(Exact name of registrant as specified in its charter)
Nevada
98-0536305
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
No. 86, Nanhu Avenue, East Lake Development Zone,
Wuhan, Hubei Province 430223
People’s Republic of China
(Address of principal executive offices) (Zip Code)
+8627-8798-5051
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ţ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ţ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ţ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 ¨ Accelerated filer o
Non-accelerated filer o Smaller reporting company ţ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ţ
The aggregate market value of Common Stock held by nonaffiliates of the registrant (14,793,707 shares), based on the closing price of the registrant’s Common Stock as reported on the OTCBB on June 30, 2010 (the last trading day of the registrant’s most recently completed second fiscal quarter) of $1.65, was $24,409,617. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors,
or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 30, 2011, the latest practicable date, there were outstanding 59,470,015 shares of the registrant’s Common Stock, par value $0.001 per share.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
38
Item 6. Selected Financial Data.
39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
53
Item 8. Financial Statements and Supplementary Data.
53
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
53
Item 9A. Controls and Procedures.
54
Item 9B. Other Information.
55
PART III
55
Item 10. Directors, Executive Officers and Corporate Governance.
55
Item 11. Executive Compensation.
59
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
61
Item 13. Certain Relationships and Related Transactions, and Director Independence.
63
Item 14. Principal Accounting Fees and Services.
65
PART IV
67
Item 15. Exhibits, Financial Statement Schedules
67
Signatures
71
Exhibits
As used in this Annual Report on Form 10-K, unless the context indicates or suggests otherwise, reference to “we”, “our”, “us”, “GC China Turbine”, the “Company” or the “Registrant” refer to GC China Turbine Corp., a Nevada corporation and its wholly-owned subsidiaries. “Luckcharm” shall mean Luckcharm Holdings Limited and its wholly-owned subsidiaries, including Wuhan Guoce Nordic New Energy Co., Ltd.
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Disclosure regarding Forward-Looking Statements
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and information we provide in our press releases, telephonic reports and other investor communications, including those on our website, may contain forward-looking statements with respect to anticipated future events and our projected financial performance, operations and competitive position that are subject to risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our expectations.
Except for statements of historical facts, this Annual Report on Form 10-K contains forward-looking statements involving risks and uncertainties. The words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions or variations thereof are intended to be forward looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect the current view of the Registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this Annual Report on Form 10-K entitled “Risk Factors”) relating to the
Registrant’s industry, the Registrant’s operations and results of operations and any businesses that may be acquired by the Registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Although the Registrant believes that the expectations reflected in the forward looking statements are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the Registrant’s financial statements and the related notes included in this report on Form 10-K.
Such risks and uncertainties include, without limitation, our ability to raise capital to finance our operations, the effectiveness, profitability and the marketability of our products, our ability to protect our proprietary information, general economic and business conditions, the impact of technological developments and competition, adverse results of any legal proceedings, the impact of current, pending or future legislation and regulation of the wind power industry, our ability to enter into acceptable relationships with one or more of our suppliers and the ability of such suppliers to manufacture products or components of an acceptable quality on a cost-effective basis, our ability to attract or retain qualified senior management personnel, including sales and marketing and technical personnel and other risks detailed from time to time in our filings with the SEC, including those described in Item 1A below. We do not
undertake any obligation to update any forward-looking statements.
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PART I
ITEM 1. BUSINESS.
Overview
We are a holding company whose primary business operations are conducted through a wholly-owned Hong Kong subsidiary, Luckcharm Holdings Limited (“Luckcharm”) and its wholly-owned Chinese subsidiary Wuhan Guoce Nordic New Energy Co., Ltd. (“GC Nordic”). Through GC Nordic, we are a wind turbine manufacturer located in Wuhan City of Hubei Province, China. With the idea of “soft design,” we sought to develop a wind turbine technologies ranging from 2-blade to 3-blade in the wind energy space that would be reliable and cost-effective to manufacture. Although the 2-blade technology is less commonly used in the China wind farm market compared to 3-blade technology, the development project that created the 2-bladed wind turbine has been operating for 10 years with 97% availability (availability is calculated as follow: [annual total hours (24×365) - turbine downtime - maintenance time]/annual total hours). Our
current product is a 2-blade 1.0 megawatt (“MW”) utility scale turbine with another 1.1 megawatt 2-blade utility scale wind turbine prototype under trial assembly, which is upgraded based on the 1.0 megawatt wind turbine. Designs for a 2.5 megawatt and larger offshore megawatt utility scale turbines are also in development. We are developing a track record and brand-awareness through the execution of our initial sales contracts.
We were incorporated under the laws of the State of Nevada on August 25, 2006 under the name of Visa Dorada Corp. On May 18, 2009, we effected a 1-for-2 reverse stock split to improve trading liquidity, and enhance overall shareholder value. In an effort to grow our company, on May 22, 2009, we entered into a letter of intent with GC Nordic as described below, and on June 11, 2009 we changed our name to Nordic Turbines, Inc. We subsequently changed our name to “GC China Turbine Corp.” on September 14, 2009.
Our Acquisition of Luckcharm and Related Financing
On May 22, 2009, we entered into a Letter of Intent (“LOI”) with GC Nordic whereby we would purchase all of the issued and outstanding shares of GC Nordic from its shareholders, and the shareholders of GC Nordic would receive a 54% ownership interest in the Company. Further on July 31, 2009, an Amended and Restated Binding Letter of Intent (“Revised LOI”) was entered among us, Luckcharm, GC Nordic, New Margin Growth Fund L.P. (“New Margin”), Ceyuan Ventures II, L.P. (“CV”) and Ceyuan Ventures Advisors Fund II, LLC (“CV Advisors”) whereby we would purchase all of the issued and outstanding shares of Luckcharm from the shareholders, and the shareholders of Luckcharm would receive a 54% ownership interest in the
Company. The Revised LOI further provided that (i) upon consummation of the reverse acquisition, as described below, we would directly or indirectly own all of the outstanding capital stock of GC Nordic; (ii) the closing date for the reverse acquisition would be thirty days from the date GC Nordic completed an audit of its financial statements as required under U.S. securities laws; and (iii) the obligation of GC Nordic to consummate the reverse acquisition was conditioned upon an additional financing of at least US$10,000,000 into the combined entities at closing.
On May 22, 2009, under the terms of the LOI we provided GC Nordic with a secured bridge loan in the amount of US$1,000,000 to be applied toward legal and audit expenses, and working capital. Upon the closing of the reverse acquisition, the bridge loan became an intercompany loan. We had been provided these funds through promissory notes from two foreign accredited investors, and these notes were later assigned to Clarus Capital Ltd. (“Clarus”).
On July 31, 2009, we, Luckcharm, GC Nordic, New Margin, CV and CV Advisors entered into an amended and restated financing agreement (the “Financing Agreement”). The Financing Agreement provided that we agreed to lend Luckcharm (i) US$2,500,000 before July 24, 2009 and (ii) US$7,500,000 before July 31, 2009. In order to guarantee Luckcharm’s lending obligations under the Financing Agreement, New Margin loaned US$5,000,000 to us and CV and CV Advisors loaned the aggregate of US$5,000,000 of the above amounts to us, and we in turn loaned US$10,000,000 to Luckcharm for purposes of working capital. Upon the consummation of the reverse acquisition, the US$10,000,000 convertible loan made to us by New Margin, CV and CV Advisors converted into shares of our common stock at a conversion
price equal to US$0.80 per share, and the US$10,000,000 we loaned to Luckcharm became an intercompany loan and was eliminated in the consolidation of our financial statements with those of Luckcharm.
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On September 30, 2009, we entered into a voluntary share exchange agreement (“Exchange Agreement”) with Luckcharm, GC Nordic and Golden Wind Holdings Limited, a company incorporated in the British Virgin Islands and the parent entity of Luckcharm (“Golden Wind”).
On October 30, 2009, the reverse acquisition contemplated by the Exchange Agreement was consummated. As a result of the reverse acquisition, Luckcharm became our wholly-owned subsidiary, and we acquired the business and operations of GC Nordic. At the closing of the reverse acquisition, we issued 32,383,808 shares of our common stock to Golden Wind in exchange for 100% of the issued and outstanding capital stock of Luckcharm and US$10,000,000 in previously issued convertible promissory notes were converted into 12,500,000 shares of our common stock. Our acquisition of Luckcharm pursuant to the share exchange agreement was accounted for as a reverse acquisition wherein Luckcharm is considered the acquirer for accounting and financial reporting purposes.
Contemporaneous with the reverse acquisition, we also completed a private placement pursuant to which investors agreed to purchase 6,400,000 shares of our common stock, at a purchase price of US$1.25 per share for an aggregate offering price of US$8,000,000. Additionally, we entered into (i) an amendment to a convertible promissory note held by Clarus in the amount of US$1,000,000 revising the conversion feature of such note (“Clarus Note I”), and (ii) a Note Purchase Agreement with Clarus whereby Clarus agreed to loan US$1,000,000 to us upon the effective date of delivery of 20 wind turbine systems by us to our customers in the form of a convertible promissory note bearing no interest, having a maturity date of 2 years from the date of issuance and convertible into shares of our common stock at US$2.00 per share at anytime at holder’s option (“Clarus Note II”). Both notes are automatically convertible into shares
of our common stock at $2.00 per share on the six-month anniversary upon the effective date of delivery of 20 wind turbine systems by us to our customers. In connection with the private placement, we also issued 640,000 warrants to investors and 560,000 warrants to placement agents and advisors to purchase our common stock with each warrant having an exercise price of US$1.00 per share and being exercisable at any time within 3 years from the date of issuance. On June 12, 2010, six months after the delivery of 20 wind turbines systems, Clarus Note I was automatically converted into 500,000 shares of our common stock at the conversion price of $2.00 per share. On August 11, 2010, the Company and Clarus entered into an amendment to the Note Purchase Agreement. The two parties reached
a consensus to extend the issuance of Clarus Note II to November 15, 2010, with an extension payment by Clarus of US$10,000. The Company and Clarus have agreed to terminate the Clarus Note II, with negotiation on detailed terms ongoing.
In connection with the private placement, Golden Wind entered into a make good escrow agreement with the investors in the private placement offering, whereby Golden Wind pledged 640,000 shares of our common stock to the investors in order to secure our make good obligations under the private placement. In the make good escrow agreement, we established a minimum after-tax net income threshold of US$12,500,000 for the fiscal year ended December 31, 2010. If the minimum after-tax net income threshold for the fiscal year 2010 is not achieved, then the investors will be entitled to receive additional shares of our common stock held by Golden Wind based upon a pre-defined formula agreed to between the investors and Golden Wind. Golden Wind deposited a total of 640,000 shares of our common stock, into escrow with Capitol City Escrow, Inc. under the make good escrow agreement. Additionally,
if the minimum after tax net income threshold for the fiscal year 2010 is not achieved, then the investors will be entitled to have the exercise price of the warrants adjusted lower based upon a pre-defined formula agreed to between the investors and us. As the minimum after-tax net income threshold of US$12,500,000 was not achieved for the fiscal year ended December 31, 2010, the shares of our common stock and exercise price of the warrants under our make good obligations are subject to adjustment. Calculations of such adjustment will be finalized subsequent to the filing of this Annual Report on Form 10-K.
Background and History of Luckcharm and its Operating Subsidiaries and Affiliates
Luckcharm was originally incorporated in Hong Kong on June 15, 2009 by Fernside Limited. On June 29, 2009, Fernside Limited transferred all of the equity interest of Luckcharm to Golden Wind. On August 1, 2009, Luckcharm entered into an agreement to acquire 100% of the equity of GC Nordic from the original nine individual shareholders (the “Founders”). On August 5, 2009, GC Nordic received approval of this acquisition from the Bureau of Commerce of the Wuhan City, Hubei Province, PRC.
Prior to the reverse acquisition, on September 30, 2009, each of the Founders entered into a Call Option Agreement and a Voting Trust Agreement with Xu Hong Bing, the sole shareholder of Golden Wind. The Call Option Agreements provide that, upon the achievement of certain conditions during the six years following entry into the Call Option Agreements, the Founders can acquire from Golden Wind shares of our common stock issued to Golden Wind in the reverse acquisition (the “BVI Shares”), at a price per share of US$0.0001. The call rights are exercisable in tranches upon the satisfaction of certain conditions set forth in the Call Option Agreements and summarized below, and if all such conditions are met, the Founders will have the right to acquire 100% of the BVI Shares.
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Condition
Percentage of shares as to which there is a right of acquisition
Status
1- Entry by the respective Founder with GC Nordic into an employment agreement for a term of 5 years
30%
Achieved
2 - GC Nordic achieving no less than USD $0.3M in after-tax net income for 2009
30%
Achieved
3 - GC Nordic achieving no less than USD $1.0M in after-tax net income for 2010
30%
Achieved
4 - GC Nordic achieving no less than USD $2.0M in after-tax net income for fiscal year 2010 or no less than USD $2.0M in after-tax net income for 2011
10%
Achieved
(due to GC Nordic achieving no less than USD $2.0M for fiscal year 2010)
If GC Nordic achieves no less than USD $2.0M for fiscal year 2010, then Conditions 3 and 4 are automatically met and the Founders have the right to acquire 40% of the BVI Shares. The rights to acquire the BVI Shares under the Call Option Agreements are allocated to the Founders in the same proportion as their ownership interest in GC Nordic.
The Voting Trust Agreements create a voting trust that appoint each Founder as a voting trustee and provide each Founder with all rights and powers of ownership with respect to their respective portion of the BVI Shares, including without limitation the right to vote and receive dividends thereon. The right to vote includes issues such as selling or transferring all or any of such Founder’s portion of the BVI Shares, and the appointment and election of directors of Golden Wind, Luckcharm or GC China. Through the Voting Trust Agreements, the Founders collectively obtained 100% voting interests with respect to the BVI Shares, which are allocated among the Founders in the same proportion as their ownership interest in GC Nordic. The BVI Shares are being
held in escrow by Global Law Office, 15th Floor, Tower 1, China Central Place, No. 81 Jianguo Road, Beijing, China until the escrow agent receives a call exercise notice to deliver the respective BVI Shares to the respective Founder. Each Voting Trust Agreement has the same term as the corresponding Call Option Agreement and terminates when all of the BVI Shares referenced in such Call Option Agreement have been acquired or forfeited.
Outside of the Founders rights under the Call Option Agreement and Voting Trust Agreement to acquire, control and vote the BVI Shares, the Founders have no control or ownership over Golden Wind or any capital stock of Golden Wind. For information on the percentage beneficial ownership of the BVI Shares reported by our officers and directors, please refer to the section entitled “Certain Beneficial Owners and Management.”
GC Nordic was organized in the PRC on August 21, 2006 as a limited liability company upon the issuing of a license by the Administration for Industry and Commerce of the Wuhan City, Hubei Province, PRC with an operating period of 30 years to August 9, 2039. On August 5, 2009, all of the outstanding equity interests of GC Nordic were acquired by Luckcharm, and GC Nordic became a wholly-owned subsidiary of Luckcharm. GC Nordic holds the government licenses and approvals necessary to operate the wind turbines business in China.
GC Nordic was founded by nine individual shareholders, including Mr. Hou Tie Xin, Mr. Xu Jia Rong, Mr. Wu Wei, Mr. Zhang Wei Jun, Mr. Bu Zheng Liang, Mr. Zuo Gang and Mr. He Zuo Zhi, who were shareholders of Wuhan Guoce Science and Technology Corp (“Guoce Science and Technology”), and Ms. Qi Na and Ms. Zhao Ying, who were senior management of Guoce Science and Technology. After GC Nordic was organized in August 2006, Mr. Hou Tie Xin, Mr. Xu Jia Rong and Mr. Bu Zheng Liang remained as chairman, general manager and engineer of Guoce Science and Technology, respectively, Ms. Qi Na, Ms. Zhao Ying, Mr. Wu Wei and Mr. Zhang Wei Jun left Guoce
Science and Technology’s management team and focused on GC Nordic’s management and operation. Mr. Zuo Gang and Mr. He Zuo Zhi currently do not hold any position in either Guoce Science and Technology or GC Nordic. Guoce Science and Technology is a technology provider to the Chinese utilities industry and it has a long history as a preferred provider to the utilities industry in China since 1995 under the former name Wuhan Guoce Electric Power New Technology Co., Ltd. (“Guoce New Technology”). In 2002 Guoce New Technology was restructured and was renamed as Wuhan Guoce Science and Technology Corp. Guoce Science and Technology is a producer of hydraulic systems and electronic control systems that enjoy dominant market share of approximately 40% in the PRC hydro-electric generation industry. GC Nordic was founded as part of a strategy of expanding Guoce Science and Technology’s product offerings in a business that closely parallels its current business. Guoce Science
and Technology is a company with great reputation in the industry with businesses covering the whole power industrial chain with productions ranging from power generation to power transmission to every sector of power utilization.
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Our Corporate Structure
The following diagram illustrates our corporate structure:
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(1)
The management of GC China Turbine currently includes: Hou Tie Xin as Chairman, Qi Na as Chief Executive Officer and Director, Ping Ye as Chief Financial Officer, Tomas Lyrner as Chief Technology Officer, Zhu Wenyao as Chief Operating Officer, and Marcus Laun, Cary Zhou and Zhang Weijun as members of the board of directors. Mr. Hou and Ms. Qi, among others, are each parties to a Call Option Agreement dated September 30, 2009 pursuant to which
they have the right to acquire the shares of GC China Turbine common stock issued to the Golden Wind in connection with the Exchange Agreement, and to a Voting Trust Agreement dated September 30, 2009 pursuant to which they are voting trustees under a voting trust created to hold all such shares. See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
(2)
The management of Luckcharm is comprised of Xu Hong Bing as the sole director.
(3)
The management of GC Nordic includes: Hou Tie Xin as Chairman, Qi Na as Chief Executive Officer and Director, Xu Jia Rong as Director, Ping Ye as Chief Financial Officer, Wu Wei, Zhang Hanyun, Zhu Wenyao and Zhang Weijun as Deputy General Managers.
(4)
The management of Guoce Nordic AB includes: Hou Tie Xin as Chairman, Tomas Lyrner as Chief Executive Officer and Director, and Wu Wei and Xu Hailian as Directors.
(5)
The management of Baicheng Guoce includes: Hou Tie Xin and Qi Na as Directors, and Zhang Yun as General Manager and Director.
(6)
The management of Baicheng Kairui includes: Qi Na as the sole Director and General Manager.
(7)
The management of GC Windpower AB includes: Hou Tie Xin as Chairman, Tomas Lyrner as Chief Executive Officer and Director, and Wu Wei and Xu Hailian as Directors.
(8)
The management of Taonan Guoce includes: Qi Na as the Managing Director, Jiang Min as General Manager, and Guo Li Hua as the person in charge of Finance.
Our Industry
Wind Power
Wind power is the conversion of wind energy into more useful forms of energy, such as electricity, using wind turbines. Humans have been using wind power for at least 5,500 years to propel sailboats and sailing ships, and architects have used wind-driven natural ventilation in buildings since similarly ancient times.
Compared to the environmental effects of traditional energy sources, the environmental effects of wind power are relatively minor. Wind power consumes no fuel, and emits no air pollution, unlike fossil fuel power sources. The energy consumed to manufacture and transport the materials used to build a wind power plant is equal to the new energy produced by the plant within a few months of operation.
The power in the wind can be extracted by allowing it to blow past moving wings that exert torque on a rotor. The amount of power transferred is directly proportional to the density of the air, the area swept out by the rotor, and the cube of the wind speed. The mass flow of air that travels through the swept area of a wind turbine varies with the wind speed and air density. Because so much power is generated by higher wind speed, much of the average power available to a windmill comes in short bursts. As a general rule, wind generators are practical where the average wind speed is 10 mph (16 km/h or 4.5 m/s) or greater. An ideal location would have a near constant flow of non-turbulent wind throughout the year and would not suffer too many sudden powerful bursts of wind. An important turbine siting factor is access to local demand or transmission capacity. The wind blows faster at higher altitudes because of the reduced influence
of drag on the surface (sea or land) and the reduced viscosity of the air. The increase in velocity with altitude is most dramatic near the surface and is affected by topography, surface roughness, and upwind obstacles such as trees or buildings. As the wind turbine extracts energy from the air flow, the air is slowed down, which causes it to spread out and divert around the wind turbine to some extent. Betz’ law states that a wind turbine can extract at most 59% of the energy that would otherwise flow through the turbine’s cross section. The Betz limit applies regardless of the design of the turbine. Intermittency and the non-dispatchable nature of wind energy production can raise costs for regulation, incremental operating reserve, and (at high penetration levels) could require demand-side management or storage solutions.
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Wind Turbines
A wind turbine is a rotating machine which converts the kinetic energy in wind into mechanical energy. If the mechanical energy is used directly by machinery, such as a pump or grinding stones, the machine is usually called a windmill. If the mechanical energy is then converted to electricity, the machine is called a wind generator, wind turbine, wind power unit (WPU), wind energy converter (WEC), or aerogenerator.
Wind turbines require locations with constantly high wind speeds. Wind turbines are designed to exploit the wind energy that exists at a location. Small wind turbines for lighting of isolated rural buildings were widespread in the first part of the 20th century. The modern wind power industry began in 1979 with the serial production of wind turbines by Danish manufacturers Kuriant, Vestas, Nordtank, and Bonus. These early turbines were small by today’s standards, with capacities of 20–30 kilowatts each. Since then, they have increased greatly in size, while wind turbine production has expanded to many countries.
Wind Industry
The wind industry is the world’s fastest growing energy sector and offers an excellent opportunity to begin the transition to a global economy based on sustainable energy. A report published by The Global Wind Energy Council (“GWEC”) and Greenpeace in October 2008 references multiple studies that indicate that the long-term potential supply using existing technology could be double the current worldwide electricity demand. Prior GWEC reports indicate that there are no technical, economic or resource barriers to supplying 12% of the world’s electricity needs with wind power alone by 2020, as compared to the challenging projection of two thirds increase of electricity demand by 2020.
The exceptions for wind power market growth in 2010 were mixed, as the low level of orders seen during the financial crisis worked their way through the system. The results of this were felt much more strongly in 2010 than in the previous year, and the overall annual market shrunk by 7% to 35.8 gigawatts (“GW”), down from 38.6 GW in 2009. The new capacity added in 2010 represents investments worth EUR 47.3 billion (USD 65 billion).
The US market installed almost 50% less than in 2009. In the European market, new installed capacity in 2010 was 7.5% down from 2009, despite a 50% growth of the offshore market in countries like the UK, Denmark and Belgium, and rapid growth in Eastern Europe, led by Romania, Bulgaria and Poland.
