and 2012 was mainly due to purchase of land and equipment as well as construction activities related to our new Zhenjiang
factory. Net cash used was less in 2012 compared to a year ago resulting from less purchase.
Net cash used in financing activities was $1.5 million in 2012
compared to $3.9 million provided by financing activities in 2011. During 2012, we repaid several bank loans totaling approximately
$4 million (RMB25 million) to CDB (RMB3 million), ICBC Zhongguancun Branch (RMB10 million), China Merchants (RMB7 million) and
China Minsheng Bank (RMB5 million), respectively. We then borrowed from banks totaling $2.5 million (RMB16 million), including
RMB5 million from China Minsheng Bank and RMB11 million from ICBC Zhenjiang Branch.
Analysis of cash flow for the year ended December 31,
2011 compared to the year ended December 31, 2010
Net cash provided by operating activities was US$9.6 million
for 2011, compared with net cash used in operating activities of US$3.9 million for 2010. The increase in net cash was due mainly
to the timely collection of our account receivables.
Net cash used in investing activities was US$12 million during
2011 compared to net cash provided by investing activities of US$5.1 million during 2010. The increase in net cash used in investing
activities was for we produced more equipment for leased contracts.
Net cash provided by financing activities was US$4 million in
2011 compared to US$24,000 in 2010. In 2011, we borrowed US$5 million from bank and repaid US$1.5 million, which increase the net
cash provided by financing activities.
LIQUIDITY AND CAPITAL RESOURCES
To date, our principal source of liquidity
has been cash generated from our operating activities relating to the sale of customized infrastructure equipment and machinery.
While the payment term of each sales contract
is negotiable, in typical contracts, approximately:
|
¨
|
30% of the total contract price is due within 10 days of the time the contract is entered into;
|
|
¨
|
50% of the total contract price is due before delivery of the equipment;
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¨
|
15% of the total contract price is due after the machine is tested and accepted by the customer; and
|
|
¨
|
the remaining 5% of the total contract price is the retainage, which is typically paid after warranty period ends (usually one year)
|
Liquidity
As of December 31, 2012, we had total assets
of $39.9 million, of which cash amounted to $1.7 million, accounts receivable amounted to $8.1 million, other receivables amounted
to $0.1 million, and costs and estimated earnings in excess of billing on uncompleted contracts amounted to $2.3 million. While
working capital was a negative $1.5 million, equity amounted to $18.7 million. The current ratio was approximately 0.93:1.
As of June 10, 2013, we maintain in total
RMB19 million (approximately $3 million) in rolling credit facilities, of this amount:
|
1)
|
China Development Bank (CDB) extended us a 3-year RMB10 million ($1.63 million) working capital facility in February 2011. The current expiration date for the loan agreement is February 24, 2014, with RMB3 million which we repaid on February 24, 2012, RMB3 million which we repaid on February 24, 2013 and the remaining RMB4 million is to be repaid on February 24, 2014. Therefore the current balance is RMB4 million ($0.6 million). RMB loans carry an interest rate equal to the People’s Bank of China’s three-year benchmark lending rate.
|
|
|
|
|
|
The CDB facility is supported by a guarantee from Beijing Zhongguancun Sci-Tech Guaranty Co. Ltd. (“Zhongguancun”), which is a professional guarantee company mainly funded by the Chinese government and provides various credit guarantees for hi-tech SMEs (such as Wowjoint) in order to help the companies obtain bank financing at reduced interest rates.
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|
|
|
|
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The material terms for the Zhongguancun guarantee of CDB facility are as follows:
|
|
·
|
RMB10
million maximum amount; the principal amount of the CDB credit line will be reduced from RMB10 million to RMB7 million in second
year, and to RMB4 million in third year, as we repay the principal in accordance with the terms of the loan agreement.
|
|
·
|
a
pledge of all future and current accounts receivables on a pro rata basis, with us being required to submit a list of all accounts
receivables to Zhongguancun every quarter;
|
|
·
|
the
term is from February 25, 2011 to February 24, 2014; and
|
|
·
|
the
fees charged by Zhongguancun for the three-year RMB10 million loan were RMB474,542, which is the sum of the following (the CDB
annual guarantee fee percentage is 10% higher than that under the ICBC facility due to the longer than one year guarantee):
|
|
a)
|
first year of agreement: RMB10 million x 1.9602% (annual guarantee fee) + RMB10 million x 0.3% (annual guarantee review fee);
|
|
b)
|
second year of agreement: RMB7 million x 1.9602% (annual guarantee fee) + RMB7 million x 0.3% (annual guarantee review fee); and
|
|
c)
|
third year of agreement: RMB4 million x 1.9602% (annual guarantee fee) + RMB4 million x 0.3% (annual guarantee review fee).
|
|
2)
|
China Minsheng Bank extended us a RMB5 million (US$0.8 million)
facility in October 2011 to provide short-term liquidity and working capital, which expired on March 29, 2012. We repaid the
loan in January 2012 before the due date, and renewed the loan for 6 months from March 2012 to September 14, 2012, which we
repaid on August 23, 2012. We subsequently entered a new 1-year RMB5 million (US$0.81 million) facility with China Minsheng
Bank with a term from August 23, 2012 to August 23, 2013. RMB loans carry an interest rate equal to 1.3 times the
People’s Bank of China’s 1-year benchmark lending rate, i.e. 7.8%.
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|
|
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|
|
The China Minsheng Bank facility is supported by a
personal guarantee from Yabin Liu, our Chief Executive Officer.
|
|
3)
|
Bank of Beijing extended us one-year RMB10 million (US$1.6 million) facility in April 2013 to provide short-term liquidity and working capital, which will expired on April 25, 2014. RMB loans carry an interest rate equal to 1.15 times the People’s Bank of China’s 1-year benchmark lending rate.
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|
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The Bank of Beijing facility is supported by a guarantee
from Beijing Zhongguancun Sci-Tech Guaranty Co. Ltd. (“Zhongguancun”). We are currently negotiating legal documents
with Zhongguancun, however the lender allowed us to draw down the full RMB10 million loan on April 25, 2013 before the execution
of final guarantee documents. We expect the guarantee documents to be signed by end of June 2013.
|
Under the above three credit facilities,
we:
(1) must pay the principal and related interests
when due;
(2) without written consent, cannot sell
or transfer assets, or provide guarantees to third parties; and
(4) must not conduct any activities, which
may be materially detrimental to the interests of lending banks.
We are in compliance with all terms and
conditions of all of the above credit agreements. Except for the above terms, there are no quantified financial covenants or financial
ratios specified in the credit agreements. We are not subject to any covenants limiting our ability to incur additional indebtedness.
Below are 3 credit facilities, which we
repaid in full and terminated in 2012:
|
(1)
|
Industrial and Commercial Bank of China Limited (“ICBC”), Zhongguancun Branch, extended a 1-year RMB40 million ($6.4 million) facilities in December 2011, of which RMB10 million ($1.6 million) was used to fund procurement and purchases related to the company’s business, and RMB30 million ($4.8 million) was used for the issuance of guarantees, letters of credit, bid bonds and performance bonds. These facilities carried an interest rate equal to 1.05 times the People’s Bank of China’s benchmark lending rate. We repaid the RMB10 million facility in full in 2 tranches - RMB5 million plus interest in October 2012 and the remainder RMB5 million plus interest in December 2012. We also terminated the RMB30 million facility when the related Zhongguancun guarantee (described below) expired in November 2012.
|
The original loan agreement with ICBC was for an
amount of RMB10 million ($1.6 million) for funding of procurements and purchases relating to our business. However, on December
23, 2010 ICBC subsequently allowed the facility to be used for an additional RMB30 million ($4.8 million) for the purpose of issuing
guarantees, letters of credit, bid bonds and performance bonds, based on the support provided by a guarantee from Zhongguancun.
There was no formal amendment to the ICBC loan agreement to reflect the increased amount. However, we obtained a letter from ICBC
confirming this arrangement.
The expiration date for the original ICBC loan agreement
was on December 8, 2011. We successfully renewed the RMB 10 million ($1.6 million) credit line under a loan agreement executed
with ICBC on December 20, 2011 and supported by a new RMB 10 million ($1.6 million) guarantee contract with Zhongguancun executed
on December 6, 2011.
The RMB30 million ($4.8 million) used for the issuance
of guarantees, letters of credit, bid bonds and performance bonds was covered under the original guarantee contract with Zhongguancun
from November 15, 2010 to November 14, 2012. While there was no specified term for the additional RMB30 million ($4.8 million)
credit line, once the guarantee from Zhongguancun terminated on November 14, 2012, the RMB30 million ($4.8 million) credit line
expired at the same time. In addition, this RMB30 million ($4.8 million) line of credit was uncommitted in nature despite the Zhongguancun
guarantee, which meant that each time we applied to use this line, ICBC had the right to decline the request at its discretion.
The material terms for the guarantee from Zhongguancun
for the ICBC facilities were as follows:
|
•
|
RMB40 million maximum amount;
|
|
•
|
a pledge of future and current accounts receivables on
a pro rata basis, with the company required to submit a list of all accounts receivables to Zhongguancun every quarter;
|
|
•
|
the term was from November 15, 2010 to November 14, 2012;
|
|
•
|
the fees charged by Zhongguancun for the guarantee of
a one-year RMB10 million loan drawdown were RMB208,200; and
|
|
•
|
the fees charged by Zhongguancun for the 15 bid and performance
bonds we opened using a RMB30 million project bidding credit line were RMB 20,168,286, which was the sum of the following:
|
|
1)
|
The
ICBC guarantee fee of RMB of 208,200 was the sum of RMB10 million x 1.782% (annual guarantee fee) + RMB10 million x 0.3% (annual
guarantee review fee).
|
|
2)
|
During
2011, the fees charged by Zhongguancun for the 14 bid and performance bonds the company opened using its RMB30 million credit
line for guarantees totaled RMB 309,011, which equaled the bond amount x 1.35% (annual percentage) x time outstanding.
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|
(2)
|
China Merchants Bank extended a 1-year RMB7 million ($1 million) facility to provide short-term liquidity and working capital.
RMB loans carried an interest rate equal to 1.3 times the People’s Bank of China’s benchmark lending rate. We repaid
this loan in full plus interest upon expiration in July 2012.
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|
3)
|
Industrial and Commercial Bank of China Limited, Zhenjiang Branch (“ICBC Zhenjiang”), extended a 6-month RMB11 million ($1.79 million) facility to one of our wholly-owned subsidiaries, Zhenjiang Wowjoint, with term from October 26, 2012 to April 30, 2013. RMB loans carried an interest rate equal to the People’s Bank of China’s 6-month benchmark lending rate. We repaid this loan in full plus interest upon expiration on April 30, 2013.
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|
|
The ICBC Zhenjiang facility was supported by a corporate
guarantee from Zhenjiang Wowjoint that has the following material terms:
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|
·
|
RMB11
million maximum amount;
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|
·
|
a pledge of land use right of the Zhenjiang facilities with appraised
value of approximately RMB16.9 million as of October 2012;
|
|
·
|
the
term from October 26, 2012 to October 25, 2017.
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Source of Funds and Liquidity Management
Our principal capital resources policy is
to maintain sufficient capital resources to be able to respond promptly to future capital needs in connection with its operations
and to maintain an appropriate level of liquidity.
Our short-term funding needs have historically
been met mainly by cash flows from operating activities, as well as by bank loans.
As of December 31, 2012, we maintained credit
facilities of RMB23 million ($3.65 million) with Industrial and Commercial Bank of China, China Development Bank and China Minsheng
Bank to secure liquidity. We are not subject to any covenants limiting its ability to incur additional indebtedness.
As of December 31, 2011, we maintained credit
facilities of RMB62 million ($9.8 million) with Industrial and Commercial Bank of China, China Development Bank, China Minsheng
Bank and China Merchants Bank to secure liquidity. We are not subject to any covenants limiting its ability to incur additional
indebtedness.
On February 22, 2010, China Fundamental
consummated its acquisition of Beijing Wowjoint pursuant to the terms of the share purchase agreement. In
connection with the acquisition, the holders of 1,374,089 of the ordinary shares sold in China Fundamental's initial public
offering properly elected to redeem their shares for cash at $7.96 per share, for an aggregate of approximately $10.9 million.
China Fundamental also entered into "forward contracts" to purchase 1,696,258 ordinary shares in privately
negotiated transactions from shareholders who would otherwise have voted against the business combination, for an aggregate
of approximately $13.6 million. The redemptions and the closing of such purchase were subsequently effected using funds that
were held in China Fundamental's trust account. After payment of redeeming shareholders
and forward contracts, and payment of transaction related expenses including deferred underwriting commissions and legal fees
and other expenses, approximately $7.1 million was available for use by the combined company for working capital
purposes after consummation of the merger in February 2010.
As a result of merger, we have a net cash
position of $2.17 million as of December 31, 2010 and our working capital rose from $9.8 million on December 31, 2009 to $16 million
as of December 31, 2010. Our net cash position was $4.63 million and our working capital was $7.98 million as of December 31, 2011.
Our net cash position was $1.71 million and our working capital was a negative $1.52 million as of December 31, 2012.
Most of the time our customers do not give
large projects (such as the from Beijing to Shanghai railway project) to just one equipment supplier. Therefore, we can only bid
for a portion of the projects. When we finish our part of the work, our customers usually do not inspect and accept our work immediately. Rather,
they do so after all the other contractors have finished their respective portions for an entire phase of the project. For large
projects, this could result in substantial delays in payment of a few months to as much as a year or more.
Our standard practice is to charge our customers
30% of the contract amount upfront and collect the balance according to a schedule based on the progress of a project. However,
many of our customers are state-owned enterprises and may be slow to make payments. For large state-owned enterprises with good
credit history, we usually agree to grant longer grace periods than usual, which may increase the aging of our accounts receivables.
A portion of our accounts receivables is
aged over the terms of our contracts, which is not uncommon in the Chinese construction market currently given the bargaining power
of very large customers, most of whom are state owned enterprises, who do not settle the outstanding receivable balances on a timely
basis, even after we have fulfilled all performance milestones, including customer acceptance and inspections.
Because we have limited bargaining leverage
with our large state-owned enterprise customers in China, we are required to finance significant operating expenses before we recognize
revenues and to finance significant accounts receivable once we recognize revenues. Due to our need to maintain an ongoing
relationship with these major customers, it may be difficult for us to obtain a significant improvement in their payment patterns.
For large projects, this could result in delays in payment of a few months to as much as several years.
As a result of the size of many of our contracts,
delayed payments by our customers may adversely affect our working capital, which could in turn negatively affect our ability to
fund our operations out of our operating cash flow. Our liquidity and cash flows from operations will deteriorate if our accounts
receivable cycles or collection periods continue to lengthen. Although no customer whose payments were delayed has gone out of
business or failed to pay us ultimately, there is no assurance that this will be the case in the future. In the whole year of 2011,
we collected $25.6 million from our customers, most representing receivables aged above one year.
VAT is accrued when related revenue is recognized
under US GAAP based upon percentage of completion method. However, based upon market convention and tax practice in
China, the company is required to pay VAT to the tax bureau after it issues invoices to its customers. We usually issue
invoices to our customers when we receive money from them, which means that we will have sufficient cash to pay VAT.
Going forward, we anticipate that our additional
annual cash needs resulting from being a public company will exceed US$1 million per year resulting from the hiring of additional
accounting and financial staff; higher insurance and legal costs; the adoption of improved corporate governance procedures; and
the upgrade of our information systems. We may invest in further build-out of our new Zhenjiang facility. We are also seeking to
enhance production efficiency and develop new products, while also seeking opportunities to expand our international operations,
especially as high speed rail continues to develop globally. We might also consider complementary acquisitions, although none are
currently under consideration. These capital investments and expansion plans will be financed primarily by funds on hand, operating
cash flows and borrowings under our existing credit facilities with banks.
