U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended DecemberMarch 31, 20102011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 000-31091

ZHONGCHAI MACHINERY, INC.
(Exact Name of Registrant as Specified in Its Charter)

NEVADA
(State of Incorporation)
33-0652593
(I.R.S. Employer I.D. Number)
  
224 Tianmushan Road,
Zhongrong Chengshi Huayuan 5-1-602,
Hangzhou, P.R. China
(Address of principal executive offices)
310007
(zip code)

(904) 418-9133
(Issuer’s Telephone Number, Including Area Code)

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files. Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated Filer o Non accelerated filer o Smaller reporting company x

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes. Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 27,613,019 shares of common stock, par value $.001 per share, outstanding as of December 31, 2010.May 11, 2011.

 
 
 

ZHONGCHAI MACHINERY, INC.

- INDEX -

    Page No.
     
PART I FINANCIAL INFORMATION  
     
Item 1 Financial Statements 4  1
  
Unaudited Consolidated Balance Sheet as of DecemberMarch 31, 20102011 and June 30, 2010
 4  2
  
Unaudited Consolidated Statements of Operations for the three and nine months ended March 31, 2011 and 2010
  3
Unaudited Consolidated Statements of Comprehensive Income for the three and sixnine months ended DecemberMarch 31, 20102011 and 20092010 5  4
  
Unaudited Consolidated Statements of Cash Flows for the sixnine months ended DecemberMarch  31, 20102011 and 2009
2010		 6  5
  Notes to Consolidated Financial Statements 7  6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 1312
Item 3 Quantitative and Qualitative Disclosures about Market Risk 1614
Item 4 Controls and Procedures 1615
     
PART II OTHER INFORMATION  
     
Item 5 Exhibits 1615
Signatures   1716

 
2
 

FORWARD-LOOKING STATEMENTS

Statements made in this Form 10-Q (the “Quarterly Report”) that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified by the use of terms such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”, “approximate”, or “continue”, or the negative thereof. Zhongchai Machinery, Inc. (the “Company”) intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include our current dependence on a limited number of products and customers, the focus of the business on the gear and transmission gearbox markets in the Peoples Republic of China, the need to develop new products and create demand for them, the effect of the global recession and availability of credit, pricing pressures on our products and margins, product quality, customer satisfaction and the ability to sustain and grow sales and expand the customer base, warranty obligations and claims, operating a business primarily in the Peoples Republic of China, currency controls and exchange rate exposure, and the other risk factors discussed in our reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

 
3


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.
 
ZHONGCHAI MACHINERY, INC.

Consolidated Balance Sheets
(Unaudited)
  December 31,  June 30, 
  2010  2010 
  (Unaudited)    
Assets      
Current assets:      
Cash and cash equivalents $3,929,108  $1,495,597 
Restricted cash  1,364,086   90,810 
Accounts receivable, net of allowance for doubtful accounts of $46,039 and $37,670 at September 30, 2010 and June 30, 2010, respectively  2,751,677   3,618,030 
Inventories  3,676,790   2,680,666 
Notes receivable  3,772,549   463,465 
Advance payments  563,863   33,132 
Other current assets  346,540   110,131 
Total current assets  16,404,613   8,491,831 
         
Property and equipment, net  4,009,375   3,017,569 
         
Goodwill  3,528,202   3,425,868 
         
Advance payments – non current portion  4,103,810   4,960,475 
         
Other assets
  0   451 
         
Total assets $28,046,000  $19,896,194 
         
Liabilities        
Current liabilities:        
Accounts payable and accrued expenses $4,545,354  $3,504,923 
Trade notes payable  3,331,067   142,365 
Short-term bank loans  5,876,710   1,428,810 
Taxes payable  248,842   224,108 
Dividend payable  387,425   381,201 
Other current liabilities  1,269,054   3,322,277 
Total current liabilities  15,658,452   9,003,684 
         
Total liabilities  15,658,452   9,003,684 
         
Equity        
Stockholders’ equity:        
Common stock, $.001 par value, 500,000,000 shares authorized, 27,613,019 shares issued and outstanding at September 30, 2010 and June 30, 2010, respectively  27,613   27,613 
Stock subscription receivable  (33,120)  (33,120)
Additional paid-in capital  16,487,486   16,484,097 
Statutory reserves  315,152   315,152 
Accumulated deficit  (6,487,773)  (7,558,542)
Accumulated other comprehensive income  1,782,301   1,361,646 
Total stockholders’ equity  12,091,659   10,596,846 
         
Noncontrolling interest  295,889   295,664 
         
Total equity  12,387,548   10,892,510 
         
Total liabilities and equity $28,046,000  $19,896,194 

The accompanying notes are an integral part of these consolidated financial statements.

 
41
 

ZHONGCHAI MACHINERY, INC.
Consolidated Balance Sheets
 
Consolidated Statements of Operations and Comprehensive Income (Loss)
  March 31,  June 30, 
  2011  2010 
Assets (Unaudited)    
Current assets:      
Cash and cash equivalents $4,687,656  $1,495,597 
Restricted cash  1,371,280   90,810 
Accounts receivable, net of allowance for doubtful accounts of $35,053  6,222,150   3,618,030 
and $37,670 at March 31, 2011 and June 30, 2010, respectively        
Inventory  3,920,950   2,680,666 
Notes receivable  2,761,806   463,465 
Advance payments  130,247   33,132 
Other current assets  321,313   110,131 
Total current assets  19,415,402   8,491,831 
         
Property and equipment, net  5,791,640   3,017,569 
         
Goodwill  3,546,808   3,425,868 
         
Advance payments – non current portion
  3,185,583   4,960,475 
         
Other assets  -   451 
         
Total assets $31,939,433  $19,896,194 
         
Liabilities        
Current liabilities:        
Accounts payable and accrued expenses $6,832,919  $3,504,923 
Trade notes payable  3,428,200   142,365 
Short-term bank loans  5,893,510   1,428,810 
Taxes payable  395,994   224,108 
Dividend payable  389,250   381,201 
Other current liabilities  1,047,833   3,322,277 
Total current liabilities  17,987,706   9,003,684 
         