Despite the decrease in annual installations, global wind power capacity increased by 22.5% during the year, and now stands at 194.4 GW. The main markets driving growth continue to be Asia and Europe, which installed 19 GW and 9.9 GW, respectively, in 2010. However, emerging markets like Latin America are beginning to take off, led by Brazil and Mexico. In cumulative terms, the Latin America and Caribbean market grew by more than 53% during 2010. For the first time in 2010, more than half of all new wind power was added outside of the traditional markets of Europe and North America. This was mainly driven by the continuing boom in China, which accounted for nearly half of the new global wind installations, with 16.5 GW. China now has 42.3 GW of wind power, and has surpassed the US to claim the number one spot in terms of total installed capacity.
The outlook for 2011 is more optimistic, with overall investment in wind power in 2010 up by 31% to reach USD 96 billion (EUR 70.4 billion), according to Bloomberg New Energy Finance (BNEF). This investment gives rise to some optimism going forward for the wind industry. It is notable that 38% of this total investment was accounted for by China and by large European offshore wind farms.
Chinese Wind Industry
According to the third National Wind Energy Census, China’s total exploitable capacity for both land-based and offshore wind energy is around 700-1,200 GW. Compared to the other leading global wind power markets, China’s wind resources are closest to that of the United States, and greatly exceed resources in India, Germany or Spain.
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Due to varied wind resources across China and differing technical and economic conditions, wind power development to date has been focused on a few regions and provinces, including: Inner Mongolia, the Northwest, the Northeast, Hebei Province, the Southeast coast and offshore islands.
China’s wind market doubled every year between 2006 and 2009 in terms of total installed capacity, and it has been the largest annual market since 2009. In 2010, China overtook the United States as the country with the most installed wind energy capacity by adding 16,500 MW over the course of the year, a 64% increase over 2009 in terms of cumulative capacity, reaching 42.3 GW in total. According to Bloomberg New Energy Finance, the growth in installed capacity was driven by a record level of investment in wind power in China, which exceeded USD 20 billion in 2009. In the third quarter of 2010, China’s investment in new wind power projects accounted for half of the global total.
In addition, the Chinese government report “Development Planning of New Energy Industry” calculated that the cumulative installed capacity of China’s wind power will reach 200 GW by 2020 and generate 440 TWh of electricity annually, creating more than RMB 250 billion (EUR 28 billion / USD 38 billion) in revenue.
China Wind Power Potential
Today, wind power in China is developing rapidly and receives particularly strong government support. The new Renewable Energy Law and its detailed incentive policies reflect the Chinese government’s intention to build up this industry. By 2020, China plans to have 30 gigawatts of wind power.
According to the China Academy of Meteorological Sciences, the country possesses a total 235 gigawatts of practical onshore wind power potential that can be utilized at 10 meters above the ground. Annual potential production from wind power could reach 632.5 gigawatts if the annual, full-load operation reaches 2,000-2,500 hours. A detailed survey is needed, however, for economically utilizable wind power resources. The potential for offshore wind power is even greater, estimated at 750 gigawatts. Offshore wind speed is higher and more stable than onshore wind, and offshore wind farm sites are closer to the major electricity load centers in eastern China. Areas rich in wind power resources are mainly concentrated in two areas: northern China’s grasslands and Gobi desert, stretching from Inner Mongolia, Gansu and Xinjiang provinces; and in the east coast from Shandong and Liaoning and the southeast coast in Fujian and Guangdong
provinces.
In 1986, China built its first wind farm in Rongcheng, Shandong Province. From 1996 to 1999, in-grid wind power developed very quickly, entering a localization stage. By the end of 2009, the total installed capacity of wind turbines in China has reached 25,805.3MW, representing a year on year growth of 114%. Liaoning, Xinjiang, Inner Mongolia and Guangdong experienced the fastest wind power development, representing 60% of the installed power generating capacity of national wind power.
Our Products
Our Company’s current product is the 1.0MW two-bladed wind turbine which is designed with technologies of soft concept, compact transmission chain, overall damping, condition monitoring and other proprietary technologies that reduce vibration and overheating, lower installation and transportation cost as well as improve service life and utilization rate with the ultimate benefits of improving wind turbine quality and lowering the costs of manufacturing, installation and maintenance.
We use “soft design” which is a combination of a passive yaw system, teeter style hub and the soft tower. By using the “soft design” technology as a damping system for the vibration and loads of the system, we can produce a transmission chain that does not have to absorb those forces. Therefore, we believe the transmission chain is more compact, cheaper, proprietary, and more reliable than other designs.
Wind turbines produced based on such “soft design” technology offer a new choice and significant opportunities for many wind farm owners who we believe will benefit from reduced vibration and overheating and improved service life and utilization rate. We also believe that wind turbines produced using such “soft design” technology can be competitive in terms of manufacturing, installation, and maintenance costs. If these wind turbines produced using “soft design” are able to achieve these benefits, they may offer the potential to improve overall wind turbine quality and increase investment returns of the owners.
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We believe the key advantages of our wind turbine with influences on costs by proprietary technologies are as follows:
Proprietary Technologies
Design Features
Influence on Costs and Benefits
Soft technology
Patented passive yaw system
· Yaw is a term used to describe the mechanical system of aiming the turbine blades into the wind.
· GC China Turbine has a passive yaw system, eliminating the need for mechanical yaw braking system.
· The passive yaw reduces loads on the tower and foundation thereby allowing for a lighter tower and smaller foundation as well as reducing the manufacturing costs for a complete machine.
Patented teeter-style hub
· The teeter-style hub reduces the negative effects of imbalanced air pressure on the blades not unlike the function of rubber engine mounts in a motor vehicle. The rubber bushings greatly reduce twisting loads on the transmission chain, tower and other components and increase the service lives of these components. This technology is characterized by rubber mountings of the blades to the main gearbox.
Soft tower
· The soft tower is lighter than a stiff tower so as to directly save raw material costs. This is achieved by designing a tower that is allowed to flex during operation. This is partially possible because the turbine and blades are significantly lighter than a three-blade system.
Compact transmission chain
Patented support tube
· Generator, gearbox and high-speed shaft are directly connected which greatly improves the service lives of the key components in transmission chain.
Integrated gearbox
· Because GC China Turbine’s design eliminates the main shaft and main bearing of three-bladed designs, the Company enjoys a lower cost profile and eliminates a significant component sourcing bottleneck.
· Integrated main shaft has a longer service life, improves the availability rate and reduces maintenance costs.
Overall damping design
Teeter and hub rubber elements, nacelle chassis rubber elements
· Significantly reduces fatigue loads on all moving parts, extends the service life and reduces operational costs.
Condition monitoring
Conducts maintenance according to actual conditions, instead of preventive and post-fault maintenance
· Extends service life of wind turbine and reduces maintenance costs.
Our products also face the following challenges, and we are working to improve our two-blade wind turbine.
Challenges
Details
Solutions
Noise
Slightly louder than three-blade wind turbine
· Wind farm is normally far away from residential areas.
· GC China Turbine’s two-blade 1.0MW wind turbine fully complies with IEC 61400-11 standard set by IEC.
Efficiency
Slightly lower than pitch-control turbines under low wind (<3.5 meter per second) and high wind (>23.5 meter per second) conditions
· We have upgraded our 1.0MW stall-type turbines into a 1.1MW pitch-control type.
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In addition to our current 1.0MW two-blade wind turbine, we have completed the design process of an upgraded type of 1.1MW turbine, based on such 1.0MW turbine, that is currently in the prototype assembly stage. We also have another 2.5MW turbine under development. Compared to the 1.0MW turbine, these two newly developed products will enable us to expand our business into wind farms that require turbines to have larger unit power and Low Voltage Ride Through (“LVRT”) capability, a new requirement issued by PRC’s State Electricity Regulatory Commission for wind turbines to be capable of maintaining continuous operation during and after abrupt voltage dips, which allows the power grid to be adjusted more quickly, thereby improving the overall safety and stability of the grid. The LVRT requirements do not affect our current orders that have already been executed.
Our Sales and Marketing
We will continue to compete in the mainstream wind farm bids as well as seek out more niche projects where the light weight and easy transportation and installation of our wind turbine based on the “soft design” concept offers what we believe to be additional advantages over the competition. These projects would include mountainous areas. We intend to bid for offshore application wind turbine bids when the research and development for larger offshore wind turbines is completed.
Using the “soft design” technology, our strategic focus is to be a low cost provider with our current core products and new products which we may launch. Our development strategy for 2011 is a medium to long-term strategy, centering on the research and development of 2.5MW wind turbines while emphasizing low-cost control, developing the 2.5MW wind turbine into a product suitable for wind farms of IEC III class or the lowest IEC III class, while improving the quality of 1.0MW stall-type and 1.1MW pitch-type wind turbines and steadily expanding our target markets.
Our Customers
We have executed six wind farm contracts as described below with the following entities: Daqing Longjiang Wind Power Co., Ltd (“Daqing Longjiang”), Wuhan Kaidi Electric Engineering Co., Ltd (“Wuhan Kaidi”), Kelipu Wind Power Co., Ltd. (“Kelipu”), Shenzhen Guohan Investment Group (“Shenzhen Guohan”), Guoneng Fengshen (Beijing) New Energy Technology Co., Ltd (“Guoneng Fengshen”) and China Guodian Inner Mongolia Xilinguolemeng Tianhe (“China Guodian”).
1. Daqing Longjiang
Daqing Longjiang has signed a wind turbine purchasing contract dated August 30, 2007 (the “DL Contract”) with GC Nordic for 50 units of 1.0MW wind turbines. These wind turbines will be installed in Daqing City, Heilongjiang Province. Daqing Longjiang was established in 2007 and is a company within the Daqing Ruihao Energy Group specializing in the research, development, construction and operation of wind power generation. Daqing Longjiang is mainly engaged in wind power project operations of new energy and high efficient energy-saving technology and environmental protection technology and currently possesses the exclusive development right of wind power in Dumeng County.
Under the terms of the DL Contract, GC Nordic was obligated to deliver ten of the wind turbines within four months after signing the DL Contract, and the balance of 40 wind turbines are to be delivered within ten months after receiving notice from Daqing Longjiang requesting them. GC Nordic delivered the first ten wind turbines and upon request by Daqing Longjiang , agreed not to deliver the remaining 40 wind turbines until requested by Daqing Longjiang. We anticipate entering into an additional agreement with Daqing Longjiang for the future delivery of the remaining 40 wind turbines. The total contract is valued at approximately US$46 million, of which approximately
US$2.9 million is included in our accounts receivable at December 31, 2010.
2. Wuhan Kaidi
Wuhan Kaidi has signed a purchase contract in September 2008 (the “WK Contract”) with GC Nordic for 50 units of 1.0MW wind turbines. These wind turbines will be installed in Pinglu City, Shanxi Province. Wuhan Kaidi is joint-stock high-tech enterprise registered at Wuhan East Lake High-Tech Development Zone, and it is a subsidiary of Wuhan Kaidi Holding Investment Co., Ltd. Wuhan Kaidi was established in 2004 with businesses in coal-fired power generation, biomass power generation, wind power, hydropower and other power construction including power plant consulting, design, equipment procurement, construction, installation and commissioning and commercial operation.
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Under the terms of the WK Contract, GC Nordic is obligated to deliver 50 wind turbines for Wuhan Kaidi’s Kaidi Power Pinglu Wind Farm project, of which GC Nordic has delivered ten wind turbines. The purchase price is due in several installments. The total contract is valued at approximately US$47 million, of which approximately US$3.8 million is included in our accounts receivable at December 31, 2010.
3. Kelipu
Kelipu executed a purchase contract with GC Nordic for 50 units of 1.0MW wind turbines in July 2009. These wind turbines will be installed at Kelipu’s wind farm located in Tu Quan County of Inner Mongolia. However, as of date of this report, Kelipu has applied for but has not yet received final approval of its wind farm entry procedure from the local government. Therefore, we have not yet delivered any wind turbines under this contract as implementation of this contract with Kelipu has been delayed until it has received the relevant approvals from the local government. The total contract
is valued at approximately US$36.2 million. However, according to new PRC requirements, turbines that are connecting to the grid in the future will need to be equipped gradually with LVRT capability and larger unit power. As a result, the Kelipu orders that have not been executed may be cancelled as the 1.0MW turbine does not qualify for the LVRT requirements.
4. Shenzhen Guohan Investment Group
Shenzhen Guohan signed a purchase contract with GC Nordic in December 2009 for 10 units of 1.0MW. The parties have agreed to delay the implementation of this contract until the wind farm permitting procedure and infrastructure are completed. Therefore, we have not yet delivered any wind turbines under this contract. The total contract is valued at approximately US$8.2 million. However, the Shenzhen Guohan orders that have not been executed may be cancelled as the 1.0MW turbine does not qualify for the LVRT requirements.
5. Guoneng Fengshen
We announced the execution of a cooperation agreement with Guoneng Fengshen on March 24, 2010. Effective February 9th, 2010, we signed a binding cooperation agreement with Guoneng Fengshen as well as a sales contract for 50 wind turbine units signed on the same day and that are slated for installation at the first phase of a new wind farm project undertaken by Guoneng Fengshen. The total contract is valued at approximately US $36 million, of which approximately US$30.6 million is included in our accounts receivable at December 31, 2010, and we have delivered 50 wind turbine units under this contract.
6. China Guodian
We entered into a wind power equipment contract with China Guodian, effective June 18, 2010, for 50 wind turbine units. The total contract is valued at approximately US $34 million, of which approximately US$20.8 million is included in our accounts receivable at December 31, 2010, and we have delivered 50 wind turbine units under this contract.
In addition to the above-referenced six wind farm contracts, we have entered into the following agreements regarding the future establishment of wind farms:
1. Dafeng Offshore Project
The Company announced that procedures for the establishment of joint venture opportunities are ongoing and has led to commitments obtained from the local government for an initial 500MW offshore wind farm. No definitive agreement for the production of wind turbines has been executed at this time.
2. Fengshuo Wind Power Co., Ltd
On February 16, 2010, the Company announced the signing of a Cooperation Agreement with Fengshuo Wind Power Co., Ltd (“Fengshuo”), of Inner Mongolia, towards the development of regional 300 MW wind farms and subsequent purchase of wind turbines from the Company. This Cooperation Agreement was signed in order that the Company assist Fengshuo in completing all planning, permitting, and approvals for 300MW wind farms, as well as assistance in obtaining increased access to capital and bank loans once the approvals are in place. No definitive agreement for the production of wind turbines has been executed at this time.
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Production and Quality Control
The Company is producing wind turbines under the “soft design” concept to grow market share by attempting to exploit what it believes to be its low-cost advantage. Concurrently the Company is investing in research and development for its upgraded and larger turbines, and expects to have 1.1MW prototype and 2.5MW prototype turbines produced in May and August, 2011 respectively.
The Company implements quality control in respect of purchasing, production, and provision and after sale services as follows:
(1)
Purchasing: We choose reliable suppliers and require complete background information and test data from such suppliers to make sure their supplies meet our rigorous standards.
(2)
Production: We run inspections throughout the whole manufacturing and production process. We conduct follow-up inspections and use specialized instruments to guarantee the specifications of moment of force and gap. We implement several check points throughout the process from component manufacturing to provision, such as a check point for the size and flatness of the bottom portion of the turbine, a check point for the yaw gear gap of 0.7mm to 0.9 mm, a check point for the moment of force of the binding bolt, and a check point for parameters in operation. We keep detailed test data of the check points and keep a detailed profile of such information.
(3)
Provision and after sale services: We strictly follow guidelines in adjustment of lubrication, hydraulic cooling and hydro-electric control system.
The Company conformed to the quality management system standard ISO 9001:2000 for the process of manufacturing and servicing wind turbines on September 10, 2008.
Our Suppliers
The Chinese government’s support of the wind turbine industry has created significant capacity for components. The Company has signed contracts with all domestic component suppliers. For key components, GC China Turbine has investigated several alternative suppliers, 2 to 3 of which will be selected to sign supply contracts with us, thereby ensuring the supply of components for future production needs. After components are successfully trial produced by the suppliers, components will then be tested by the original manufacturers, and each component is also tested by GC China Turbine for performance before installation into our wind turbines. All of our principal
Chinese suppliers are Chuan Run Stock Co., Ltd., Xiang Tan Generator Stock Co., Ltd., Jiangsu Tianming Machinery Group, China Erzhong Group (Deyang) Heavy Industries Co., Ltd., Nanfang Ventilator Industries Co., Ltd., Xi’an Dun’an Electric Co., Ltd. and Zhong Neng Wind Power Device Co., Ltd. and Wuhan Mita-Sanlian New Energy Technology Co., Ltd.
Logistics and Inventory
Because a wind turbine is a product with a high unit price, we keep low inventory and follow a make-to-order policy. We make annual orders with our suppliers at the beginning of the year based on the forecast of our sales. We start production of the wind turbines upon execution of sales contracts with our customers and upon receipt of a deposit on such contracts.
Seasonality
Our Company’s operating results are not materially affected by seasonality.
Competition
The wind power market is rapidly evolving and is expected to become intensively competitive and includes wind turbine manufacturers that are registered in China, as well as subsidiaries of international wind turbine manufacturers. Some of our competitors have established a market position more prominent than ours and if we fail to attract and retain customers and establish a successful distribution network for our wind turbines, we may be unable to increase our sales and market share. We compete with major international and PRC companies including Dongfang Steam Turbine, Dalian Huarui, Gold Wind, CSIC, Spanish Gamesa, and Indian Suzion. Some of these companies are more experienced and more established than us with mature manufacturing capabilities. Some of these companies are well-capitalized and benefit from earlier development advantages. We
also expect that our future competition will include new entrants to the wind power market offering new technological solutions.
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However, we believe that the cost and performance of our technologies, products and services will have advantages compared to competitive technologies, products and services. Some of our competitors are large enterprises resulting in inflexible operations. Some of our competitors receive less government support. We believe we also have the following advantages over our competitors:
1. Our Cost Structure
We believe our wind turbines and technological process provides for lower manufacturing costs resulting from significantly more efficient material usage, use of fewer parts and fewer manufacturing steps for our product as compared to our competitors. We believe the installation costs of our product are also significantly lower as compared to our competitors because our wind turbine has a simple structure, lighter total weight and can be more easily installed at less cost than the cost of installation of three-bladed wind turbines used by our competitors. Further, we believe use of our two-bladed wind turbine can also significantly reduce overall maintenance costs for a wind farm because it is equipped with condition monitoring system which monitors the operational condition of the wind turbine, and signals for maintenance based on actual turbine condition, increasing revenue and reducing maintenance costs. These cost advantages
greatly reduce the initial investment, installation costs and maintenance costs of wind farm for owners using our two-bladed wind turbine.
a. The constitution of the typical wind farm investment includes:
No.
Constitution
(i)
Wind turbine
(ii)
Tower
(iii)
Foundation
(iv)
Transportation, hoisting
(v)
Others
b. Comprehensive analysis of unit price
(i) Comparison of Wind Turbine Cost Unit: RMB
Type
Unit Price
(ten thousand/unit)
Unit cost of capacity
(Yuan/kw)
Percentage
1.5MW
645
4300
100
%
GC Nordic 1.0MW
300
3000
70
%
(ii) Comparison of Tower Cost
Type
Height
(m)
Weight
(t)
Unit cost of capacity
(ten thousand/MW)
Percentage
1.5MW
70
116
86
100
%
GC Nordic 1.0MW
70
65
72
84
%
(iii) Comparison of foundation cost
Type
Expenses
(ten thousand)
Unit cost of capacity
(ten thousand/MW)
Percentage
1.5MW
39
26
100
%
GC Nordic 1.0MW
9.6
9.6
37
%
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(iv) Comparison of hoisting cost
Type
Crane cost
Hoisting Time
Hoisting Time of unit capacity
Percentage
1.5MW
100T Crane 1 set
30T Crane 1 set
2 day/set
1.333 day/MW
100%
GC Nordic 1.0MW
80T Crane 1 set
1 day/set
1 day/MW
75%
(v) Comparison of Transportation Cost (assuming the same transportation tool, same distance, the same unit price for each ton)
Type
Pay load
Unit volume weight
Percentage
1.5MW
90T
60T/MW
100%
GC Nordic 1.0MW
40T
40T/MW
67%
2. Our Relationship with Guoce Science and Technology
Since GC China Turbine Group was formed by certain founders and management of Guoce Science and Technology, some of these individuals, including Mr. Hou Tie Xin, Mr. Xu Jia Rong, Ms. Qi Na, who also formed our initial core management team, we have the advantage of initial strategic guidance and the supply of necessary start-up resources. The main businesses of Guoce Science and Technology’s include research and development, production, sales, and system engineering services of power testing instrument, computer-based monitoring system for hydropower station, hydropower governor, hydropower station excitation, direct current system, substation automation, power dispatching automation, network monitoring, cluster server, and computer storage technology.
Guoce Science and Technology has a strong reputation as a provider of technology services in the energy industry. Its businesses cover the whole power industrial chain with products ranging from power generation to power transmission to every sector of power utilization. With the complete product framework, it expects to compete in the industry for a long time.
Our relationship with Guoce Science and Technology has many benefits including:
·
access to engineering prowess
·
access to established technology in the turbine control arena
·
access to the utilities industry in China as it has large market share for their products
·
credibility within the utilities industry because it has long-standing relationships and operating history within the industry
The entire wind power industry also faces competition from other power generation sources, both conventional and emerging technologies. Large utility companies dominate the energy production industry. Coal continues to dominate as the primary resource for electricity production. Other conventional resources, including natural gas, oil and nuclear compete with wind energy in generating electricity. Wind power has some advantages and disadvantages when compared to other power generating technologies. Wind power is plentiful and widely distributed. It is a renewable source of energy. Since wind power does not generate greenhouse gases, it does not contribute to global warming. Wind power produces no water or air pollution that can contaminate the environment because no chemical processes are involved in wind power generation. As a result, wind power reduces toxic atmospheric gas emissions. However, wind turbines require
locations with constantly high wind speeds and since wind is unpredictable, wind power is not predictably available.
Research and Development
GC China Turbine identified a 2-bladed wind turbine technology in the wind energy space that would be reliable and cost-effective to manufacture. While the 2-blade technology is less commonly used in the China wind farm market compared to 3-blade technology, the development project that created the 2-bladed wind turbine has been operating for 10 years with 97% availability and was developed through a 10 year research project costing over US$75 million. Our technology is based on the core concepts of “soft design,” which has been developed with the assistance of certain former personnel of Deltawind AB who have joined our Company. Those personnel are assisting in the research and development efforts as well as the testing of the new Chinese components.