Based on the funds on hand, cash flows from
our operating activities, and the available funds under our bank line, we believe that we have sufficient means to satisfy our
near term liquidity needs and future obligations in the longer term.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any outstanding off-balance
sheet arrangements and have not entered into any transactions that are established for the purpose of facilitating off-balance
sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements
in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amount of
our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period, as well
as the reported amounts of revenues and expense during each fiscal period. Significant items subject to such estimates and
assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets and valuation
allowances for receivables. We continually evaluate these judgments and estimates based on our own historical experiences, knowledge
and assessment of current business and other conditions, and its expectations regarding the future based on available information
and assumptions that we believe to be reasonable. Since the use of estimates is an integral component of the financial reporting
process, our actual results could differ depending on the estimates used.
While our significant accounting policies
are more fully described in Note 2 of our consolidated financial statements appearing at the end of this Annual Report, we believe
that the following accounting policies are the most critical to aid in fully understanding and evaluating its reported financial
results.
Revenue Recognition
We recognize revenues using the percentage
of completion method of accounting by relating contract costs incurred to date to the estimated costs at completion. Contract price
and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are
reflected in contract revenues and gross profits in the reporting period when such estimates are revised. Revenue is recognized
when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price
to the customer is fixed or determinable, and collectability is reasonably assured. Beijing Wowjoint generates revenue from
three main categories (i) machinery sales, which includes sales of equipment and components, (ii) technical services and (iii)
equipment leasing.
|
1)
|
Revenue
from equipment sales is recognized on the percentage of completion method, measured by references to the proportion of contract
costs incurred to date to the total estimated costs at completion. Equipment sales revenue represents the invoiced value of goods,
net of a value-added tax (“VAT”). All of Beijing Wowjoint’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 17 percent of the gross sales price. This VAT may be offset by VAT paid by Beijing Wowjoint on raw
materials and other materials included in the cost of producing its finished product.
|
|
2)
|
Revenue
from the rendering of technical services is recognized in accordance with the terms stated in the agreements with its customers.
|
|
3)
|
Revenue
from the leasing is recognized based on equipment usage in accordance with terms of the contracts.
|
|
4)
|
Where
contract costs incurred to date plus recognized profits less recognized losses exceed progress billings, the surplus is treated
as an amount due from contract consumers. Where progress billings exceed contract costs incurred to date plus recognized profits
less recognized losses, the surplus is treated as an amount due to contract customers.
|
Impairment allowances for accounts and other receivables
Beijing Wowjoint estimates that the impairment
allowances for accounts and other receivables by assessing the collectability of the receivables based on the age of the balance,
the related customer’s credit history and prevailing market conditions. Allowances are applied to accounts and other receivables
where events or changes in circumstances indicate that the balance may not be collectible. Beijing Wowjoint reassesses the impairment
allowances at each balance sheet date.
Property, Plant and Equipment
Property, plant and equipment (other than
construction-in-progress) are recorded at cost less accumulated depreciation and are depreciated over the estimated useful lives
of the related assets using the straight-line method. Estimated useful lives of the assets are as follows:
|
Useful Life
|
Land use rights
|
40
|
Plant
|
20
|
Furniture and fixtures
|
5
|
Equipment
|
5-10
|
Automobiles
|
5
|
Foreign Currency Translation
We use the local currency (RMB) as its functional
currency. Translation adjustments are reported as other comprehensive income in the statements of operations and accumulated
as other comprehensive income in equity section of consolidated balance sheets. Financial information is translated into
U.S. Dollars at prevailing or current rates, respectively, except for revenues and expenses, which are translated at average current
rates during the reporting periods.
QUANTITATIVE AND QUALITATIVE MARKET RISKS
We are exposed to certain market risks that
exist as part of our ongoing business operations and we use various means, where appropriate, to manage these risks. As a matter
of policy, it does not engage in trading or speculative transactions.
Interest Rate Risk
. We are
exposed to interest rate risk due primarily to our short-term bank loans. Although the interest rates are fixed for the terms
of the loans, the terms are typically twelve months and interest rates are subject to change upon renewal. We monitor
interest rates in conjunction with its cash requirements to determine the appropriate level of debt balances relative to other
sources of funds. We have not entered into any hedging transactions in an effort to reduce its exposure to interest rate
risk.
At December 31, 2012, we performed
a sensitivity analysis for our financial instruments that have interest rate risk. It calculated the pretax earnings
effect on its interest sensitive instruments. Based on this sensitivity analysis, we have determined that an increase
of 10% in our average floating interest rates at December 31, 2012 would have increased interest expense by $29,242 for the year
ended December 31, 2012.
Foreign Exchange Risk
. The
value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political
and economic conditions. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s
Bank of China, China’s central bank, regularly intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium
to long term. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in the
RMB exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of our earnings
and cash assets are denominated in RMB, but its reporting currency is the U.S. dollar, fluctuations in the exchange rate between
the U.S. dollar and the RMB will affect its balance sheet and its earnings per share in U.S. dollars. In addition, appreciation
or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in its business or results of operations.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions
in an effort to reduce its exposure to foreign currency exchange risk. While we may enter into hedging transactions in the
future, the availability and effectiveness of these transactions may be limited, and it may not be able to successfully hedge its
exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert RMB into foreign currencies.
Commodities Risk
Principal materials and components that
we use in its various manufacturing processes include steel, castings, engines, tires, hydraulics, cylinders, drive trains, electric
controls and motors, and a variety of other commodities and fabricated or manufactured items. Extreme movements in the cost and
availability of these materials and components may affect its financial performance. We have been able to successfully reduce input
costs for many of its materials, although it remains concerned by the potential for steel prices to rise. With the move of the
major mining companies to reprice ore on a quarterly basis rather than annually, this will make steel purchasing more volatile.
At this point, it is difficult to predict the impact that such pricing actions may have on its business.
Inflation
. Inflationary factors,
such as increases in the cost of its raw materials and overhead costs, could impair our operating results. Although we do
not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of
inflation in the future may have an adverse effect on its ability to maintain current levels of gross margin and selling, general
and administrative expenses as a percentage of sales revenue if the selling prices of its products do not increase with these increased
costs.
ALLOWANCES FOR DOUBTFUL RECEIVABLES
Our major customers are large Chinese state-owned
enterprises, and therefore our debt collection experience is significantly affected by the China government’s macroeconomic
policy.
Our allowance for doubtful debts consists
of:
|
·
|
a specific allowance provided for those accounts receivable the company
believes it is unlikely to collect; and
|
|
·
|
a general allowance is provided based on an aging analysis.
|
Compared to December 31, 2010, our specific
allowance increased by $380,898 in the year ended December 31, 2011, but the general allowance decreased by $270,763. Therefore,
our bad debts allowance increased by a net of $110,135 during the year ended December 31, 2011.
As of December 31, 2011, our accounts receivable
balance was $12.3 million, of which $ 4.2 million is expected to be received prior to June 30,2012 and $7.6 million is expected
to be collected prior to December 31,2012. The remaining $0.5 million is unlikely to be collected and we have provided a 100%
allowance of doubtful debts for this portion.
Compared to December 31, 2011, our specific allowance increased
by $167,590 in the year ended December 31, 2012, the general allowance increased by $203,353. Therefore, our bad debts allowance
increased by a net of $370,943 during the year ended December 31, 2012.
As of December 31, 2012, our accounts receivable balance was
$8.1 million, of which $5.0 million has been received prior to June 14, 2013 and $3.1 million is expected to be collected prior
to December 31, 2013.
The level of accounts receivables over 180
days is primarily due to the fact that we sell to blue chip state-owned enterprise companies. At times these customers
experience short term working capital constraints due to delay in payments from the Chinese government. As a result,
they in turn delay payments to us.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Our directors and executive officers as
of December 31, 2012 were as follows:
Name
|
|
Age
|
|
Position
|
Yabin Liu
|
|
54
|
|
Chief Executive Officer and Chairman of the Board of Directors
|
Fude Zhang
|
|
57
|
|
Chief Technical Officer and Director
|
John Rui Peng
|
|
31
|
|
Comptroller and acting Chief Financial Officer
|
Feizhou Hao
|
|
46
|
|
Director
|
Liguo Liu
|
|
41
|
|
Senior Vice President of Marketing and Sales
|
Jibing Li
|
|
59
|
|
Director
|
Chun Liu
|
|
72
|
|
Director
|
Yabin Liu
became our chief executive
officer and chairman of the board of directors upon consummation of the acquisition. Mr. Liu has extensive experience
in the railway and railway related construction equipment industry in China. He has served as chief executive officer
of Beijing Wowjoint since its inception in 2004. Since 1996, Mr. Liu has been serving as general manager of Beijing Wan Qiao Mechanical
and Electrical Equipment Co., Ltd., a consulting company and a minority shareholder of Beijing Wowjoint. Since May 2009, Mr. Liu
has been serving as president and sole director of Bright Bridge Construction, Inc., a Nevada company, which engages in the marketing
of Wowjoint’s equipment to the North American market. From 1994 to 1996, Mr. Liu served as chief coordinator with China Academy
of Railway Sciences to promote international academic exchange in railway construction technologies. From 1982 to 1994, he served
with the China Academy of Railway Sciences in various academic research positions as engineer, associate professor and director
in charge of academic research.
Mr. Liu’s introduction of the first
900T special carrier and the first 900T launching gantry for traversing through tunnels were named by Bridge Design & Construction
of England as the newest innovative technology introduced to the construction of erected paved roads. Mr. Liu was named honorary
professor by his school Beijing Jiaotong University on September 2008. His research has been published numerous times in both English
and Chinese. Mr. Liu received his Bachelors degree in mechanics from Beijing Jiaotong University
Fude Zhang
became our chief technical
officer and a director upon consummation of the acquisition. Mr. Zhang has served as deputy general manager with Beijing Wowjoint
since its inception in 2004. Prior to that, Mr. Zhang served as deputy general manager of Beijing Wan Qiao Mechanical and Electrical
Equipment Co., Ltd. From 1989 to 1996, he worked in various engineering positions including engineer and chief engineer at Beijing
Internal Combustion Engine of the Beijing Railway Bureau. From 1982 to 1989, he worked as engineer and chief engineer at the Huairou
North Locomotive Depot of the Beijing Railway Bureau. Mr. Zhang received his Bachelors degree in mechanics from Beijing Jiaotong
University.
John Rui Peng
became our controller
in January 2011. He is also serving as acting chief financial officer following the resignation of Anthony Hung, for
personal reasons, on November 3, 2010, while a search for a new chief financial officer is underway. Prior to joining Wowjoint,
Mr. Rui served as senior auditor with Deloitte CPA Ltd in Beijing from August 2007 to September 2010, and before that, with PriceWaterhouseCoopers
CPA Ltd. in Beijing from July 2006 to July 2007, and as auditor from September 2004 to June 2006. Mr. Rui received a Bachelor of
Economics degree from The University of International Business and Economics.
Feizhou
Hao
became a director
of Wowjoint in August 1, 2011. Mr. Hao has many years of investment banking and fund management experience. From 1998
to 2006, Mr. Hao was advisor for the initial public offerings and listings on Chinese Stock Exchanges of a number of companies
including Hubei Huaxin Cement Co. Ltd., Xinjiang Dushanzitianli High-tech Co. Ltd and Foshan Huaxin Packaging Co. Ltd. Since 2006,
Mr. Hao has been employed by China Golden Future, Inc., which was founded by the China Research Development Foundation under the
State Council’s Research Development Center. Mr. Hao is currently involved in preparing for the launch of a hedge fund
in China, which will engage in the acquisition of mineral resources in China, Australia, Mexico, the United States, Western Africa,
and other countries and regions. Mr. Hao has a Master's degree in Finance & Economics from China Central University of Finance
& Economics and a Bachelor’s degree from China University of Geosciences.
Liguo Liu
became our senior
vice president of marketing and sales upon consummation of the acquisition. Mr. Liu has served as vice general manager of sales
with Beijing Wowjoint since its inception in 2004. In 1998, Mr. Liu joined Beijing Wan Qiao Mechanical and Electrical Equipment
Co., Ltd. as an engineer. From 1994 to 1997, he worked at Hebei Qinhuangdao Municipal Engineering Corp Second Corp, where he performed
mainly as an engineer responsible for the quality of engineering and construction of the local municipal construction projects.
Mr. Liu received his Bachelors degree in construction machinery from Hebei Zhangjiakou Constructional Engineering University.
Jibing Li
began serving as director
to Wowjoint upon the consummation of the acquisition. Mr. Li has been involved widely in the financial and strategic planning with
both private and public listed companies both in the US and China. From 2004 to 2009, Mr. Li has been a chief economist with UTStarcom,
Inc. (Nasdaq: UTSI). From 2001 to 2004, he served as chief economist and general manager of strategic planning with China Unicom
(NYSE: CHU; Hong Kong Exchange: 0762). From 1998 to 2001, he also served as head of research with China Telecom. Prior to Mr. Li’s
return to work in China, he held various positions as economist with Virginia State Corporation Commission and Montana Public Service
Commission. Mr. Li is a Ph.D. candidate of Beijing University and the School of Business of the University of Wyoming (pending
dissertation). He received his Master’s degree in economics from the School of Business of the University of Wyoming and
a Bachelor’s degree in mechanical and electrical engineering from Beijing Jiaotong University.
Chun Liu
began serving as director
to Wowjoint upon the consummation of the acquisition. Mr. Liu has been providing freelance consulting to the industry of railway
engineering since 2001. From 1999 to 2001, Mr. Liu was appointed deputy chief commander in charge of engineering of the construction
of the express railway from Qinhuangdao to Shenyang, an express railway with designed speeds of up to 250 kilometer/hour and
a total length of 401 kilometers. He was responsible for the overall supervision of the engineering and construction of this
first express railway built in China. After college and from 1965 to 1999, Mr. Liu was with China Railway Engineering Group in
various positions as technician, engineer, senior engineer, chief engineer, commander in engineering and duty chief commander in
engineering, all involved in the construction of conventional or high speed railways. He has been involved greatly in the development
of the China railway system from its infancy to where the Chinese railway system is today. He has published various research papers
in the field of railway engineering. He is a China Honor Scientist. Mr. Liu received his Bachelor’s degree in engineering
from Tang Shan Railway Institute.
Board Committees
Our board of directors has established an
audit committee, a compensation committee and a nomination governance committee.
Audit Committee
. Our
audit committee consists of Jibing Li, Feizhou Hao and Chun Liu as of December 31, 2012. Mr. Li is the chair of our audit
committee, and we believe that Mr. Hao qualifies as an “audit committee financial expert”, as such term is defined
in the rules of the Securities and Exchange Commission.
Our board of directors has adopted an audit
committee charter, providing for the following responsibilities of the audit committee:
|
·
|
retaining
and terminating our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by
the independent auditors;
|
|
·
|
discussing
the annual audited financial statements with management and the independent auditors;
|
|
·
|
annually
reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
such
other matters that are specifically delegated to our audit committee by our board of directors after the business combination
from time to time;
|
|
·
|
meeting
separately and periodically with management, the internal auditors and the independent auditors; and
|
|
·
|
reporting
regularly to the board of directors.
|
Compensation Committee
. Our
compensation committee consists of Messrs. Feizhou Hao, Jibing Li and Chun Liu as at December 31, 2011. Mr. Hao is the chair
of our compensation committee. Messrs. Hao, Li and Liu do not have any direct or indirect material relationship with us other than
as a director.
Our board of directors adopted a compensation
committee charter, providing for the following responsibilities of the compensation committee:
|
·
|
reviewing
and making recommendations to the board regarding our compensation policies and forms of compensation provided to our directors
and officers;
|
|
·
|
reviewing
and making recommendations to the board regarding bonuses for our officers and other employees;
|
|
·
|
reviewing
and making recommendations to the board regarding share-based compensation for our directors and officers;
|
|
·
|
administering
our share option plans, if they are established in the future, in accordance with the terms thereof; and
|
|
·
|
such
other matters that are specifically delegated to the compensation committee by our board of directors after the business combination
from time to time.
|
Nomination Committee
. Our
nomination committee consists of Messrs. Feizhou Hao, Jibing Li and Chun Liu as at December 31, 2012. Mr. Chun Liu is the
chair of our nomination committee. Messrs. Hao, Li and Liu did not have any direct or indirect material relationship with us other
than as a director.