Total liabilities  17,987,706   9,003,684 
         
Equity        
Stockholders’ equity:        
Common stock, $.001 par value, 500,000,000 shares authorized,        
27,613,019 shares issued and outstanding at March 31, 2011 and        
June 30, 2010, respectively  27,613   27,613 
Stock subscription receivable  (33,120)  (33,120)
Additional paid-in capital  16,487,924   16,484,097 
Statutory reserves  315,152   315,152 
Accumulated deficit  (5,036,035)  (7,558,542)
Accumulated other comprehensive income  1,894,033   1,361,646 
Total stockholders’ equity  13,655,567   10,596,846 
         
Non-controlling interest  296,160   295,664 
         
Total equity  13,951,727   10,892,510 
         
Total liabilities and equity $31,939,433  $19,896,194 
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.2
  For the Three Months Ended  For the Six Months Ended 
  December 31,  December 31, 
  2010  2009  2010  2009 
             
Sales $4,750,859  $1,889,823  $8,734,404  $3,838,229 
                 
Cost of sales  3,497,710   1,483,353   6,470,261   3,026,527 
                 
Gross profit  1,253,149   406,470   2,264,143   811,702 
                 
Operating expenses                
Selling, general and administrative  604,411   287,950   948,855   632,190 
                 
Income from operations  648,738   118,520   1,315,288   179,512 
                 
Other income (expenses):                
Interest income (expenses), net  (186,783)  (15,502)  (202,738)  (34,269)
Other income, net  108,247   36,069   143,099   40,309 
Total other income  (78,536)  20,567   (59,639)  6,040 
                 
Income (loss) before provision for income taxes  570,202   139,087   1,255,649   185,552 
                 
Provision for income taxes  10,595   31,588   184,655   67,093 
                 
Net income  559,607   107,499   1,070,994   118,459 
                 
Less: Noncontrolling interest  48   61,167   225   100,482 
                 
Net income attributable to Zhongchai Machinery, Inc.  559,559   46,332   1,070,769   17,977 
                 
Other comprehensive income                
Foreign currency translation adjustment  190,851   56   420,655   16,918 
                 
Comprehensive income (loss) $750,410  $46,388  $1,491,424  $34,895 
                 
Loss per common share:                
Basic $0.02  $0.00  $0.04  $0.00 
Diluted $0.02  $0.00  $0.04  $0.00 
                 
Weighted average number of common shares outstanding:                
Basic  27,613,019   27,613,019   27,613,019   27,613,019 
Diluted  27,947,203   27,613,019   27,899,037   27,613,019 

The accompanying notes are an integral part of these consolidated financial statements.

 
5
 
ZHONGCHAI MACHINERY, INC.
Consolidated Statements of Operations
(Unaudited)

  For the Three Months Ended  For the Nine Months Ended 
  March 31,  March 31, 
  2011  2010  2011  2010 
             
Sales $7,044,067  $3,202,350  $15,778,471  $7,040,579 
                 
Cost of sales  5,128,888   2,454,953   11,599,149   5,481,480 
                 
Gross profit  1,915,179   747,397   4,179,322   1,559,099 
                 
Operating expenses                
Selling, general and administrative  265,020   284,340   1,213,875   916,530 
                 
Income from operations  1,650,159   463,057   2,965,447   642,569 
                 
Other income (expenses):                
Interest expense, net  (15,197)  (29,095)  (217,935)  (63,364)
Other income, net  47,564   16,289   190,663   56,598 
Total other income (expenses)  32,367   (12,806)  (27,272)  (6,766)
                 
Income before provision for income taxes  1,682,526   450,251   2,938,175   635,803 
                 
Provision for income taxes  230,742   73,448   415,397   140,541 
                 
Net income  1,451,784   376,803   2,522,778   495,262 
                 
Less: Net income attributable to noncontrolling interest  46   112,942   271   213,424 
                 
Net income attributable to Zhongchai Machinery, Inc.  1,451,738   263,861   2,522,507   281,838 
                 
Income per common share:                
Basic $0.05  $0.01  $0.09  $0.01 
Diluted $0.05  $0.01  $0.09  $0.01 
                 
Weighted average number of common shares outstanding:
                
Basic  27,613,019   27,613,019   27,613,019   27,613,019 
Diluted  27,904,892   27,613,019   27,901,009   27,613,019 

The accompanying notes are an integral part of these consolidated financial statements.3

ZHONGCHAI MACHINERY, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
  
For the Three Months Ended
March 31,
  
For the Nine Months Ended
March 31,
 
  2011  2010  2011  2010 
             
Net income $1,451,784  $376,803  $2,522,778  $495,262 
                 
Other comprehensive income                
Foreign currency translation adjustment  111,732   398   532,387   16,521 
                 
Total other comprehensive income  111,732   398   532,387   16,521 
                 
Comprehensive income  1,563,516   377,201   3,055,165   511,783 
                 
Less: Comprehensive income attributable to the  46   112,942   271   213,424 
noncontrolling interest                
                 
Comprehensive income attributable to Zhongchai Machinery, Inc. $1,563,470  $264,259  $3,054,894  $298,359 

The accompanying notes are an integral part of these consolidated financial statements.4

ZHONGCHAI MACHINERY, INC.
Consolidated Statements of Cash Flows
(Unaudited)