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In December 30, 2009, GC Nordic jointly established GC Windpower AB in Sweden with Tomas Lyrner, a former employee of Nordic Windpower AB and founder of Deltawind AB. 85% percent of the shares of GC Windpower AB are held by GC Nordic and 15% by Mr. Lyrner. GC Windpower AB is a research and development center of GC Nordic, and will contribute to GC Nordic all of the intellectual property rights it develops. In 2010 to 2011, this research and development center will focus on the development of 2.5MW and offshore wind turbines.
Our current product is a 1.0MW utility scale turbine with another upgraded 1.1MW prototype under trial assembly, and designs for a 2.5MW and offshore utility scale turbine in development. For fiscal years 2009 and 2010, we have spent US$90,437 and US$918,732, respectively, on research and development expenses. The Company plans to continue investing more in research and development for its larger scale turbines. The Company is expecting the production of its 2.5MW wind turbines to commence in 2012. The 3.0MW offshore wind turbine has the same structure as the 2.5MW wind turbine, but with changes on the foundation and higher rotation. Therefore, the research and development of the 3.0MW offshore wind turbine will be carried out simultaneously with that
of the 2.5MW wind turbine.
Intellectual Properties and Licenses
The following table describes the intellectual property currently owned by GC Nordic:
Type
Name
Category Number
and Description
Issued By
Duration
Description
Trademark
GC NORDIC
39 (transport; packaging and storage of goods; travel arrangement)
7 (Machines and machine tools; motors and engines (except for land vehicles); machine coupling and transmission components (except for land vehicles); agricultural implements other than hand-operated; incubators for eggs)
Can significantly reduce fatigue on all moving parts, extending the service life and reducing operational costs.
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GC China Turbine takes all necessary precautions to protect our intellectual property. Aside from registering our trademarks with the State Trademark Administration and filing patents to protect our intellectual property, our marketing team also diligently conducts market research to ensure that our intellectual property is not being violated. However, we cannot assure you that we will be able to protect or enforce our intellectual property rights. In the event of any infringement upon our intellectual property rights, we will pursue all legal rights and remedies.
On November 30, 2010, we entered into a Termination, Release and Settlement Agreement (the “Agreement”) with Nordic Windpower, among others, pursuant to which the parties agreed that Nordic Windpower shall not use the mark “NORDIC WINDPOWER” in China and we shall not use the mark “NORDIC” or any confusingly similar marks outside of China, subject to legal requirements. Further, we consented to Nordic Windpower’s use and registration of the mark or any mark incorporating the term “NORDIC” outside of China, and Nordic Windpower consented to our use and registration of the mark “GC NORDIC” or “GUOCE NORDIC” in China. In addition, the parties agreed to terminate the technical license between Wuhan Guoce Nordic New Energy Co., Ltd. and Deltawind AB that was subsequently transferred from Deltawind AB to Nordic Windpower Limited.
China Economic Incentive Policies
To support the development of wind power technology and growth of the in-grid wind power market, the Chinese government has implemented a series of projects and also stipulated a series of economic incentive policies.
Ride the Wind Program
To import technology from foreign companies and to establish a high-quality Chinese wind turbine generator sector, the former State Development and Planning Commission (“SDPC”) initiated the “Ride the Wind Program” in 1996. This initiative led to two joint ventures, NORDEX (Germany) and MADE (Spain). These joint ventures effectively introduced a 600 kilowatts wind turbine generator manufacturing technology into China. This program has already been implemented and is not applicable to our Company.
National Debt Wind Power Program
To encourage the development of domestic wind power equipment manufacturing, the former State Economic & Trade Commission (“SETC”) implemented the “National Debt Wind Power Program.” This program required the purchase of qualified, locally-made wind power components for new generation projects. China’s government provided bank loans with subsidized interest to wind farm owners as compensation for the risk of using locally-made wind turbine generators. These loans funded construction of demonstration project wind farms with a total installed capacity of 8MW. This program has been completed and was meant for wind farm owners, not wind farm manufacturers, and therefore we did not apply for the program.
Wind Power Concession Project
The NDRC initiated the “Wind Power Concession Project” in 2004 with a 20-year operational period. This program aims to reduce the in-grid wind power tariff by building large capacity wind farms and achieving economies of scale. Each of the wind farms built under this program must reach a 100MW capacity. By 2006, NDRC had approved 5 wind farms, in Jiangsu, Guangdong, Inner Mongolia, and Jilin Province.
In February 2005, China’s Renewable Energy Law was formulated and was put into effect on January 1, 2006. The law stipulates that the power grid company must sign a grid connection agreement with the wind power generating company and purchase the full amount of the wind power generated by it. The wind power tariff will be determined by the wind farm project tendering. The winner’s quoted tariff will be the tariff of that wind farm project.
Wind power is a priority “National Clean Development Mechanism Project” of the Chinese government. Wind farm developers can sell Certified Emission Reduction Certificates (“CER’s”) to developed countries under the terms of the Kyoto Protocol.
This project is not yet applicable to our Company and as such we have not applied for any of its programs.
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Governmental Regulations
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China.
Compliance with Circular 75, Circular 106 and the 2006 M&A Regulations
On October 21, 2005, State Administration of Foreign Exchange (the “SAFE”) issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular 75, which became effective as of November 1, 2005. According to Circular 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC, or an offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise
in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company. To further clarify the implementation of Circular 75, the SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner.
Our current shareholders and/or beneficial owners may fall within the ambit of the SAFE notice and be required to register with the local SAFE branch as required under the Circular 75. If so required, and if such shareholders and/or beneficial owners fail to timely register their SAFE registrations pursuant to the Circular 75, or if future shareholders and/or beneficial owners of our company who are PRC residents fail to comply with the registration procedures set forth in the Circular 75, this may subject such shareholders, beneficial owners and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital (including using the proceeds from this offering) into our PRC subsidiaries,
limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise adversely affect our business.
On August 8, 2006, six PRC ministries and commissions promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule, a “Round-trip Investment” refers that a PRC business owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under the 2006 M&A Rule, any Round-trip Investment must be approved by the Ministry of Commerce, or MOFCOM, and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law. In the opinion of our PRC legal counsel dated September 30, 2009,
Global Law Office, the GC Nordic Acquisition does not constitute a Round-trip investment under 2006 M&A Rule as there were no PRC citizens, including the former nine individual shareholders of GC Nordic, who had direct or indirect equity interests within Luckcharm at the date of the GC Nordic Acquisition.
However, the PRC regulatory authorities may take the view that the reverse acquisition transaction and related transaction documents including the call option agreements and the voting trust agreements are part of an overall series of arrangements which constitute a Round-trip Investment, because at the end of these transactions, the Founders of GC Nordic will become the majority shareholders of a foreign entity that acquired ownership of our Chinese subsidiary. The PRC regulatory authorities may also take the view that the registration of the reverse acquisition with the Wuhan office of the PRC State Administration of Industry and Commerce, or AIC, and the filings with the SAFE may not be evidence that the Acquisition has been properly approved because the relevant parties did not fully disclose to the AIC, SAFE or MOFCOM the overall restructuring
arrangements, the existence of the Exchange Agreement and its link with the GC Nordic Acquisition. If the PRC regulatory authorities take the view that the GC Nordic Acquisition constitutes a Round-trip Investment under the 2006 M&A Rule, we cannot assure you that we will be able to obtain the approval required from MOFCOM.
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If the GC Nordic Acquisition is found to constitute a Round-trip Investment or be in violation of any provision under the PRC 2006 M&A Rules, the relevant PRC authorities, including MOFCOM, which is the primary regulator of foreign investment in China, the State Administration of Foreign Exchange (“SAFE”) and the State Administration of Industry and Commerce (“SAIC”) would have broad discretion in dealing with these violations, including: discontinuing or restricting GC Nordic’s operations, requiring us or GC Nordic to restructure the relevant ownership structure, restricting or prohibiting our remittance of the dividend and our use of the proceeds of our private placement to finance our business and operations in China, or imposing conditions or requirements with which we or GC Nordic may not be able to comply. The imposition of any of these penalties would result in a material and adverse effect on our business,
cash flow, results of operations, reputation and prospects, as well as our dividend distribution and price of our shares.
Dividend Distribution
The principal laws, rules and regulations governing dividends paid by our PRC operating subsidiary include the Company Law of the PRC (1993), as amended in 2006, Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001. Under these laws and regulations, our PRC subsidiary may pay dividends only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of its respective registered capital. These reserves are not distributable as cash dividends. The board of directors
of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds. After the allocation of relevant welfare and funds, the equity owners can distribute the rest of the after-tax profits provided that all the losses of the previous fiscal year have been made up.
Taxation
The applicable tax laws, regulations, notices and decisions (collectively referred to as “Applicable Tax Law”) related to foreign investment enterprises and their investors include the follows:
·
Enterprise Income Tax Law of the People’s Republic of China issued by the National People’s Congress of China on January 1, 2008;
·
Implementing Rules of the Enterprise Income Tax Law of the People’s Republic of China promulgated by the State Council of China, which came into effect on January 1, 2008;
·
Interim Regulations of the People’s Republic of China Concerning Value-added Tax promulgated by the State Council came into effect on January 1, 2009;
·
Implementation Rules of The Interim Regulations of the People’s Republic of China Concerning Value-added Tax promulgated by the Treasury Department of China came into effect on January 1, 2009;
·
Business Tax Interim Regulations of the People’s Republic of China promulgated by the State Council came into effect on January 1, 2009;
·
Implementation Rules of The Business Tax Interim Regulations of the People’s Republic of China promulgated by the Treasury Department of China came into effect on January 1, 2009.
Income Tax on Foreign Investment Enterprises
GC Nordic is subject to income tax at a rate of 15% of their taxable income starting from January 1, 2010 as compared to 25% in previous years as a result of being treated as a High-Tech Enterprise, which is entitled to enjoy a favorable tax treatment for 10% deduction on income tax for three consecutive years. In addition, newly established and acquired subsidiaries are still subject to a 25% tax rate.
Before the implementation of the Enterprise Income Tax (“EIT”) law (as discussed below), Foreign Invested Enterprises established in the People’s Republic of China are generally subject to an EIT rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax. On March 16, 2007, the National People’s Congress of China passed the new Corporate Income Tax Law (“CIT Law”), and on November 28, 2007, the State Council of China passed the Implementation Rules for the CIT Law (“Implementation Rules”) which took effect on January 1, 2008. The CIT Law and Implementation Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and foreign invested enterprises (“FIEs”), unless they qualify under certain limited exceptions. Therefore,
nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old tax laws applicable to FIEs, and its associated preferential tax treatments, beginning January 1, 2008.
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Value-added Tax
The new Interim Regulations of the People’s Republic of China on Value-added Tax promulgated by the State Council came into effect on January 1, 2009 and its Implementation Rules promulgated by the Treasury Department of China came into effect on January 1, 2009. Under these regulation and rules, value-added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.
Value-added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided but excluding, in respect to both goods and services, any amount paid in respect of value-added tax included in the price or charges, and less any deductible value-added tax already paid by the taxpayer on purchases of goods and service in the same financial year.
Business Tax
The new Interim Regulations on Business Tax of the People’s Republic of China promulgated by the State Council came into effect on January 1, 2009, providing that the business tax rate for a business that provides services, assigns intangible assets or sells immovable property will range from 3% to 5% of the charges of the services provided, intangible assets assigned or immovable property sold, as the case may be except that the entertainment industry shall pay a business tax at a rate ranging from 5% to 20% of the charges of the services provided.
Tax on Dividends from PRC Enterprise with Foreign Investment
According to the Enterprise Income Tax Law, income resulting from rental properties, royalties and profits in the PRC derived by a foreign enterprise which has no establishment in the PRC or has establishment but the income has no relationship with such establishment is subject to a 10% withholding tax, subject to reduction as provided by any applicable double taxation treaty, unless the relevant income is specifically exempted from tax under the Enterprise Income Tax Law.
Wholly foreign-owned enterprise
There are three common forms for foreign companies to make investment and operate business in China, including Sino-foreign equity joint venture, Sino-foreign cooperation joint venture and wholly foreign-owned enterprise, which are subject to three different Chinese laws. Wholly foreign-owned enterprises are governed by the Law of the People’s Republic of China Concerning Enterprises with Sole Foreign Investments, which was promulgated on 12th April, 1986 and amended on 31 October 2000, and its Implementation Regulations promulgated on 12th December, 1990 and amended on 12 April 2001 (together the “Foreign Enterprises Law”).
In order to completely control GC Nordic’s businesses and assets in China, Luckcharm acquired all of GC Nordic’s shares and restructured GC Nordic from a Chinese-owned company to be a wholly foreign-owned enterprise on August 5, 2009. After the completion of the reverse acquisition in October 2009, Luckcharm became our wholly-owned subsidiary, and, as a result, we indirectly controlled the businesses, assets and operations of GC Nordic. Under our control, GC Nordic is maintained as a legal person pursuant to the Chinese laws, which enables us to operate business, market, manufacture, sell, bid for Chinese wind farm procurement and hire employees in China.
(a)
Procedures for establishment of a wholly foreign-owned enterprise
The establishment of a wholly foreign-owned enterprise will have to be approved by the Ministry of Commerce of the PRC (“MOC”) (or its delegated authorities). If two or more foreign investors jointly apply for the establishment of a wholly foreign-owned enterprise, a copy of the contract between the parties must also be submitted to the MOC (or its delegated authorities) for its record. A wholly foreign-owned enterprise must also obtain a business license from the State Administration for Industry & Commerce of the PRC (“SAIC”) before it can commence business.
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(b)
Nature
A wholly foreign-owned enterprise is a limited liability company under the Foreign Enterprises Law. It is a legal person which may independently assume civil obligations, enjoy civil rights and has the right to own, use and dispose of property. It is required to have a registered capital contributed by the foreign investor(s). The liability of the foreign investor(s) is limited to the amount of registered capital contributed. A foreign investor may make its contributions by installments and the registered capital must be contributed within the period as approved by the MOC (or its delegated authorities) in accordance with relevant regulations.
(c)
Profit distribution
The Foreign Enterprise Law provides that after payment of taxes, a wholly foreign-owned enterprise must make contributions to a reserve fund, an enterprise development fund and an employee bonus and welfare fund. The allocation ratio for the employee bonus and welfare fund may be determined by the enterprise. However, at least 10% of the after-tax profits must be allocated to the reserve fund. If the cumulative total of allocated reserve funds reaches 50% of an enterprise’s registered capital, the enterprise will not be required to make any additional contribution. The reserve fund may be used by a wholly foreign-owned enterprise to make up its losses and with the consent of the examination and approval authority, can also be used to expand its production operations and to increase its capital. The enterprise is prohibited from distributing dividends unless the losses (if any) of previous years have been made up. The development
fund is used for expanding the capital base of the company by way of capitalization issues. The employee bonus and welfare fund can only be used for the collective benefit and facilities of the employees of the wholly foreign-owned enterprise.
Environmental Protection Regulations
The PRC has expressed a concern about pollution and other environmental hazards. Although we believe that we comply with current national and local government regulations, if it is determined that we are in violation of these regulations, we can be subject to financial penalties as well as the loss of our business license, in which event we would be unable to continue in business. Further, if the national or local government adopts more stringent regulations, we may incur significant costs in complying with such regulations. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations.
Renewable Energy Regulations
China formulated and promulgated the “Renewable Energy Law of the People’s Republic of China” in February 28, 2005 (“Renewable Energy Law”) which has been carried out from January 1, 2006 to further facilitate the development and utilization of renewable energy including wind energy, increase the energy supply, protect the environment, and improve energy structure. Following the promulgation of the Renewable Energy Law, the PRC Government has also successively carried out various relevant ancillary measures, including the “Circular Regarding Requirements of Administration of Wind Power Construction,” the “Relevant Provisions for Administration of Renewable Energy Resource Electricity Generation,” the “Renewable Energy Industry Development Guidance Catalogue” and the “Trial Measures for Administration
of Renewable Energy Power Generation Pricing and Expenses Sharing” to lay down special rules and regulations to facilitate the development of wind power industry in the PRC.
China promulgated the “Renewable Energy Law of People’s Republic of China, as amended” on December 26, 2009, to be implemented from April 1, 2010. The promulgation of such act is for the purpose of improving the Renewable Energy Law, and provides further legal protections to renewable energies including wind, solar energy and others.
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The Ministry of the PRC issued the “Provisional Measures for Administration of Special Capital on Developing Renewable Energy Resources,” stipulating the establishment of “Special Capital on Developing Renewable Energy Resources” by utilization of the central budget to promote the development of renewable energy, especially on the local production of the mechanical equipments for the development and utilization of renewable energy.
In 2006, the State Council promulgated “National Guideline on Medium-and Long-Term Program for Science and Technology Development (2006-2020)” (the “Guideline”), stipulating the priority research on large types of wind power facilities in terms of the low-cost and large-scale of the development and utilization of renewable energy resources. Following the above-mentioned Guideline, in 2007, the PRC Development and Reform Committee promulgated the ancillary notice the “Eleventh Five-Year Plan of High Technology Industry” to promote the research, commercial use, industrialization of the wind turbines and its key assembly.
Foreign Exchange Controls
In August 2008, the Foreign Exchange Bureau issued the Foreign Exchange Administration Regulation, as amended. Under the Regulation, the Renminbi (“RMB”) is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment, loans and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. These limitations could affect the PRC company’s ability to obtain foreign exchange through debt or equity financing. This could negatively impact our financial performance as it may limit our ability to reallocate capital and to take advantage of market opportunities.
On August 29, 2008, SAFE promulgated a notice entitled Circular 142, regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting the use of converted RMB. The notice requires that the registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used for purposes within the business scope stated in the business license and may not be used for equity investments within PRC. In addition, SAFE strengthened its supervision of the flow and use of the registered capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s prior approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Employees
The following table sets forth the number of our employees for each of our areas of operations and as a percentage of our total workforce as of December 31, 2010:
Number of
Employees
% of
Employees
Management
8
5.84
%
GM Office
12
8.76
%
Engineering
4
2.92
%
Accounting
7
5.11
%
Financing and Investment
4
2.92
%
Technology
18
13.14
%
Quality Assurance
7
5.11
%
Marketing
11
8.02
%
Wind Resources
4
2.92
%
Purchasing
7
5.11
%
Production
47
34.31
%
Logistics
8
5.84
%
TOTAL
137
100.00
%
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The Company has 137 employees, most of whom have signed employment contracts and confidentiality agreements with the Company. Generally, the employment contract is 5 to 10 years for senior management personnel; 3 years for middle management personnel, marketing staff, technicians and other special staff; and 2 years for the rest. For non-experienced staff, the employment contract is 1 year. We believe that our relationship with our employees is good.
We are in full compliance with Chinese labor laws and regulations and are committed to providing safe and comfortable working conditions and accommodations for our employees. We believe in the importance of maintaining our social responsibilities, and we are committed to providing employees with a safe, clean and comfortable working environment and accommodations. Our employees are also entitled to time off during public holidays. In addition, we frequently monitor contract manufacturers’ working conditions to ensure their compliance with related labor laws and regulations. We are in full compliance with our obligations to provide pension benefits to our workers, as mandated by the PRC government. We strictly comply with Chinese labor laws and regulations, and offer reasonable wages, life insurance and medical insurance to our workers.
Compliance with Environmental Laws
We are required to comply with several domestic environmental protection laws and regulations, including Environmental Protection Law of the People’s Republic of China, Law of the People’s Republic of China on Prevention and Control of Water Pollution, Law of the People’s Republic of China on the Prevention and Control of Atmospheric Pollution, Law of the People’s Republic of China on the Prevention and Control of Environmental Pollution by Solid Waste, Law of the People’s Republic of China on Prevention and Control of Pollution From Environmental Noise, Law of the People’s Republic of China on Appraising of Environment Impact and Regulations on the Administration of Construction Project Environmental Protection.
In accordance with the Environmental Protection Law of the People’s Republic of China adopted by the Standing Committee of the National People’s Congress on December 26, 1989, the bureau of environmental protection of the State Council sets the national guidelines for the discharge of pollutants. The provincial and municipal governments of provinces, autonomous regions and municipalities may also set their own guidelines for the discharge of pollutants within their own provinces or districts in the event that the national guidelines are inadequate. The subdivision environmental protection laws on control of pollution of water, air, solid waste and noise set more detailed rules, standards and specifications with respect to their areas of regulation.
Pursuant to the Environmental Protection Law and its subdivision laws, a company or enterprise which causes environmental pollution and discharges other polluting materials which endanger the public should implement environmental protection methods and procedures into their business operations. This may be achieved by setting up a system of accountability within the company’s business structure for environmental protection; adopting effective procedures to prevent environmental hazards such as waste gases, water and residues, dust powder, radioactive materials and noise arising from production, construction and other activities from polluting and endangering the environment. The environmental protection system and procedures should be implemented simultaneously with the commencement of and during the operation of construction, production and
other activities undertaken by the company. Any company or enterprise which discharges environmental pollutants should report and register such discharge with relevant bureaus of environmental protection and pay any fines imposed for the discharge. A fee may also be imposed on the company for the cost of any work required to restore the environment to its original state. Companies which have caused severe pollution to the environment are required to restore the environment or remedy the effects of the pollution within a prescribed time limit.
In addition, the Law of the People’s Republic of China on Appraising of Environment Impact Issued by the National People’s Congress of China which came into effect on September 1, 2003 provides the methods and institutions for analyzing, predicting and appraising the impact of operation and construction projects that might incur after they are carried out. In case a construction project of any company or enterprise fails to pass the examination, the construction may not be started. Regulations on the Administration of Construction Project Environmental Protection Issued by the State Council of China which came into effect on November 29, 1998 provide that the building of construction projects having impacts on the environment within the territory of the People’s Republic of China shall compile or submit a report on environmental
impact, a statement on environmental impact or a registration form on environmental impact in accordance with the extent of environmental impact of construction projects.
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Where you can find more information
We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (SEC). You may read and copy any document that we file at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our filings can also be reviewed by accessing the SEC’s website at http://www.sec.gov.
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ITEM 1A. RISK FACTORS.
Disclosure regarding Forward-Looking Statements
Except for statements of historical facts, this Annual Report on Form 10-K contains forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from projected results. The words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions or variations thereof are intended to be forward looking statements. Such “forward looking” statements include, but are not necessarily limited to statements regarding anticipated levels of future revenues and earnings from the operations of GC China Turbine Corp. and its subsidiaries, projected costs and expenses related
to our operations, liquidity, capital resources, and availability of future equity capital on commercially reasonable terms. Such statements reflect the current view of the Registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to the Registrant’s industry, the Registrant’s operations and results of operations and any businesses that may be acquired by the Registrant. Factors that could cause actual results to differ materially are discussed below. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Although the Registrant believes that the expectations reflected in the forward looking statements are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the Registrant’s financial statements and the related notes included in this report on Form 10-K.
