ZHONGCHAI MACHINERY, INC
224 Tianmushan Road
Zhongrong Chengshi Huayuan 5-1-602
Hangzhou, 310007 P.R. China
November 22, 2010
FILED VIA EDGAR
Ms. Theresa Messinese
Securities and Exchange Commission
Washington, D.C. 20543
Re: | Zhongchai Machinery, Inc. |
Form 10-K for Fiscal Year Ended June 30, 2010 | |
Filed September 21, 2010 | |
File No. 000-31091 |
Dear Ms. Messinese:
I am responding to your letter to me as the Chief Financial Officer of Zhongchai Machinery, Inc., dated November 5, 2010. We have reproduced the comments of the Staff from that letter below, and below each we have provided the company response.
Our counsel, Andrew Hudders, with the firm of Golenbock Eiseman Assor Bell & Peskoe LLP, 437 Madison Avenue, New York, New York, 10022 (Fax: 212-754-0330 – Tel: 212-907-7349), in connection with the first comment letter, has spoken with Mr. Foti, and based on that conversation we understand that we may provide the intended responses in this letter for the Staff consideration before making the actual amendments in the Form 10-K, if any are required. Please feel free to contact Mr. Hudders.
Form 10-K for Fiscal Year Ended June 30, 2010
Item 7. Management’s Discussion and Analysis of Financial Conditions and Result of Operations, page 23
Operating Results
1. | We note your response to prior comment 4. Your proposed disclosure states that the decrease in SG&A expenses is mainly attributable to a reduction in legal expenses as a result of settling litigation; however, it appears that only $59,611 of the $212,649 decrease in legal expenses is attributable to the settlement. Please revise accordingly. Also in this regard, please quantify the decrease attributed to certain promotion and research and development related expenses in the narrative and provide more detail as to the reason for change. |
Response
Below is the proposed revision to the Form 10K.
“Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the company generally consist labor cost and related overhead costs for sales, marketing, finance, legal, human resources and general management. They also include the expenses recognized for stock-based compensation pursuant to FAS 123(R).
SG&A expenses decreased by $760,796 to $1,287,359 in the year ended June 30, 2010, from $2,048,155 in year ended June 30, 2009. SG&A expenses for fiscal years 2010 and 2009 mainly consist of selling expenses, research and development, labor costs and costs related to being a public company, including professional services related to auditing, legal and other services. .
The decrease in SG&A expenses from 2009 fiscal year to 2010 fiscal year was mainly attributable to (i) a reduction in legal expenses of about $212,649 as a result of settling litigation in 2009, no continuing legal expenses for disposal of IBC Automotive and no continuing legal expenses for attempted restructuring, (ii) the disposal of IBC Automotive which resulted in a reduction of about $213,902 of associated SG&A expenses, and (iii) a reduction in certain promotion and research and development related expenses of $ 110,458. The promotion and research and development expenses fell by 31.05%, because product development for certain gearbox products was completed in fiscal year 2009 and as a result there were no continuing costs. The decrease was also due to savings from the consolidation of Shengte of $48,539. The Company reduced its personal count at the corporate level and implemented cost cutting measures in the fiscal year 2010, resulting in a reduction of payroll expense of approximately $152,790. There was a non-cash expense of $63,606 recognized for stock based compensation related to stock options and warrants granted in the period pursuant to SFAS 123(R), however, this was less than in fiscal year 2009 by approximately $45,183.
Notwithstanding the overall decrease in expenses, there was an increase in SG&A expenses for Zhongchai China of about $81,896 to $636,837 in the year ended June 30, 2010, from $554,941 in fiscal year 2009, or 14.76%. This increase is mainly caused by the increase of production scale of Zhongchai China. Management believes that the SG&A of Zhongchai China will continue to increase as the production scale of Zhongchai China increases. Even though, the R&D expenses were decreased in fiscal year 2010, the management believes that it also will increase as the Company seeks to develop and introduce more new products in the near future.”