  For the Nine Months Ended 
  March 31, 
  2011  2010 
Cash flows from operating activities:      
Net income $2,522,778  $495,262 
Adjustments to reconcile net income to net cash        
Provided by (used in) operating activities:        
Depreciation and amortization  272,806   229,508 
Loss on disposal of fixed assets  -   4,846 
Provision for bad debts  (3,880)  10,442 
Share-based payments  3,827   63,606 
Changes in assets and liabilities:        
Restricted cash  (1,255,487)  224,710 
Accounts receivable  (2,430,296)  (894,050)
Inventory  (1,126,119)  (636,675)
Notes receivable  (2,265,971)  (620,622)
Advance payments for inventory  (94,309)  (136,150)
Other current assets  (205,497)  (494,611)
Accounts payable and accrued expenses  3,151,777   1,557,049 
Trade notes payable  3,224,874   (225,048)
Taxes payable  161,178   123,839 
Other current liabilities  (2,336,663)  44,461 
Total adjustments  (2,903,760)  (748,695)
         
Net cash used in operating activities  (380,982)  (253,433)
         
Cash flows from investing activities:        
Advance payments for purchase of equipment  (406,689)  - 
Advance payments for purchase of land use rights and building  2,323,450   (2,199,600)
Additions to property and equipment  (2,894,422)  (529,260)
Proceeds from notes receivable  22,500   11,500 
         
Net cash used in investing activities  (955,161)  (2,717,360)
         
Cash flows from financing activities:        
Proceeds from (repayment of) short-term bank loans  4,437,345   (777,192)
Contribution from minority shareholders  -   293,280 
         
Net cash provided by (used in) financing activities  4,437,345   (483,912)
         
Effect of foreign currency translation on cash  90,857   3,852 
         
Net increase (decrease) in cash and cash equivalents  3,192,059   (3,450,853)
         
Cash and cash equivalents – beginning
  1,495,597   3,990,767 
         
Cash and cash equivalents – ending
 $4,687,656  $539,914 
  For the Six Months Ended 
  December 31, 
  2010  2009 
Cash flows from operating activities:      
Net income $1,070,769  $17,977 
Adjustments to reconcile net income to net cash Provided by (used in) operating activities:        
Noncontrolling interest  225   100,482 
Depreciation and amortization  175,447   148,156 
Loss on disposal of fixed assets      4,846 
Provision for bad debts  (21,317)  1,604 
Share-based payments  3,389   54,395 
Changes in assets and liabilities:        
Restricted cash  (1,259,843)  172,118 
Accounts receivable  987,522   (86,738)
Inventory  (908,321)  (597,283)
Notes receivable-trade  (3,290,413)  13,573 
Advance payments  (134,179)  (8,804)
Other assets  (232,760)  (474,263)
Accounts payable and accrued expenses  929,980   641,186 
Trade notes payable  3,157,579   (172,478)
Taxes payable  17,887   (48,124)
Other current liabilities  (2,223,703)  93,208 
Total adjustments  (2,798,507)  (158,122)
         
Net cash used in operating activities  (1,727,738)  (140,145)
         
Cash flows from investing activities:        
Advance payments for purchase of equipment  (1,726,242)  (49,858)
Advance payments for purchase of land use rights and building  2,331,510   (2,199,600)
Additions to property and equipment  (1,069,057)  (311,472)
Proceeds from notes receivable  22,500   10,000 
         
Net cash used in investing activities  (441,289)  (2,550,930)
         
Cash flows from financing activities:        
Proceeds from (repayment for) short-term bank loans  4,541,176   (777,192)
Contribution from minority shareholders  -   293,280 
         
Net cash Provided by (used in) financing activities  4,541,176   (483,912)
         
Effect of foreign currency translation on cash  61,362   4,219 
         
Net decrease in cash and cash equivalents and restricted cash  2,433,511   (3,170,768)
         
Cash and cash equivalents and restricted cash– beginning
  1,495,597   3,990,767 
         
Cash and cash equivalents and restricted cash – ending
 $ 3,929,108  $819,999 

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.5
 
6
 

ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)

ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Unaudited)

Note 1 – Organization and Nature of Business

Zhongchai Machinery, Inc. (“Zhongchai Machinery” or “the Company”) (Formerly “Equicap, Inc.”), a Nevada corporation, is a manufacturer and distributor of gears and gearboxes and drive axles that are marketed and sold to equipment manufacturers in China.

On July 6, 2007, the Board of Directors of Zhejiang Zhongchai Machinery Co., Ltd. (“Zhejiang Zhongchai”), the China based and 75% owned subsidiary of the Company, approved and finalized a Share Purchase Agreement (“Share Purchase Agreement”) with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in the People’s Republic of China. Pursuant to the Share Purchase Agreement, Zhejiang Zhongchai purchased all the outstanding equity of Zhejiang Shengte Transmission Co., Ltd. (“Shengte”) from Keyi, the sole owner of Shengte for approximately $3.7 million

On March 7, 2007, the Company and Usunco Automotive, Ltd. (“Usunco”), a British Virgin Islands company, entered into a Share Exchange Agreement (“Exchange Agreement”) which was consummated on March 9, 2007. Under the terms of the Exchange Agreement, the Company acquired all of the outstanding equity securities of Usunco in exchange for 18,323,944 shares of the Company’s common stock.

For accounting purposes, becauseSince the Company had been a public shell company prior to the share exchange, the share exchange was treated as a recapitalization of the Company.  As such, the historical financial information prior to the share exchange is that of Usunco and its subsidiaries. Historical share amounts have been restated to reflect the effect of the share exchange.

On June 18, 2006, Usunco acquired 100% of IBC Automotive Products Inc (“IBC”), a California Corporation as of May 14, 2004 (date of inception), through a Share Exchange Agreement of 28% of Usunco’s shares. IBC was considered a “predecessor” business to Usunco as its operations constituted the business activities of Usunco formed to consummate the acquisition of IBC.  The consolidated financial statements reflect all predecessor statements of income and cash flow activities from the inception of IBC in May 2004.