Our board of directors adopted a nomination
committee charter, providing for the following responsibilities of the nominations committee:
|
·
|
overseeing
the process by which individuals may be nominated to our board of directors after the business combination;
|
|
·
|
identifying
potential directors and making recommendations as to the size, functions and composition of our board of directors after the business
combination and its committees;
|
|
·
|
considering
nominees proposed by our shareholders;
|
|
·
|
establishing
and periodically assessing the criteria for the selection of potential directors; and
|
|
·
|
making
recommendations to the board of directors on new candidates for board membership.
|
The business address of each party described
above is 1108 A Block Tiancheng Mansion, #2 Xinfeng Road, Deshengmenwai Street, Xicheng District Beijing.
Compensation
The following table shows information concerning
the annual compensation of our executives for services during the periods indicated:
|
|
|
|
|
|
|
|
|
|
Total
|
|
Name
|
|
Year Ended
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yabin Liu
|
|
December 31,2012
|
|
RMB
|
312,000
|
|
|
RMB
|
126,800
|
|
|
RMB
|
438,800
|
|
|
|
December 31, 2011
|
|
RMB
|
307,448
|
|
|
RMB
|
193,200
|
|
|
RMB
|
500,648
|
|
|
|
December 31, 2010
|
|
RMB
|
209,728
|
|
|
RMB
|
222,569
|
|
|
RMB
|
432,297
|
|
|
|
December 31, 2009 (four months only)
|
|
RMB
|
60,700
|
|
|
RMB
|
80,080
|
|
|
RMB
|
140,780
|
|
|
|
August 31, 2009
|
|
RMB
|
226,380
|
|
|
RMB
|
240,240
|
|
|
RMB
|
466,620
|
|
|
|
August 31, 2008
|
|
RMB
|
221,760
|
|
|
RMB
|
240,240
|
|
|
RMB
|
462,000
|
|
|
|
August 31, 2007
|
|
RMB
|
188,496
|
|
|
RMB
|
204,549
|
|
|
RMB
|
393,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fude Zhang
|
|
December 31,2012
|
|
RMB
|
296,400
|
|
|
RMB
|
138,880
|
|
|
RMB
|
435,280
|
|
|
|
December 31,2011
|
|
RMB
|
291,848
|
|
|
RMB
|
150,052
|
|
|
RMB
|
441,900
|
|
|
|
December 31,2010
|
|
RMB
|
205,331
|
|
|
RMB
|
204,363
|
|
|
RMB
|
409,694
|
|
|
|
December 31,2009 (four months only)
|
|
RMB
|
55,425
|
|
|
RMB
|
69,693
|
|
|
RMB
|
125,118
|
|
|
|
August 31, 2009
|
|
RMB
|
210,070
|
|
|
RMB
|
209,080
|
|
|
RMB
|
419,150
|
|
|
|
August 31, 2008
|
|
RMB
|
205,920
|
|
|
RMB
|
209,080
|
|
|
RMB
|
415,000
|
|
|
|
August 31, 2007
|
|
RMB
|
175,032
|
|
|
RMB
|
174,510
|
|
|
RMB
|
349,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liguo Liu
|
|
December 31,2012
|
|
RMB
|
270,400
|
|
|
RMB
|
133,680
|
|
|
RMB
|
404,080
|
|
|
|
December 31,2011
|
|
RMB
|
259,448
|
|
|
RMB
|
142,968
|
|
|
RMB
|
402,416
|
|
|
|
December 31,2010
|
|
RMB
|
150,871
|
|
|
RMB
|
231,189
|
|
|
RMB
|
382,060
|
|
|
|
December 31,2009 (four months only)
|
|
RMB
|
43,137
|
|
|
RMB
|
78,840
|
|
|
RMB
|
121,977
|
|
|
|
August 31, 2009
|
|
RMB
|
154,350
|
|
|
RMB
|
236,520
|
|
|
RMB
|
390,870
|
|
|
|
August 31, 2008
|
|
RMB
|
150,480
|
|
|
RMB
|
236,520
|
|
|
RMB
|
387,000
|
|
|
|
August 31, 2007
|
|
RMB
|
127,908
|
|
|
RMB
|
199,372
|
|
|
RMB
|
327,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yasheng Liu*
|
|
December 31,2012
|
|
RMB
|
-
|
|
|
RMB
|
-
|
|
|
RMB
|
-
|
|
|
|
December 31,2011
|
|
RMB
|
-
|
|
|
RMB
|
-
|
|
|
RMB
|
-
|
|
|
|
December 31,2010
|
|
RMB
|
96,176
|
|
|
RMB
|
89,431
|
|
|
RMB
|
185,607
|
|
|
|
December 31,2009 (four months only)
|
|
RMB
|
24,642
|
|
|
RMB
|
33,800
|
|
|
RMB
|
58,442
|
|
|
|
August 31, 2009
|
|
RMB
|
109,047
|
|
|
RMB
|
101,400
|
|
|
RMB
|
210,447
|
|
|
|
August 31, 2008
|
|
RMB
|
108,000
|
|
|
RMB
|
101,400
|
|
|
RMB
|
209,400
|
|
|
|
August 31, 2007
|
|
RMB
|
91,800
|
|
|
RMB
|
84,540
|
|
|
RMB
|
176,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Peng Rui
|
|
December 31,2012
|
|
RMB
|
152,715
|
|
|
RMB
|
8,180
|
|
|
RMB
|
160,895
|
|
|
|
December 31, 2011
|
|
RMB
|
171,155
|
|
|
RMB
|
5,230
|
|
|
RMB
|
176,645
|
|
* Mr. Liu Yasheng passed away in May 2011.
Wowjoint currently has no options or long-term
compensation plans.
In developing future salary ranges, potential
bonus payouts, equity awards and benefit plans, it is anticipated that our Compensation Committee will take into account: (1) competitive
compensation among comparable companies and for similar positions in the market, (2) relevant ways to incentivize and reward senior
management for improving shareholder value while building Wowjoint into a successful company, (3) individual performance, (4) how
best to retain key executives, (5) our overall performance, (6) our ability to pay, and (7) other factors deemed to be relevant
at the time.
Specific compensation plans for our key
executives will be negotiated and established by the Compensation Committee. This will include, but may not be limited to, the
Wowjoint executives who currently have employment contracts.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between
our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
Director Independence
Our board of directors has determined that
Messrs. Jibing Li and Chun Liu qualify as independent directors.
We pay $5,000 to each of our independent
directors annually, inclusive of all business-related expenses.
Employees
As of December 31, 2012, we had approximately
196 full-time employees, including 69 technical and R&D, 36 manufacturing, 23 sales (including 1 based in the US and 3 based
in Italy), 8 project management, 7 quality control, 3 purchasing staff, with the remainder being managerial, administrative, finance,
accounting and internal control staff. Since our incorporation in 2004, we have substantially increased our headcount,
with a focus on increasing the number of employees such as technicians and engineers with strong technical skills. We believe we
have a good relationship with our employees. In geographic location, we have one employee in U.S. and one employee in Italy and
the remainder of our employees are in China.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information
regarding the beneficial ownership of our ordinary shares by:
|
·
|
each
person who is the owner of more than 5% of our outstanding ordinary shares;
|
|
·
|
each
person who became an executive officer or director of the Company; and
|
|
·
|
all
of our directors and executive officers as a group
|
Ordinary shares which an individual or group
has a right to acquire within 60 days pursuant to the exercise the warrants noted above, and the pre-IPO and private placement
warrants issued to our investors prior to the acquisition of China Fundamental, are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the table below.
The below table is based on information
known to the company or can be ascertained from SEC filings. The percentages are based on the total number of issued and outstanding
ordinary shares as of June 5, 2013.
Name and Address of Beneficial Owner
|
|
Number of Shares of
Ordinary Shares
Beneficial Ownership
|
|
|
Percentage of
Outstanding
Ordinary
Shares
|
|
|
|
|
|
|
|
|
Realink Group Limited(1)(2)
|
|
|
4,578,246
|
|
|
|
54.5
|
%
|
Yabin Liu(1) (2)
|
|
|
0
|
|
|
|
-
|
|
Fude Zhang (2)
|
|
|
0
|
|
|
|
-
|
|
Jibing Li(2)
|
|
|
0
|
|
|
|
-
|
|
Liguo Liu (2)
|
|
|
8,500
|
|
|
|
*
|
|
Feizhou Hao(2)
|
|
|
0
|
|
|
|
-
|
|
Chun Liu(2)
|
|
|
0
|
|
|
|
-
|
|
John Rui Peng (2)
|
|
|
4,000
|
|
|
|
*
|
|
All directors and officers as a group
|
|
|
4,590,746
|
|
|
|
54.6
|
%
|
* Less than 1%
|
(1)
|
Mr.
Liu is the sole director of Realink Group Limited and may be deemed as the beneficial owner of the shares directly owned by Realink
Group Limited.
|
|
(2)
|
The
business address of the persons is Beijing Wowjoint Machinery Co. Ltd., Du Shi Industrial Park, Songzhuang Town, Tongzhou Dist.,
Beijing 101118 P.R. China.
|
B. Related Party Transactions
During the year ended December 31, 2012,
there are three related parties as below:
Beijing Runtuo Industry &Technology
Co. Ltd. (“Beijing Runtuo”) is a related party of the Company. Mr. Yabin Liu, our CEO owns part of an entity that is
a shareholder of Beijing Runtuo. Beijing Runtuo provided the natural gas to Wowjoint for production, and Wowjoint purchased the
natural gas and made the payment according to the contract. Wowjoint Mechanical and Electrical Equipment Co., (“Wowjoint
Mechanical”) a related party of the Company. Mr. Yabin Liu, our CEO and a shareholder of Wowjoint Mechanical. Wowjoint Mechanical
provided preliminary working process for Wowjoint. Mr. Yabin Liu provided certain personal guaranty to ensure our payment obligations
under the RMB5 million Loan Agreement with China Minsheng Bank entered in August 2012.
Our board of directors has approved the
procedure whereby all ongoing and future transactions between us and any of our directors or their respective affiliates, will
be on terms believed by it at that time, based upon other similar arrangements known to it, to be no less favorable than are available
from unaffiliated third parties. Such transactions will require prior approval in each instance by a majority of our uninterested
“independent” directors, or the members of our board who do not have an interest in the transaction, in either case
who had access, at its expense, to its attorneys or independent legal counsel. It is our intention to obtain estimates from unaffiliated
third parties for similar goods or services to ascertain whether such transactions with affiliates are on terms that are no less
favorable to it than are otherwise available from such unaffiliated third parties. If a transaction with an affiliated third party
were found to be on terms less favorable to us than with an unaffiliated third party, we would not engage in such transaction.
C. Interest of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Please see “Item 18. Financial Statements”
for a list of the financial statements filed as part of this Annual Report.
B. Significant Changes
On April 8, 2012, a special 6%
stock dividend was paid to all holders of ordinary share, and holders of unit consisting one ordinary share and one warrant as
of record date of March 31, 2012.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Not applicable.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares, warrants and units
have been traded on the OTCQB since November 16, 2012 under the symbols BWOW, BWOWW and BWOWU, respectively. Prior to November
16, 2012, our ordinary shares, warrants and units traded on NASDAQ Capital Market and prior to April 30, 2012, our ordinary shares,
warrants and units traded on NASDAQ Global Market. Prior to May 5, 2010, our units were quoted on the Over-the-Counter Bulletin
Board under the symbol WJHUF and after the ordinary shares and warrants began separate trading on July 22, 2008, our ordinary
shares and warrants were also quoted on the Over-the-Counter Bulletin Board, under the symbols WJHCF and WJHWF, respectively. Prior
to April 9, 2010, our ordinary shares, warrants and units traded under the symbols CFQCF, CFQWF and CFQUF, respectively. The change
in our trading symbols related to the change in our name from China Fundamental Acquisition Corporation to Wowjoint Holdings Limited.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Our memorandum and articles of association
currently authorize share capital consisting of 49,000,000 ordinary shares, $0.001 par value, and 1,000,000 shares of undesignated
preferred share, $0.001 par value. As at December 31, 2012, 8,406,968 ordinary shares were issued and outstanding, including
ordinary shares forming part of outstanding units. No preferred shares were outstanding as of that date.
B. Memorandum and Articles of Association
The description of our second amended and
restated memorandum and articles of association is contained in our 20-F annual report (File No.
000-53233
),
filed with the Commission on March 10, 2010, which is incorporated herein by reference.
C. Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in Item 4, “Information on the Company”
and in Item 7, “Major Shareholders and Related Party Transactions” or elsewhere in this Annual Report on Form 20-F
which are incorporated herein by reference.
D. Exchange Controls and Other Limitations Affecting Security
Holders
Under Cayman Islands law, there are currently
no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance
of dividends, interest or other payments to nonresident holders of our shares.
E. Taxation
The following summary of the material
Cayman Islands and United States federal income tax consequences of an investment in ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change. This summary does not
deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state,
local and other tax laws.
Cayman Islands Taxation
The Government of the Cayman Islands will
not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding
tax upon the Company or its shareholders. The Cayman Islands are not party to any double taxation treaties.
No Cayman Islands stamp duty will be payable
by our shareholders in respect of the issue or transfer of ordinary shares. However, an instrument transferring title to an ordinary
share, if brought to or executed in the Cayman Islands, would be subject to Cayman Islands stamp duty.
We have received an undertaking from the
Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the
Cayman Islands, for a period of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing
any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax
to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable
(i) on the shares, debentures or other obligations of the Company or (ii) by way of the withholding in whole or in part of a payment
of dividend or other distribution of income or capital by the Company to its members or a payment of principal or interest or other
sums due under a debenture or other obligation of the Company.
Certain U.S. Federal Income Tax Considerations
The following is a summary of certain United
States federal income tax considerations relating to an investment in our ordinary shares by U.S. Holders (as defined below). This
summary is written on the basis that investors will hold their ordinary shares as “capital assets” (generally, property
held for investment) under the United States Internal Revenue Code (the “Code”) and is based upon existing United States
federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This
summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in
light of their individual investment circumstances, including investors subject to special tax rules (for example, financial institutions,
insurance companies, broker dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)),
holders who are not U.S. Holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors
that will hold equity shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United
States federal income tax purposes, or investors that have a functional currency other than the United States dollar, all of whom
may be subject to tax rules that differ significantly from those summarized below. In addition, except as set forth below, this
summary does not discuss any United States federal income tax considerations relating to an investment in our warrants, or any
non-United States, state, or local tax considerations. Investors are urged to consult their tax advisors regarding the
United States federal, state, local, and non-United States income and other tax considerations of an investment in our ordinary
shares or warrants.
General
For purposes of this summary, a “U.S.
Holder” is a beneficial owner of ordinary shares that is for United States federal income tax purposes (i) an individual
who is a citizen or resident of the United States, (ii) a corporation created in, or organized under the law of, the United States
or any State or political subdivision thereof, (iii) an estate the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary
supervision of a United States court and which has one or more United States persons who have the authority to control all substantial
decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If a partnership is a beneficial owner of
the ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and
the activities of the partnership.
Passive Foreign Investment Company Considerations
A non-United States corporation, such as
the Company, will be treated as a "passive foreign investment company" (a "PFIC"), for United States federal
income tax purposes, if either (i) 75% or more of its gross income consists of certain types of "passive" income or (ii)
50% or more of its assets (determined on the basis of a quarterly average) produce or are held for the production of passive income. For
this purpose, our unbooked intangibles are taken into account and passive income generally includes dividends, rents, royalties,
and gains from the sale or other disposition of passive assets. A non-U.S. corporation will be treated as owning a proportionate
share of the assets and income of any other corporation in which it owns, directly, or indirectly, 25% or more (by value) of the
stock.