RISK FACTORS
You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this Annual Report on Form 10-K that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. While the risks described below are the ones we believe are most important for you to consider, these risks are not the only ones that we face. If any of the following events described in these risk factors actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business and Industry
Our limited operating history makes it difficult to evaluate our future prospects and results of operations.
GC Nordic, which commenced business in 2006, has a limited operating history. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early-stage companies in evolving industries in China. Some of these risks and uncertainties relate to our ability to:
·
maintain our market position;
·
respond to competitive market conditions;
·
increase awareness of our brand;
·
respond to changes in our regulatory environment;
·
maintain effective control of our costs and expenses;
·
raise sufficient capital to sustain and expand our business; and
·
attract, retain and motivate qualified personnel.
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If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
If we fail to implement our business strategy, our financial performance and our growth could be materially and adversely affected.
Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Our business strategy envisions several initiatives, including driving revenue growth and enhancing operating results by increasing adoption of our products by targeting high-growth segments, establishing successful distribution networks in our target markets for our products, anticipating customer needs in the development of system-level solutions, strengthening our technology leadership while lowering cost and pursuing targeted strategic acquisitions and alliances. We may not be able to implement our business strategy successfully or achieve the anticipated benefits of our business plan. If we are unable to do so, our long-term growth and profitability may be adversely affected. Even if we are able to implement some or all of the initiatives of our business plan successfully, our operating
results may not improve to the extent we anticipate, or at all. Implementation of our business strategy could also be affected by a number of factors beyond our control, such as increased competition, legal developments, government regulation, general economic conditions or increased operating costs or expenses. In addition, to the extent we have misjudged the nature and extent of industry trends or our competition; we may have difficulty in achieving our strategic objectives. Any failure to implement our business strategy successfully may adversely affect our business, financial condition and results of operations. In addition, we may decide to alter or discontinue certain aspects of our business strategy at any time.
If we are unable to raise additional funds to expand our operations, we may not be able to operate profitably or at all.
In connection with the development and expansion of our business, we will incur significant capital and operational expenses. We do not presently have any funding commitments other than our present credit arrangements which we do not believe is sufficient to enable us to satisfy our purchase commitments and to otherwise expand our business. If we are unable to obtain additional funding to pay our purchase commitments and we cannot find alternative financing we may be unable to expand our business or finance the growth of our existing business, which may impair our ability to operate profitably.
Because of the worldwide economic downturn, we may not be able to raise any additional funds that we require on favorable terms, if any. The failure to obtain necessary financing may impair our ability to manufacture our products and continue in business.
If a substantial market for wind power does not develop, there may be no market for the wind power industry products in which we are investing heavily.
Our wind turbines business is based on the assumption that wind power will become a more significant source of power in the PRC and elsewhere. At present wind power accounts for an insignificant percentage of China’s energy needs, and we cannot assure you that wind power will ever become a significant source of energy in China. Since our growth plan is based on developing and providing equipment and components for that industry, our business will be impaired if the market for wind power generation equipment does not develop or if the market develops but our products are not accepted by the market. We are making the financial and manpower commitment in our belief that there will be an increased demand for wind power in China and elsewhere. We cannot assure you that we will be able to develop this business, and our failure to develop the business will have a material adverse effect on our overall financial condition and the results
of our operations.
Because we sell capital equipment, our business is subject to our customers’ capital budget and we may suffer delays or cancellations of orders as a result of the effects of the worldwide economic downturn.
Our customers purchase our equipment as part of their capital budget. As a result, we are dependent upon receiving orders from companies that are either expanding their business, commencing a new business, upgrading their capital equipment or who otherwise require capital equipment. Our business is therefore dependent upon both the economic health of these industries and our ability to offer products that meet regulatory requirements, including environmental requirements of these industries and are cost justifiable, based on potential cost savings in using our equipment in contrast to existing equipment or equipment offered by others. We cannot predict the extent that the market for capital equipment in the wind power industries will be affected. However, any economic slowdown can affect all purchasers and manufactures of capital equipment, and we cannot assure you that our business will not be significantly impaired as a
result of the worldwide economic downturn.
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We are subject to particularly lengthy sales cycles which may have an adverse effect on our financial results.
We are subject to lengthy sale cycles that may last over nine months. These lengthy and challenging sales cycles may mean that it could take longer before our sales and marketing efforts result in revenue, if at all, and may have adverse effects on our operating results, financial condition, cash flows and stock price.
The nature of our products creates the possibility of significant product liability and warranty claims, which could harm our business.
Customers use some of our products in potentially hazardous applications that can cause injury or loss of life and damage to property, equipment or the environment. In addition, some of our products are integral to the production process for some end-users and any failure of our products could result in a suspension of operations. We cannot be certain that our products will be completely free from defects. Moreover, we do not have any product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. In addition, because the insurance industry in China is still in its early stages of development, business interruption insurance available in China offers limited coverage compared to that offered in
many other countries. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.
Our ability to sell our products to wind farms is dependent upon designing equipment that enables our customers to meet environmental requirements.
We mainly market wind power equipment to operators of wind farms. Our ability to market these products is dependent upon the continued growth of wind farms and our ability to offer products that enable the operators of the wind farms to produce electricity through a cleaner process than would otherwise be available at a reasonable cost. To the extent that government regulations are adopted that require the wind farms to reduce or eliminate polluting discharges from wind farms, our equipment would need to be designed to meet such requirements.
If we fail to introduce enhancements to our existing products or to keep abreast of technological changes in our markets, our business and results of operations could be adversely affected.
We believe our future success depends in part on our ability to enhance our existing products and develop new products in order to continue to meet customer demands. Our failure to introduce new or enhanced products on a timely and cost-competitive basis, or the development of processes that make our existing technologies or products obsolete, could harm our business and results of operations.
Our inability to comply with recently enacted LVRT requirements may adversely impact our business.
The PRC’s State Electricity Regulatory Commission has recently created new requirements which will ultimately require all wind turbines in China to have LVRT capacity installed. LVRT refers to the capacity of wind turbines to maintain continuous operation during and after abrupt voltage dips. LVRT-capable wind turbines would allow the power grid to be adjusted more quickly, thereby improving the overall safety and stability of the grid. At present, the Company’s 1.0MW turbines do not qualify for the LVRT requirements. As a result, the Kelipu and Shenzhen Guohan orders for 1.0MW turbines that have not been executed may be cancelled. Further, the inability of the Company’s turbines to meet LVRT requirements in the future could significantly adversely impact
the Company’s business as it may not be able to execute and fulfill future orders for its wind turbines.
Because we face intense competition from other companies for our operating segment, many of which have greater resources than we do, we may not be able to compete successfully and we may lose or be unable to gain market share.
The markets for products in our business segments are intensely competitive. Many of our competitors have established more prominent market positions, and if we fail to attract and retain customers and establish successful distribution networks in our target markets for our products, we will be unable to increase our sales. Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size in some cases provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices, as well as securing supplies at times of shortages. Many of our competitors also have greater brand name recognition, more established distribution networks and larger customer bases. In addition, many of our competitors have well-established relationships
with our current and potential customers and have extensive knowledge of our target markets. As a result, they may be able to devote greater resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations.
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Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.
As our manufacturing processes generate noise, wastewater, gaseous and other industrial wastes, we are required to comply with all national and local regulations regarding protection of the environment. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. We use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our research and development and manufacturing activities. Any failure by us to control the use of, or to restrict adequately, the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations.
Failure to successfully reduce our production costs may adversely affect our financial results.
A significant portion of our strategy relies upon our ability to successfully rationalize and improve the efficiency of our operations. In particular, our strategy relies on our ability to reduce our production costs in order to remain competitive. If we are unable to continue to successfully implement cost reduction measures, especially in a time of a worldwide economic downturn, or if these efforts do not generate the level of cost savings that we expect going forward or result in higher than expected costs, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.
If we are unable to make necessary capital investments or respond to pricing pressures, our business may be harmed.
In order to remain competitive, we need to invest in research and development, manufacturing, customer service and support and marketing. From time to time, we also have to adjust the prices of our products to remain competitive. We may not have available sufficient financial or other resources to continue to make investments necessary to maintain our competitive position.
We must obtain sufficient supply of component materials to conduct our business.
Our component and materials suppliers may fail to meet our needs. We do not currently have long-term supply contracts with our suppliers. This generally serves to reduce our commitment risk but does expose us to supply risk and to price increases that we have to pass on to its customers. In some cases, supply shortages and delays in delivery may result in curtailed production or delays in production, which can contribute to an increase in inventory levels and loss of profit. We expect that shortages and delays in deliveries of some components will occur from time to time. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing delays, which could harm our relationships with current or prospective customers and reduce our sales. If we are unable to continue to purchase components from these
limited source suppliers or identify alternative suppliers, our business and operating results would be materially and adversely affected. We may also not be able to obtain competitive pricing for some of our supplies compared to its competitors. We also cannot assure that the component and materials from domestic suppliers will be of similar quality or quantity as those imported component and materials which may lead to rejections of component and materials by our customers. In the event the domestic component and materials do not perform as well as the imported component and materials or do not perform at all, our business, financial condition and results of operations could be adversely affected.
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A small number of customers account for all of our sales, and the loss of any one of them as a customer would substantially harm our financial results.
For the fiscal year 2010, China Guodian and Guoneg Fengshen were the two customers that accounted for all of our sales revenue, and for the fiscal year ended 2009, Daqing Longjiang and Wuhan Kaidi were the two customers that accounted for all of our sales revenue. Revenues and outstanding accounts receivable in 2008 were solely from one customer. As a result, currently we are substantially dependent upon the continued participation of these customers in order to maintain and continue to grow our total revenues. Significantly reducing our dependence on these customers is likely to take a long time and there can be no guarantee that we will succeed in reducing that dependence. There is no assurance that any of these customers will continue to contribute to our total sales revenue in subsequent years. Under present conditions, the loss of any one of these customers could have a material effect on our performance, liquidity and
prospects.
Our inability to collect our accounts receivable could adversely impact our business.
As of December 31, 2010, our net accounts receivable balance of US$58,182,615 is comprised of amounts due from four customers and represents approximately 72% of our total assets. Our inability to timely collect amounts receivable from our customers for any reason, including the inability of our customers to obtain governmental approval to operate their wind farms or the customers’ inability to operate their wind farms profitably, could result in a material adverse effect on our business, financial condition, results of operations or cash flows.
The inability of our customers to receive necessary governmental approvals for their wind farm projects may adversely impact our business.
The implementation of our contracts with Kelipu and Shenzhen Guohan has been delayed, pending the receipt of the necessary governmental approvals for these customers’ wind farm projects. Any significant delay of our customers to receive the required governmental approval for their wind farm projects may result in a significant delay in our ability to deliver wind turbines, recognize revenue under such contracts and collect the related accounts receivable. The timing of governmental approvals may also disrupt our production schedules and inability to provide wind turbines according to agreed upon terms in our contracts. Further, if our customers are unable
to receive the required governmental approvals, our contracts will likely be terminated, which could result in a material adverse effect on our business, financial condition, results of operations or cash flows.
The inherent volatility in the market price of electricity could impact our profitability.
Our ability to generate revenue has exposure to movements in the market price of electricity, as sales to the power market are likely to be made at prevailing market prices. The market price of electricity is sensitive to cyclical changes in demand and capacity supply, and in the economy, as well as to regulatory trends and developments impacting electricity market rules and pricing, and other external factors outside of our control. Energy from wind generating facilities must be taken “as delivered” which necessitates the use of other system resources to keep the demand and supply of electric energy in balance. The inherent volatility in the market price of electricity could impact our potential revenue, income and cash flow, which could impact our profitability.
Reduction or elimination of government subsidies and economic incentives for the wind power industry could cause demand for our products to decline, thus adversely affecting our business prospects and results of operations.
Growth of the wind power market depends largely on the availability and size of government subsidies and economic incentives. At present, the cost of wind power substantially exceeds the cost of conventional power provided by electric utility grids in many locations around the world. Various governments have used different policy initiatives to encourage or accelerate the development and adoption of wind power and other renewable energy sources. Renewable energy policies are in place in the European Union, most notably Germany and Spain, certain countries in Asia, including China, Japan and South Korea, and many of the states in Australia and the United States. Examples of government-sponsored financial incentives include capital cost rebates, feed-in tariffs, tax credits, net metering and other incentives to end-users, distributors, system integrators and manufacturers of wind power products to promote the use of wind power
and to reduce dependency on other forms of energy. Governments may decide to reduce or eliminate these economic incentives for political, financial or other reasons. Government subsidies have been reduced in a few countries and are expected to be further reduced or eliminated in the future. Reductions in, or eliminations of, government subsidies and economic incentives before the wind power industry reaches a sufficient scale to be cost-effective in a non-subsidized marketplace could reduce demand for our products and adversely affect our business prospects and results of operations. In addition, reductions in, or eliminations of, government subsidies and economic incentives may cause the prices for the products of our customers to decline and we may in turn face increased pressure to reduce the sale price of our products. To the extent any price decline cannot be offset by further reduction of our costs, our profit margin will suffer.
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Unforeseen or recurring operational problems at our facilities may cause significant lost production, which could have a material adverse effect on our business, financial condition, results of operations and cash flow.
Our manufacturing processes could be affected by operational problems that could impair our production capability. Our facilities contain complex and sophisticated machines that are used in our manufacturing process. Disruptions at our facilities could be caused by maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any of our machines; the effect of noncompliance with material environmental requirements or permits; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, earthquakes or other catastrophic disasters; labor difficulties; or other operational problems. Any prolonged disruption in operations at our facilities could cause significant lost production, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
We do not own our primary facilities or have long- term leases for our primary facilities which means that we can be removed from these locations without notice or warning which could cause significant disruption to our business.
Our manufacturing facility is 36,000 square meters situated in the Donghu Development District, Wuhan, China. Currently we lease the land under our facility. There is no expiration date for the lease, which is provided free of charge by the Administrative Committee of Donghu Development District. We also lease our office facilities which is provided free of charge by the Wuhan Donghu New Technology Development Co., Ltd. Because these facilities are provided by the government free of charge, we can be removed from these locations without notice or warning which could cause significant disruption to our business and manufacturing process and add unplanned expenses for us to relocate to new offices and facilities. In the event we get evicted from our current primary facilities and we are unable to immediately relocate, our business, financial condition and results of operations will be adversely affected.
Our business depends substantially on the continuing efforts of our executive officers and our ability to maintain a skilled labor force and our business may be severely disrupted if we lose their services.
Our future success depends substantially on the continued services of our executive officers, especially Mr. Hou Tie Xin, the chairman of our board of directors. We do not maintain key man life insurance on any of our executive officers and directors. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers. Our executive officers and chairman are parties to employment agreements as described elsewhere in this Annual Report on Form 10-K. However, if any disputes arise between our executive officers and us, we
cannot assure you, in light of uncertainties associated with the Chinese legal system, the extent to which any of these agreements could be enforced in China, where some of our executive officers reside and hold some of their assets.
If we are unable to attract, train and retain technical and financial personnel, our business may be materially and adversely affected.
Our future success depends, to a significant extent, on our ability to attract, train and retain technical and financial personnel. Recruiting and retaining capable personnel, particularly those with expertise in our chosen industries, are vital to our success. There is substantial competition for qualified technical and financial personnel, and there can be no assurance that we will be able to attract or retain our technical and financial personnel. If we are unable to attract and retain qualified employees, our business may be materially and adversely affected.
Litigation may adversely affect our business, financial condition and results of operations.
We are party to various legal actions arising in the ordinary course of our business, such as the recently settled litigation with Nordic Windpower regarding the use of certain marks and the technical license agreement. We cannot guarantee that any such claims will be resolved amicably in the near future, or ever. Such litigation may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. See “Legal
Proceedings” for further details regarding any pending matters.
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Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.
We rely primarily on trade secret and contractual restrictions, as well as trademark and patent filings to protect our intellectual property. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. As a result, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others and the enforcement of intellectual property rights in China may be difficult. Litigation may also be necessary to defend ourselves from claims of intellectual
property infringement, including against any litigation initiated by Nordic Windpower if it believes any of the Company’s wind turbines contain Nordic Windpower trade secrets (outside of our patented technology) in China and overseas as a result of the Termination, Release and Settlement Agreement with Nordic Windpower, among others. We cannot assure you that the outcome of any litigation will be in our favor. Intellectual property litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other
parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Recently the Company has successfully applied for and received Chinese utility patents for its passive-yaw system, a flexible drive system for support-tube structure, and a teeter-structured flexible hub, which further underpin our commitment to technology leadership in the global wind energy market. These patents are important to our strategy to differentiate our wind turbines because wind turbines produced based on such “soft design” technology offer a new choice and significant opportunities for many wind farm owners who we believe will benefit from reduced vibration and overhearing and improved service life and utilization rate. We also believe that wind turbines produced using such “soft design” technology can be competitive in terms of manufacturing, installation, and maintenance costs. If these wind turbines produced
using “soft design” are able to achieve these benefits, they may offer the potential to improve overall wind turbine quality and increase investment returns of the owners. Therefore, the received patents have begun to and will protect our intellectual property rights to some extent, which will also have positive effect on our business, financial condition or operating results. However, implementation of China’s intellectual property-related laws has historically been lacking, primarily because of ambiguities in China’s laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Our failure to protect our intellectual property for any reason could have a material adverse effect on our business, results of operations and financial condition.
Corporate insiders or their affiliates may be able to exercise significant control matters requiring a vote of our stockholders and their interests may differ from the interests of our other stockholders.
Pursuant to the Call Option Agreement and Voting Trust Agreement entered into by and between Golden Wind and certain of our officers and directors on September 30, 2009, such officers and directors have the opportunity to acquire, as well as to vote, all of the shares of GC China Turbine issued to Golden Wind as part of the reverse acquisition, which shares comprise of 54% of our issued and outstanding common stock. Such officers and directors have received 60% of the shares as of the date of this annual report and will receive 40% of the shares subsequent to the filing of this report. As a result, these officers and directors may be able to exercise significant control over matters requiring approval by our stockholders. Matters that require the approval of our stockholders include the
election of directors and the approval of mergers or other business combination transactions. Certain transactions are effectively not possible without the approval of these officers and directors by virtue of their control over the shares held by Golden Wind, including, proxy contests, tender offers, open market purchase programs or other transactions that can give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares of our common stock.
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We may be required to incur significant costs and require significant management resources to evaluate our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act, and any failure to comply or any adverse result from such evaluation may have an adverse effect on our stock price.
As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an internal control report with this Annual Report on Form 10-K. This report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Failure to comply, or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our debt and equity securities. As of December 31, 2010,
the management of the Company assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Management concluded, as of the year ended December 31, 2010, that its internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP rules. Management realized there were deficiencies in the design or operation of our internal control that adversely affected our internal controls which management
considers to be material weaknesses including those described below:
i)
We lack additional personnel with the experience to properly analyze and record complex transactions in accordance with U.S. GAAP.
ii)
We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
iii)
We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.
iv)
We do not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members, and an independent audit committee financial expert is an important entity-level control over our financial statements.
v)
We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.
Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that, we and our independent registered public accounting firm would be able to conclude that our internal control over financial reporting is effective at fiscal year end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating effectively.
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Risks Related to Our Corporate Structure
If our acquisition of GC Nordic New Energy Co., Ltd is determined to constitute a Round-trip Investment under the 2006 M&A Rules, the acquisition may be invalidated, which would materially and adversely affect our business and financial performance.
Prior to obtaining the approval from the Commerce Bureau of Wuhan City on August 5, 2009 and the business license from the Wuhan Administration for Industry and Commerce on August 10, 2009, pending the full payment of the purchase price, and prior to Luckcharm Holdings Limited purchasing 100% capital stock of GC Nordic (the “GC Nordic Acquisition”), GC Nordic was a PRC business whose shareholders were nine PRC individuals, of which Hou Tie Xin was the controlling shareholder holding 58.46% of its shares. When Luckcharm was incorporated on June 15, 2009 and when the GC Nordic Acquisition was approved, none of the shareholders of Luckcharm was a PRC citizen. After the GC Nordic Acquisition, Luckcharm
became the sole shareholder of GC Nordic. On September 30, 2009, Luckcharm, the Company, Golden Wind and a significant stockholder and former officer and director of the Company executed the Exchange Agreement and immediately after the consummation of the reverse acquisition between Luckcharm and the Company, Golden Wind, which held 100% of the equity interests of Luckcharm, became our controlling shareholder. Mr. Hou Tie Xin, Ms. Qi Na, Ms. Zhao Ying and Mr. Xu Jia Rong, who are PRC nationals and who have become officers
and directors of the Company in connection with the reverse acquisition, are parties to a Call Option Agreement with Golden Wind, pursuant to which these individuals have the opportunity to acquire the shares of the Company’s common stock issued to Golden Wind as part of the reverse acquisition (the “Shares”). These individuals are additionally parties to a Voting Trust Agreement with Golden Wind, pursuant to which they have the right to vote the Shares on behalf of Golden Wind. The Call Option Agreement and Voting Trust Agreement were executed in conjunction with the GC Nordic Acquisition.
On August 8, 2006, six PRC ministries and commissions promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule, a “Round-trip Investment” refers that a PRC business owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under the 2006 M&A Rule, any Round-trip Investment must be approved by the Ministry of Commerce, or MOFCOM, and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law. In the opinion of our PRC legal counsel dated September 30, 2009,
Global Law Office, the GC Nordic Acquisition does not constitute a Round-trip investment under 2006 M&A Rule as there were no PRC citizens, including the former nine individual shareholders of GC Nordic, who had direct or indirect equity interests within Luckcharm at the date of the GC Nordic Acquisition.
However, the PRC regulatory authorities may take the view that the reverse acquisition transaction and related transaction documents including the call option agreements and the voting trust agreements are part of an overall series of arrangements which constitute a Round-trip Investment, because at the end of these transactions, the Founders of GC Nordic will become the largest shareholders of a foreign entity that acquired ownership of our Chinese subsidiary. The PRC regulatory authorities may also take the view that the registration of the reverse acquisition with the Wuhan office of the PRC State Administration of Industry and Commerce, or AIC, and the filings with the SAFE may not be evidence that the Acquisition has been properly approved because the relevant parties did not fully disclose to the AIC, SAFE or MOFCOM the overall restructuring
arrangements, the existence of the Exchange Agreement and its link with the GC Nordic Acquisition. If the PRC regulatory authorities take the view that the GC Nordic Acquisition constitutes a Round-trip Investment under the 2006 M&A Rule, we cannot assure you that we will be able to obtain the approval required from MOFCOM.