On June 15, 2009, IBC was sold to certain of the management persons of IBC in exchange for the following: (i) the cancellation of an aggregate of 555,994 shares of common stock of the Company which those individuals owned, and (ii) the payment of $60,000 in installments pursuant to the terms of an unsecured promissory note, the final payment of which will bewas made on November 15, 2010. As part of the transaction, the Company cancelled $428,261 through the closing date, of inter-company debt which funds had been used in the business of IBC prior to the transaction.

On September 22, 2009, Xinchang Xian Lisheng Machinery Co., Ltd. (“Lisheng”) was incorporated by Zhejiang Zhongchai and two individual investors. Total registered capital of Lisheng is RMB 5 million, of which Zhejiang Zhongchai accounts for 60%. The Company plans to startstarted production of die casting products in 2010 for use in gearboxes, diesel engines and other machinery products.

On December 16, 2009, Zhongchai Machinery and its wholly owned subsidiaries, Usunco and Zhongchai Holding (Hong Kong) Limited, a Hong Kong company (“Zhongchai Holding”), took action to approve transfer of the shares of Zhejiang Zhongchai Machinery Co., from Usunco to Zhongchai Holding. The transfer was completed on December 23, 2009. The purpose of the transfer was to take advantage of the tax treaty between the Peoples Republic of China and the Special Administrative Region of Hong Kong which reduces the withholding tax rate of the PRC on payments to entities outside of China. Usunco, which no longer had any assets after transferring all of them to Zhongchai Holding was subsequently dissolved. The consolidated financial statements will continue to account for Zhejiang Zhongchai Machinery Co., in the same manner as before the transfer of the ownership. Shareholder approval by the shareholders of Zhongchai Machinery was not required under Nevada law, as there was no sale of all or substantially all the assets of the Company. The shareholder ownership and shareholder rights of Zhongchai Machinery remain the same as before the transaction.

 
76
 

ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Nature of Business (continued)

On April 26, 2010, Zhongchai Holding (Hong Kong) Limited. (“Zhongchai Holding”), which owned 75% of the equity in Zhejiang Zhongchai Machinery Co., Ltd. (“Zhejiang Zhongchai”), executed a Share Purchase Agreement (“Share Purchase Agreement”) with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in the People’s Republic of China. Pursuant to the Share Purchase Agreement, Zhongchai Holding purchased the residual 25% equity of Zhejiang Zhongchai Machinery Co., Ltd. (“Zhejiang Zhongchai”) from Keyi at $2.6 million. The agreement has been approved by the local government agency and a new business license has been issued as Wholly Foreign Owned Enterprise.Enterprise.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements include the accounts of its controlled subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

In preparing the accompanying unaudited consolidated financial statements, we evaluated the period from DecemberMarch 31,, 2010 2011 through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure.disclosure. No such events were identified for this period.

Interim Financial Statements

These interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the years ended June 30, 2010 and 2009, as not all disclosures required by GAAP for annual consolidated financial statements are presented. The interim consolidated financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the years ended June 30, 2010 and 2009.

Reclassification

Certain amounts as ofaccounts for the period ended June 30, 2010 and DecemberMarch 31, 2010 were reclassified for presentation purposes.

to confirm to the March 31, 2011 presentation.
8
ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note 3 – Accounts Receivable

Trade accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.are recorded.

The balance of allowanceAllowance for doubtful accounts amounted to $17,297 and $37,670 as of DecemberMarch 31, 20102011 and June 30, 2010, amounted to $35,053 and $37,670, respectively.

Note 4 – InventoryInventory

Inventory as of DecemberMarch 31, 20102011 and June 30, 2010 consists of the following:
:
  December 31, 2010  June 30, 2010 
       
By Type      
Gears products $1,991,372  $1,372,326 
Gearbox products  1,657,053   1,307,940 
Transaxles products  28,365   - 
Other  -   400 
Total $3,676,790  $2,680,666 
         
  December 31, 2010  June 30, 2010 
By Category:        
Raw materials $1,524,723  $896,273 
Work in process  518,908   487,235 
Finished goods  1,633,159   1,297,158 
Total $3,676,790  $2,680,666 
Note 5 –Notes Receivable

Notes receivable as of December 31, 2010 and June 30, 2010 consists of the following:

  December 31,2010  June 30, 2010 
       
Notes receivable-trade $3,772,549  $440,965 
Notes receivable-other  -   22,500 
         
Total $3,772,549  $463,465 

Note 6 – Advance Payments

Advance payments as of December 31, 2010 and June 30, 2010 consists of the following:

  December 31,2010  June 30, 2010 
       
Inventory $563,863  $33,132 
Equipment  1,740,931   - 
Land use rights and buildings  2,362,879   4,960,475 
Total  4,667,673   4,993,607 
Less: Current portion  563,863   33,132 
         
Total non current portion $4,103,810  $4,960,475 

 
97
 
 
ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 74 – Property and EquipmentInventory (continued)

Property and equipment
  March 31,  June 30, 
  2011  2010 
By Type:      
Gears products $2,318,298  $1,372,326 
Gearbox products  1,574,965   1,307,940 
Transaxles products  27,687   - 
Other  -   400 
Total $3,920,950  $2,680,666 

  March 31,  June 30, 
  2011  2010 
By Category:      
Raw materials $1,700,232  $896,273 
Work in process  733,173   487,235 
Finished goods  1,487,545   1,297,158 
Total $3,920,950  $2,680,666 

Note 5 – Notes Receivable

Notes receivable as of DecemberMarch 31, 20102011 and June 30, 2010 consists of the following:

  March 31,
2011		  June 30,
2010		 
       
Notes receivable-trade $2,761,806  $440,965 
Notes receivable-other  -   22,500 
         
Total $2,761,806  $463,465 

Note 6 – Advance Payments

Advance payments as of March 31, 2011 and June 30, 2010 consist of the following:

  March 31,
2011		  June 30,
2010		 
       
Inventory $130,247  $33,132 
Equipment  413,743   - 
Land use rights and buildings  2,771,840   4,960,475 
Total  3,315,830   4,993,607 
Less: Current portion  130,247   33,132 
         
Total non current portion $3,185,583  $4,960,475 

Note 7 – Property and Equipment

Property and equipment as of March 31, 2011 and June 30, 2010 consists of the following:

  March 31,  June 30, 
  2011  2010 
       
Manufacturing equipment $3,863,765  $3,272,563 
Office equipment and furniture  60,596   51,306 
Vehicles  127,306   122,965 
Subtotal  4,051,667   3,446,834 
Less: Accumulated depreciation  1,004,747   702,871 
   3,046,920   2,743,963 
8
  December 31,  June 30, 
  2010  2010 
       
Manufacturing equipment $3,792,439  $3,272,563 
Office equipment and furniture  56,978   51,306 
Vehicles  126,638   122,965 
Subtotal  3,976,055   3,446,834 
Less: Accumulated depreciation  900,337   702,871 
   3,075,718   2,743,963 
Add: Construction in progress  933,657   273,606 
         
Total $4,009,375  $3,017,569 
ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note 7 – Property and Equipment (continued)

Add: Construction in progress  2,744,720   273,606 
         
            Total $5,791,640  $3,017,569 

Depreciation expense for the three months ended DecemberMarch 31, 201011 and 20092010 was $90,536$97,361 and $75,728,$81,083, and for the sixnine months ended Decemberended March 31, 201011 and 20092010 was $174,987$272,348 and $147,618,$228,701, respectively.

Note 8 – Goodwill

The following table provides information related to the carrying value of goodwill:

Balance as of June 30, 2009 $3,407,262  $3,407,262 
Goodwill acquired during the year  -   - 
Effect of foreign currency translation  18,606   18,606 
Impairment  -   - 
Balance as of June 30, 2010  3,425,868   3,425,868 
Goodwill acquired during the year  -   - 
Effect of foreign currency translation  102,334   120,940 
Impairment  -   - 
Balance as of December 31, 2010
 $ 3,528,202 
Balance as of March 31, 2011
 $3,546,808 

Note 9 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

 December 31, 2010  June 30, 2010  March 31,
2011		  June 30,
2010		 
            
Accounts payable $4,456,282  $3,419,595  $6,789,211  $3,419,595 
Accrued expenses  89,072   85,328   43,708   85,328 
                
Total $4,545,354  $3,504,923  $6,832,919  $3,504,923 

The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.

Note 10 – Short-Term Bank Loans

Short-term bank loans consist of the following:

  March 31,  June 30, 
  2011  2010 
       
On June 10, 2010, the Company obtained a loan from Agricultural Bank      
of China, the principal of which was paid in full before June 10, 2011.      
Interest was paid monthly, at 5.31% per annum. The loan was guaranteed      
by a third party. $-  $1,428,810 
         
On September 28, 2010, the Company obtained a loan from Agricultural        
Bank of China, the principal of which is due on September 20, 2011.        
Interest is paid monthly, at 5.31% per annum. The loan is guaranteed        
by a third party, Zhejiang Xinchai Co., Ltd.  1,525,000   - 
         
On November 9, 2010, the Company obtained a loan from Agricultural        
Bank of China, the principal of which is due on November 7, 2011.        
Interest is paid monthly, at 5.56% per annum. The loan is guaranteed        
by a third party, Zhejiang Xinchai Co., Ltd.  305,000   - 
 
109
 
 
ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 10 – Short-Term Bank Loans
On December 2, 2010, the Company obtained a loan from Agricultural      
Bank of China, the principal of which is due on November 28, 2011.      
Interest is paid monthly, at 5.56% per annum. The loan is guaranteed      
by a third party, Zhejiang Xinchai Co., Ltd.  1,372,500   - 
         
On December 29, 2010, the Company obtained a loan from Standard        
Chartered Bank (Hong Kong) Limited at 1.98% per annum. Accrued        
interest amounting to $53,701 together with principal is due and payable        
on December 20, 2011.  2,691,010   - 
         
Total short-term bank loans
 $5,893,510  $1,428,810 

Short-term bank loans consist of the following:

  December 31,  June 30, 
  2010  2010 
       
On June 10, 2010, the Company obtained a loan from Agricultural Bank  of China, the principal of which was paid in pull by June 10, 2011. The  interest  was calculated using an annual fixed interest rate of 5.31% and  paid monthly. The loan was secured by a third party. $-  $1,428,810 
         
On September 28, 2010, the Company obtained a loan from Agricultural  Bank of China, the principal of which is due on September 20,  2011. The interest is calculated using an annual fixed interest rate of  5.31% and paid monthly. The loan is secured by a third party, Zhejiang Xinchai Co., Ltd.  1,517,000   - 
         
On November 9, 2010, the Company obtained a loan from Agricultural Bank of China, the principal of which is due on November 7, 2011.The interest is calculated using an annual fixed interest rate of 5.56% and paid monthly. The loan is secured by a third party, Zhejiang Xinchai Co., Ltd..  303,400   - 
         
On December 2, 2010, the Company obtained a loan from Agricultural Bank of China, the principal of which is due on November 28, 2011.The interest is calculated using an annual fixed interest rate of 5.56% and paid monthly. The loan is secured by a third party, Zhejiang Xinchai Co., Ltd..  1,365,300   - 
         
On December 29, 2010, the Company obtained a loan from Standard  Chartered Bank (Hong Kong) Limited, the interest is calculated using an  annual fixed interest rate of 1.98%. The principal and interest is due on December 20,2011.The interest is $ 53,701  2,691,010   - 
         
Total short-term bank loans $5,876,710  $1,428,810 

Note 11 – Other Current Liabilities

Other current liabilities are $1,269,054$1,047,833 and $3,322,277 as of DecemberMarch 31, 20102011 and June 30, 2010, respectively, approximately $438,301respectively. Approximately $440,612 and $425,588 of which represents the last payment due to Keyi for the acquisition of Shengte acquisition in July 2007 for both of the above mentioned periods.2007.