Because we were a blank check company, with
no current active business, until the consummation of the business combination on February 22, 2010, we believe that we were classified
as a PFIC for the 2009 taxable year. After the acquisition of Beijing Wowjoint, we may still be classified as a PFIC
depending upon the value of our ordinary shares and nature of our income and assets. If we are or become classified
as a PFIC for any year during which a U.S. Holder holds our ordinary shares, and the U.S. Holder does not make a "mark-to-market"
election as described below, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S.
Holder holds our ordinary shares. Because there are uncertainties in the application of the relevant rules and PFIC
status is a fact-intensive determination made on an annual basis, there can be no assurance that we are not or will not become
classified as a PFIC.
Dividends
Subject to the PFIC rules discussed below,
any cash distributions paid on ordinary shares out of our earnings and profits, as determined under United States federal income
tax principles, will be includible in the gross income of a U.S. Holder as dividend income. Because we do not intend to determine
our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated
as a "dividend" for United States federal income tax purposes. For taxable years beginning before January
1, 2011, a non-corporate recipient of dividend income will generally be subject to tax on dividend income from a "qualified
foreign corporation" at a maximum United States federal tax rate of 15% rather than the marginal tax rates generally applicable
to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a corporation
that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will be
considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the
United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and
which includes an exchange of information program or (ii) with respect to any dividend it pays on stock which is readily tradable
on an established securities market in the United States. Provided that our ordinary shares are readily tradable on
the OTCQB, any dividends paid on ordinary shares should qualify for the lower rate.
Dividends generally will be treated as income
from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex
limitations, to claim a foreign tax credit in respect of any foreign withholding taxes (excluding any dividend distribution taxes
incurred by us) imposed on dividends received on ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit
for foreign tax withheld may instead claim a deduction for United States federal income tax purposes, in respect of such withholdings,
but only for a year in which such holder elects to do so for all creditable foreign income taxes.
Sale or Other Disposition of Ordinary Shares
A U.S. Holder will generally recognize capital
gain or loss upon the sale or other disposition of ordinary shares in an amount equal to the difference between the amounts realized
upon the disposition and the holder's adjusted tax basis in such ordinary shares. Any such capital gain or loss will be long-term
if the ordinary shares have been held for more than one year and will generally be considered a United States source gain or loss
for United States foreign tax credit purposes. The deductibility of a capital loss may be subject to limitations.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable
year during which a U.S. Holder holds our ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described
below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we
remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid
during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three
preceding taxable years or, if shorter, the U.S. Holder's holding period for the ordinary shares), and (ii) any gain realized on
the sale or other disposition, including a pledge, of ordinary shares. Under the PFIC rules:
|
·
|
such
excess distribution or gain will be allocated ratably over the U.S. Holder's holding period for the ordinary shares;
|
|
·
|
such
amount allocated to the current taxable year and any taxable years in the U.S. Holder's holding period prior to the first taxable
year in which we are classified as a PFIC (a “pre-PFIC year”) will be taxable as ordinary income;
|
|
·
|
such
amount allocated to each prior taxable year, other than the current taxable year or a pre-PFIC year, will be subject to tax at
the highest tax rate in effect applicable to the U.S. Holder for that year; and
|
|
·
|
an
interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year,
other than the current taxable year or a pre-PFIC year.
|
If we are a PFIC for any taxable year during
which our shareholders hold our ordinary shares and any of our non-United States subsidiaries is also a PFIC, our shareholders
would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application
of these rules. Shareholders and potential investors should consult their tax advisors regarding the application of
the PFIC rules to any of our subsidiaries.
The "QEF election" regime, which
serves as an alternative to the foregoing rules, is not available.
As a further alternative to the foregoing
rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election, provided that the ordinary
shares qualify as being regularly traded on the OTCQB. If a U.S. Holder makes this election, the holder will generally
(i) include in income as ordinary income for each taxable year the excess, if any, of the fair market value of ordinary shares
held at the end of the taxable year over the adjusted tax basis of such ordinary shares and (ii) deduct as an ordinary loss
the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of such ordinary shares held at
the end of the taxable year, but such loss is allowed only to the extent of the amount previously included in income as a result
of the mark-to-market election. The U.S. Holder's adjusted tax basis in the ordinary shares would be adjusted to reflect
any ordinary income or loss resulting from the mark-to-market election.
If a U.S. Holder makes a mark-to-market
election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will
not be required to take into account the gain or loss described above during any period that such corporation is not classified
as a PFIC. Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder
may continue to be subject to the PFIC rules with respect to any indirect interest in any lower-tier PFICs that we may own. Although
a mark-to-market election may be made with respect to our ordinary shares, such election is not available with respect to an investment
in our warrants. A U.S. Holder who determines to make a mark-to-market election is urged to consult its tax advisor
regarding the application and effect of the mark-to-market election.
Under recently enacted legislation, each
U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. In
addition, if our shareholders hold ordinary shares in any year in which we are a PFIC, our shareholders will be required to file
Internal Revenue Service Form 8621 regarding distributions received on the ordinary shares, any gain realized on the disposition
of the ordinary shares, and any "reportable election." In the case of a U.S. Holder who has held ordinary
shares during any taxable year in respect of which we were classified as a PFIC and continue to hold such ordinary shares (or any
portion thereof) and has not previously determined to make a mark-to-market election, and who is now considering making a mark-to-market
election, special tax rules may apply relating to purging the PFIC taint of such ordinary shares.
Each U.S. Holder is urged to consult its
tax advisor concerning the United States federal income tax consequences of purchasing, holding, and disposing ordinary shares
and warrants if we are or become classified as a PFIC, including the possibility of making a mark-to-market election.
Backup Withholding and Information Reporting
Recently enacted legislation imposes new
reporting requirements on certain U.S. investors in connection with holding interests of a foreign company, including our ordinary
shares, either directly or through a "foreign financial institution". This new legislation also imposes penalties if
such investor is required to submit such information to the Internal Revenue Service and fails to do so. In addition, U.S. Holders
may be subject to information reporting to the Internal Revenue Service with respect to dividends on and proceeds from the sale
or other disposition of our ordinary shares. Dividend payments with respect to our ordinary shares and proceeds from the sale or
other disposition of our ordinary shares are not generally subject to U.S. backup withholding (provided that certain certification
requirements are satisfied). U.S. Holders should consult their tax advisors regarding the application of the United States information
reporting and backup rules to their particular circumstances.
F. Dividends and Paying Agents
Although we paid a special 6% stock dividend
to holders of all the outstanding ordinary shares, we have no current plans to pay cash dividends.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have filed this annual report on Form 20-F,
including exhibits, with the SEC. As permitted by the SEC, in Item 19 of this annual report, we incorporate by reference certain
information we have filed with the SEC. This means that we can disclose important information to you by referring you to another
document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.
You may read and copy this annual report,
including the exhibits incorporated by reference in this annual report, at the SEC’s public reference room at 100 F Street,
N.E., Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.
The SEC also maintains a website at www.sec.gov
that contains reports, proxy statements and other information concerning registrants that file electronically with the SEC. Our
annual report and some of the other information submitted by us to the SEC may be accessed through this website.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16
of the Exchange Act.
Our financial statements have been prepared
in accordance with US GAAP. We will furnish our shareholders with annual reports, which will include a review of operations and
annual audited consolidated financial statements prepared in conformity with US GAAP.
We will also provide without charge to each
person, including any beneficial owner, upon written or oral request of that person, a copy of any and all of the information that
has been incorporated by reference in this Annual Report. Please direct such requests to John Rui Peng, 1108 A Block Tiancheng
Mansion, #2 Xinfeng Rd. Deshengmenwai St, Xicheng Dist. Beijing 100088.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We do not have any instruments subject to
market risk.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
Wowjoint Holdings Limited
Consolidated Balance Sheets
As of December 31, 2012 and 2011
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Note
|
|
2012
|
|
|
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
|
$
|
1,714,019
|
|
|
$
|
4,626,799
|
|
Restricted Cash
|
|
|
|
|
973,354
|
|
|
|
577,872
|
|
Accounts Receivable, net
|
|
3
|
|
|
8,082,559
|
|
|
|
12,307,677
|
|
Other receivable, net
|
|
|
|
|
132,858
|
|
|
|
1,655,766
|
|
Note receivable, net
|
|
|
|
|
47,611
|
|
|
|
-
|
|
Advance to Suppliers
|
|
4
|
|
|
3,566,706
|
|
|
|
8,955,688
|
|
Inventories
|
|
5
|
|
|
3,738,684
|
|
|
|
3,979,034
|
|
Cost and Estimated Earnings in Excess of Billings
|
|
14
|
|
|
2,250,420
|
|
|
|
4,413,482
|
|
Prepaid Expenses - Short Term
|
|
|
|
|
278
|
|
|
|
-
|
|
Due from the Related Parties
|
|
13
|
|
|
-
|
|
|
|
76,037
|
|
Total current asset
|
|
|
|
|
20,506,489
|
|
|
|
36,592,355
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current Assets:
|
|
|
|
|
|
|
|
|
|
|
Property, Plant & Equipment, net
|
|
6
|
|
|
12,396,250
|
|
|
|
9,016,441
|
|
Construction in Progress
|
|
6
|
|
|
5,300,951
|
|
|
|
5,572,511
|
|
Intangible Assets, net
|
|
7
|
|
|
3,141,448
|
|
|
|
1,067,336
|
|
Other Long Term Asset – Deposit
|
|
|
|
|
1,622
|
|
|
|
|
|
Total Assets
|
|
|
|
$
|
41,346,760
|
|
|
$
|
52,248,643
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Short Term Loans
|
|
8
|
|
$
|
2,539,239
|
|
|
$
|
3,491,620
|
|
Accounts Payable and Accrued Expenses
|
|
9
|
|
|
8,682,502
|
|
|
|
14,202,819
|
|
Advances from Customers
|
|
|
|
|
3,414,157
|
|
|
|
5,313,646
|
|
Taxes Payable
|
|
11
|
|
|
4,601,795
|
|
|
|
4,591,302
|
|
Other Payables
|
|
10
|
|
|
1,992,159
|
|
|
|
480,817
|
|
Due to Related Parties
|
|
13
|
|
|
315,833
|
|
|
|
53,972
|
|
Bank Loan - Short Term
|
|
8
|
|
|
476,107
|
|
|
|
476,138
|
|
Total Current Liabilities
|
|
|
|
|
22,021,792
|
|
|
|
28,610,314
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
Bank Loan - Long Term
|
|
8
|
|
|
634,810
|
|
|
|
1,110,962
|
|
Total Liabilities
|
|
|
|
$
|
22,656,602
|
|
|
$
|
29,721,276
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares ($0.001 par value per share, 49,000,000
authorized shares, 8,459,272 and 7,971,465 issued
and outstanding) as of December 31, 2012 and 2011
|
|
15
|
|
$
|
8,460
|
|
|
$
|
7,972
|
|
Additional Paid in Capital
|
|
|
|
|
4,755,290
|
|
|
|
4,755,290
|
|
Warrants
|
|
20
|
|
|
5,580,625
|
|
|
|
5,580,625
|
|
Statutory Surplus Reserve
|
|
16
|
|
|
3,024,562
|
|
|
|
3,024,562
|
|
Retained Earnings
|
|
|
|
|
3,290,571
|
|
|
|
7,148,925
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
2,030,650
|
|
|
|
2,009,993
|
|
Total Stockholders' Equity
|
|
|
|
|
18,690,158
|
|
|
|
22,527,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Stockholders' Equity
|
|
|
|
$
|
41,346,760
|
|
|
$
|
52,248,643
|
|
See Notes to Financial Statements
Wowjoint Holdings Limited
Consolidated Statements of Operations and
Comprehensive Income
For the years ended December 31, 2012 and
2011
|
|
|
|
For the years ended
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Note
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
$
|
10,098,202
|
|
|
$
|
24,398,421
|
|
Cost of Sales
|
|
|
|
|
7,159,814
|
|
|
|
17,635,911
|
|
Gross Profit
|
|
|
|
|
2,938,388
|
|
|
|
6,762,510
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
|
|
|
2,179,902
|
|
|
|
1,159,941
|
|
General & Administrative Expenses
|
|
|
|
|
5,066,556
|
|
|
|
3,544,343
|
|
Total Operating Expenses
|
|
|
|
|
7,246,458
|
|
|
|
4,704,284
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
(4,308,070
|
)
|
|
|
2,058,226
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
1,006,298
|
|
|
|
69,432
|
|
Other Expenses
|
|
|
|
|
(25,268
|
)
|
|
|
(264,441
|
|
Bank expenses
|
|
|
|
|
-
|
|
|
|
(45,224
|
)
|
Interest Income
|
|
|
|
|
2,868
|
|
|
|
14,137
|
|
Interest Expense
|
|
|
|
|
(311,480
|
)
|
|
|
(298,600
|
)
|
Government Income
|
|
|
|
|
4,100
|
|
|
|
-
|
|
Total Other Income (Loss) & Expense
|
|
|
|
|
676,518
|
|
|
|
(524,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before Tax
|
|
|
|
|
(3,631,552
|
)
|
|
|
1,533,530
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax/Deferred Tax Benefit
|
|
|
|
|
226,324
|
|
|
|
345,550
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
$
|
(3,857,876
|
)
|
|
$
|
1,187,980
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
20,657
|
|
|
|
916,979
|
|
Comprehensive Income
|
|
|
|
$
|
(3,837,219
|
)
|
|
$
|
2,104,959
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted Earnings (Loss) Per Share
|
|
17
|
|
$
|
(0.46
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding
|
|
17
|
|
|
8,337,320
|
|
|
|
7,971,465
|
|
See Notes to Financial Statements
Wowjoint Holdings Limited
Consolidated Statements of Stockholders’
Equity
As of and for the years ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
No.