If the GC Nordic Acquisition is found to constitute a Round-trip Investment or be in violation of any provision under the PRC 2006 M&A Rules, the relevant PRC authorities, including MOFCOM, which is the primary regulator of foreign investment in China, the State Administration of Foreign Exchange (“SAFE”) and the State Administration of Industry and Commerce (“SAIC”) would have broad discretion in dealing with these violations, including: discontinuing or restricting GC Nordic’s operations, requiring us or GC Nordic to restructure the relevant ownership structure, restricting or prohibiting our remittance of the dividend and our use of the proceeds of our private placement to finance our business and operations in China, or imposing conditions or requirements with which we or GC Nordic may not be able to comply. The imposition of any of these penalties would result in a material and adverse effect on our business,
cash flow, results of operations, reputation and prospects, as well as our dividend distribution and price of our shares.
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Risks Related to Doing Business in China
Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent.
All of our assets are located in the PRC. Because our assets are located overseas, our assets may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our shareholders may not receive the distributions on liquidation that they would otherwise be entitled to if our assets were to be located within the U.S., under U.S. Bankruptcy law.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
All of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.
Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.
We conduct substantially all of our business through subsidiaries and affiliated entities in China. These entities are generally subject to laws and regulations applicable to foreign investment in China. China’s legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and China’s legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and management attention.
New labor laws in the PRC may adversely affect our results of operations.
On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner
that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.
Unprecedented rapid economic growth in China may increase our costs of doing business, and may negatively impact our profit margins and/or profitability.
Our business depends in part upon the availability of relatively low-cost labor and materials. Rising wages in China may increase our overall costs of production. In addition, rising raw material costs, due to strong demand and greater scarcity, may increase our overall costs of production. If we are not able to pass these costs on to our customers in the form of higher prices, our profit margins and/or profitability could decline.
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Governmental control of currency conversion may affect the value of your investment.
The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current structure, our income is primarily derived from payments from GC Nordic. Shortages in the availability of foreign currency may restrict the ability of our Chinese subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from China State Administration
of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.
Fluctuation in the value of RMB may have a material adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Our revenues and costs are mostly denominated in RMB, while a significant portion of our financial assets are also denominated in RMB. We rely entirely on fees paid to us by our affiliated entity in China. Any significant fluctuation in the value of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our stock in U.S. dollar. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollar into RMB for such purposes.
Health epidemics and other outbreaks could adversely effect our business.
Our business could be adversely affected by the effects of an epidemic outbreak, such as the SARS epidemic in April 2004 and recent swine flu pandemic. Any prolonged recurrence of such adverse public health developments in China may have a material adverse effect on our business operations. For instance, health or other government regulations adopted in response may require temporary closure of our stores or offices. Such closures would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS, swine flu or any other epidemic.
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Risks Related to an Investment in Our Securities
Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.
Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than US$5.00 per share or an exercise price of less than US$5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability
of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
We expect to experience volatility in our stock price, which could negatively affect shareholders’ investments.
The market price for shares of our common stock may be volatile and may fluctuate based upon a number of factors, including, without limitation, business performance, news announcements or changes in general market conditions.
Other factors, in addition to the those risks included in this section, that may have a significant impact on the market price of our common stock include, but are not limited to:
·
receipt of substantial orders or order cancellations of products;
·
quality deficiencies in services or products;
·
international developments, such as technology mandates, political developments or changes in economic policies;
·
changes in recommendations of securities analysts;
·
shortfalls in our backlog, revenues or earnings in any given period relative to the levels expected by securities analysts or projected by us;
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·
government regulations, including stock option accounting and tax regulations;
·
energy blackouts;
·
acts of terrorism and war;
·
widespread illness;
·
proprietary rights or product or patent litigation;
·
strategic transactions, such as acquisitions and divestitures;
·
rumors or allegations regarding our financial disclosures or practices; or
·
earthquakes or other natural disasters concentrated in Hubei, China where a significant portion of our operations are based.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to changes in the volatility of our common stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain all earnings for our operations.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to investors, and otherwise fund and conduct our businesses.
Substantially all of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance
with PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As of December 31, 2010, the amount of our restricted net assets was US$17,776,327. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Our common shares are currently traded at low volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. However, we do not rule out the possibility of applying for listing on the NYSE Amex (formerly known as American Stock Exchange) or NASDAQ Capital Market or other markets.
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Our common shares are currently traded, but currently with low volume, based on quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal
or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of
those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market and we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market. The occurrence of these patterns or practices could increase the future volatility of our share price.
Our corporate actions are substantially controlled by our principal shareholders and affiliated entities, which give these parties substantial control over matters such as the election of directors and approval of major corporate transactions and may make it difficult for shareholders to approve any matters not supported by management.
Through the Call Option Agreement and Voting Trust Agreement entered into by and between Golden Wind and certain of our officers and directors on September 30, 2009, our principal shareholders, which includes our officers and directors, and their affiliated entities, own approximately 54% of our outstanding shares of common stock. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal shareholders and their affiliated entities, elections of our board of directors will generally be within the control of these shareholders and their affiliated entities. While
all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with these principal shareholders and their affiliated entities. As such, it would be difficult for shareholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as shareholders will be viewed favorably by all of our shareholders.
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.
Our Articles of Incorporation contain a provision permitting us to eliminate the personal liability of our directors to our company and shareholders for damages for breach of fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
36
ITEM 2. PROPERTIES.
Wuhan offices and facilities
Our principal executive offices and our primary facilities are located in Wuhan City, China. The table below provides a general description of our facilities:
Location
Principal Activities
Area (sq. meters)
Lease Expiration Date
No.86, Nanhu Avenue, East Lake Development Zone, Wuhan, Hubei Province, PRC 430223
Principal Executive Office and Factory
36,000 square meters
N/A (provided by Wuhan Donghu New Technology Development Co., Ltd. at no charge)
18 Huaguang Blvd. Gaoke Tower, 12th Floor, Guandong Technology Area, Donghu Development District, Wuhan City, Hubei Province PRC 430040
Office
100 square meters
N/A (provided by Wuhan Donghu New Technology Development Co., Ltd. at no charge)
Our manufacturing facility and principal executive office is 36,000 square meters situated in the Donghu Development District, Wuhan, China. Only the state may own land in China, therefore we lease the land under our facility. There is no expiration date for the lease, which is provided free of charge by the Administrative Committee of Donghu Development District.
Taonan facilities
In early 2010, the Company decided to invest and construct a production base in Taonao, Jilin Province, for the purpose of enhancing its production capability, as well as to enable it to produce wind turbines with larger unit power. The construction of this Taonan production base started in May, 2010 and is located in the border region among the provinces of Jilin, Inner Mongolia and Liaoning in one of the newest wind resource development areas in China, and as a result, such production base is well positioned geographically.
ITEM 3. LEGAL PROCEEDINGS.
On December 4, 2009, Nordic Windpower USA, Inc. (“Nordic Windpower”) filed a lawsuit (the “Lawsuit”) against GC China Turbine Corp., f.k.a. Nordic Turbines, Inc., in the U.S. District Court for the Northern District of California, alleging trademark infringement, trademark dilution, unfair competition and trade dress infringement. The complaint stated that Nordic Windpower seeks to enjoin us from using the mark “Nordic Turbines” and to take any corrective action related to our use, recover damages sustained from our use of the mark “Nordic Turbines” and to obtain a judgment against us because we allegedly competed unfairly under the California Business and Professions Code. Nordic Windpower filed an amended complaint on December 23, 2009.
On November 30, 2010, we entered into a Termination, Release and Settlement Agreement (the “Agreement”) with Nordic Windpower, among others, pursuant to which, the parties agreed to the settlement of all disputes between the parties and to dismiss the Lawsuit. Further, the parties agreed that Nordic Windpower shall not use the mark “NORDIC WINDPOWER” in China and we shall not use the mark “NORDIC” or any confusingly similar marks outside of China, subject to legal requirements. Further, we consented to Nordic Windpower’s use and registration of the mark or any mark incorporating the term “NORDIC” outside of China, and Nordic Windpower consented to our use and registration of the mark “GC NORDIC” or “GUOCE NORDIC” in China. In addition, the parties agreed to terminate the technical license between Wuhan Guoce Nordic New Energy Co., Ltd.
and Deltawind AB that was subsequently transferred from Deltawind AB to Nordic Windpower Limited.
37
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is not listed on any stock exchange. Our common stock is traded over-the-counter on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “GCHT.OB”. Our common stock has been trading on the OTCBB since May 15, 2009 and the following table sets forth the high and low bid information for our common stock for the indicated quarters, as reported by the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.
As of March 30, 2011, the closing sales price for shares of our common stock was $0.45 per share on the OTCBB.
Stockholders
As of March 30, 2011, there were approximately 44 shareholders of record of our common stock based upon the shareholders’ listing provided by our transfer agent. Our transfer agent is Holladay Stock Transfer Inc. The transfer agent’s address is 2939 N. 67th Place Suite C, Scottsdale, AZ85251, and its phone number is (480) 481-3970.
Dividends
We have never paid cash dividends on our common stock. We intend to keep future earnings, if any, to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future payment of dividends will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors that our board of directors may deem relevant. Our retained earnings deficit currently limits our ability to pay dividends.
Recent Sales of Unregistered Securities
On October 30, 2009, we issued 32,383,808 shares of our common stock to the Golden Wind in exchange for 100% of the capital stock of Luckcharm. The issuance of the common stock to the Golden Wind pursuant to the Exchange Agreement was exempt from registration under the Securities Act pursuant to Section 4(2) and Regulation D thereof. We made this determination based on the representations of the sole shareholder of Golden Wind which included, in pertinent part, that such shareholder was an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, and that such shareholder was acquiring our common stock, for investment purposes for its own account and not as nominee or agent, and not with a view to the resale or distribution thereof, and that such shareholder understood that the shares of our common stock may not be sold
or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
38
Between October 5, 2009 and October 30, 2009, we entered into Securities Purchase Agreements with the Investors, pursuant to which the Investors purchased 6,400,000 shares of our common stock, at a purchase price of US$1.25 per share for an aggregate offering price of US$8,000,000. Additionally, we issued warrants to each Investor in an amount equal to 10% of the number of shares that an Investor purchased and an aggregate of 560,000 warrants to advisors and placement agents, with each warrant having an exercise price of US$1.00 per share and being exercisable at any time within 3 years from the date of issuance. On October 30, 2009, we entered into a Note Purchase Agreement with Clarus whereby Clarus agreed to loan US$1,000,000 to us upon the effective date of delivery of 20 wind
turbine systems by GC Nordic to its customers. The loan will be in the form of a convertible promissory note which shall bear interest at a rate of 1% per month (the “Note”), and have a maturity date of 2 years from the date of issuance of the Note. However, both parties have agreed to terminate the Note with negotiation on detailed terms ongoing.
The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act. We made this determination based on the representations of Investors, which included, in pertinent part, that such shareholders were either (a) “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, or (b) not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S under the Act, and that such Investor was acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that each Investor understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
On July 31, 2009, we issued convertible promissory notes to certain foreign accredited investors for proceeds of US$10,000,000. The notes bear interest at 6% per annum or the lowest rate permissible by law calculated annually. Upon closing of certain agreements, the principal and accrued interest will automatically be converted into shares of common stock of the Company, at a rate of US$0.80 per share. We offered and sold the convertible notes in reliance on Section 506 of Regulation D and/or Regulation S of the Securities Act, and comparable exemptions for sales to “accredited” investors under state securities laws.
On June 8, 2009, we issued convertible promissory notes to certain foreign accredited investors for aggregate proceeds of US$1,015,000, of which US$1,000,000 was subsequently assigned by such investors to Clarus. On October 30, 2009, we agreed to amend the terms of the note with Clarus, such that upon the six month anniversary of the date of delivery of 20 wind turbine systems by GC Nordic to its customers, the note would automatically convert into shares of our common stock at US$2.00 per share. On June 12, 2010, six months after the delivery of 20 wind turbines systems, the note was automatically converted into 500,000 shares of our common stock at the conversion price of $2.00 per share. We offered and sold the convertible notes in reliance on Section 506 of Regulation D and/or
Regulation S of the Securities Act, and comparable exemptions for sales to “accredited” investors under state securities laws.
Securities Authorized for Issuance under Equity Compensation Plans
None.
Issuer Purchase of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
39
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the results of operations and financial condition for the fiscal years ended December 31, 2010, 2009 and 2008, should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere in this annual report on Form 10-K. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business
sections in this annual report on Form 10-K. We use words such as “anticipate,”“estimate,”“plan,”“project,”“continuing,”“ongoing,”“expect,”“believe,”“intend,”“may,”“will,”“should,”“could,” and similar expressions to identify forward-looking statements.
OVERVIEW
We are a wind turbine manufacturer located in Wuhan City of Hubei Province, China. Our current product is a 2-blade, 1.0 megawatt utility scale turbine with another 1.1 megawatt 2-blade utility scale wind turbine prototype under trial assembly, which is upgraded based on the 1.0 megawatt wind turbine. Designs for a 2.5 megawatt and larger offshore megawatt utility scale turbines are also in the development. We have already successfully won six wind farm contracts and begun delivering turbines to fulfill some of these contracts.
Reverse Acquisition
We were incorporated under the laws of the State of Nevada on August 25, 2006 under the name of Visa Dorada Corp. for the purpose of acquiring and developing mineral properties. We conducted limited operations from the date of our incorporation until October 2009. On October 30, 2009, we consummated a voluntary share exchange pursuant to a Share Exchange Agreement with Luckcharm, and its sole shareholder. As a result of the share exchange, we acquired all of the issued and outstanding capital stock of Luckcharm in exchange for a total of 32,383,808 shares of our common stock. Luckcharm is deemed to be the accounting acquiring entity in the share exchange and, accordingly, the financial information included in this Annual Report on Form 10-K reflects the operations of Luckcharm, as if Luckcharm had acquired us. Upon completion
of the reverse acquisition, Luckcharm became our wholly-owned direct subsidiary.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements attached hereto, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Revenue Recognition
We recognize revenues in accordance with ASC 605-10 (pre-codification reference as Staff Accountant Board (“SAB”) No.104, “Revenue Recognition”), when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. For an arrangement with multiple deliverables, we recognize product revenues in accordance with ASC 605-25 (pre-codification reference as Emerging Issues Task Force (“EITF”) No.00-21, “Revenue Arrangements with Multiple Deliverables”).
In October 2009, the FASB published ASU 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. We prospectively adopted ASU 2009-13 on January 1, 2010.
ASU 2009-13 modifies the requirements for determining whether a deliverable in a multiple element arrangement can be treated as a separate unit of accounting by removing the criteria that objective and reliable evidence of fair value exists for the undelivered elements. The new guidance requires consideration be allocated to all deliverables based on their relative selling price using vendor-specific objective evidence (VSOE) of selling price, if it exists; otherwise selling price is determined based on third-party evidence (TPE) of selling price. If neither VSOE nor TPE exist, we use our best estimates of selling price (ESP) to allocate the arrangement consideration. We adopted this update under the prospective method and have applied the new guidance to agreements entered into or materially modified after January 1, 2010.
40
Sales of the wind turbines are considered arrangements with two deliverables, consisting of the delivery of the wind turbines and the two-year period maintenance service. Under Subtopic 605-25 (pre-codification reference as EITF 00-21, Revenue Arrangement with Multiple Deliverables), we recognized all revenue upon the delivery of the wind turbines. Applying ASU 2009-13 (pre-codification reference as EITF 08-01), we would use ESP to allocate the consideration between the delivery of the wind turbines and the two-year period maintenance service. Accordingly, revenue of the two-year period maintenance service was deferred at the time of sale and will be recognized on a straight-line basis over the two years.
For the year ended December 31, 2010, the adoption of ASU 2009-13 decreased revenue, income before provision for income tax and net income by US $1,799,993, US$599,476 and US$507,756, respectively, with a decrease of US$0.01 on both basic and diluted EPS, as compared to application of the previous guidance.
The Company did not elect to adopt ASU 2009-13 retrospectively for prior periods revenue recognition for those arrangements signed prior to the fiscal year of 2010 will not be affected by ASU 2009-13. If the arrangements accounted for under Subtopic 605-25 were subject to the measurement requirements of ASU 2009-13, our revenue would have been US$12,377,441, or decreased by US$382,807 compared to the revenue recognized under Subtopic 605-25, for the year ended December 31, 2009.
We are not contractually obligated to accept returns. The sales of goods and services involve inconsequential or perfunctory performance obligations. These obligations can include non-essential installation or training, provision of product manuals and materials, and limited, pre-scheduled technical maintenance support. When the only remaining undelivered performance obligation under an arrangement is inconsequential or perfunctory, we recognize revenue on the delivery of turbines, the predominant deliverable in the total contract and provides for the cost of the unperformed obligations. Cash advances received from customers before the revenue is earned are classified as deferred revenue.
From time to time, revenue is recognized under a bill and hold arrangement. Recognition of revenue on bill and hold arrangements occurs when risk of ownership has passed to the customer, a fixed commitment has been provided by the customer, the goods are complete and ready for shipment, the goods are segregated from inventory, no performance obligation remains, and a schedule for delivery has been established.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. We conduct credit reviews for customers to whom we extend credit terms. We estimate the amount of accounts receivable that may not be collected by both specific identification of customer account where appropriate and the application of the general provision primarily based on the age of our accounts receivable.
Impairment of long-lived assets
We evaluate our long-lived assets and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the asset group to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets. For the periods presented, we recorded no impairment of our long-lived assets.
41
Inventories
Our inventories are stated at the lower of cost or net realizable value determined by the weighted average method. The valuation of inventory involves our management’s determination of the value of excess and slow moving inventory, which is based upon assumptions of future demands and market conditions. If actual market conditions are less favorable than those projected by our management, inventory write-downs may be required. We routinely evaluate quantities and value of our inventories in light of current market conditions and market trends, and record write-downs against the cost of inventories for a decline in net realizable value. Inventory write-down charges establish a new cost basis for inventory. In estimating obsolescence, we utilize our backlog information and project future demand. Market conditions are subject to change and actual consumption of inventories could differ from forecasted demand. Furthermore, the price
of steel, a key raw material component in our turbines is subject to fluctuations based on global supply and demand. If actual market conditions are less favorable or other factors arise that are significantly different than those anticipated by our management, additional inventory write-downs or increases in obsolescence reserves may be required. Our management continually monitors the spot price of steel to ensure that inventory is recorded at the lower of cost or net realizable value.
Income Taxes
As required by FASB ASC No.740, “Income Taxes” (pre-codification reference as FASB Statement No.109, “Accounting for Income Taxes”), we periodically evaluate the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. Deferred income taxes are recognized for (1) temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, or (2) net operating
loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of our management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or the expected timing of their use when they do not relate to a specific asset or liability.
Fair value of financial instruments
We estimate fair value of financial assets and liabilities as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants. The fair value measurement guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority, Level 3, to measurements based on unobservable inputs and classifies assets and liabilities with limited observable inputs or observable inputs for similar assets or liabilities as Level 2 measurement. We determine the fair value of an asset or liability using valuation techniques that maximize the use of observable inputs.
BACKLOG
Our current contracts consist of 140 units of our 1.0 MW wind turbines as of both December 31, 2010 and 2009. The 140 units representing approximately US$121.5 million, was composed of 50 units in connection with the sales contract with Daqing Longjiang, offset by 10 units delivered, 50 units in connection with the sales contract with Wuhan Kaidi, offset by 10 units delivered, 50 units in connection with the sales contract with Kelipu, and 10 units in connection with
the sales contract with Shenzhen Guohan. However, according to new PRC requirements, turbines that are connecting to the grid in the future will need to be equipped gradually with LVRT capability and larger unit power. As a result, the contracts of Kelipu and Shenzhen Guohan that have not been executed in the amount of US$36.3 million and US$8.2 million, respectively, may be cancelled as the 1.0MW turbine does not qualify for the LVRT requirements. As for orders by Daqing Longjiang and Wuhan Kaidi that have been executed and delivered, the Company will make best efforts in executing the remainder of the contracts. Nevertheless,
to date, the Company has not received any demand from Daqing Longjiang and Wuhan Kaidi to execute the remainder of the contracts. See “Business - Our Customers.”
Net income attributable to GC China Turbine Corp. shareholders
$
11,394,527
19.58
%
$
339,647
2.67
%
Revenue
Sales for the year ended December 31, 2010 were US$58,199,785 compared to US$12,760,248 for the year ended December 31, 2009. This increase of US$45,439,537 or 356%, was due to an increase in the number of units sold during 2010 as compared with 2009. Our production facilities were operational for all of 2010, during which we recorded sales of 100 units of 1.0 MW wind turbines, as compared to 16 wind turbines sold in 2009.
Cost of Sales and Gross Profit Margin
Total cost of sales for the year ended December 31, 2010 was US$41,903,175, an increase from US$9,792,077 in 2009. Gross profit for fiscal year ended 2010 was US$16,296,610 or 28% of revenue compared to 23.26% for fiscal year 2009. The increase was mainly due to a combination of (a) we were released of the obligation for paying royalties to Nordic Windpower in accordance with the settlement agreement signed between the Company and Nordic Windpower, and as a result, the previously accrued royalties were reversed and the technical license was fully amortized, the comprehensive impact of which had a positive influence on the decrease of our cost of sales in 2010, and (b) the increase in the quantity of wind turbines produced, which leads to relevant decreases in the manufacturing costs per unit
due to economies of scale, has also been a direct cause for the increase in gross profit margin.
The following table sets forth the components of our cost of sales and gross profit both in absolute amount and as a percentage of total net sales for the periods indicated.
The largest component of our cost of sales, raw materials, consists of components, fittings and materials used in the manufacture of our wind turbines. Most of these raw materials are procured within China. Localization of the Company’s raw materials for its wind turbine products has also resulted in corresponding lower sales prices per unit as compared to 2009.
Operating Expenses, Interest Expense (Income) and Other Expense (Income)
Gain from change in fair value of warrant liability
(1,181,499
)
(2.03
) %
(65,493
)
(0.51
) %
Provision for income tax
2,066,875
3.55
%
1,340,364
10.50
%
Income before equity investment income
11,365,465
19.53
%
339,647
2.67
%
Equity investment income, net of tax
4,410
0.01
%
-
-
%
Net income
11,369,875
19.54
%
339,647
2.67
%
Net loss attributable to noncontrolling interests
(24,652
)
(0.04
) %
-
-
%
Net income attributable to GC China Turbine Corp. shareholders
$
11,394,527
19.58
%
$
339,647
2.67
%
Operating Expenses
Selling expenses in 2010 increased by US$876,837 from US$144,440 in 2009 to US$1,021,277 in 2010. This was primarily due to the rise of revenue during 2010 as compared with 2009. Additionally, the level of salaries and welfare for employees has relatively improved. As a result, selling expenses for the year ended December 31, 2010 which included the addition of eight sales personnel, salaries and bonus, travelling expenses, marketing, office supplies and other expenses increased when compared with the year ended December 31, 2009.