Note 12 – Risk Factors

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 as well as by the general state of the PRC’s economy. The Company’s business may be influenced by changes in 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.etc.

Note 13 – Risk of Concentrations in Sales and PurchasesPurchase

Two customers, Lonking (Shanghai) Forklift Co., Ltd. and Zhejiang Xinchai Co., Ltd., accounted for 34%31% and 27%24%, respectively, of the Company’s sales for the threenine months ended DecemberMarch 31, 2010.2011. The same two customers accounted for 36%23% and 27%40%, respectively, of the Company’s sales for the sixnine months ended DecemberMarch 31, 2010.

11
ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)

One major supplier, Zhejiang Yuyang Machinery Co. Ltd. accounted for approximately 15%11% and 17%20% of the Company’s total purchases for the threenine months ended DecemberMarch 31, 20102011 and six months ended December 31,2010,2010, respectively.

Note 14 – Supplemental Disclosure of Cash Flow Information

 For the Six Months Ended December 31,  For the Nine Months Ended
March 31,		 
 2010  2009  2011  2010 
            
Cash paid for interest $208,051  $43,871  $251,140  $76,107 
Cash paid for income taxes $119,818  $78,163  $211,621  $93,222 

Note 15 – Earnings Per Share

The Company presents earnings per share on a basic and diluted basis. Basic earnings per share have been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding including the dilutive effect of equity securities.. The weighted average number of shares calculated for Diluted EPS excludes the potential common stock that would be exercised under the options granted to employees and warrants granted to agents because of their anti-dilutive effect.

  Three Months Ended December 31, 
  2010  2009 
       
Net income (loss) attributable to Zhongchai Machinery, Inc. $559,559  $46,332 
         
Weighted average common shares (denominator for basic loss per share)  27,613,019   27,613,019 
         
Effect of dilutive securities:  334,184   - 
         
Weighted average common shares (denominator for diluted loss per share)  27,947,203   27,613,019 
         
Basic net income (loss) per share $0.02  $(0.00)
Diluted net income (loss) per share $0.02  $(0.00)

     Six Months Ended December 31,    
  2010  2009 
       
Net income (loss) $1,070,769  $17,977 
         
Weighted average common shares (denominator for basic loss per share)  27,613,019   27,613,019 
         
Effect of dilutive securities:  286,018   - 
         
Weighted average common shares (denominator for diluted loss per share)  27,899,037   27,613,019 
         
Basic net income (loss) per share $0.04  $0.00 
Diluted net income (loss) per share $0.04  $0.00 

 
1210
 
 
ZHONGCHAI MACHINERY, INC.
Notes to Consolidated Financial Statements
(Unaudited)

 
Note 15 – Earnings Per Share (continued)

  Three Months Ended
March 31,		 
  2011  2010 
       
Net income attributable to Zhongchai $1,451,738  $263,861 
Machinery, Inc.        
         
Weighted average common shares  27,613,019   27,613,019 
(denominator for basic income per share)        
         
Effect of dilutive securities:  291,873   - 
         
Weighted average common shares  27,904,892   27,613,019 
(denominator for diluted income per share)        
         
Basic net income per share $0.05  $0.01 
Diluted net income per share $0.05  $0.01 

  Nine Months Ended
March 31,		 
  2011  2010 
       
Net income attributable to Zhongchai $2,522,507  $281,838 
Machinery, Inc.        
         
Weighted average common shares  27,613,019   27,613,019 
(denominator for basic income per share)        
         
Effect of dilutive securities:  287,990   - 
         
Weighted average common shares        
(denominator for diluted income per share)  27,901,009   27,613,019 
         
Basic net income per share $0.09  $0.01 
Diluted net income per share $0.09  $0.01 

Note 16 – Share-Based Payments

On July 7, 2010, the Company issued 1,300,000 options to its employees that shall vest over three years with a life of five years. The grant date fair value was $0.003729 based on the following assumptions: volatility of 10%, risk free interest rate of 1.76%, dividend yield of 0%, and expected life of 5 years. On November 1, 2010, the Company issued 8,333 options to its consultant, Mr. Larry Chinemployee with a life of five years and strike price of $0.50.years. The grant date fair value was $0.070585 based on the following assumptions: volatility of 12.81%, risk free interest rate of 1.17%, dividend yield of 0%, and expected life of 5 years. No estimate of forfeitures was made as the Company has a short history of granting options. For the sixnine months ended DecemberMarch 31, 2010,2011, the Company recorded approximately $3,389$3,827 of stock-based compensation cost.

The fair value of the options was determined based on the number of shares granted and the quoted price of the Company’s common stock on the grant. The fair value of stock-based compensation was determined using the Black-Scholes model.
 
 
1311
 


Item 22.  Management’s Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operations.
 
Zhongchai Machinery, Inc. (“Zhongchai”), a Nevada corporation, does business through its subsidiary, Zhongchai Holding (Hong Kong) Limited, a Hong Kong company (“Zhongchai Holding”), which in turn operates through Zhejiang ZhongChai Machinery Co., Ltd. (the “Zhongchai China”), a wholly owned subsidiary established under the laws of the People’s Republic of China (the “PRC” or “China”), Zhejiang Shengte Transmission Co., Ltd. (“Shengte”) a company established under the laws of the PRC and wholly owned by Zhongchai China, and Xinchang Xian Lisheng Machinery Co., Ltd. (“Lisheng”), a company established under the laws of the PRC and 60% owned by Zhongchai China.  Through its wholly and partially owned operating subsidiaries, Zhongchai is currently engaged in the manufacturing and sale of drivetrain products, such as gears, transmission gearboxes, and drive axels in China.
 