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Of
|
|
|
Registered
|
|
|
Capital
|
|
|
|
|
|
Surplus
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Capital
|
|
|
Surplus
|
|
|
Warrants
|
|
|
Reserve
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
|
7,949,965
|
|
|
|
7,950
|
|
|
|
4,719,622
|
|
|
|
5,580,625
|
|
|
|
3,024,562
|
|
|
|
5,960,944
|
|
|
|
1,093,014
|
|
|
|
20,386,717
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,187,981
|
|
|
|
-
|
|
|
|
1,187,981
|
|
Issuance of share based compensation
|
|
|
21,500
|
|
|
|
22
|
|
|
|
35,669
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,690
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
916,979
|
|
|
|
916,979
|
|
Balance at December 31, 2011
|
|
|
7,971,465
|
|
|
|
7,972
|
|
|
|
4,755,291
|
|
|
|
5,580,625
|
|
|
|
3,024,562
|
|
|
|
7,148,925
|
|
|
|
2,009,993
|
|
|
|
22,527,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
|
|
7,971,465
|
|
|
|
7,972
|
|
|
|
4,755,291
|
|
|
|
5,580,625
|
|
|
|
3,024,562
|
|
|
|
7,148,925
|
|
|
|
2,009,993
|
|
|
|
22,527,367
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,857,876
|
)
|
|
|
-
|
|
|
|
(3,857,876
|
)
|
Issuance of share based compensation
|
|
|
9,500
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
Stock dividend
|
|
|
478,307
|
|
|
|
478
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(478
|
)
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,657
|
|
|
|
20,657
|
|
Balance at December 31, 2012
|
|
|
8,459,272
|
|
|
|
8,460
|
|
|
|
4,755,291
|
|
|
|
5,580,625
|
|
|
|
3,024,562
|
|
|
|
3,290,571
|
|
|
|
2,030,650
|
|
|
|
18,690,158
|
|
See Notes to Financial Statements
Wowjoint Holdings Limited
Consolidated Statements of Cash Flow
For the years ended December 31, 2012 and
2011
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(3,857,876
|
)
|
|
$
|
1,187,981
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
996,420
|
|
|
|
725,365
|
|
Issuance of share based compensation
|
|
|
10
|
|
|
|
-
|
|
Loss/(Gain) on disposal of property, plant and equipment
|
|
|
(11,416
|
)
|
|
|
-
|
|
Bad debt expenses
|
|
|
370,881
|
|
|
|
110,135
|
|
Issuance of common shares for services
|
|
|
-
|
|
|
|
35,690
|
|
Decrease / (Increase) in Accounts Receivable
|
|
|
3,854,236
|
|
|
|
5,486,362
|
|
Decrease / (Increase) in Other Receivable
|
|
|
1,522,908
|
|
|
|
(932,398
|
)
|
Decrease / (Increase) in Note Receivable
|
|
|
(47,611
|
)
|
|
|
-
|
|
Decrease / (Increase) in Advance to Suppliers
|
|
|
5,388,982
|
|
|
|
(5,431,961
|
)
|
Decrease / (Increase) in Inventories
|
|
|
240,350
|
|
|
|
1,245,223
|
|
Decrease / (Increase) in Cost and Estimated Earnings in Excess of Billings
|
|
|
2,163,061
|
|
|
|
(1,723,283
|
)
|
Decrease / (Increase) in Prepaid Expenses - Short Term
|
|
|
(275
|
)
|
|
|
-
|
|
Increase / (Decrease) in Accounts Payable and Accrued Expenses
|
|
|
(5,520,317
|
)
|
|
|
6,700,102
|
|
Increase / (Decrease) in Advances from Customer
|
|
|
(1,899,489
|
)
|
|
|
4,140,631
|
|
Increase / (Decrease) in Unearned Lease Income
|
|
|
-
|
|
|
|
(748,333
|
)
|
Increase / (Decrease) in Taxes Payable
|
|
|
10,493
|
|
|
|
(459,286
|
)
|
Increase / (Decrease) in Other Payable
|
|
|
1,511,342
|
|
|
|
157,800
|
|
Increase / (Decrease) in Billings in Excess of Costs and Estimated Earnings
|
|
|
-
|
|
|
|
(896,649
|
)
|
Increase/ (Decrease) in Deposit
|
|
|
(1,622
|
)
|
|
|
-
|
|
Net cash provided by / (used in) operating activities
|
|
|
4,720,077
|
|
|
|
9,597,379
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(4,313,921
|
)
|
|
|
(8,044,665
|
)
|
(Increase) / Decrease in construction in progress
|
|
|
271,560
|
|
|
|
(4,061,256
|
)
|
Purchases of intangible asset – land
|
|
|
(2,125,004
|
)
|
|
|
-
|
|
Prepaid expense - long term loan
|
|
|
-
|
|
|
|
101,438
|
|
Net cash provided by / (used in) investing activities
|
|
|
(6,167,365
|
)
|
|
|
(12,004,483
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment of Short term loans
|
|
|
(952,412
|
)
|
|
|
(1,510,000
|
)
|
Due from the related party
|
|
|
76,037
|
|
|
|
6,154
|
|
Due to related parties
|
|
|
261,861
|
|
|
|
53,972
|
|
Restricted cash
|
|
|
(395,482
|
)
|
|
|
344,002
|
|
Proceed of short term debt
|
|
|
-
|
|
|
|
3,491,620
|
|
Proceed of long term debt
|
|
|
(476,152
|
)
|
|
|
1,587,100
|
|
Net cash provided by / (used in) financing activities
|
|
|
(1,486,148
|
)
|
|
|
3,972,848
|
|
|
|
|
|
|
|
|
|
|
Net Increase/(Decrease) in Cash & Cash Equivalents for the year
|
|
|
(2,933,436
|
)
|
|
|
1,565,745
|
|
|
|
|
|
|
|
|
|
|
Effect of currency translation
|
|
|
20,656
|
|
|
|
893,336
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents at beginning of year
|
|
|
4,626,799
|
|
|
|
2,167,718
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents at end of year
|
|
$
|
1,714,019
|
|
|
$
|
4,626,799
|
|
|
|
|
|
|
|
|
|
|
Interest received
|
|
$
|
2,868
|
|
|
$
|
-
|
|
Interest paid
|
|
$
|
311,480
|
|
|
$
|
219,621
|
|
Tax paid
|
|
$
|
706,898
|
|
|
$
|
427,370
|
|
See Notes to Financial Statements
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
|
1.
|
ORGANIZATION AND DESCRIPTION OF BUSINESS
|
Wowjoint Holdings Ltd (“Wowjoint”),
formerly known as China Fundamental Acquisition Corporation (“CFAC”), was incorporated in Cayman Islands on December
12, 2007. Wowjoint Holdings Ltd and its subsidiaries (together, the “Company”) are in the business of design, manufacturing
and sales of a complete line of portable, re-locatable and stationary non-standard heavy duty construction equipment and machinery
used in various engineering fields, such as bridge, road and railway construction, as well as in areas of heavy capacity lifting
and transporting of concrete beams, boats and shipping containers.
As of December
31, 2012, details of Wowjoint Holdings Ltd’s subsidiaries are as follows
Subsidiaries
|
|
Date of
Incorporation
|
|
Place of Incorporation
|
|
Percentage of
Ownership
|
|
|
Principal Activity
|
Authentic Genius Limited
(“AGL”)
|
|
December 22, 2009
|
|
Hong Kong
|
|
|
100
|
%
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
|
|
Giant Nova Holdings Limited
(“Giant Nova”)
|
|
December 18, 2009
|
|
the British Virgin Islands
|
|
|
100
|
%
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Xin Fu Industry Consulting Co., Ltd.
(“BXFI”)
|
|
August 31, 2009
|
|
the People’s Republic of China (“PRC”)
|
|
|
100
|
%
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Wowjoint Machinery Co., Ltd.
(“BWMC” or “Beijing Wowjoint”)
|
|
March 3, 2004
|
|
PRC
|
|
|
100
|
%
|
|
Design and manufacture heavy duty construction equipment and machinery
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Wowjoint Xingyun Co., Ltd.
(“BWXC”)
|
|
May 10, 2010
|
|
PRC
|
|
|
100
|
%
|
|
Lease and sell equipment and machinery
|
|
|
|
|
|
|
|
|
|
|
|
Zhenjiang Wowjoint Heavy-duty
Machinery Co., Ltd.
(“Zhenjiang Wowjoint”)
|
|
April 13, 2011
|
|
PRC
|
|
|
100
|
%
|
|
Design and manufacture heavy duty construction equipment and machinery
|
|
|
|
|
|
|
|
|
|
|
|
Bright Bridge Construction Inc.
(“Bright Bridge”)
|
|
April 29, 2009
|
|
Nevada, USA
|
|
|
100
|
%
|
|
Sales and marketing of equipment and machinery
|
|
|
|
|
|
|
|
|
|
|
|
BWI Consulting s.r.l.
(“BWI”)
|
|
March 22, 2012
|
|
Italy
|
|
|
100
|
%
|
|
Sales and marketing of equipment and
|
Note: AGL, Giant Nova, BXFI, BWMC, Zhenjiang
Wowjoint, Bright Bridge, BWI and for the periods subsequent to May 20, 2010, BWXC, are collectively referred to as “Beijing
Wowjoint”, unless specific reference is made to an entity.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
Acquisition
CFAC was formed as a Special Purpose Acquisition Company,
a SPAC, whereby they raised funds in an initial public offering with the intent to apply substantially all net proceeds from the
public offering to a business combination. CFAC’s initial public offering was completed in May 2008.
Acquisition of Beijing Wowjoint
On November 30, 2009, CFAC entered into a share purchase
agreement with Beijing Wowjoint and all of the shareholders of Beijing Wowjoint, pursuant to which CFAC would acquire all of the
outstanding ordinary shares of Beijing Wowjoint. On February 12, 2010, CFAC held a special meeting of its shareholders, during
which the acquisition of Beijing Wowjoint was approved.
On February 22, 2010, CFAC consummated its acquisition
(the “Acquisition”). At the closing of the acquisition, CFAC acquired all common stock of Beijing Wowjoint from its
shareholders for a total consideration of 5,700,000 ordinary shares of the Company. Of the 5,700,000 shares issued, a total of
3,696,735 shares will be held in escrow to be released on February 22, 2014. Subsequent to the acquisition, CFAC changed its name
to Wowjoint Holding Limited (“Wowjoint”).
The transaction enabled the shareholders of Beijing
Wowjoint, to obtain a majority voting interest in CFAC, a non-operating public company with a significant amount of cash. The Acquisition
will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the
shareholders of Beijing Wowjoint immediately after the acquisition will have effective control of CFAC through (1) their approximately
55% shareholder interest in the combined entity, (2) majority representation on the board of directors, and (3) being named
to all of the senior executive officer positions. For accounting purposes, Beijing Wowjoint will be deemed to be the accounting
acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of Beijing Wowjoint, i.e.,
a capital transaction involving the issuance of share by CFAC for the shares of Beijing Wowjoint. Accordingly, the combined assets,
liabilities and results of operations of Beijing Wowjoint became the historical financial statements of CFAC at the closing of
the Acquisition, and CFAC assets (primarily cash and cash equivalents), liabilities and results of operations will be consolidated
with those of Beijing Wowjoint beginning on the acquisition date. No step-up in basis of intangible assets or goodwill will be
recorded in this transaction. As this transaction is being accounted for as a reverse acquisition, all direct costs of the transaction
will be charged to additional paid-in capital. Subsequent to the Acquisition, CFAC will be known as Wowjoint.
In connection with the Acquisition, holders of 1,374,089
shares of CFAC’s, from CFAC’s public offering (the “Offering”) and Over-allotment (the “Over-allotment”)
from May 2008, elected to redeem their shares for cash at $7.96 per share. In order to facilitate the Acquisition being approved
by CFAC shareholders, CFAC, Beijing Wowjoint and their respective affiliates entered into privately negotiated “forward contracts”
transactions to purchase 1,696,258 ordinary shares of CFAC from shareholders who had indicated their intention to vote against
the Acquisition and seek redemption of their shares for cash. These transactions were entered into prior to the meeting of CFAC
shareholders to approve the Acquisition, but would not be completed until the Acquisition was consummated. The redemption purchase
and the forward contracts were paid out of funds of CFAC. Prior to the Acquisition, a total of 5,320,312 shares of CFAC were outstanding,
subsequent to the redemption and forward contracts a total of 2,249,965 were outstanding.
In addition to the 2,249,965 CFAC shares outstanding
prior to the Acquisition, upon completion of the Acquisition on February 22, 2010, warrants underlying 7,264,756 shares exercisable
at $5.00 per and have a life until the fourth anniversary of Offering, or until May 15, 2012. CFAC may redeem the warrants, at
a price of $0.01 per warrant upon 30 days’ notice while the warrants are exercisable, only in the event that the last sale
price of the ordinary shares is at least $10.00 per share for any 20 trading days within a 30 trading day period ending on the
third day prior to the date on which notice of redemption is given. In accordance with the warrant agreement relating to the warrants
issued in the Offering, CFAC is only required to use its best efforts to maintain the effectiveness of the registration statement
covering the Warrants. CFAC will not be obligated to deliver securities, and there are no contractual penalties for failure to
deliver securities, if a registration statement is not effective at the time of exercise. The CFAC warrants are comprised of (i)
1,064,062 shares underlying the warrants issued to the shareholders that established CFAC (the “Existing Shareholders”)
in a 1:1 proportion to the actual shares issued for CFAC’s establishment, (ii) 1,944,444 shares underlying the warrants sold
to investors in a private placement (the “Private Placement Warrants”), sold simultaneously as CFAC was closing the
Offering in May 2008, and (iii) 4,256,250 shares underlying the warrants included in the Offering and Over-allotment from May 2008.
Included in these warrants are the warrants issued with the 1,374,089 shares that were redeemed, and warrants issued with the 1,696,258
shares that were re-purchased in forward contracts. The shareholders electing to redeem their shares and sell the shares in the
forward contracts were permitted to retain the warrants that they had received in the Offering and Over-allotment.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
The Existing Shareholders and the holders of the Private
Placement Warrants are entitled to registration rights with respect to their outstanding ordinary shares and shares underlying
their warrants pursuant to an agreement signed on the closing date of the Offering. The Existing Shareholders are entitled to demand
that CFAC register their ordinary shares commencing six months after the consummation of the Acquisition. The holders of the Private
Placement Warrants are entitled to demand that CFAC register these securities commencing upon the consummation of the Acquisition.
In addition, the Existing Shareholders and holder of the Private Placement Warrants have certain “piggy-back” registration
rights on registration statements filed after CFAC’s consummation of the Acquisition.
As CFAC was a non-operating public shell company before
the transaction, no step-up in basis of intangible assets or goodwill will be recorded in this transaction and the cost incurred
in connection with such transaction have been charged directly to additional paid-in capital. The net book value of acquired assets
and liabilities on February 22, 2010 is as follows:
Cash
|
|
$
|
6,910,534
|
|
Accounts Payable and Accrued Liabilities
|
|
|
184,410
|
|
Net Assets Acquired
|
|
$
|
6,726,124
|
|
Earn-out Shares
Pursuant to an earn-out provision
in the share purchase agreement, CFAC has agreed to issue Realink Group Limited (“Realink”), one of the shareholders
of Wowjoint, up to 500,000 additional shares if the following performance targets are achieved:
|
·
|
200,000 earn-out shares in the event that the closing price per share
is at or above US$10.00 for 180 days out of 360 days during the period from the acquisition closing date, February 22, 2010, to
the second anniversary of the closing date.
|
|
·
|
200,000 earn-out shares in the event that the closing price per share
is at or above US$13.80 for 180 days out of 360 days during the period from the acquisition closing date to the third anniversary
of the closing date.
|
|
·
|
100,000 earn-out shares in the event that average daily trading volume
is no less than 200,000 shares for six consecutive months during the period from the closing date of the acquisition to the second
anniversary of the closing date.
|
Upon issuance, such shares will be recorded as an
adjustment to the accounting acquiree’s basis in the reverse acquisition (i.e., as an adjustment at par value to ordinary
shares and additional paid-in capital), and will be included in the calculations of earnings per share from that date.
Reorganization of Beijing Wowjoint prior
to Acquisition
|
(a)
|
On August 3, 2009, AGL established Beijing Xin Fu Industry Consulting Co., Ltd. (“BXFI”), a wholly-owned foreign
enterprise (a “WOFE”) under the law of PRC.
|
On August 25, 2009, BXFI entered into contractual
agreements with Beijing Wowjoint Machinery Co., Ltd. (“BWMC”) and its shareholders, as described below, by which BXFI
is deemed the primary beneficiary of BWMC and BWMC being deemed a subsidiary of AGL under the requirements of the U.S. generally
accepted accounting principles (“GAAP”).
In accordance with GAAP, BWMC is deemed a variable
interest entity (a “VIE”) of BXFI, the primary beneficiary, and is required to be consolidated by BXFI, as BXFI is
subject to a majority of the risk of loss for the VIE, or is entitled to receive a majority of the VIE’s residual returns.
VIE’s are entities in which their primary beneficiary, through contractual arrangements, bears the risks of, and enjoys the
rewards normally associated with ownership of the entities. The results of VIE’s, are treated as that of a subsidiary, and
are included in the consolidated statements of operations from the effective date of Acquisition.