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Research and development expenses were US$918,732 for the fiscal year ended December 31, 2010 compared to US$90,437 for the fiscal year ended December 31, 2009. We incorporated Guoce Nordic AB and GC Wind Power AB in Sweden which are engaged in 1.1MW, 2.5MW and 3.0MW wind turbine research. The increase was primarily attributable to the research and development activities of the 1.1MW, 2.5MW and 3.0MW wind turbines during 2010.
General and administrative expenses increased by US$1,270,846 from US$973,965 in 2009 to US$2,244,811 in 2010. With the development of the business and increased headcount, the level of salaries and welfare for employees have significantly increased for salary and bonus, office expense and travelling expense. Furthermore, our professional fees increased by US$553,516 in the year ended December 31, 2010 for expenses associated with the filing of periodic reports with the SEC and other consulting services related to tax, human resources (“HR”), internal control, and legal services.
Other operation income increased by US$107,008 from US$79,047 in 2009 to US$186,055 in 2010. This was mainly due to the increase in unrestricted government subsidies from local government agency.
Interest Expense
Interest expense was US$346,192 for the year ended December 31, 2010 compared to US$159,229 for the year ended December 31, 2009. The increase of interest expense was mainly due to the short-term bank borrowings drawn down in late June 2010 and November 2010.
Interest Income
Interest income was US$302,278 for the year ended December 31, 2010 compared to US$47,529 for the year ended December 31, 2009. The increase was primarily due to the amortization of premium in the amount of US$50,500 for convertible promissory note, the amortization for the difference between long-term accounts receivable’s present value and face amount in the amount of US$56,527, and interest income earned from term deposit and short-term lending to related parties of US$56,430 and US$138,080, respectively, for the year ended December 31, 2010. Interest income in 2009 mainly consisted of the amortization of premium in the amount of US$22,250 for convertible promissory note, and interest income earned from short-term lending to related parties of US$21,470.
Gain from Change in Fair Value of Warrant Liability
We recorded a gain on fair value change of US$1,181,499 of the warrant liability for the year ended December 31, 2010. In conjunction with the private placement offering of 6,400,000 common shares on October 30, 2009, we granted warrants to each investor in an amount equal to 10% of purchased common shares, or a total of 640,000 shares. We recorded the fair value of the warrants of US$1,332,881 on day one as warrant liability in the consolidated balance sheets as the warrants do not qualify for equity classification under US GAAP. The warrant liability was re-measured at fair value of US$85,889 and US$1,267,388 as of December 31, 2010 and 2009, respectively. The fair value change of US$1,181,499 was recorded as gain on change
in fair value of warrant liability in the consolidated statements of operations for the year ended December 31, 2010.
Provision for Income Tax
Income tax provision for the year ended December 31, 2010 was US$2,066,875 compared to income tax provision of US$1,340,364 for the year ended December 31, 2009. The effective tax rate for the year ended December 31, 2010 decreased by 64.6% from the 80% effective tax rate for the year ended December 31, 2009 to 15.4%. The decrease was primarily due to a combination of (a) income tax liability of US$825,000 arising from the US$3,300,000 cash consideration paid by Luckcharm to the Founders during the recapitalization which was deemed as capital contribution subject to PRC income tax for the year ended December 31, 2009, and (b) effective January
1, 2010, GC Nordic is entitled to enjoy a 15% preferential tax rate as a high-and-new technology enterprise.
Net Income Attributable to Shareholders
Net income attributable to shareholders for the year ended December 31, 2010 was US$11,394,527, an increase of US$11,054,880 from net income attributable to shareholders of US$339,647 for the year ended December 31, 2009. This is mainly due to the rise of revenue for the year ended December 31, 2010 in the amount of US$58,199,785 compared to US$12,760,248 for year ended December 31, 2009.
Sales for the year ended December 31, 2009 were US$12,760,248 compared to US$3,065,007 for the year ended December 31, 2008. This increase of $9,695,241, or 361%, was due to an increase in the number of units sold during 2009 as compared with 2008. Production of our wind turbines began during 2008, and four wind turbines were sold in 2008. Our production facilities were operational for all of 2009, during which we recorded sales of 16 units of 1.0 MW wind turbines. We started mass production based on orders from our customers during the second half of 2009, and we expect to have sales during every quarter of fiscal 2010.
Cost of Sales and Gross Profit Margin
The following table sets forth the components of our cost of sales and gross profit both in absolute amount and as a percentage of total net sales for the periods indicated.
Total cost of sales for the year ended December 31, 2009 was US$9,792,077, an increase from US$2,970,613 in 2008. Gross profit for fiscal year ended 2009 was US$2,968,171 or 23.26% compared to 3.08% for fiscal year 2008. The increase in gross profit as a percentage of total net sales is due to the allocation of our overhead expenses over a larger number of units sold in 2009 as compared to the fiscal year 2008. As compared to the cost of raw materials expenses and labor, which are directly tied to our net sales, our overhead expenses are generally fixed or increase or decrease at a much lower rate than net sales. We started mass production starting from the second half of 2009 and recognized revenue of 16 wind turbines. While in 2008, only 4 wind turbines were sold during the whole year.
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The largest component of our cost of sales, raw materials, consists of components, fittings and materials used in the manufacture of our wind turbines. Most of these raw materials are procured within China. With the anticipated growth of the wind power industry in China, management expects that the manufacturing capacity of the parts and components of our wind turbines will also continue to grow and result in decreased costs for these raw materials within our industry. In addition, if we are able to grow successfully and increase production, management believes we will be able to negotiate better pricing on raw materials through higher volume purchase and more efficiently utilize its manufacturing capacity resulting in a lower average cost of production per unit.
Operating Expenses, Interest Expense (Income) and Other Expense (Income)
Selling expenses in 2009 increased by US$86,515 from US$57,925 in 2008 to US$144,440 in 2009. In order to develop our markets and capture market share, we increased our sales force and certain selling expenses for the year ended 2009, including salaries and bonus, traveling expenses, marketing and other expenses.
Research and development expenses were US$90,437 for the fiscal year ended December 31, 2009 compared to US$94,300 for the fiscal year ended December 31, 2008. Research and development expenses were primarily attributable to the patent amortization of the 1.5MW wind turbine for both 2009 and 2008.
General and administrative expenses increased by US$580,183 from US$393,782 in 2008 to US$973,965 in 2009. Due to the financing activities during fiscal year 2009, our legal and auditing fees increased accordingly. Furthermore, with the development of the business, we hired additional employees associated with administrative activities, which led to significant increase of management costs, such as salary and bonus, office expense and traveling expense.
47
In 2009, we received unrestricted government subsidies from local government agency allowing us full discretion in the fund utilization of $79,047, which was recorded in other operating income in the consolidated statements of income. In 2008, we received a government grant, which is related to our activities in research and development projects, from a local government agency in the amount of $42,435. We recorded the government grant against the research and development expenses when incurred.
Interest Expense
Interest expense was US$159,229 in 2009 compared to US$106,231 in 2008. Interest expense was primarily due to the bank loan we borrowed in fiscal 2008, which was repaid in July 2009 upon maturity. There was interest expense associated with the extinguished promissory note in the amount of $48,720 in fiscal year 2009, which was the main reason for the decrease of interest expenses when compared with fiscal year 2008.
Interest Income
Interest income was US$47,529 for the year ended 2009 compared to US$1,405 for the year ended 2008. The increase was primarily due to the amortization of premium in the amount of US$22,250 for convertible promissory note, and interest income earned from short-term loans to related parties of US$21,470 in 2009.
Other Expense (Income), Net
Other expense (income), net for 2009 and 2008 amounted to US$54,356 and US$(62,109), respectively, a decrease of US$116,465. The decrease was mainly due to the foreign exchange loss resulting from overseas raw materials purchases caused by the devaluation of the RMB against the Euro. We purchase most of the raw materials from suppliers in China now, and management does not believe further devaluation of the RMB against the Euro would result in significant foreign exchange losses in future periods.
Loss from Debt Extinguishment
We recorded a loss on debt extinguishment of US$57,802 for the year ended at December 31, 2009. On June 8, 2009, we issued a promissory note of $600,000 to New Margin (“New Margin Note”) and a promissory note of $415,000 to Coach Capital LLC (“Coach Note”), respectively. On October 30, 2009, the New Margin Note and the Coach Note were assigned to Clarus and superseded by a promissory note to Clarus in the principal amount of $1,000,000. All accrued but unpaid interest on the New Margin Note and the Coach Note was waived. We accounted for the assignment and modification of the Coach Note as a debt extinguishment, and recorded a loss on debt extinguishment of US$57,802 in the consolidated statements of operations. We accounted for the assignment and modification
of the New Margin Note as a capital transaction given New Margin’s equity shareholder capacity on the extinguishment date. The amount that otherwise would have been recognized as loss on debt extinguishment, or $83,478, was recorded against additional paid-in capital.
Gain from Change in Fair Value of Warrant Liability
We recorded a gain on fair value change of US$65,493 of the warrant liability. In conjunction with the private placement offering of 6,400,000 common shares on October 30, 2009, we granted warrants to each investor in an amount equal to 10% of purchased common shares, or a total of 640,000 shares. The warrants had an exercise price of $1.00 per share and were exercisable any time within three years from the date of issuance. However if the fiscal year 2010 after tax net income (ATNI) is less than a guaranteed $12,500,000, we will reduce the exercise price of each warrant to equal to Adjusted Exercise Price in accordance to a pre-set formula, provided that if the Adjusted Exercise Price is negative, the Adjusted Exercise Price will be deemed to equal to $0.001 per share. We recorded the fair value of the warrants of $1,332,881 as warrant liability in the consolidated balance
sheets as the warrants do not qualify for equity classification under US GAAP. The warrant liability was re-measured at fair value of $1,267,388 at December 31, 2009. The fair value change of $65,493 was recorded as gain on change in fair value of warrant liability in the consolidated statements of operations.
48
Provision (Benefit) for Income Tax
Income tax provision for 2009 was US$1,340,364 compared to income tax benefit of US$115,742 for 2008. The actual effective tax rates for the year ended December 31, 2009 and 2008 are 80% and 23%, respectively. The increase of the effective tax rate is mainly attributable to the income tax liability of $825,000 arising from the $3,300,000 cash consideration paid by Luckcharm to the Founders during the recapitalization which was deemed as capital contribution subject to PRC income tax.
Net Income (Loss)
Net profit in 2009 was US$339,647, an increase of US$718,235 from net loss US$378,588 in 2008. This is mainly due to the rise of revenue in 2009, revenue achieved US$12,760,248 in 2009 with US$9,695,241 increase comparing with 2008, represented a 316% growth rate. Most of these raw materials are procured within China now, which reduced the unit cost of the wind turbines by US$130,648 and this is also a main reason for the increase of the net profit. The largest component of our cost of sales, raw materials, consists of components, fittings and materials used in the manufacture of our wind turbines. With the anticipated growth of the wind power industry in China, management expects that the manufacturing capacity of the parts and components of our wind turbines will also continue to grow and result in decreased costs for these raw materials within our industry. In addition, if we are able to grow successfully and increase
production, management believes we will be able to negotiate better pricing on raw materials through higher volume purchase and more efficiently utilize its manufacturing capacity resulting in a lower average cost of production per unit.
LIQUIDITY AND CAPITAL RESOURCES
The following table set forth a summary of our cash flows for the periods indicated:
As of December 31, 2010, we had cash and cash equivalents of US$1,788,138, other current assets of US$71,340,151 and current liabilities of US$45,047,487. Other current assets included US$1,056,972 six-month term deposit and US$2,551,304 restricted cash used as security against bank drafts which are used as short term instruments to reduce financing cost. As of December 31, 2010, our accounts receivable consisted of billed receivable of US$25,685,643, and unbilled receivable of US$32,764,395, offset by bad debt provision of US$267,423. As of the date hereof, we collected US$498,287 billed receivable from the customers. We anticipate collecting approximately US$10 million from customers in the second quarter of 2011.
Substantially all of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance
with PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes, such as reduce previous years’ loss and increase the capital of the subsidiaries, and are not transferable to us in the form of loans, advances or cash dividends. As of December 31, 2010, the amount of our restricted net assets was US$17,776,327. This represented the registered capital of our PRC subsidiaries. In accordance with Section 209 of China’s Company Law, the founder shareholders of the company are restricted to withdraw such registered capital;
otherwise, it would be deemed an offence and we would be subject to paying a penalty.
49
Our cash needs are primarily for working capital to support our operations and the purchase of raw materials related to the commencement of our mass production. We presently finance our operations through revenue from the sale of our products and services, the private placement of equity and debt securities and short-term bank borrowings. We believe that our existing capital resources are sufficient to meet our current obligations and operating requirements, but will not be sufficient to meet our more aggressive growth plans and that we may need to raise additional capital based on actual conditions. We will consider debt or equity offerings or institutional borrowings as potential means of financing, however, there are no assurances that we will be successful or that we will obtain terms that are favorable to us. Our ability to raise capital is subject to approval by our existing investors, New Margin, CV and CV Advisors
pursuant to an investor rights agreement. As such, we may not be able to accept certain available financing offers if we do not receive the approval of New Margin, CV and CV Advisors. If we are unable to reach an agreement with New Margin, CV and CV Advisors regarding future financing opportunities, that could adversely affect our ability to meet our business objectives.
Our liquidity could be further impacted by external factors such as any significant decrease in the market price of electricity or increase in the price of raw materials like steel and copper. Although we have yet to be materially impacted by such factors, each or a combination of such factors may result in lower sales, increased expenses and costs and result in lower profitability and cash flow, thus reducing our liquidity. We may also in the future apply for and receive government subsidies. Although we have not applied for any such subsidies to date, any such subsidies which we may receive in the future may increase our liquidity. See “Business - China Economic Incentive Policies.”
Cash Flows from Operating Activities
Net cash used in operating activities for the year ended December 31, 2010 was US$10,677,482 compared with net cash used in operating activities of US$9,182,962 for the year ended December 31, 2009. We began mass production in the second half year in 2009 and delivered 100 sets of wind turbines in the year ended December 31, 2010, which increased accounts receivable in the amount of US$45,213,187, long-term accounts receivable in the amount of US$3,034,601, income tax payable in the amount of US$1,753,976, and decreased US$3,081,376 for inventories, respectively. The sales contracts of our Company often
are consistent with the generally accepted payment terms within the wind power equipment manufacturing industry, which include payments upon signing, progress payments, delivery payments, pre-acceptance payments, and guarantee payments. Our liquidity may be impacted by the timely collection of accounts receivable, but the effect will be partially mitigated by the pertinent management on the payments of accounts payable. We delivered 100 wind turbines in fiscal year 2010, which led to the increase of account payables and notes payable balance in the amount of US$16,343,519 on December 31, 2010 as compared with December 31, 2009. Advance to suppliers decreased by US$1,477,876 due to the arrival of raw materials purchased in 2010. In the year ended December 31, 2010, we spent US$25,243,507 in purchasing raw materials and
other production materials, US$1,121,611 in staff compensation and social welfare, US$403,753 in income tax and other taxes, US$2,735,397 in other operating expenses, and received US$18,024,393 from our customers and US$802,393 from other operating activities.
Cash Flows from Investing Activities
Net cash used in investing activities was US$5,489,319 for the year ended December 31, 2010, compared with US$4,350,171 used in investing activities for the year ended December 31, 2009. This increase in cash used in investing activities was primarily related to an increase in six-month term deposit of US$1,056,972, the purchase of property and equipment in the amount of US$1,909,487, and an increase in loan to related parties of US$6,718,534, offset by US$4,154,069 repayment received from related parties.
Cash Flows from Financing Activities
Net cash provided by financing activities was US$14,077,246 for the year ended December 31, 2010, compared with US$17,324,407 for the year ended December 31, 2009. Cash provided by financing activities during the year ended December 31, 2010 was primarily related to US$13,451,217 short-term borrowings from a bank and US$626,029 short-term loans from related parties. The amount of US$17,324,407 net cash provided by financing activities in 2009 was primarily related to US$7,275,014 cash contribution from shareholders, US$4,588,764 short-term loans from related parties, offset by US$4,727,779 repayment of short-term loans to related parties and US$9,906,115 proceeding from issuance of convertible promissory notes.
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Outstanding Indebtedness
We had a loan facility in the amount of US$18,119,520 (RMB120,000,000) from a PRC bank for procuring raw material purpose, which was guaranteed by GC-Tech and four shareholders of the Company, and collateralized by the same amount of our accounts receivable. As of December 31, 2010, we were in compliance with all the covenant requirements under this loan agreement.
On June 24, 2010, we have drawn down the first tranche of this loan facility of US$9,059,760 (RMB60,000,000) with a fixed annual interest rate of 6.37%. On November 26, 2010, another tranche of US$4,529,880 (RMB30,000,000), with a fixed annual interest rate of 6.67% under the same loan facility, was withdrawn by us, with simultaneously passing through Hou Tie Xin, the chairman and the principal shareholder of the Company. As of December 31, 2010, there was US$4,529,880 (RMB30,000,000) available from the loan facility for future withdrawing.
Net cash used in operating activities for 2009 was US$9,182,962 compared with net cash used in operating activities of US$2,369,299 for 2008. The increase in net cash used in operating activities for 2009 was mainly due to a US$20,173,793 increase in working capital attributable to activities associated with our commencement of mass production. With the delivery of sixteen sets of wind turbine in 2009, our accounts receivable balance increased US$8,925,117. As the entity commenced mass production in 2009, the purchase of the raw material led to a US$1,701,662 increase in our inventory balance. The advance to suppliers increased US$2,735,602 due to prepayment of the raw material purchased in late 2009. Other current liabilities increased US$1,755,564 and mainly include VAT payable, warranty accrual and other royalty accrual. Net cash used in operating activities for 2008 was mainly due to changes in working capital for 2008
primarily related to a US$2,724,470 decrease in advance to suppliers due to the arrival of the raw material purchased in late 2008, and a US$342,509 increase in deferred revenue because of the prepayment received from a customer. Such amounts were offset by increases in accounts receivable and inventories of US$3,090,202 and US$3,138,119, respectively.
Cash Flows from Investing Activities
Net cash used in investing activities was US$4,350,171 for 2009, compared with US$189,643 used in investing activities for 2008. This increase in cash used in investing activities was primarily related to an increase in loans made to related parties and an increase in restricted cash. Loans from related parties increased to US$1,696,774 in 2009 from US$0 in 2008, the most significant of which was US$1,837,636 owed to Wuhan Guoce Science & Technology Corp. which is an electric power equipment manufacturer controlled by Hou Tie Xin. Restricted cash increased to US$2,878,941 in 2009 from US$0 in 2008. As noted above, restricted cash consists of bank demand deposits used as security against bank drafts which are used as short term instruments to reduce financing cost. Capital expenditures increased US$280,560 in 2009, compared to an increase of
US$118,869 in 2008. This increase resulted primarily from increases in machinery, tools, and other equipment used as we commenced mass production activities in 2009.
Cash Flows from Financing Activities
Net cash provided by financing activities was US$17,324,407 in 2009, compared with US$1,865,443 in 2008. This increase was due to an overall increase in our capital raising activities used to support operations related to the commencement of our mass production. The primary financing activities included our receipt net cash proceeds of US$7,275,014 from an October 2009 private placement offering under which 6,400,000 common shares were issued to third party investors at $1.25 per share. We also executed convertible promissory notes in favour of New Margin, CV and CV Advisors for net proceeds of US$9,906,115. The proceeds from our capital raising activities were primarily offset by repayments of short-term borrowings, including US$2,195,808 repaid on bank borrowings and US$4,727,779 repaid to related parties.
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CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in its determination of amounts presented in the tables, in order to assist in the review of this information within the context of its consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of December 31, 2010, and the effect these obligations are expected to have on its liquidity and cash flows in future periods.
Payments Due by Period
Total
Less than 1 year
1-3 Years
3-5 Years
5 Years +
Contractual obligations:
Capital obligations
$
1,769,019
$
1,769,019
$
-
$
-
$
-
Purchase obligations
$
17,809,299
$
12,321,205
$
5,488,094
$
-
$
-
Total contractual obligations:
$
19,578,318
$
14,090,224
$
5,488,094
$
-
$
-
Capital obligations include the items in relation to asset improvement and new plant construction within the next twelve months. Purchase obligations consist of expenses on purchasing components, such as gear box, power generator, and blades, etc.
Off-Balance Sheet Arrangements
As of December 31, 2010, we do not have any outstanding guarantees. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Recent Accounting Pronouncements
On December 21, 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-29 to address differences in the ways entities have interpreted ASC 805’s requirements for disclosures about pro forma revenue and earnings in a business combination. The ASU states that “if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.” In addition, the ASU “expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.”The
Company considers that the adoption of ASU 2010-29 has no significant impact on its consolidated financial statements.
On July 21, 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. For public entities, the new and amended disclosures that relate to information as of the end of a reporting period will be effective for the first interim or annual reporting periods ending on or after December 15, 2010. That is, for calendar-year-end public entities,
most of the new and amended disclosures in the ASU will be effective for this year-end reporting season. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications of financing receivables. For calendar-year-end public entities, those disclosures will be effective for the first quarter of 2011. The Company considers that the adoption of ASU 2010-20 has no significant impact on its consolidated financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, accounts receivable, amount due from related parties, accounts payable, advance to suppliers, short-term borrowings, warrants, and convertible notes. The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in interest rates and foreign exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as
to expected future rates.
Interest Rates. We did not experience any material changes in interest rate exposures during 2008, 2009 and 2010. Hence, the effect of the fluctuations of the interest rates is considered minimal to our business operations. Based upon economic conditions and leading market indicators at December 31, 2010, we do not foresee a significant adverse change in interest rates in the near future and do not use interest rate derivatives to manage exposure to interest rate changes.