Results of Operations
 
Three Months Ended DecemberMarch 31, 20102011 Compared to Three Months Ended DecemberMarch 31, 20092010
 
Sales
 
Sales increased by $2,861,036$3,841,717 or 151%120% to $4,750,859$7,044,067 for the three months ended DecemberMarch 31, 20102011 compared to $1,889,823$3,202,350 for the three months ended DecemberMarch 31, 2009.2010. Sales for the three months ended DecemberMarch 31, 20102011 consisted mainly the sales of gears and transmission gearboxes in China. The increase in gear and transmission gearbox sales was attributable to the continued increasing of the Company’s production capabilities, increase sales and an increased share of the market due to the recognition of the Company and its products.
 
Cost of Sales and Gross Profit Margin
 
Cost of sales was $3,497,710$5,128,888 for the three months ended DecemberMarch 31, 2010,2011, increasing by $2,014,357,$2,673,935, or 136%109%, from $1,483,353$2,454,953 for the three months ended DecemberMarch 31, 2009.2010. The gross profit margin was approximately 27% for the three months ended March 31, 2011, compared to approximately 23% for the three months ended March 31, 2010. The increase in gross profit margin in this quarter as compared to the same period in the prior fiscal year was attributable mainly to the decrease in transmission gearbox unit cost and therefore the increase in transmission gearbox margin after the expansion in transmission gearbox production capacity and sales.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consisted primarily of labor costs and overhead costs for sales, marketing, finance, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123R (ASC 718).
SG&A expenses decreased by $19,320 to $265,020 in the three months ended March 31, 2011, from $284,340 in three months ended March 31, 2010. The change of SG&A was minimal. Even though the sales have increased 120%, SG&A expenses are almost remained the same compared to the amount at March 31, 2010. There were no significant cost decreases in administration, sales, and professional services.
Net Income (Loss)
Net income was $1,451,738 in three months ended March 31, 2011, compared to a net income of $263,861 in the three months ended March 31, 2010. The increase of net income in the quarter is mainly attributable to increased sales and gross profit.
Nine Months Ended March 31, 2011 Compared to Nine  Months Ended March 31, 2010
Sales
Sales increased by $8,737,892 or 124% to $15,778,471 for the nine months ended March 31, 2011 compared to $7,040,579 for the nine months ended March 31, 2010. Sales for the nine months ended March 31, 2011 consisted mainly the sales of gears and transmission gearboxes in China. The increase in gear and transmission gearbox sales was attributable to the continued increasing of the Company’s production capabilities, increase sales and an increased share of the market due to the recognition of the Company and its products.
12
Cost of Sales and Gross Profit Margin
Cost of sales was $11,599,149 for the nine months ended March 31, 2011, increasing by $6,117,669, or 112%, from $5,481,480 for the nine months ended March  31, 2010. The gross profit margin was approximately 26% for the threenine months ended DecemberMarch 31, 2010,2011, compared to approximately 22% for the threenine months ended DecemberMarch 31, 2009.2010. The increase in gross profit margin in this quarter as compared to the same period in the prior fiscal year was attributable mainly to the decrease in transmission gearbox unit cost and therefore the increase in transmission gearbox margin after the expansion in transmission gearbox production capacity and sales.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (“SG&A”) expenses consisted primarily of labor costs and overhead costs for sales, marketing, finance, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123R (ASC 718).
 
SG&A expenses increased by $316,461$297,345 to $604,411$1,213,875 in the threenine months ended DecemberMarch  31, 2010,2011, from $287,950$916,530 in threenine months ended DecemberMarch 31, 2009. As the sales increased significantly, the company spent more resources in administration, sales, and professional services.

14
Net Income (Loss)
Net income was $559,559 in three months ended December 31, 2010, compared to a net income of $46,332 in the three months ended December 31, 2009. The increase of net income in the quarter is mainly attributable to increased sales and gross profit.
Six  Months Ended December 31, 2010 Compared to Six  Months Ended December 31, 2009
Sales
Sales increased by $4,896,175 or 128% to $8,734,404 for the six months ended December 31, 2010 compared to $3,838,229 for the six months ended December 31, 2009. Sales for the six months ended December 31, 2010 consisted mainly the sales of gears and transmission gearboxes in China. The increase in gear and transmission gearbox sales was attributable to the continued increasing of the Company’s production capabilities, increase sales and an increased share of the market due to the recognition of the Company and its products.
Cost of Sales and Gross Profit Margin
Cost of sales was $6,470,261 for the six months ended December 31, 2010, increasing by $3,443,734, or 114%, from $3,026,527 for the six months ended December 31, 2009. The gross profit margin was approximately 26% for the six months ended December 31, 2010, compared to approximately 21% for the six months ended December 31, 2009. The increase in gross profit margin in this quarter as compared to the same period in the prior fiscal year was attributable mainly to the decrease in transmission gearbox unit cost and therefore the increase in transmission gearbox margin after the expansion in transmission gearbox production capacity and sales.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consisted primarily of labor costs and overhead costs for sales, marketing, finance, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123R (ASC 718).
SG&A expenses increased by $316,665 to $948,855 in the six months ended December 31, 2010, from $632,190 in six months ended December 31, 2009.2010. As the sales increased significantly, the company spent more resources in administration, sales, and professional services.
 
Net Income (Loss)
 
Net income was $1,070,769$2,522,507 in sixnine months ended DecemberMarch 31, 2010,2011, compared to a net income of $17,977$281,838 in the sixnine months ended DecemberMarch 31, 2009.2010. The increase of net income for the period is mainly attributable to increased sales and gross profit.
 