Consolidated Statements of Cash Flow, page F-5
2. | We note your response to prior comment 7. Cash payments to acquire inventory, including settlement on related trade notes payable, should be presented as cash outflows for operating activities in accordance with ASC 230-10-45-17. Please revise accordingly. |
Response
We will revise the Consolidated Statements of Cash Flows as below:
For the Years Ended June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 1,072,405 | $ | (1,132,190 | ) | |||
Adjustments to reconcile net income (loss) to net cash | ||||||||
provided by operating activities: | ||||||||
Noncontrolling interest | 263,903 | 45,278 | ||||||
Depreciation and amortization | 323,734 | 215,844 | ||||||
Loss on disposal of assets | 4,847 | - | ||||||
Provision for bad debts | 29,768 | 92,017 | ||||||
Stock based compensation | 63,606 | 108,789 | ||||||
Non-cash payments of rent | - | 3,750 | ||||||
Loss on disposal of a subsidiary-IBC | - | 390,431 | ||||||
Changes in assets and liabilities: | ||||||||
Change in restricted cash | 225,094 | (315,151 | ) | |||||
Accounts receivable | (2,090,134 | ) | (1,154,135 | ) | ||||
Inventory | (1,098,936 | ) | (322,261 | ) | ||||
Notes receivable - trade | (47,470 | ) | (95,257 | ) | ||||
Advance payments | 600,846 | 2,091,724 | ||||||
Other current assets | 3,902 | 184,912 | ||||||
Accounts payable and accrued expenses | 1,926,414 | 838,019 | ||||||
Trade notes payable | (173,760 | ) | 315,151 | |||||
Taxes payable | 168,795 | 54,145 | ||||||
Other current liabilities | 84,033 | 118,561 | ||||||
Total adjustments | 284,642 | 2,571,817 | ||||||
Net cash provided by operating activities | 1,357,047 | 1,439,627 | ||||||
Cash flows from investing activities: | ||||||||
Notes receivable - other | 35,000 | (57,500 | ) | |||||
Advance payments for purchase of land use rights and building | (2,581,392 | ) | ||||||
Additions to property and equipment | (393,720 | ) | (368,312 | ) | ||||
Additions to construction in progress | (272,436 | ) | - | |||||
Proceeds from Minority-40% equity of Lisheng | 293,340 | |||||||
Adjustment in the distribution of dividends | (166,614 | ) | ||||||
Loss on disposal of a subsidiary –IBC, net of cash | (178,965 | ) | ||||||
Net cash used in investing activities | (3,085,822 | ) | (604,777 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from (repayments of) short-term bank loans | (777,351 | ) | 2,197,500 | |||||
Net cash provided by (used in) financing activities | (777,351 | ) | 2,197,500 | |||||
Effect of foreign currency translation on cash | 10,956 | 1,444 | ||||||
Net increase (decrease) in cash and cash equivalents and restricted cash | (2,495,170 | ) | 3,033,794 | |||||
Cash and cash equivalents at beginning of year | 3,990,767 | 956,973 | ||||||
Cash and cash equivalents at end of year | $ | 1,495,597 | $ | 3,990,767 | ||||
Supplemental Schedule of Non Cash Activity | ||||||||
Other current liability for noncontrolling interest ownership buyback | $ | 2,600,000 | $ | - | ||||
3. | In your response to prior comment 8 you state that “there was $2.6 million due to Keyi…” and Note 11 discloses that $2.6 million due to Keyi is included in the balance in other current liabilities; however, your statement of cash flows reflects the amount as a cash outflow in the same period. Please clarify and revise the consolidated financial statements for consistency. |
Response
The Company has not paid Keyi for the noncontrolling interest buyback in the amount of $2,600,000. Accordingly, a liability of $2,600,000 was recorded in the balance in other current liabilities as of June 30, 2010. Pursuant to your comment, the Company will revise the statement of cash flow for the year ended June 30, 2010 to present the effect of the noncontrolling interest buyback as a non cash activity under the Supplemental Schedule of Non Cash Activity.