Foreign Exchange Rates. 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. 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, cash and assets are denominated in RMB, 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 our business or results of operations. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our Chinese operations are translated from local currency into U.S. dollar upon consolidation. If the U.S. dollar weakens against the RMB, the translation of our foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against the RMB. Additionally, foreign exchange rate fluctuations on transactions denominated
in RMB other than the functional currency result in gains and losses that are reflected in our consolidated statement of operation. Our operations are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
Considering the RMB balance of our cash as of December 31, 2010, which amounted to US$1,657,101, a 1.0% change in the exchange rates between the RMB and the U.S. dollar would result in an increase or decrease of approximately US$16,571 of the balance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Annual Financial Statements for the year ended December 31, 2010 will follow the text of this Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rule 13a-15(e) and 15a-15(e)) as of December 31, 2010 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer along with our Principal Financial Officer concluded that our disclosure controls and procedures are not effective as of the end of the period covered by this annual report in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This conclusion is based
on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Management concluded, as of December 31, 2010, that our internal control over financial reporting was not effective. Management realized there were deficiencies in the design or operation of the
Company’s internal control that adversely affected the Company’s internal controls which management considers to be material weaknesses.
Remediation and Changes in Internal Control over Financial Reporting
As previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, management had concluded that as of December 31, 2009, there were deficiencies in the design or operation of our internal control that adversely affected our internal controls which management considers to be material weaknesses including those described below:
i)
We lack additional personnel with the experience to properly analyze and record complex transactions in accordance with U.S. GAAP.
ii)
We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
iii)
We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.
iv)
We do not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members, and an independent audit committee financial expert is an important entity-level control over our financial statements.
v)
We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.
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For the material weaknesses identified in (i), (ii) and (iii), we have hired Ms. Ping Ye, a licensed CPA, as our Chief Financial Officer, and engaged an external consulting firm who specialized in designing internal control to assist us with establishing Sarbanes-Oxley compliance programs to evaluate our internal control over financial reporting under Section 404. These actions have partially remediated the material weaknesses, but management concluded that we still have these material weaknesses as of December 31, 2010. We will continue to remediate these material weaknesses in the next 12 months by hiring additional personnel with experience and knowledge in U.S. GAAP, directly involved in internal control review and design, and allow for segregation of key financial reporting. This may cost us in excess
of US $100,000 per year. The material weakness identified in (iv) has not been remediated. However, in March 2011, our Board of Directors agreed to establish an audit committee and compensation committee and is currently in the process of reviewing candidates for such committees. We need to analyze the costs of such additional independent directors in accordance with current market and industry practices. The material weakness identified in (v) has not been remediated. We plan to remediate this material weakness by working with our internal resources such as Ms. Qi Na and Ms. Ping Ye, and legal counsel over the next 12 months to perform periodic entity level risk assessment. This may not need additional significant cost.
As a conclusion, management believes that the five material weaknesses identified as of December 31, 2009 has not been remediated. We still have such material weaknesses as of December 31, 2010. Other than as described above, management does not believe that there have been any other changes in the Company's internal control over financial reporting during the Company's most recent fiscal quarter, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Management
The following table sets forth the names and ages of our current directors, executive officers, significant employees, the principal offices and positions with us held by each person and the date such person became our director, executive officer or significant employee. Our executive officers are appointed by our Board of Directors. Our directors serve until the earlier occurrence of the appointment of his or her successor at the next meeting of stockholders, death, resignation or removal by the Board of Directors.
Our Board of Directors believes that its members encompass a range of talent, skill, and experience sufficient to provide sound and prudent guidance with respect to our operations and interests. The information below with respect to our directors includes each director’s experience, qualifications, attributes, and skills that led our board of directions to the conclusion that he or she should serve as a director.
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Mr. Hou Tie Xin is the Chairman of our Board of Directors. He is the founder, Chairman of the Board and General Manager of Guoce New Technology, which was established in 1995 and was renamed to Guoce Science and Technology in 2002. Since inception of Guoce Science and Technology, Mr. Hou has overseen the acquisition of over ten subsidiaries and has been awarded the title of “Outstanding Entrepreneur” by the municipal government. Mr. Hou is a nationally renowned power expert and is a professor of engineering. Mr. Hou has obtained more than 20 patents for his inventions in connection with his research and development of energy technology. Mr. Hou is a member of the China Standardization Committee and is an author of China’s Power
Quality Standards. Mr. Hou is also a member of the International Electrotechnical Commission (“IEC”) and attended the 2007 IEC Assembly in Tokyo as the leader of the Chinese delegation. Mr. Hou obtained his Bachelor of Engineering degree in Power System and Automation from Wuhan University in 1982 and a Masters degree in Power Automation from Huazhong University of Science & Technology in 1990. Mr. Hou’s business and leadership experience, his knowledge and stature in the power industry and his engineering background give him unique insights into our challenges, opportunities, and operations.
Ms. Qi Na is our Chief Executive Officer and a member of our Board of Directors. She has been General Manager of GC Nordic since 2006. From 2004, Ms. Qi was General Manager of Wuhan Guoce Power Investment Corp. as well as Vice General Manager of Guoce Science and Technology. In 1999, Ms. Qi founded and was General Manager of Hubei TaiKang Engineering Tech Corp. From 1993 to 1999, she worked at Hubei International Financial Technology Consultation Corp., Hubei ChangJiang HePingShiYe Corp., and Wuhan Machine Bidding Corp. From 1972 to 1992, Ms. Qi worked at YiChang 403 factory and 461 factory in various departments, including, youth union, cadre, repair, drive workshop, quality control and energy. Ms. Qi obtained a Bachelor of Engineering degree specializing in Marine Power Plant from Shanghai Jiaotong University in 1978. Ms. Qi’s
leadership and operational experience and her broad range of work experiences at multiple levels of government, and her engineering background make her an a valuable asset to our Board of Directors.
Ms. Ping Ye is our Chief Financial Officer. Ms. Ye has over 15 years of general accounting, auditing and financial reporting experience and most recently served as Chief Financial Officer of China Environment Protection, Inc., (CNVP.OB), a People’s Republic of China-based company listed on the OTCBB and engaged in the design, manufacture and installation of water and sewage treatment equipment for environmental protection purposes. From 2007 to 2009, Ms. Ye held the position of Vice President of Finance and Accounting of USI Holding Corporation Colburn Insurance, a Goldman Sachs private equity portfolio company. From 2005 to 2007, Ms. Ye served as Manager of Internal Reporting at the Massachusetts Institute of Technology. Earlier, Ms. Ye held various positions in accounting and finance at several global financial service companies
in both the United States and China. Ms. Ye is a licensed certified public accountant in New York State and is a member of the American Institute of Certified Public Accountants. Ms. Ye received her MBA from the Wharton School, University of Pennsylvania, and has a Bachelor of Business Administration from Baruch College (CUNY) in New York, New York.
Mr. Tomas Lyrner is our Chief Technology Officer. He has been serving as the Chief Technology Officer of Wuhan Guoce Nordic New Energy Co., Ltd. since 2006. Mr. Lyrner began his professional career at a Danish wind turbine manufacturer named NEG Micon (later merged into Vestas) in 1985. His main responsibilities were research and development, design and calculations. He was closely involved with the development of a Danish three-bladed 200 kilowatt wind turbine of which 50-60 machines was produced. From the beginning of 1990 to 1999, Mr. Lyrner worked at the consultant company AF-Industriteknik where he was highly involved in the design and development of the 2 Nordic Windpower prototype wind turbines with the generator power of 400 and 1000 kilowatts. Mr. Lyrner designed and calculated wind turbine offshore foundations for the
company Vindkompaniet of which 5 wind turbines were installed and still operating 4 kilometers outside of Nasudden, Gotland, Sweden. From 1999-2004, he was Chief Technology Officer of Nordic Windpower USA, Inc. working with modification and adoption to serial production of the Nordic 1000, 1MW wind turbine prototype. He was also responsible for design approval against the Det Norske Veritas. Since 2004, Mr. Lyrner has had his own consultant firm named Wind Engineering Consultant (“WEC”). WEC has acted as assistant and advisor for EON Sweden (a European power company) regarding a large wind power offshore project. WEC has also designed docking system for offshore wind turbines and conducted conceptual studies leading to the final layout of 6MW offshore wind turbines through dynamic simulations by means of VIDYN software. Mr. Lyrner received his Masters in Mechanical Engineering from the Royal Institute of Technology of Stockholm Sweden
in 1984.
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Mr. Zhu Wenyao is our Chief Operating Officer. Mr. Zhu has served as the Deputy General Manager of Marketing for the Company since October 2010, where his responsibilities included developing the Company’s marketing strategy, managing the Company’s marketing budget, overseeing sales team management, developing new markets, supporting the Company’s accounts receivable collection process and collecting market information for management. Prior to joining the Company, Mr. Zhu served
as Deputy General Manager of Sales and Service and Sales Manager for Diamond Power Machine (Hubei) Co., Inc. since October 2008, where Mr. Zhu’s responsibilities included managing the annual budget of the Sales and Service team, leading the Sales and Service team, achieving orders within required margins and conditions, and assisting in establishing a marketing strategy, forecast and plan. From December 2004 to October 2008, Mr. Zhu served as Commercial Department Manager of NK Wuhan Cable Co., Ltd. where his responsibilities included being responsible for the performance of the marketing and sales team, managing subordinates to develop new key customers and preparing marketing analysis reports for management. From October 2000 to December 2004, Mr. Whu served as a Commercial Engineer for NK Wuhan Cable Co., Ltd., where his responsibilities included sales development, accounts receivable collection and marketing feedback. From December 1999 to October 2000, Mr. Whu
served as Purchaser in the Production Department of NK Wuhan Cable Co., Ltd. Prior to that, Mr. Whu served in various capacities with Chengtong Group Southern Metal Branch from July 1993 to December 1999, including the position of Purchasing Department Manager. Mr. Zhu received his Bachelor of Science in Engineering and Masters of Business Administration degrees from the Huazhong University of Science and Technology.
Mr. Marcus Laun is a member of our Board of Directors. He currently is a senior banker at Wynston Hill Capital, LLC where he is responsible for all aspects of capital raising and advisory engagements for micro- and small-cap ventures. From 2004 through 2008, Mr. Laun held various positions at Knight Capital Group including serving as managing director and director. From 2000-2004, Mr. Laun was founder and Chief Executive Officer of Hype (USA) Inc. which controlled the exclusive rights to HYPE Energy Drink in North America. Prior to this, Mr. Laun was a Vice President of corporate finance at Brean Murray & Co., Inc. and a research analyst at Greenwich High Yield LLC and Mendham Capital Group LLC. Mr. Laun received a Masters in Business Administration degree from Columbia Business School and received a Bachelor of Science
degree from Cornell University. Mr. Laun’s banking experience, prior operational experience and dealings with small cap public companies provides our Board with a perspective of someone with knowledge in multiple facets of public and private company operations, capital-raising and strategy.
Mr. Cary Zhou is a member of our Board of Directors. Mr. Zhou is a senior partner with New Margin Ventures, which controls New Margin, a 10% stockholder of the Company, and one of the first independent and professionally managed private equity fund management companies in China to undertake the management of both domestic and offshore funds. New Margin Ventures currently has over US$1 billion under management and to-date has invested more than US$600 million in over 100 companies. Of these, over 30 have gone public in domestic or international stock exchanges. Over the years, Mr. Zhou has worked throughout China beginning with AT&T Bell Labs as senior engineer for telecommunications, followed by a move to Lucent Technology (China) resulting
in his role as a Vice President, Sales & Marketing, prior to his joining New Margin Ventrures in 2007. Also while at Lucent, Mr. Zhou was the Chief Representative of Lucent Technology for southern China, where he was responsible for the oversight of all of Lucent’s activities in the region, including with respect to government relationships. Mr. Zhou also set up the Lucent Joint Venture in China and was the General Manager for Lucent Technologies of Shanghai Joint Venture. Mr. Zhou received his B.S. and M.S. degrees in Electrical Engineering from the Polytechnic University of New York. The Board of Directors appointed Mr. Zhou to the board due to his lengthy industry background, extensive government relationships in China, experience with publicly traded companies and demonstrated business expertise, which the Board believes will prove to be an extraordinary asset for the Company.
Mr. Zhang Weijun is a member of our Board of Directors. Mr. Zhang has served as the Deputy General Manager in charge of wind resource development of GC Nordic, the Company’s wholly owned operating subsidiary, since March 2009. Mr. Zhang is responsible for acquiring sales orders and wind resources, as well as managing sales projects in the Inner Mongolia region. Prior to that, Mr. Zhang served as the Manager of the Instrumentation Department of Guoce Science and Technology from March 1993 to March 2009 where he participated in the development of all of the company’s instruments. Mr. Zhang received his Bachelor of Engineering degree from the Beijing Institute
of Technology, where he majored in Electronic Engineering, and his Master of Engineering degree from the Huazhong University of Science and Technology, where he majored in Electronic Surveying. The Board of Directors appointed Mr. Zhang to the board due to his lengthy wind-turbine industry background, technical expertise, and knowledge of the Company through his association with GC Nordic and Guoce Science and Technology.
Family Relationships
There are no family relationships between or among any of our directors, executive officers and incoming directors or executive officers.
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Involvement in Certain Legal Proceedings
There has been a legal proceeding filed against GC China Turbine in connection with trademark infringement, trademark dilution, unfair competition and trade dress infringement that was settled in November 2010. See “Legal Proceedings.”
Board Committees; Director Independence
All members of our board of directors serve in this capacity until their terms expire or until their successors are duly elected and qualified. Our bylaws provide that the authorized number of directors will be not less than one or greater than eight. In March 2011, our Board of Directors agreed to establish an audit committee and compensation committee and is currently in the process of reviewing candidates for such committees. We expect to post the charters of our audit and compensation committees on our website at www.gcchinaturbine.com as soon as practicable once such charters are finalized and approved by our
Board of Directors. As of this date, our board of directors has not appointed a disclosure committee or nominating committee. The functions ordinarily handled by these committees are currently handled by our entire board of directors. Our board of directors intends, however, to continue to review our governance structure and institute additional board committees and appoint additional directors as necessary and advisable in the future, to facilitate the management of our business.
As of this date, we appointed 2 independent directors and 3 non-independent directors to our board of directors. Marcus Laun and Cary Zhou are our two independent directors and we continue to evaluate additional independent director candidates for our board of directors. We evaluate independence by the standards for director independence established by applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established by The New York Stock Exchange, Inc., The NASDAQ National Market, and the Securities and Exchange Commission.
Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive
officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $200,000 or two percent of that other company’s consolidated gross revenues.
Code of Ethics
We have adopted a code of ethics that applies to our officers, directors and employees, including our chief executive officer, senior executive officers, principal accounting officer, and other senior financial officers. A copy of our code of ethics is included as an exhibit to this Annual Report on Form 10-K and will be provided to any person without charge, upon written request sent to us at our offices located at No.86, Nanhu Avenue, East Lake Development Zone, Wuhan, Hubei Province, China.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, officers, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These regulations require the directors, officers, and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of the copies of such forms received by us during the fiscal year ended December 31, 2010, and written representations that no other reports were required, we believe that each person who, at any time during such fiscal year was a director, officer, or beneficial owner of more than 10% of our common stock, complied with all Section 16(a) filing requirements during such fiscal year, except that Mr. Hou
Tie Xin, Ms. Zhao Ying, Mr. Xu Jia Rong, Ms. Qi Na, Mr. Xu Hong Bing and Golden Wind Holdings Ltd. each filed one late report on Form 4 relating to the acquisition of shares from Golden Wind pursuant to the Call Option Agreements described above.
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ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
Currently, we do not pay any compensation to members of our board of directors for their service on the board. However, we intend to review and consider future proposals regarding board compensation.
Executive Compensation
The following summary compensation table indicates the cash and non-cash compensation paid by GC Nordic during the fiscal years ended December 31, 2010 and 2009, respectively, to the current and former Chief Executive Officer, the current and former Chief Financial Officer and each of the other two highest paid executives, if any, whose total compensation exceeded $100,000 during the fiscal years ended December 31, 2010 and 2009, respectively.
Ms. Qi Na is our Chief Executive Officer and took office concurrently with Mr. Lennon’s resignation effective October 30, 2009. Salary and other annual compensation paid to Ms. Qi are from GC Nordic and are expressed in U.S. dollars based on the interbank exchange rates of RMB 6.6227 and RMB 6.8282 for each US$1.00, on December 31, 2010 and 2009, respectively.
(2)
Ms. Ping Ye is our Chief Financial Officer and took office concurrently with Ms. Zhao’s resignation effective November 8, 2010. Pursuant to the terms and conditions of Ms. Ye's Management Agreement, Ms. Ye shall be paid a monthly retainer of US$8,333. Additionally, Ms. Ye is eligible to receive possible bonus compensation pursuant to an overtime arrangement and in connection with certain material corporate transactions, all as set forth in the Management Agreement. Further, it is contemplated that Ms. Ye will receive certain non-qualified stock options to purchase Company stock pursuant to an equity incentive plan approved by the Company’s Board of Directors; however, no such stock options have been issued at this time
and the Company has not yet approved an equity incentive plan. The Management Agreement is effective as of November 8, 2010 and will continue for six (6) months thereafter, unless terminated sooner, after which the parties shall attempt to mutually agree to the terms of an extension to the Agreement.
(3)
Mr. John J. Lennon resigned as our Chief Executive Officer, President, Chief Financial Officer, Treasurer, Secretary, and director effective October 30, 2009.
(4)
Ms. Zhao Ying is our former Chief Financial Officer and took office concurrently with Mr. Lennon’s resignation, effective October 30, 2009. Ms. Zhao resigned as the Company’s Chief Financial Officer and Secretary effective November 8, 2010. Salary and other annual compensation paid to Ms. Zhao are from GC Nordic and are expressed in U.S. dollars based on the interbank exchange rates of RMB 6.6227 and RMB 6.8282 for each US$1.00, on December 31, 2010 and 2009, respectively.
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Except as indicated above, none of our executive officers received, nor do we have any arrangements to pay out, any bonus, stock awards, option awards, non-equity incentive plan compensation, or non-qualified deferred compensation.
Potential Payments Upon Termination or Change-in-Control
SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection with any termination of employment or change in control of the company. We currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control. As a result, we have omitted this table.
Employment Agreements
Our wholly-owned subsidiary, GC Nordic, entered into employment agreements with Mr. Hou Tie Xin, Ms. Qi Na, and Mr. Xu Jia Rong on September 30, 2009 (each an “Employment Agreement,” and together the “Employment Agreements”). The following are summaries of the Employment Agreements with the above-mentioned officers and directors.
GC Nordic entered into an Employment Agreement with Mr. Hou Tie Xin on September 30, 2009. Effective September 30, 2009, Mr. Hou was appointed Chairman of GC Nordic, and his basic annual salary is RMB 300,000 or approximately US$43,924 per year (the “Base Salary”). GC Nordic’s salary shall be payable by GC Nordic in regular installments in accordance with GC Nordic’s general payroll practices. GC Nordic shall also purchase social insurances and provide welfare and benefits to Mr. Hou according to the applicable labor laws and regulations. In addition, the Board may award Mr. Hou a bonus of up to 25% of his Base Salary during his employment period according to degree of GC Nordic’s accomplishment of certain financial targets established annually
by GC Nordic.
GC Nordic entered into an Employment Agreement with Ms. Qi Na on September 30, 2009. Effective September 30, 2009, Ms. Qi Na was appointed the General Manager of GC Nordic and her total annual salary is RMB 200,000 or approximately US$29,283 per year. Ms. Qi’s salary shall be payable by GC Nordic in regular installments in accordance with GC Nordic’s general payroll practices. GC Nordic shall also purchase social insurances and provide welfare and benefits to Ms. Qi according to the applicable labor laws and regulations. In addition, the Board may award Ms. Qi a bonus of up to 25% of her Base Salary during her employment period according to the degree of GC Nordic’s accomplishment of certain
financial targets established annually by GC Nordic.
GC Nordic entered into an Employment Agreement with Mr. Xu Jia Rong on September 30, 2009. Effective September 30, 2009, Mr. Xu Jia Rong was appointed the Deputy General Manager of GC Nordic and his total annual salary is RMB 15,000 or approximately US$2,196 per year. GC Nordic’s salaries shall be payable by GC Nordic in regular installments in accordance with the GC Nordic’s general payroll practices. GC Nordic shall also purchase social insurances and provide welfare and benefits to Mr. Xu according to the applicable labor laws and regulations. In addition, the Board may award Mr. Xu a bonus of up to 25% of his Base Salary during his employment period according to degree of GC Nordic’s accomplishment of certain financial targets established annually by GC Nordic.
All of the above-described Employment Agreements will be effective from September 30, 2009 to the fifth anniversary date (the “Initial Employment Period”), and all of them shall automatically be renewed on their respective original terms and conditions as modified from time to time by the officers and directors and GC Nordic for additional one-year periods as soon as the expiration of the Initial Employment Period. GC Nordic may terminate the employment of the officers and directors before his or her employment periods expires if such officers and directors materially violates GC Nordic’s rules or policies, negligently causes substantial damage or adverse effect to GC Nordic’s interests, or is charged or convicted with criminal liabilities. The officers and directors agree that during their employment periods and anytime thereafter that they shall not to disclose any
confidential information, including those received from third parties, to unauthorized person or use for his or her own account without prior written consent(s) from the appropriate authorities, unless the confidential information becomes generally known to and available for use by the public or is required to be disclosed by law or court order. In addition, the officers and directors agree to make prompt and full disclosure to GC Nordic or its affiliates of his or her obtaining ownership of intellectual properties during his or her employment period and one year thereafter in connection with the business of GC Nordic or its affiliates.
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Pursuant to the terms and conditions of Ms. Ye's Management Agreement, Ms. Ye shall be paid a monthly retainer of US$8,333. Additionally, Ms. Ye is eligible to receive possible bonus compensation pursuant to an overtime arrangement and in connection with certain material corporate transactions, all as set forth in the Management Agreement. Further, it is contemplated that Ms. Ye will receive certain non-qualified stock options to purchase Company stock pursuant to an equity incentive plan approved by the Company’s Board of Directors; however, no such stock options have been issued at this time and the Company has not yet approved an equity incentive plan. The Management Agreement is effective as of November
8, 2010 and will continue for six (6) months thereafter, unless terminated sooner, after which the parties shall attempt to mutually agree to the terms of an extension to the Agreement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information regarding the beneficial ownership of our common stock as of March 30, 2011, for each of the following persons:
·
each of our directors and each of the current named executive officers in the “Management—Executive Compensation” section of this report;
·
all directors and current named executive officers as a group; and
·
each person who is known by us to own beneficially five percent or more of our common stock.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the shareholder’s name. Unless otherwise indicated, the address of each beneficial owner listed below is No.86, Nanhu Avenue, East Lake Development Zone, Wuhan, Hubei Province, China.
All directors and executive officers as a group (8 persons)
20,417,712
34.33
%
5% Shareholders:
Golden Wind Holdings Limited
13,337,522
(8)
22.43
%
New Margin Growth Fund L.P.