Accounts Receivable
 
Accounts receivable were $2,751,677$6,222,150 after a reduction of $17,297$35,053 for doubtful accounts at DecemberMarch 31, 2010,2011, compared to accounts receivable of $3,618,030 after a reduction of $37,670 for doubtful accounts at June 30, 2010. The decreaseincrease in the amount of accounts receivable is mainly attributable to the increased sales of the Company enforcing a strict payment policy on its customers.during the period reported upon. The payment term for sold products usually is 60-90 days, and, to date, the Company’s experience is that the accounts receivable are within the payment terms.
 
Note Receivable
 
Notes receivable were $3,772,549$2,761,806 at DecemberMarch 31, 2010,2011, compared to $463,465 at June 30, 2010. All the current note receivables are from the trade accounts. Many of the principal customers of the Company use bank accepted forward drafts to pay for their purchases. As the sales increased during the reported period, the amount of bank accepted forward drafts also increased somewhat in line with the sales increase.
 
Foreign Currency Translation
 
All foreign currency assets and liabilities are translated at the period-end exchange rate and all revenues and expenses are translated at the average exchange rate for the period. The effects of translating the financial statements of foreign subsidiaries into U.S. Dollars are reported as a cumulative translation adjustment, a separate component of comprehensive income in stockholder's equity. As the exchange rate between CNY to USD is significantly increased during the sixnine months ended DecemberMarch 31, 2010,2011, the Company recorded a comprehensive income $420,655.

15
$532,387.
 
Liquidity and Capital Resources
 
As of DecemberMarch 31, 2010, Zhongchai had current assets equal to $16,404,613,$19,415,402, current liabilities equal to $15,658,452$17,987,706 and working capital of $746,161.$1,427,696. Zhongchai believes that if there is no sufficient operating capital for its current operations, it will seek an increase in its credit available under current bank loans.
 
Operating Activities
 
Net cash used in operating activities was approximately $1.7$0.38 million for the sixnine months ended DecemberMarch 31, 2010,2011, as compared to $0.31$0.25 million net cash used in operating activities for the same period in the prior fiscal year. The change was due to the increase of $3.3$1.54 million in accounts receivable, $1.64 million in trade related notes receivables,receivable, and $2.3$2.77 million in other current liabilities, the decrease of $1.59 million in accounts payable, and $3.45 million in trade related notes payable during the six-monthnine-month period.
 
Investing Activities
 
Net cash used in investing activities was $0.44$0.96 million for the six-monthnine-month period ended DecemberMarch 31, 2010,2011, a decrease from $2.11$2.72 million for the same period in fiscal year 2009.2010. The decrease was mainly due to the $2.3 million advance payment being returned to the Company in December 2010. The advance payment was originally made by the Zhongchai China to Xinchai Holdings in 2009, for the purchase of land use rights and building for Zhongchai China’s future expansion of its production capabilities. Because there were several legal issues regarding the transferring of title of ownership, the deposit was returned; however, the Company believes that the issues shall be solved in the future and the Company will pursue title ownership.
 
13
Financing Activities
 
Net cash provided by financing activities was $4.5$4.4 million for the six-monthnine-month period ended DecemberMarch 31, 2010,2011, which consisted of the following:  a loan from a bank with an annual fixed interest rate of 5.31% which is due on September 20, 2011; a loan from a bank with an annual fixed interest rate of 5.56% which is due on November 7, 2011; a loan from a bank with an annual fixed interest rate of 5.56% which is due on November 28, 2011; and a loan from a bank with an annual fixed interest rate of 1.98% which is due on December 20, 2011. These loans aggregated a total outstanding loan from a bank in principal amount of $5,876,710.$5,893,510.
 
Other Current Liabilities
 
On DecemberMarch 31, 2010,2011, the other current liabilities of the Company were $1,269,054,$1,047,833, which included $438,301$440,612 due to Keyi from the Shengte acquisition in July 2007, there is no any interest charge or penalty due in respect of this liability. The remaining other current liabilities of $830,753$607,221 are as follows:
 
Professional Fees $124,820  $94,524 
Accrued Consulting Fees $171,950  $123,601 
Tax Payment $83,794  $84,236 
Pre-allocated Warranty Expenses $151,700 
Pension Payment $3,533  $3,832 
Employee Rent Withhold $4,334  $5,767 
Rent Payment $9,471 
Working Meal Payment $713  $993 
Working Cloth Deposit $2,048  $2,333 
Other Trade Related Payments $287,861  $282,464 
Total $830,753  $607,221 
 
As Zhongchai expands its operations and considers additional acquisitions of private companies, divisions or product lines, it may require additional capital for its business development and operations.  Zhongchai does not have any specific sources of capital at this time; therefore, it would need to find additional funding for its capitalization needs.  Such capital may be in the form of either debt or equity or a combination.  To the extent that financing is in the form of debt, it is anticipated that the terms will include various restrictive covenants, affirmative covenants and credit enhancements such as guarantees or security interests.  The terms of any proposed financing may not be acceptable to Zhongchai.  There is no assurance that funding will be identified or accepted by Zhongchai or, that if offered, it will be concluded.

16

Off-Balance Sheet Arrangements
 
The Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
 
Critical Accounting Policies and Estimates
 
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended June 30, 2010, for disclosures regarding Zhongchai Machinery, Inc.’s critical accounting policies and estimates.  The interim financial statements follow the same accounting policies and methods of computations as those for the year ended June 30, 2009.  There were no new accounting policies and estimates during the period ended DecemberMarch 31, 20102011 which affects the Company.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.
 
14
Item 4.  Controls and Procedures.
 
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, the Chief Executive Officer and Acting Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II — OTHER INFORMATION

Item 5.  Exhibits.
 
ExhibitDescription
*31.1Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Peter Wang
*32.1Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Peter Wang
* Filed herewith

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ZHONGCHAI MACHINERY, INC.
  
By:/s/ Peter Wang
Name:Peter Wang
Title:President & Acting Chief Financial Officer
Date: May 12, 2011

Date: February 11, 2011

 
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