The assets, liabilities, and non-controlling interest
of a consolidated VIE are accounted for as if the entities were consolidated based on voting interests and the usual accounting
rules for which the VIE operates are applied as they would to a consolidated subsidiary as follows:
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
|
·
|
Carrying amounts of the VIE are consolidated into the financial statements
of BXFI as the primary beneficiary (referred as “Primary Beneficiary” or “PB”)
|
|
·
|
Inter-company transactions and balances, such as revenues and costs,
receivables and payables between or among the Primary Beneficiary and the VIE(s) are eliminated in their entirety
|
|
·
|
There is no direct ownership interest by the Primary Beneficiary in
the VIE, equity of the VIE is eliminated with an offsetting credit to minority interest.
|
Based on the contractual agreements, BXFI provides
consulting services to BWMC and is entitled to (1) receive a substantial portion of the economic benefits from BWMC; (2) exercise
effective control over BWMC and (3) has an exclusive option to purchase all or part of the equity interest in BWMC when and to
the extent permitted by the PRC laws. By the virtue of the contractual agreements, BXFI consolidates the operating results, assets
and liabilities in BWMC’s financial statements.
The followings are brief description of
contracts entered between BXFI and BWMC:
|
·
|
Exclusive Technical Consulting and Services Agreement
- BXFI
entered into an Exclusive Technical Consulting and Service Agreement with BWMC, pursuant to which, BXFI exclusively provides consulting
services to BWMC in exchange for a percentage of BWMC’s revenue as determined by BXFI. This agreement enables the
transfer of substantial portion of economic interests from BWMC to BXFI.
|
|
·
|
Equity Pledge Agreement
- BXFI, BWMC and its shareholders
have entered into an Equity Pledge Agreement, pursuant to which, each of the shareholders of BWMC has pledged all of its equity
interests in BWMC to BXFI to guarantee the payment of service fees under the Exclusive Technical Consulting and Service Agreement.
|
|
·
|
Voting Rights Proxy Agreement
- BXFI and shareholders
of BWMC have entered into a Voting Rights Proxy Agreement, pursuant to which, each of the shareholders of BWMC has granted to BXFI
and its designated person the power to exercise all voting rights of such shareholder
|
|
·
|
Exclusive Purchase Option Agreement
- BXFI and shareholders
of BWMC have entered into an Exclusive Call Option Agreement, pursuant to which, each of the shareholders of BWMC has
irrevocably and unconditionally granted BXFI or its designated person an exclusive call option to purchase, at any time if
and when permitted by the PRC laws, all or any portion of the equity interests in BWMC at the price equal to five percent
(5%) of the actual capital contribution made by each shareholder.
|
The consideration BWMC and its shareholders received
for entering into the contractual agreements was of a nominal amount. The contractual agreements were entered into to protect BWMC
against possible future foreign ownership restrictions that might currently apply to BWMC. The contractual agreements affords BXFI,
and their VIE namely BWMC, the opportunity to access capital market outside of the PRC, which would otherwise not be available
to BWMC. If at such time in the future possible PRC ownership restrictions were to be eased with regards to BWMC, and should AGL
obtain financing from foreign sources, the structure of the contractual agreements are such that control could go from that of
a VIE relationship to that of direct ownership with ease and limited restrictions under PRC laws.
AGL’s wholly-owned subsidiary, BXFI, is the
recipient of all the benefits of the contractual relationships. If BXFI is not be able to perform its services under the terms
of the contractual agreements, the agreements and the VIE structure would not be in effect. AGL entered into the contractual relationship
with the objective of obtaining financing from foreign sources, without which its BXFI subsidiary could not fulfill its contractual
agreements with BWMC.
|
(b)
|
On December 8, 2010, the ownership of Beijing Wowjoint Machinery Co., Ltd (“BWMC”) was transferred to Beijing Xin
Fu Industry Consulting Co., Ltd (“BXFI’). BXFI formerly had no direct equity ownership interest in Beijing Wowjoint
and relied on contractual arrangements with Beijing Wowjoint and its shareholders to substantially control and operate BWMC. After
the transfer was completed, the Company directly owns 100% of its operating entity BWMC.
|
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
(a)
Basis of Presentation
The accompanying consolidated financial statements
have been prepared in conformity with the generally accepted accounting principles in the United States (“GAAP”). The
basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the
accounting principles of PRC (“PRC GAAP”). The Company’s functional currency is the United States Dollars (USD)
while the Chinese operating subsidiaries’ functional currency is the Chinese Renminbi (RMB). The accompanying consolidated
financial statements have been translated and presented in United States Dollars (USD). All significant inter-company transactions
and balances have been eliminated.
(b)
Use of Estimates
The preparation of the consolidated financial statements
in conformity with GAAP requires the Company’s management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates,
and such differences may be material to the financial statements. Significant estimates include the allowance for doubtful accounts,
the allowance for obsolete inventory, the useful lives of plant and equipment, intangible assets, long-term prepaid expenses, and
accruals for taxes due.
(c)
Principles of Consolidation
The consolidated financial statements include the
financial statements of Wowjoint and its subsidiaries. All significant inter-company transactions, balances and unrealized profits
and losses have been eliminated on consolidation.
|
1.)
|
As discussed in Note 1, “Organization and Description of Business”, the financial positions and results of BWMC
were consolidated in the financial statements of the Company because BWMC was determined to be a variable interest entity of the
Company. On August 4, 2010, BWMC became a subsidiary of the Company. On December 8, 2010 BWMC became a subsidiary of BXFI upon
approval of BXFI to acquire BWMC. Such approval was granted by State Administration for Industry & Commerce of the People’s
Republic of China (SAIC).
|
In anticipation of approval of the BXFI’s acquisition
of all the equity interest in BWMC from the BWMC shareholders, BXFI and the BWMC shareholders entered into a Stock Transfer Agreement
on April 25, 2010. The proceeds to the BWMC shareholders, of 1million RMB (approximately $151,000), under the Stock Transfer Agreement
were loaned to BWMC interest free for five years subsequent to the change in the registration of BWMC’s ownership. This loan
was formalized in a June 11, 2010 loan agreement, which was subsequently amended on June 11, 2010, whereby the former BWMC shareholders
waived all right to the proceeds under the loan agreement.
|
2.)
|
The financial positions and results of BWLC were consolidated in the financial statements of the Company since its incorporation
date on May 10, 2010.
|
(d)
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand and
held with banks, including demand deposits, which are unrestricted as to withdrawal and use, and which have original maturities
of three months or less when purchased. The Company’s bank balances held in Chinese financial institutions were uninsured.
(e)
Restricted cash
Restricted cash represents amounts held by banks,
which are not available for the Company’s general use, as security for issuance of letters of credit, bank acceptance bills,
bank borrowings and bank drafts. Upon maturity of the letters of credit and repayment of bank acceptance bills, bank borrowings
and bank drafts, the deposits are released by the bank and become available for general use by the Company.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
(f)
Accounts Receivable
The Company records accounts receivable net of an
allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews
the accounts receivable on a periodic basis and makes general and specific allowances when 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 historical payment history, its current credit-worthiness and current economic
trends. The amount of the provision, if any, is recognized in the consolidated statements of operations within the general and
administrative expenses. Accounts are written off after appropriate collection efforts are conducted.
(g)
Inventories
Inventories other than inventoried cost relating to
long-term contracts are stated at the lower of cost or market utilizing the moving average method. Inventoried costs relating to
long-term contracts are stated at the actual production cost and tolling cost, and applicable overhead, not in excess of realizable
value. An allowance is established when management determines that the carrying value of certain inventories may not be realizable.
If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will
record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates and reflected
in cost of sales.
(h)
Plant and Equipment (Including
leased equipment)
Plant and equipment is recorded at cost (including
costs of self-construction for leased equipment) and depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Expenditures for major additions or improvements, which extend the useful lives of assets, are capitalized.
Minor replacements, maintenance and repairs, which do not improve or extend the lives of the assets, are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation, and any resulting gain or loss is reflected in current
operations. In accordance with GAAP, the Company examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Depreciation is computed on a straight-line
basis over the following estimated useful lives:
Plant
|
20 years
|
Furniture and fixtures
|
5 years
|
Equipment
|
5-10 years
|
Automobiles
|
5 years
|
Manufactured equipment deemed to be leased to customers
though operating leases whereby the Company is deemed the lessor are included in plant and equipment.
(i)
Construction in Progress
Construction in progress consists of costs incurred
for construction projects that have not yet been completed. Once these projects are completed, the costs will be transferred to
the appropriate property, plant and equipment category.
(j)
Impairment of Long-lived Assets
In accordance with GAAP, the Company periodically
reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the assets
estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the
years ended December 31, 2012 and 2011.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
(k)
Foreign Currency Translation
The accompanying consolidated financial statements
are presented in USD. The functional currency of the Company is RMB. The consolidated financial statements are translated in USD
from RMB at period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Equity
accounts are translated at their historical exchange rates when the equity transactions occurred. The resulting transaction adjustments
are recorded as a component of stockholders’ equity. Gains and losses from foreign currency transactions are included in
net income.
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Year ended RMB:USD Exchange Rate:
|
|
|
6.30110
|
|
|
|
6.36470
|
|
Average Yearly RMB:USD Exchange Rate:
|
|
|
6.30336
|
|
|
|
6.47351
|
|
The RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts
could have been, or could be, converted into USD at the rates used in translation.
(l)
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted ASC
820-Fair Value Measurements and Disclosure or ASC 820 for assets and liabilities measured at fair value on a recurring basis. ASC
820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require
the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value
measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but
did expand certain disclosures.
ASC 820 defines fair value as the price that would
be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable inputs such as quoted market prices in active
markets for identical assets or liabilities
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs
that are corroborated by market data
|
|
Level 3:
|
Unobservable inputs for which there is little or no market
data, which require the use of the reporting entity’s own assumptions
|
Cash and cash equivalents include money market securities
and commercial paper that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable
in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.
In addition, the Company did not elect the
fair value options for any of its qualifying financial instruments.
(m)
Revenue Recognition
The Company generates revenue from the design, engineering,
manufacturing and sales of customized heavy lifting and carrier equipment used in various engineering projects involving the construction
of bridges, highways, railways and other applications requiring lifting and carrying capability.
In general, the Company records revenue when persuasive
evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the
various revenues streams of the Company:
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
Contract Accounting
In accounting for long-term engineering and construction-type
contracts, the Company follows the provisions of ASC 605-35-05-7 Percentage-of-Completed-Method (formerly the AICPA’s Statement
of Position 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts). The Company recognizes
revenues using the percentage of completion method of accounting by relating contract costs incurred to date to the total estimated
costs at completion. Contract prices and cost estimates are reviewed periodically as work progresses and adjustments proportionate
to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates
are revised. This method of revenue recognition requires the Company to prepare estimates of costs to complete contracts in progress.
In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule, the cost of
materials and labor, and productivity; and the impact of change orders, liability claims, contract disputes, and achievement of
contractual performance standards which may result in revisions to costs and income and are recognized in the period in which the
revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses
are determined. The asset, “costs and estimated earnings in excess of billings,” represents revenues recognized in
excess of amounts billed. The liability, “billings in excess of costs and estimated earnings”, represents billings
in excess of revenues recognized.
Payments received before all of the relevant criteria
for revenue recognition are satisfied are recorded as advances from customers.
The Company also generates technical services income
in accordance with terms stated in the agreements with its customers.
The Company’s revenue consists of the invoiced
value of goods, net of a value-added tax (VAT). No product return or sales discount allowance is made as products delivered and
accepted by customers are normally not returnable and a sales discount is normally not granted after products are delivered.
Service Revenue
The Company provides technical and consultation
service to its customers. Service revenue is recognized when the service is performed.
Spare Parts revenue
The Company recognizes sales of spare parts
upon delivery.
Lease Revenue
The Company provides machinery lease to its customers.
Lease revenue is recognized based on equipment usage in accordance with terms of the contract.
(n)
Advertising Expenses
Advertising expenses consist primarily of costs of
promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising expenses
as incurred and classifies these expenses under selling expenses.
(o)
Research and Development
The Company expenses all research and development
expenses as incurred and classifies these expenses under general and administrative expenses.
(p)
Income Taxes
The Company is subject to the Income Tax Law of the
People’s Republic of China. Income taxes are accounted for under FASB ASC-740 Income Taxes or ASC 740. Under the asset and
liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective
tax bases and tax loss carry forwards. Any deferred tax assets and liabilities would be measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
Beginning January 1, 2008, the new Enterprise Income
Tax (“EIT”) Law of China replaced the existing China laws for Domestic Enterprises (“DES”) and Foreign
Invested Enterprises (“FIEs”). The new standard EIT applicable to high technology corporations is 15%.
From January 1, 2010 to the present, the income tax
rate applicable to the Company is 15%.
(q)
Accumulated Other Comprehensive Income
The accounts of Beijing Wowjoint were maintained and
its financial statements were expressed in Chinese Renminbi (RMB). Such financial statements were translated into United States
Dollars (USD) in accordance with US GAAP, with the USD as the functional currency. All balance sheet items, assets and liabilities
are translated at the current exchange rates of the balance sheet dates, shareholders’ equity is translated at the historical
rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments
are reported under other comprehensive income in accordance with GAAP as a component of shareholders’ equity.
During the year of 2012 and 2011, the transactions
of Beijing Wowjoint were denominated and recorded in RMB at the rates of exchange in effect when the transactions occur. Exchange
gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities
are settled. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as incurred.
Accumulated other comprehensive income consisted of
unrealized gains or losses resulting from the translation of financial statements from RMB to US dollars.
(r)
Segment Reporting
GAAP requires the use of the management approach model
for segment reporting. The management approach model is based on how a company’s management organizes segments within the
company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management disaggregates a company. Based on this model, the
Company has one reportable business segment, the manufacture and marketing of non-standard heavy lifting and carrying equipment
in China.
(s)
Risks and Uncertainties
The Company is subject to substantial risks from,
among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity
requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility
of public markets.
The Company’s operations are carried out in
the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political,
economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s business may
be influenced by changes in PRC governmental policies with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other things.
(t)
Contingencies
Certain conditions may exist as of the date the financial
statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending
against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought.
If the assessment of a contingency indicates that
it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability
would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss
contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
Loss contingencies considered to be remote by management
are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
(u)
Reclassifications
Certain amounts in the prior year financial statements
have been reclassified to conform with the current year’s presentation. Such reclassifications had no effect on previously
reported net income or net assets.
(v)
Recent Accounting Pronouncements
The following is a list of recent accounting
pronouncements summarized below:
On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill
and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option
to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that
the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived
intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required
to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently
required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial
statements.
In October, 2012, the FASB issued ASU No. 2012-04,
“Technical
Corrections and Improvements” (“ASU 2012-04”).
The amendments cover a wide range of topics in the FASB
ASC. The amendments are incorporated into two sections: a. Technical corrections and improvements, and b. Conforming amendments
related to fair value measurements.
|
a.)
|
The amendments in the technical corrections and improvements
section are categorized as follows:
|
|
·
|
Source literature amendments. These amendments are considered necessary
due to differences between source literature and the FASB ASC. The amendments primarily carry forward legacy document guidance
and/or subsequent amendments into the FASB ASC. Often, either writing style or phrasing in the legacy documents did not directly
relate to the FASB ASC format and style so that the meaning of certain guidance might have been unintentionally altered.
|
|
·
|
Guidance clarification and reference corrections. These amendments
include updated wording or corrected references, or a combination of both.
|
|
·
|
Relocated guidance. These amendments primarily move authoritative
literature guidance from one location to another location that is deemed more appropriate within the FASB ASC.
|
|
b.)
|
On the fair value measurements issue, the guidance in ASU 2012-04 identifies when the use of the term “fair value”
should be linked to the definition of fair value included in FASB ASC 820, entitled Fair Value Measurement. Most of the amendments
are of a nonsubstantive nature. Many of the amendments relate to conforming wording to be consistent with the terminology in FASB
ASC 820 for example, references to market value and current market value have been changed to appropriately refer to fair value
so that the literature is consistent throughout.
|
In October 2012, the FASB issued ASU No. 2012-06,
“Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted
Acquisition of a Financial Institution” (“ASU 2012-06”). This amendment requires that indemnification assets
recognized in accordance with Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non-controlling
Interest, as a result of a government-assisted acquisition of a financial institution involving an indemnification agreement should
be subsequently measured on the same basis as the asset subject to indemnification. For public and nonpublic entities, the amendments
in this Update are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012.
Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial
position or results of operations.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
In January 2013, the FASB issued ASU No. 2013-01,
“Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”). The Update
clarifies that ordinary trade receivables and receivables are not in the scope of Accounting Standards Update No. 2011-11, Balance
Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, Update 2011-11 applies only to derivatives,
repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either
offset in accordance with specific criteria contained in FASB Accounting Standards Codification® or subject to a master netting
arrangement or similar agreement. The amendments in this Update are effective for fiscal years, and interim periods within those
years, beginning on or after January 1, 2013. Management does not expect the adoption of this standard has a significant effect
on the Company’s consolidated financial position or results of operations.
In February 2013, the FASB issued ASU No. 2013-02,
“Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The
amendments require an organization to:
|
(a)
|
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of
net income of significant amounts reclassified out of accumulated other comprehensive income–but only if the item reclassified
is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
|
|
(b)
|
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required
under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case
when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet
account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
|
The amendments are effective for reporting periods
beginning after December 15, 2012, for public companies. Management does not expect the adoption of this standard has a significant
effect on the Company’s consolidated financial position or results of operations.
In February 2013, the FASB issued ASU No. 2013-03,
“Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities” (“ASU 2013-03”).
The amendment clarifies that the requirement to disclose the level of the fair value hierarchy within which the fair value measurements
are categorized in their entirety (as Level 1, Level 2, or Level 3) does not apply to private companies and nonpublic not-for-profits
for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. The
amendments are effective upon issuance. Management does not expect the adoption of this standard has a significant effect on the
Company’s consolidated financial position or results of operations.
In March 2013, the FASB issued ASU No. 2013-04, “Obligations
Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting
Date” (“ASU 2013-04”). The update provides guidance for the recognition, measurement, and disclosure of obligations
resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU
is fixed at the reporting date, except for obligations addressed within existing guidance in US GAAP. The guidance requires an
entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement
among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance
in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those
obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2013. Management does not expect the adoption of this standard will have a significant effect on the Company’s
consolidated financial position or results of operations.
In March 2013, the FASB issued ASU No. 2013-05, “Parent’s
Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign
Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). The ASU clarifies that when a parent entity
ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other
than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required
to apply the guidance in Accounting Standards Codification 830-30 to release any related cumulative translation adjustment into
net income. The ASU provides that the cumulative translation adjustment should be released into net income only if the sale or
transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of
assets had resided. The amendments take effect prospectively for public companies for fiscal years beginning after December 15,
2013, and interim reporting periods within those years. Management does not expect the adoption of this standard will have a significant
effect on the Company’s consolidated financial position or results of operations.
A variety of proposed or otherwise
potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due
to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such
proposed standards would be material to our financial statements.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
A significant percentage of contract value is billed
upon the delivery of the equipment to our customers. Accounts billed represent billed amounts. Unbilled amounts represent sales
for which billings have not been presented to customers at year end. (See Note 15)
Accounts receivable consisted of the following:
|
|
2012
|
|
|
2011
|
|
Amount billed
|
|
$
|
8,709,121
|
|
|
$
|
10,521,420
|
|
Retainage, subsequent to completion of contracts and acceptance by the owners
|
|
|
1,247,243
|
|
|
|
3,289,119
|
|
Accounts receivable
|
|
|
9,956,364
|
|
|
|
13,810,539
|
|
Less
: Allowance for doubtful accounts
|
|
|
(1,873,805
|
)
|
|
|
(1,502,862
|
)
|
Accounts receivables, net
|
|
$
|
8,082,559
|
|
|
$
|
12,307,677
|
|
Retainage, with respect to accounts receivable, is
the balance invoiced but not paid by customers pursuant to retainage provisions in long-term contracts due upon completion of the
contracts and acceptance by the customer after an evaluation period to determine that the machine is operating in accordance with
the sales contractual agreement. Retainage not invoiced, and prior to the completion of the customary evaluation period accorded
to customer, is accounted for as costs and estimated earnings and billings.
The Company advances to certain vendors for the purchase
of materials. As of December 31, 2012 and 2011, the advances to suppliers amounted to $3,566,706 and $8,955,688, respectively.
Inventories are summarized as follows:
|
|
2012
|
|
|
2011
|
|
Raw Material
|
|
$
|
3,056,637
|
|
|
$
|
3,544,443
|
|
Finished Good
|
|
|
362,118
|
|
|
|
-
|
|
Direct production cost
|
|
|
319,929
|
|
|
|
434,591
|
|
|
|
$
|
3,738,684
|
|
|
$
|
3,979,034
|
|
Inventoried cost, are costs relating to the assembly
of sub-component parts available for future use on various types of machines manufactured by the Company, and for costs relating
to the construction of equipment which has not been contracted by a customer, but which Company management has determined is readily
saleable in the construction equipment industry. Total inventoried costs as of December 31, 2012 and 2011, were $319,929 and $434,591,
respectively.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
|
6.
|
PROPERTY, PLANT AND EQUIPMENT AND CONSTRUCTION IN
PROGRESS
|
Property, Plant and equipment and Construction
in Progress consisted of the following:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Plant
|
|
$
|
1,346,191
|
|
|
$
|
1,346,170
|
|
Furniture and Fixtures
|
|
|
285,562
|
|
|
|
64,327
|
|
Equipment
|
|
|
12,957,646
|
|
|
|
8,862,018
|
|
Automobiles
|
|
|
419,951
|
|
|
|
411,498
|
|
Less
: Accumulated Depreciation
|
|
|
(2,613,100
|
)
|
|
|
(1,667,572
|
)
|
Plant and Equipment, Net
|
|
$
|
12,396,250
|
|
|
$
|
9,016,441
|
|
|
|
|
|
|
|
|
|
|
Construction in Progress
|
|
$
|
5,300,951
|
|
|
$
|
5,572,511
|
|
Plant and equipment are recorded at cost basis.
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 plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and
fixtures. All ordinary repair and maintenance costs are expensed as incurred.
$11,837,660 and $6,150,173 is included in equipment
that was produced for operating leasing that is leased to our customers for the years ended December 31, 2012 and 2011, respectively.
Depreciation for financial reporting purposes is provided
using the straight line method over the estimated useful lives of the assets. The Company had depreciation expense of $945,528
and $725,365 for the years ended December 31, 2012 and 2011, respectively.
Land Use Right
According to the laws of the PRC, the government owns
all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 40 years.
Land use rights consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Land use rights
|
|
$
|
3,310,933
|
|
|
$
|
1,185,929
|
|
Less
: Accumulated amortization
|
|
|
(169,485
|
)
|
|
|
(118,593
|
)
|
|
|
$
|
3,141,448
|
|
|
$
|
1,067,336
|
|
Total amortization expenses of land use right for the years
ended December 31, 2012 and 2011 amounted to $50,892 and $33,969, respectively.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
Short-term loans were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
Description
|
|
2012
|
|
|
2011
|
|
Loan payable to Industrial and Commercial Bank of China, interest at 6.56% annually, due by December 19, 2012, with collateral consisting of accounts receivables and guarantee from the Beijing Zhongguancun Sci-Tech Guaranty Co., Ltd.
|
|
$
|
-
|
|
|
$
|
1,587,074
|
|
|
|
|
|
|
|
|
|
|
Loan payable to China Minsheng Bank, interest at 7.93% annually, due by September 14, 2012.
|
|
|
-
|
|
|
|
793,594
|
|
|
|
|
|
|
|
|
|
|
Loan payable to China Merchants Bank, interest at 8.53% annually, due by July 21, 2012.
|
|
|
-
|
|
|
|
1,110,952
|
|
|
|
|
|
|
|
|
|
|
Loan payable to China Minsheng Bank, interest at 7.8% annually, due by August 23, 2013.
|
|
|
793,512
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan payable to Industrial and Commercial Bank of China, interest at 5.6% annually, due by April 30, 2013 with collateral consisting of land use rights for the land in Yangtze River Road North and Ruishan Road West, New District, Zhenjiang.
|
|
|
1,745,727
|
|
|
|
-
|
|
|
|
$
|
2,539,239
|
|
|
$
|
3,491,620
|
|
Long-term loans were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
Description
|
|
2012
|
|
|
2011
|
|
Loan payable to China Development Bank, interest at 6.1% annually, due by Feb 24, 2014, with collateral consisting of accounts receivables and guarantee from the Beijing Zhongguancun Sci-Tech Guaranty Co., Ltd.
|
|
$
|
1,110,917
|
|
|
$
|
1,587,100
|
|
|
|
|
|
|
|
|
|
|
Long-term loan due within one year
|
|
|
(476,107
|
)
|
|
|
(476,138
|
)
|
|
|
|
|
|
|
|
|
|
Long-term loan will be paid beyond one year
|
|
$
|
634,810
|
|
|
$
|
1,110,962
|
|
The interest expense was $311,480 and $298,600,
for the years ended December 31, 2012 and 2011, respectively.
As of December 31, 2012, the Company maintained in total RMB 23 million (approximately $3.65 million)
in rolling credit facilities, of this amount:
|
1)
|
China Development Bank (CDB) extended a 3-year RMB10 million ($1.59 million) working capital facility in February 2011. The
current expiration date for the loan agreement is February 24, 2014, with RMB3 million which was repaid on February 24, 2012, RMB3
million which would be repaid on February 24, 2013 and the remaining RMB4 million to be repaid on February 24, 2014. Therefore
the balance as of December 31, 2012 was RMB7 million ($1.11 million). RMB loans carry an interest rate equal to the People’s
Bank of China’s three-year benchmark lending rate.
|
The CDB facility is supported by a guarantee from Beijing
Zhongguancun Sci-Tech Guaranty Co. Ltd. (“Zhongguancun”), which is a professional guarantee company mainly funded by
the Chinese government and provides various credit guarantees for hi-tech SMEs (such as Wowjoint) in order to help the companies
obtain bank financing at reduced interest rates.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
The material terms for the Zhongguancun guarantee of
CDB facility are as follow:
|
·
|
RMB10 million maximum amount; the principal amount of the CDB credit line will be reduced from RMB10 million
to RMB7 million in second year, and to RMB4 million in third year, as the Company repays the principal in accordance with the terms
of the loan agreement;
|
|
·
|
A pledge of all future and current accounts receivables on a pro rata basis, with the Company being required
to submit a list of all accounts receivables to Zhongguancun every quarter;
|
|
·
|
The term is from February 25, 2011 to February 24, 2014; and
|
|
·
|
The fees charged by Zhongguancun for the three-year RMB10 million
loan were RMB474,542, which is the sum of the following (the CDB annual guarantee fee percentage is 10% higher than that under
the ICBC facility due to the longer than one year guarantee):
|
|
a)
|
First year of agreement: RMB10 million x 1.9602% (annual guarantee fee) + RMB10 million x 0.3% (annual guarantee review fee);
|
|
b)
|
Second year of agreement: RMB7 million x 1.9602% (annual guarantee fee) + RMB7 million x 0.3% (annual guarantee review fee);
and
|
|
c)
|
Third year of agreement: RMB4 million x 1.9602% (annual guarantee fee) + RMB4 million x 0.3% (annual guarantee review fee).
|
|
2)
|
China Minsheng Bank extended the Company a RMB5 million (US$0.79 million) facility in October 2011 to
provide short-term liquidity and working capital, which expired on March 29, 2012. The loan was repaid in January 2012 before the
due date, and was renewed for 6 months from March 2012 to September 14, 2012, which was repaid on August 23, 2012. The Company
subsequently entered a new 1-year RMB5 million (US$0.79 million) facility with China Minsheng Bank with term from August 23, 2012
to August 23, 2013. RMB loans carry an interest rate equal to 1.3 times the People’s Bank of China’s 1-year benchmark
lending rate, i.e. 7.8%.
|
The China Minsheng Bank facility is supported by a personal guarantee from Yabin Liu, the company’s
Chief Executive Officer.
|
3)
|
Industrial and Commercial Bank of China Limited, Zhenjiang Branch (“ICBC Zhenjiang”), extended
a 6-month RMB11 million ($1.75 million) facility to one of the Company’s wholly-owned subsidiaries, Zhenjiang Wowjoint, with
term from October 26, 2012 to April 30, 2013. RMB loans carried an interest rate equal to the People’s Bank of China’s
6-month benchmark lending rate.
|
The ICBC Zhenjiang facility was supported by a corporate
guarantee from Zhenjiang Wowjoint that has the following material terms:
|
·
|
RMB11 million maximum amount;
|
|
·
|
A pledge of land use right of the Zhenjiang facilities with appraised
value of approximately RMB16.9 million as of October 2012; and
|
|
·
|
The term for the guarantee is from October 26, 2012 to October 25,
2017
.
|
Under the above three credit facilities,
the Company:
(1) Must pay the principal and related interests
when due;
(2) Without written consent, the
Company cannot sell or transfer assets, or provide guarantees to third parties; and
(3) Must not conduct any activities,
which may be materially detrimental to the interests of lending banks.
The Company fully drew down the above credit facilities and is in compliance with all terms and conditions
of all of the above credit agreements as of December 31, 2012. Except for the above terms, there are no quantified financial covenants
or financial ratios specified in the credit agreements. The Company is not subject to any covenants limiting their ability to incur
additional indebtedness.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
|
9.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses are
the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accounts payable
|
|
$
|
8,185,565
|
|
|
$
|
11,387,293
|
|
Accrued expenses
|
|
|
342,781
|
|
|
|
2,661,364
|
|
Accrued warranty cost
|
|
|
154,155
|
|
|
|
154,162
|
|
Total
|
|
$
|
8,682,501
|
|
|
$
|
14,202,819
|
|
The Company’s equipment are typically sold with one year warranty from the date of sales against
defects in materials. Warranty cost is accrued as revenue is recognized. Cost of warranties is estimated based on the Company’s
experience in recent years. Actual warranty costs when incurred are charged against accrued warranty liability. The Company did
not accrue warranty expense during the year ended December 31, 2012 and 2011, as their accrued warranty of $154,155 and $154,162
were adequate to compensate for expected future warranty costs as of those respective dates.
Other payables comprised of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Payable to Employees
|
|
$
|
500,327
|
|
|
$
|
107,996
|
|
Payable to Other Companies
|
|
|
1,491,832
|
|
|
|
372,821
|
|
Total
|
|
$
|
1,992,159
|
|
|
$
|
480,817
|
|
Tax payables are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
VAT tax payables
|
|
$
|
4,241,346
|
|
|
$
|
4,183,815
|
|
Income tax liability
|
|
|
353,575
|
|
|
|
411,638
|
|
Individual Income tax payable
|
|
|
6,712
|
|
|
|
-
|
|
Other tax payable
|
|
|
162
|
|
|
|
(4,151
|
)
|
Total taxes payable
|
|
$
|
4,601,795
|
|
|
$
|
4,591,302
|
|
Enterprises or individuals, who sell commodities,
engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax (VAT) in accordance with
Chinese Laws. The VAT standard rate is 17% of the gross sale price. A credit is available whereby VAT paid on the purchases of
semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the
VAT due on the sales of the finished products.
In accordance with common market practice in China,
the company pays VAT to tax authorities based on the VAT invoices it issues to customers. For the projects which the company has
completed but has not issued invoices, the company classified the VAT tax to “Cost and estimated earnings in excess of billing”
from “Accounts Receivables”, not included in Accounts Receivable on its balance sheet.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
On March 16, 2007, the National People’s Congress
of China approved the new Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), which
was effective from January 1, 2008.
The key changes in the new law are:
The new standard EIT rate of 25% replaced the 33%
rate currently applicable to both DES and FIEs, except for High Tech companies who pay a reduced rate of 15%; and
Companies established before March 16, 2008 will continue
to enjoy tax holiday treatment approved by the local government for a grace period of the next 5 years or until the tax holiday
term is completed, whichever is sooner.