Note 5 – Advance Payments, page F-12
4. | We note your response to prior comment 11. Current asset classification is used to designate assets that are expected to be ultimately realized in cash (such as inventory), and therefore excludes items where cash has been designated for non-current assets such as PP&E. In this regard, we continue to believe that the classification of the $4.6 million advance payment should be classified as a non-current asset in the balance sheet as it is for the ultimate purchase of a non-current asset. Please revise. |
Response
We will reclassify the $4.9 million advance payment as a non-current asset, including $4,577,495 made by the Zhongchai JV to Zhejiang Xinchai Holdings Co., Ltd., and $382,980 made by Xinchang Xian Lisheng Machinery Co., Ltd. to the government, to purchase land use rights and building.
Consolidated Balance Sheets
June 30, 2010 | June 30, 2009 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,495,597 | $ | 3,990,767 | ||||
Restricted cash | 90,810 | 315,151 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $37,670 | 3,618,030 | 1,540,402 | ||||||
$37,670 and $7,732 at June 30, 2010 and 2009, respectively | ||||||||
Inventory | 2,680,666 | 1,568,445 | ||||||
Notes receivable | 463,465 | 448,655 | ||||||
Advance payments- trade | 33,132 | 2,988,235 | ||||||
Other current assets | 110,131 | 115,266 | ||||||
Total current assets | 8,491,831 | 10,966,921 | ||||||
Property and equipment, net | 3,017,569 | 2,662,924 | ||||||
Goodwill | 3,425,868 | 3,407,262 | ||||||
Advance payments-non current portion | 4,960,475 | |||||||
Other assets | 451 | 65,575 | ||||||
Total assets | $ | 19,896,194 | $ | 17,102,682 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 3,504,923 | $ | 1,562,217 | ||||
Trade notes payable | 142,365 | 315,151 | ||||||
Short-term bank loans | 1,428,810 | 2,197,500 | ||||||
Taxes payable | 224,108 | 54,292 | ||||||
Dividend payable | 381,201 | - | ||||||
Other current liabilities | 3,322,277 | 635,408 | ||||||
Total current liabilities | 9,003,684 | 4,764,568 | ||||||
Total liabilities | 9,003,684 | 4,764,568 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $.001 par value, 500,000,000 shares authorized, | ||||||||
27,613,019 shares issued and outstanding at June 30, 2010 | ||||||||
and 2009, respectively | 27,613 | 27,613 | ||||||
Stock subscription receivable | (33,120 | ) | (33,120 | ) | ||||
Additional paid-in capital | 16,484,097 | 16,484,097 | ||||||
Statutory reserves | 315,152 | 124,460 | ||||||
Retained earnings (accumulated deficit) | (7,558,542 | ) | (8,440,255 | ) | ||||
Accumulated other comprehensive income | 1,361,646 | 1,415,474 | ||||||
Total stockholders’ equity | 10,596,846 | 9,578,269 | ||||||
Noncontrolling interest | 295,664 | 2,759,845 | ||||||
Total equity | 10,892,510 | 12,338,114 | ||||||
Total liabilities and equity | $ | 19,896,194 | $ | 17,102,682 |
In connection with our response to the comments of the Staff of the SEC made above, the company acknowledges that: | |
· | the company is responsible for the adequacy and accuracy of the disclosure in its filing of the Form 10-K; |
· | Staff comments or changes to disclosure in response to Staff comments do not foreclose the SEC from taking any action with respect to the filing; and |
· | the company may not assert Staff comments as a defense in any proceeding initiated by the SEC or any person under the federal securities laws of the United States. |
Sincerely, | |
/S/ Peter Wang | |
Peter Wang, | |
Acting Chief Financial Officer |