The Company is a high technology company and enjoys
the benefit of a reduced income tax rate at 15%. The applicable new EIT for the Company was 7.5% until December 31, 2009. For
the years ending December 31, 2012 and 2011, the company’s income tax rate was 15%.
In accordance with the New CIT Law, enterprises established
under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC
territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The
definition of “place of effective management" refers to an establishment that exercises, in substance, overall management
and control over the production and business, personnel, accounting, properties, etc. of an enterprise. As of December 31, 2012,
no detailed interpretation or guidance has been issued to define “place of effective management”. Furthermore, as of
December 31, 2012, the administrative practice associated with interpreting and applying the concept of “place of effective
management” is unclear. If the Company were to have non-PRC incorporated entities that are deemed PRC tax residents, such
entities would be subject to PRC tax under the New CIT Law. The Company has analyzed the applicability of this law, as of December
31, 2012, and the Company has not accrued for PRC tax on such basis. The Company will continue to monitor changes in the interpretation
or guidance of this law.
The New CIT Law also imposes a 10% withholding income
tax, subject to reduction based on tax treaty where applicable, for dividends distributed by a foreign invested enterprise to its
immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law and regulations.
The foreign invested enterprise is subject to the withholding tax starting from January 1, 2008. There were no dividends distributed during
the years ended December 31, 2012, and 2011.
The table below summarizes the reconciliation of the
Company’s income tax provision (benefit) computed at the statutory rate in the PRC and the effective tax rate.
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Income Tax Provisions (benefit)
|
|
|
38
|
%
|
|
|
38
|
%
|
Abatement of taxes - Technology enterprises
|
|
|
(15
|
)%
|
|
|
(15
|
)%
|
Tax Provisions (benefit)
|
|
|
23
|
%
|
|
|
23
|
%
|
The Company uses FASB ASC 740 (formerly FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”)). – An Interpretation of FASB Statement No. 109,
Accounting for Income Taxes. The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed
on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
FIN 48 also provides guidance on recognition, classification, interest and penalties on income taxes, accounting in interim periods
and requires increased disclosures. As of December 31, 2012 and 2011, the Company did not have a liability for unrecognized tax
expenses.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
|
13.
|
RELATED PARTY TRANSACTIONS
|
Parties are considered to be related if one party
has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making
financial and operational decisions. Parties are also considered to be related if they are subject to common control or common
significant influence. The due from/to related parties represents advances to /or from entities controlled by the Company’s
shareholders, or the shareholders themselves. The amounts are unsecured, non-interest bearing and due on demand.
Beijing Runtuo Industry &Technology Co. Ltd. (“Beijing
Runtuo”) is a related party of the Company. The CEO of the Company owns part of an entity that is a shareholder of Beijing
Runtuo. Beijing Runtuo provided natural gas to the Company for production. The Company has advanced to Beijing Runtuo $76,037,
as of December 31, 2011 and a liability amounting $261,863 as of December 31, 2012. The Company also has a liability amounting
$53,970 and $53,972 to Beijing Wowjoint Mechanical and Electrical Equipment Co., (“Wowjoint Mechanical”) a related
party of the Company, as of December 31, 2012 and 2011 respectively. The CEO of the Company is the CEO and a shareholder of Wowjoint
Mechanical. Wowjoint Mechanical provided preliminary work in process for the Company.
The CEO of the Company also provided certain personal guaranty to ensure the Company’s payment obligations
under the RMB 5 million Loan Agreement with China Minsheng Bank entered in August 2012, which is not reflected on the balance sheet.
|
14.
|
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
|
The current assets, “costs and estimated earnings in excess of billings” on contract in progress,
represent cumulative revenues recognized in excess of the cumulative amount billed to customers. Included in cost and estimated
earnings in excess of billings are unbilled receivables on contracts, or portions of contracts, that have been recorded in sales
on attainment of sales or revenue criteria, though appropriately recognized, cannot be billed yet under the contracts as of the
balance sheet date. Included in costs and estimated earnings in excess of billings is retainage not invoiced, which is typically
5%-10% of a construction contract. Retainage not invoiced, and prior to the completion of the customary evaluation period accorded
to customer, is accounted for as costs and estimated earnings and billings. Retainage is typically invoiced to the customer one
year after delivery of construction equipment. This extended payment period for the last portion of a contract is given to allow
the customer to operate their equipment and notify the Company if adjustments to the equipment are required.
As of December 31, 2012 and 2011, costs
and estimated earnings in excess of billings are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Contract costs incurred plus recognized profits less recognized losses to date
|
|
$
|
55,607,242
|
|
|
$
|
22,564,799
|
|
Less:
Progress billings to date
|
|
|
(53,356,822
|
)
|
|
|
(18,151,317
|
)
|
Costs and estimated earnings in excess of billings
|
|
$
|
2,250,420
|
|
|
$
|
4,413,482
|
|
The timing of when the Company bill their customers is generally based on advance billing terms or contingent
upon completion of certain phases of the work, as stipulated in the contract. Costs and estimated earnings in excess of billings
at December 31, 2012 and 2011 are typically billed within one year.
Prior to Acquisition, CFAC has issued and
outstanding 5,320,312 ordinary shares.
As described in Note 1, Wowjoint
issued 5,700,000 ordinary shares to Beijing Wowjoint’s shareholders on February 22, 2010. In connection with the Acquisition,
the holders of 1,374,089 of the ordinary shares sold in CFAC's initial public offering elected to redeem their shares. Wowjoint
also entered into "forward contracts" to purchase 1,696,258 ordinary shares in privately negotiated transactions
from shareholders who would otherwise have voted against the business combination.
After giving effect to the issuance of
5,700,000 ordinary shares to Wowjoint’s shareholders, the redemptions and the forward contract payments, there are 7,949,965
ordinary shares of Wowjoint outstanding as of December 31, 2011.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
The Company issued stock compensation of 21,500 common
shares in October 2011 for services performed by a financial consultant. These shares were valued at market on the date of their
approval for issuance. The company recorded $35,690 in compensation expense, included in general and administrative expenses, related
to this share issuance. After issuing the shares, there are 7,971,465 ordinary shares of Wowjoint outstanding as of December 31,
2011.
On April 8, 2012, a special 6% stock dividend was
paid to all holders of ordinary share, and holders of unit consisting one ordinary share and one warrant as of record date of March
31, 2012. Prior to the stock dividend, there were 7,971,465 ordinary shares issued and outstanding as of December 31, 2011. After
the 6% stock dividend and stock issued for services, there were 8,459,272 ordinary shares issued and outstanding as of December
31, 2012.
The movement of ordinary
shares during the year ended in December 31, 2012 and 2011 is summarized below:
Issued and outstanding shares of CFAC prior to acquisition
|
|
|
5,320,312
|
|
Shares redeemed
|
|
|
(1,374,089
|
)
|
Shares under forward contact
|
|
|
(1,696,258
|
)
|
|
|
|
2,249,965
|
|
Shares issued to Beijing Wowjoint’s shareholders
|
|
|
5,700,000
|
|
Shares issued for services
|
|
|
21,500
|
|
Outstanding shares as at December 31, 2011
|
|
|
7,971,465
|
|
Stock issued for services
|
|
|
9,500
|
|
Shares issued for dividends paid
|
|
|
478,307
|
|
Outstanding shares as of December 31,2012
|
|
|
8,459,272
|
|
|
16.
|
STATUTORY SURPLUS RESERVE
|
In accordance with the laws and
regulations of PRC, it is required that before an enterprise registered in the PRC distributes profits, it must first satisfy all
tax liabilities, provide for losses incurred in previous years, and make allocations to its statutory surplus reserves. The Company’s
PRC subsidiaries are required to transfer 10% of their after-tax profits to a statutory surplus reserve until the reserve balance
reaches 50% of its registered capital, which must be completed prior to dividend distribution. Statutory surplus reserves may be
utilized to offset prior years’ losses or to increase registered capital. Usage of the statutory surplus reserves should
not result in its balance falling below 25% of registered capital, unless the reserves are used to reduce incurred losses. At December
31, 2012 and 2011 the balance of statutory surplus reserves was $3,024,562.
Basic and diluted earnings per share have been calculated as
follows
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Net Income (Loss)
|
|
$
|
(3,857,876
|
)
|
|
$
|
1,187,981
|
|
Weight average number of shares outstanding, basic and diluted
|
|
|
8,337,320
|
|
|
|
7,957,151
|
|
Earnings per share, basic and diluted
|
|
$
|
(0.46
|
)
|
|
$
|
0.15
|
|
For accounting period prior to the date of reverse
acquisition, the number of shares included in the earnings per share calculation has been retroactively restated to reflect the
number of shares to which Beijing Wowjoint shareholders are entitled in the share purchase agreement.
As disclosed in Note 1, an earn-out provision in the
share purchase agreement provides for up to an additional 500,000 ordinary shares being issued, the issuance of which is contingent
upon certain performance criteria. As such contingency has not been met as of December 31, 2012, the above basic and diluted earnings
per share have not included these issuable ordinary shares. In addition, diluted earnings per share exclude 1,786,056 ordinary
shares, issuable upon the exercise of warrants, since the exercise price of these warrants were in excess of the average market
price of the Company’s ordinary shares.
Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
Major vendors
There was one vendor from which the Company purchased
more than 10% of its raw materials for the year ended December 31, 2012, that accounting for about 11%, of its raw material purchases.
There were two vendors from which the Company purchased
more than 10% of its raw materials for the year ended December 31, 2011, with each vendor accounting for about 14% and 11%, respectively,
of its raw material purchases.
Major customers
There were three customers accounting for over 10%
of the total sales for the year ended December 31, 2012, with each customer accounting for about 24%, 21% and 14%, respectively,
of total sales over this period.
There were three customers accounting for over 10%
of the total sales for the year ended December 31, 2011, with each customer accounting for about 31%, 26% and 15%, respectively,
of total sales over this period.
Sales by Geographic Region
For the year ended December 31, 2012, 74% of sales were to customers
located in China. For the year ended December 31, 2011, 74% of sales were to customers located in China.
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(1)
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On December 23, 2011, the Company received two subpoenas from the Securities and Exchange Commission.
The subpoenas require the Company to provide certain documents to the SEC and a representative of Wowjoint to testify before the
SEC. As stated in the SEC correspondence accompanying the subpoenas, the investigation and subpoenas should not be construed as
an indication that violations of laws have occurred. A representative of Wowjoint, together with Wowjoint’s attorney at Ellenoff
Grossman & Schole LLP, subsequently testified before the SEC from June 27-29, 2012. In connection with the subpoenas, the Company
has provided additional company information to the SEC. The investigation is a non-public fact finding inquiry. It is not possible
at this time to predict the outcome of the SEC investigation, including whether or when any proceedings might be initiated, when
these matters may be resolved or what, if any, penalties or other remedies may be imposed. Wowjoint is committed to cooperating
with the SEC. The investigation may require considerable legal expense and management’s time and attention. Moreover, if
the SEC were to initiate an enforcement proceeding against the Company or its officers or both, an enforcement proceeding could
subject the Company or its management to injunctions, fines, and other penalties or sanctions or result in private civil actions,
loss of key personnel, or other adverse consequences.
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(2)
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Eden, one of the Company’s customers, claimed that the Company supplied poor quality products to
four projects in Korea in 2011, in which Eden did the design work and sub-contracted manufacturing to the Company. The Company
previously issued four performance bonds to Eden amounting to a total of Euro 552,000 via ICBC Beijing (1 bond for each project
in the amount of Euro 138,000). In December 2012 Eden made the claims under these four performance bonds and ICBC Beijing paid
accordingly. The Company strongly disagreed with Eden on the claims and is currently appealing and seeking to recover Euro 552,000
through arbitration in Italy.
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Wowjoint Holdings Limited
Notes to Financial Statements
As of and for the years ended December 31,
2012 and 2011
In addition, in January 2013 Eden made the same claims under quality bonds in the total amount of Euro
500,000 which the Company had issued via ICBC Beijing in connection with the aforementioned four projects in Korea. The Company
strongly disagreed with Eden on the claims. Therefore, the Company engaged local Chinese lawyers and applied to court in Beijing
to stop ICBC from paying to Eden. The Beijing court had issued a stop payment order to ICBC Beijing. The Company is now in a lawsuit
with Eden, which may take up to one year for the court to issue a final ruling. The Company was required to put up a cash deposit
in RMB equivalent of Euro 500,000 with the Beijing court. However the cash deposit will be replaced around May 2013 by a collateral
backed by an apartment, which is owned by one of the Company’s senior employees, As a result, the cash deposit will be released
back to the Company no later than the end of June 2013. Since such kind of lawsuit is not common in PRC, the Company’s attorney
cannot give any assurance on the outcome.
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(3)
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The Company has previously paid RMB 900,000 annually to rent the approximately 160,000 square feet production
and office facility in Beijing for 3 years. Since the Company had built a new manufacturing facility in Zhenjiang, the Company
decided discontinue the Beijing lease at the end of its term in January 2013. The landlord of the said property had filed a lawsuit
against the Company. The Landlord claimed that the Company has damaged the floors and walls during the rental period and sought
pecuniary compensation of RMB 2 million. At present, the case is still pending in Beijing court and the court will likely issue
a ruling by the end of 2013.
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On March 22, 2012, the Company commenced a tender
offer (the “Offer”) to all holders of the Company’s outstanding warrants to purchase an aggregate of 7,700,642
of the Company’s ordinary shares, to receive one (1) share in exchange for every 15.9 warrants tendered by the holders of
warrants. The Offer shall expire at 5:00 p.m., New York City time, on July 17, 2012, unless further extended by the Company.
On April 17, 2012, the Company’s board of directors
approved an extension of the warrant’s expiration date to May 15, 2013 (from May 15, 2012, the expiration date provided by
the original terms of the Warrants). Except for the extension of the expiration date, the terms of the warrants remain unchanged.
On November 26, 2012, the Company terminated the previously announced exchange offer for outstanding warrants. No
warrants were exchanged for ordinary shares pursuant to the exchange offer, and all warrants tendered to us had been returned.
As of November 26, 2012 and December 31, 2012, total number of outstanding warrants was 7,212,452.
The following material events have occurred subsequent
to December 31, 2012:
1) Industrial and Commercial Bank of China Limited,
Zhenjiang Branch (“ICBC Zhenjiang”), extended a 6-month RMB11 million ($1.75 million) facility to one of the Company
wholly-owned subsidiaries, Zhenjiang Wowjoint, with term from October 26, 2012 to April 30, 2013. RMB loans carried an interest
rate equal to the People’s Bank of China’s 6-month benchmark lending rate. The Company repaid this loan in full plus
interest upon expiration on April 30, 2013.
2) Bank of Beijing extended the Company a one-year
RMB10 million (US$1.59 million) facility in April 2013 to provide short-term liquidity and working capital, which will expire on
April 25, 2014. RMB loans carry an interest rate equals to 1.15 times the People’s Bank of China’s 1-year benchmark
lending rate.
The Bank of Beijing facility is supported by a guarantee
from Beijing Zhongguancun Sci-Tech Guaranty Co. Ltd. (“Zhongguancun”). The Company is currently negotiating legal documents
with Zhongguancun, however the lender allows the Company to draw down the full RMB10 million loan on April 25, 2013 before the
execution of final guarantee documents. The Company expects the guarantee documents to be signed by end of June 2013.
3) China Development Bank (CDB) extended a 3-year
RMB10 million ($1.59 million) working capital facility to the Company in February 2011. The current expiration date for the loan
agreement is February 24, 2014, of which RMB3 million has been repaid on February 24, 2012, another RMB3 million has been repaid
on February 24, 2013, and the remaining RMB4 million is to be repaid on February 24, 2014. Therefore the balance as of June 10,
2013 is RMB4 million ($0.63 million). RMB loans carry an interest rate equal to the People’s Bank of China’s three-year
benchmark lending rate.
4) 7,264,756 non-exercised warrants were expired
on May 15, 2013.
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