6,250,000
(10)
10.51
%
Ceyuan Ventures II, LP
6,016,250
(9)
10.12
%
Bu Zheng Liang
3,231,904
(7)(8)
5.43
%
*
Less than 1%
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(1)
Unless otherwise indicated in the footnotes to the table, each shareholder shown on the table has sole voting and investment power with respect to the shares beneficially owned by him or it.
(2)
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act, and is based on 59,470,015 shares outstanding as of March 30, 2011. Pursuant to the rules of the SEC, shares of Common Stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
(3)
Includes 7,316,965 shares owned of record by Golden Wind. Golden Wind and Mr. Hou have entered into a Call Option Agreement pursuant to which Mr. Hou has the right to acquire all of such shares. Golden Wind and Mr. Hou have also entered a Voting Trust Agreement, under which Mr. Hou has been appointed as voting trustee under a voting trust created with respect to all of such shares. Therefore, Mr. Hou may be deemed to be the sole beneficial owner of such shares.
(4)
Includes 1,067,002 shares owned of record by Golden Wind. Golden Wind and Ms. Qi have entered into a Call Option Agreement pursuant to which Ms. Qi has the right to acquire all of such shares. Golden Wind and Ms. Qi have also entered a Voting Trust Agreement, under which Ms. Qi has been appointed as voting trustee under a voting trust created with respect to all of such shares. Therefore, Ms. Qi may be deemed to be the sole beneficial owner of such shares.
(5)
Mr. Zhou is a senior partner with New Margin Ventures, which controls New Margin Growth Fund L.P., a 10% stockholder of the Company. The address of Mr. Zhou is c/o New Margin Growth Fund L.P., Villa #3, Radisson Xingguo Hotel, 78 Xingguo Road, Shanghai 200052 PRC. The shares indicated in the table are owned personally by Mr. Zhou.
(6)
Consists of warrants to purchase 35,000 shares issued in the name of Manhatten Valley Capital, LLC and 26,250 shares issued in the name of Beige Capital LLC, to the extent exercisable within 60 days. Mr. Laun is a member in both limited liability companies and therefore may be deemed to be the beneficial owner to such warrants. The address of Mr. Laun is c/o Wynston Hill Capital, 488 Madison Avenue 24th Floor, New York, NY10022.
(7)
Includes 1,331,085 shares owned of record by Golden Wind. Golden Wind and Mr. Bu have entered into a Call Option Agreement pursuant to which Mr. Bu has the right to acquire all of such shares. Golden Wind and Mr. Bu have also entered into a Voting Trust Agreement, under which Mr. Bu has been appointed as voting trustee under a voting trust created with respect to all of such shares. Therefore, Mr. Bu may be deemed to be the sole beneficial owner of such shares.
(8)
The address of Golden Wind is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The sole owner of Golden Wind is Xu Hong Bing. Through Call Option Agreements and Voting Trust Agreements, the beneficial owners of Golden Wind are deemed to be Hou Tie Xin (30.13%), Bu Zheng Liang (5.48%), Qi Na (4.39%), Xu Jia Rong (3.61%), Wu Wei (3.56%), Zhao Ying (2.64%), Zuo Gang (1.91%), Zhang Wei Jun (1.81%) and He Zuo Zhi (1.38%). As such, they are deemed to have or share investment control over Golden Wind’s portfolio. The numbers of shares of GC China Turbine Corp’s common stock reported herein as beneficially owned by Mr. Hou, Mr. Bu, Ms. Qi, Mr. Xu, Mr. Wu, Ms. Zhao,
Mr. Zuo, Mr. Zhang and Mr. He are held by Golden Wind, which they in turn own indirectly through their respective ownership of Golden Wind.
(9)
The address of Ceyuan Ventures II, LP is No. 25 Qinlao Hutong, Dongcheng District, Beijing 100009 PRC. Christopher Walker Wadsworth, Bo Feng and WeiGuo Zhao have dispositive and voting control for Ceyuan Ventures II, LP.
(10)
The address of New Margin Growth Fund L.P. is Villa #3, Radisson Xingguo Hotel, 78 Xingguo Road, Shanghai 200052 PRC. Mr. Yan YiXun has dispositive and voting control for New Margin Growth Fund L.P.
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Securities Authorized For Issuance Under Equity Compensation Plans
None.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
On May 22, 2009, GC Nordic entered into a promissory note in favor of us, in the principal amount of US$1,000,000. On the same day, we wired the US$1,000,000 to Golden Wind, a company controlled 100% by the Chairman of GC Nordic at that time due to the fact that Golden Wind and Luckcharm were not yet incorporated. Subsequently, on July 28, 2009, Luckcharm received the proceeds from the related party. Upon closing of the reverse acquisition, this loan became an intercompany loan.
On June 8, 2009, we issued convertible promissory notes to certain foreign accredited investors for aggregate proceeds of US$1,015,000, of which US$1,000,000 was subsequently assigned by such investors to Clarus. On October 30, 2009, we agreed to amend the terms of such notes with Clarus, such that upon the six month anniversary of the date of delivery of 20 wind turbine systems by GC Nordic to its customers, the loan would automatically convert into shares of our common stock at US$2.00 per share. Also on October 30, 2009, we entered into (i) an amendment to a convertible promissory note held by Clarus in the amount of US$1,000,000 revising the conversion feature of such note (“Clarus Note I”), and (ii) a Note Purchase Agreement with Clarus whereby Clarus agreed to loan
US$1,000,000 to us upon the effective date of delivery of 20 wind turbine systems by us to our customers in the form of a convertible promissory note bearing no interest, having a maturity date of 2 years from the date of issuance and convertible into shares of our common stock at US$2.00 per share at anytime at holder’s option (“Clarus Note II”). Both notes are automatically convertible into shares of our common stock at $2.00 per share on the six-month anniversary upon the effective date of delivery of 20 wind turbine systems by us to our customers. On June 12, 2010, six months after the delivery of 20 wind turbines systems, Clarus Note I was automatically converted into 500,000 shares of our common stock at the conversion price of $2.00 per share. On August 11, 2010, the Company
and Clarus entered into an amendment to the Note Purchase Agreement. The two parties have agreed to terminate the Clarus Note II with negotiation on detail terms ongoing. In connection with the private placement, we also issued 640,000 warrants to investors and 560,000 warrants to placement agents and advisors to purchase our common stock with each warrant having an exercise price of US$1.00 per share and being exercisable at any time within 3 years from the date of issuance. Mr. Marcus Laun who is a member of our board of directors is also the Managing Director of Clarus.
On July 31, 2009, Luckcharm entered into a promissory note in favor of us in the principal amount of US$10,000,000 in connection with our loan made to Luckcharm. Under the terms of the promissory note, we shall forgive the debt and cancel the promissory note so long as (i) the reverse acquisition is completed pursuant to its terms or (ii) if the reverse acquisition is not completed pursuant to its terms, the debt is converted pursuant to the Financing Agreement. If the reverse acquisition is not completed and the debt is not converted pursuant to the Financing Agreement, the debt shall be due and payable within 180 days from the date of the promissory note. Upon closing of the reverse acquisition, this loan became an intercompany loan.
On September 4, 2009, we appointed Mr. Hou Tie Xin, Ms. Qi Na and Mr. Xu Jia Rong to our Board of Directors. On October 30, 2009, we consummated the reverse acquisition with Luckcharm and its operating subsidiary, GC Nordic. Mr. Hou Tie Xin, Ms. Qi Na and Mr. Xu Jia Rong were each original founders of GC Nordic and each received beneficial ownership of shares of our common stock in connection with the reverse acquisition as described in “Security Ownership of Certain Beneficial Owners and Management.” In addition, Mr. Hou
Tie Xin and Ms. Qi Na are the Chairman of the Board and Chief Executive Officer, respectively, of GC Nordic. In connection with the closing of the reverse acquisition, Ms. Qi Na was appointed Chief Executive Officer of our Company.
In December 30, 2009, GC Nordic contributed US$28,597 and jointly established Guoce Nordic AB with Tomas Lyrner in Sweden, of which 85% of the shares of Guoce Nordic AB is held by GC Nordic and 15% by Mr. Lyrner. Guoce Nordic AB is the research and development center of GC Nordic will contribute to GC Nordic all of the intellectual rights developed. Mr. Lyrner is our Chief Technology Officer.
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Wuhan Guoce Science & Technology Corp. (“GC-Tech”) and we are related parties as Mr. Hou Tie Xin is the Chairman of the board of directors for both companies. The Company had US$3,453,918 and US$1,837,636 due from GC-Tech as of December 31, 2010 and December 31, 2009, respectively. The amount of US$3,453,918 represented 1) the prepayment of US$259,529 to GC-Tech who imported raw materials from overseas on behalf of the Company and 2) a short-term lending and related interest receivable of US$3,194,389 with stated due date in June 2011. The amount of US$1,837,636 as of
December 31, 2009 represented the prepayment of US$407,549 to GC-Tech and the related party lending of US$1,430,087 the Company extended to GC-Tech in August 2009. Weighted average interest rates of the related party loan are 5.6% and 5.4% for the years ended December 31, 2010 and 2009, respectively, which benchmarks to the one year borrowing rate for bank loans from People’s Bank of China.
The Company had US$1,213,228 and US$266,687 due from Wuhan Guoce Electricity Investment Co., Ltd. (“Guoce Electricity Investment”) as of December 31, 2010 and 2009, respectively. Guoce Electricity Investment and we are subject to common control as it is controlled by our principal shareholder and Chairman of the Board. The amount of US$1,213,228 as of December 31, 2010 represented other receivable of US$96,637, and a short-term lending and related interest receivable of US$1,116,591 with stated due date in June 2011. Weighted average interest rate of the related party lending is 5.6%, which benchmarks to the one year borrowing rate for bank loans from People's Bank of China. The amount
of US$266,687 as of December 31, 2009 represented a short-term lending to Guoce Electricity Investment bearing no interest, and this amount was settled in March 2010.
The Company had US$0 and US$210,899 due from Wuhan Sanlian Water & Electricity Control Equipment Co., Ltd (“Wuhan Sanlian”) as of December 31, 2010 and December 31, 2009, respectively, for the purchase of raw materials. Wuhan Sanlian is controlled by Xu Jia Rong, a former director of the Company. The Company also had US$453,029 and US$0 due to Wuhan Sanilan as of December 31, 2010 and December 31, 2009, respectively, for a short-term lending, bearing no interest. After
the establishment of Wuhan Mita-Sanlian New Energy Technology Co., Ltd. (“Wuhan Mita-Sanlian”), an equity investee of the Company, the purchase and prepayment for the raw materials were all transferred from Wuhan Sanlian to Wuhan Mita-Sanlian.
The Company had US$104,264 and US$0 due to Wuhan Mita-Sanlian as of December 31, 2010 and 2009 respectively. The amount of US$104,264 represented the accounts payable to Wuhan Mita-Sanlian for purchase of raw materials. The Company purchased US$419,376 raw materials from Wuhan Mita-Sanlian during the year ended December 31, 2010.
The Company had US$173,000 short-term borrowings from Join Right Management Limited (“Join Right”), an entity controlled by our principal shareholder and Chairman of the Board, as of December 31, 2010. Such borrowing does not bear any interest and is payable upon demand. In addition, the Company has other receivable of US$10,000 from Join Right as of December 31, 2009.
In January 2010, we entered into an agreement to acquire 70% ownership of Baicheng Guoce Wind Power Development Co., Ltd (“Baicheng Guoce”) for a consideration of US $205,032 (RMB1,400,000) from a related party, Wuhan Guoce Electricity Investment Co., Ltd., with whom we are related parties as Mr. Hou Tie Xin is the Chairman of the board of directors for both companies. Baicheng Guoce is mainly engaged in production and erection of wind turbines and providing technical support during installation, operation, maintenance and after-sales service for wind turbines. We are required to inject additional capital funds in the amount of $820,129 by December 31, 2011.
The Company has a loan facility in the amount of US$18,119,520 (RMB120,000,000) from a PRC bank for procuring raw material purpose. On November 26, 2010, a tranche of US$4,529,880 (RMB30,000,000) with a fixed annual interest rate of 6.67% under the loan facility, was granted to the Company via a simultaneous pass through from Hou Tie Xin, the chairman and the principal shareholder of the Company.
64
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table shows the fees paid or accrued by us for the audit and other services provided by Deloitte Touche Tohmatsu CPA Ltd. (“Deloitte”) for the fiscal periods shown.
The following table shows the fees paid or accrued by us for the audit and other services provided by Madsen & Associates, CPA’s Inc. (“Madsen”) for the fiscal period shown.
The aggregate fees billed by the independent registered accountants for the years ended December 31, 2010 and 2009 for professional services for the review of the quarterly financial statements for the quarters ended March 31, June 30 and September 30, 2009, annual financial statements for the fiscal years ended December 31, 2010 and 2009 and services that are normally provided by the accountants in connection with statutory and regulatory filings or engagements for those period years were as follows: $500 for each of the quarters ended March 31, June 30 and September 30, 2009 to Madsen and $600,000 and $235,000 for the annual financial
statements for the fiscal years ended December 31, 2010 and 2009, respectively, to Deloitte.
(2) Audit Related Fees
The aggregate fees billed, mentioned above for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Item 9(e)(1) of Schedule 14A. Services comprising the fees disclosed under the category of “Audit-related fees” in 2009 primarily consisted of audit and review of financial statements in conjunction with our reverse acquisition transaction which was consummated on October 30, 2009 and review of financial statements and registration statement in connection with our registration of certain shares and warrants.
(3) Tax Fees
The aggregate fees billed in December 31, 2010 and 2009 for professional services rendered by the principal accountants for tax compliance, tax advice, and tax planning was zero.
(4) All Other Fees
The aggregate fees billed in December 31, 2010 and 2009 for products and serviced provided by the principal accountant, other than the services reported in (1) through (3) above was zero.
65
(5) Audit Committee’s Pre-approval Policies
In the absence of a formal audit committee, the full Board of Directors pre-approves all audit and non-audit services to be performed by the independent registered public accounting firm in accordance with the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. The Board of Directors pre-approved 100% of the audit, audit-related and tax services performed by the independent registered public accounting firm for the fiscal years ended December 31, 2010 and 2009.
(6) Audit Hours Incurred
The percentage of hours expended on the principal accountant’s engagement to audit the Company’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0%.
66
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibits
The following exhibits are included as part of this report by reference:
Supplementary Agreement to Call Option Agreement dated April 30, 2010 with Xu Hong Bing and each of Hou Tie Xin, Bu Zheng Liang, Qi Na, Xu Jia Rong, Wu Wei, Zhao Ying, Zuo Gang, Zhang Wei Jun and He Zuo Zhi
Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Additional Information - Financial Statement Schedules
F-28
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
GC China Turbine Corp.
No. 86, Nanhu Avenue, East Lake Development Zone
Wuhan, Hubei Province, PRC
We have audited the accompanying consolidated balance sheets of GC China Turbine Corp. and subsidiaries (the "Group") as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2010 and the related financial statement schedules. These financial statements and financial statement schedules are the responsibility of the Group's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of GC China Turbine Corp. and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Accounts receivable, less allowance for doubtful accounts of $267,423 and nil as of December 31, 2010 and 2009, respectively
5
58,182,615
12,128,711
Inventories
6
2,116,022
5,087,326
Advance to suppliers
2,349,826
3,734,728
Amount due from related parties
7
4,667,146
2,325,212
Prepaid expenses and other current assets
323,472
155,780
Deferred tax assets
16
92,794
276,206
Total current assets
73,128,289
30,391,690
Property, plant and equipment, net
8
3,314,939
1,402,839
Intangible assets, net
9
-
744,175
Prepaid land use right
363,108
-
Equity investment
12
110,176
-
Long-term accounts receivable
3,711,852
532,387
Deferred tax assets
16
139,982
37,157
Other assets
141,119
165,490
Total assets
$
80,909,465
$
33,273,738
LIABILITIES & EQUITY
Current liabilities:
Short-term borrowings
10
$
13,589,640
$
-
Accounts payable
13,086,475
2,543,843
Notes payable
6,175,208
2,030,865
Accrued expenses and other current liabilities
11
8,216,598
2,770,488
Deferred revenue
-
1,856,413
Income tax payable
3,249,273
1,416,643
Amount due to related parties
7
730,293
-
Total current liabilities
45,047,487
10,618,252
Convertible promissory note
13
-
1,182,750
Warrant liability
15
85,889
1,267,388
Other long-term liabilities
2,609,269
473,198
Total liabilities
47,742,645
13,541,588
Commitments and contingencies
18
EQUITY
Common share (US$0.001 par value; 100,000,000 shares authorized, 59,470,015 and 58,970,015 shares issued and outstanding as of December 31, 2010 and 2009, respectively)
14
59,470
58,970
Additional paid-in capital
21,016,395
19,884,645
Retained earnings (accumulated deficit)
11,022,150
(372,377
)
Accumulated other comprehensive income
1,001,158
158,757
Total GC China Turbine Corp. shareholders' Equity
33,099,173
19,729,995
Non controlling interest
67,647
2,155
Total equity
33,166,820
19,732,150
Total liabilities and equity
$
80,909,465
$
33,273,738
The accompanying notes are an integral part of these consolidated financial statements.
F-2
GC China Turbine Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in US dollars, except share data)
Year ended December 31
Note
2010
2009
2008
Revenues
$
58,199,785
$
12,760,248
$
3,065,007
Cost of sales
41,903,175
9,792,077
2,970,613
Gross profit
16,296,610
2,968,171
94,394
Operating expenses:
Selling and marketing expenses
1,021,277
144,440
57,925
Research and development expenses
918,732
90,437
94,300
General and administrative expenses
2,244,811
973,965
393,782
Other operation income
(186,055
)
(79,047
)
-
Total operating expenses
3,998,765
1,129,795
546,007
Income (loss) from operations
12,297,845
1,838,376
(451,613
)
Interest expense
346,192
159,229
106,231
Interest income
(302,278
)
(47,529
)
(1,405
)
Other expense (income), net
3,090
54,356
(62,109
)
Loss from debt extinguishment
13
-
57,802
-
Gain from change in fair value of warrant liability
15
(1,181,499
)
(65,493
)
-
Income (loss) before provision for income tax and equity investment income
13,432,340
1,680,011
(494,330
)
Provision (benefit) for income tax
16
2,066,875
1,340,364
(115,742
)
Income (loss) before equity investment income
11,365,465
339,647
(378,588
)
Equity investment income, net of tax
12
4,410
-
-
Net income (loss)
11,369,875
339,647
(378,588
)
Net loss attributable to noncontrolling interest
(24,652
)
-
-
Net income (loss) attributable to GC China Turbine Corp. shareholders
$
11,394,527
$
339,647
$
(378,588
)
Earnings (loss) per share- basic
17
$
0.19
$
0.01
$
(0.01
)
Earnings (loss) per share- diluted
17
$
0.17
$
0.01
$
(0.01
)
Weighted average common share outstanding- basic
17
59,246,727
36,899,821
32,383,808
Weighted average common share outstanding- diluted
17
60,022,853
38,115,890
32,383,808
The accompanying notes are an integral part of these consolidated financial statements.
F-3
GC China Turbine Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Amounts expressed in US dollars, except share data)
(Amounts expressed in US dollars, except share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
GC China Turbine Corp. (the "Company") was incorporated in the State of Nevada, United States of America, on August 25, 2006. On July 24, 2009 and further amended and restated on July 31, 2009, the Company entered into a binding letter of intent (the "LOI") with Luckcharm Holdings Limited, a Hong Kong company ("Luckcharm"), GC Nordic New Energy Co., Ltd. ("GC Nordic"), Ceyuan Venture II, L.P. ("CV"), Ceyuan Ventures Advisors Fund II, LLC ("CV Advisors") and NewMargin Growth Fund L.P. ("New Margin"). CV, CV Advisors and New Margin are the private equity investors. Under the terms of LOI, the
Company acquired all of the issued and outstanding shares of Luckcharm in exchange for Golden Wind Holdings Limited ("Golden Wind"), a company incorporated in the British Virgin Islands as an exempted company with limited liability under the Companies Law of the British Virgin Islands and the parent company of Luckcharm at that time, acquiring fifty-four percent (54%) ownership interest in the Company (the "Exchange Transaction"). On October 30, 2009, the Exchange Transaction was consummated. As a result of the Exchange Transaction, Luckcharm became the Company's wholly-owned subsidiary. For accounting purpose, Luckcharm is the acquiring entity. In the consolidated financial statements subsequent to the transaction, the assets
and liabilities of the Company were recognized at fair value (which approximated carrying value) on the transaction date, except for those resulted from transactions entered into on behalf of or primarily for the benefit of Luckcharm or the Company prior to the Exchange Transaction and the assets and liabilities of Luckcharm were recorded at carrying amounts immediately prior to the transaction. The amount recognized as issued equity interests was determined by adding the issued equity interest of Luckcharm outstanding immediately before the transaction to the fair value of the Company. However, the equity structure was restated to reflect the number of common shares of the
Company issued to effect the transaction using the exchange ratio prescribed by the Exchange Agreement. The historical financial statements prior to the effective date of the Exchange Transaction are those of Luckcharm. All share and per share data have been presented to give retroactive effect of the Company’s legal capital throughout the periods presented in these financial statements.
Luckcharm Holding Limited was incorporated in Hong Kong on June 15, 2009 as a shell company. On June 28, 2009, Luckcharm was acquired by Golden Wind Holding Limited for cash consideration of HK$1.00 (US$0.13). On August 1, 2009, Luckcharm entered into an agreement to acquire 100% of the equity of Wuhan Guoce Nordic New Energy Co., Ltd. ("GC Nordic") for total cash consideration of $3.3 million (RMB 22.5 million) from the original nine individual shareholders (the "Founders"). At the time of this transaction, the Founders obtained 100% voting interests in Golden Wind in the same proportion as their ownership interest in GC Nordic, through a call option and voting trust agreements
with Xu Hong Bing (the "Seller"), the sole shareholder of Golden Wind for a nominal consideration. The acquisition of Golden Wind has been accounted for as a reverse acquisition with no change in control. On August 5, 2009, GC Nordic received approval on this acquisition from the Bureau of Commerce of the Wuhan City, Hubei Province, People's Republic of China ("PRC"). The restructuring process has been accounted for as a recapitalization as Luckcharm and GC Nordic were under common control with no adjustment to the historical basis of the assets and liabilities of GC Nordic.
GC Nordic was established as a domestic limited liability company on August 21, 2006 upon the issuing of a license by the Administration for Industry and Commerce of the Wuhan City, Hubei Province, PRC with an operating period of ten years to August 20, 2016.
Upon the consummation of the Exchange Transaction on October 30, 2009,
1)
The Company issued 32,383,808 common shares to Golden Wind in exchange for 100% of the issued and outstanding capital stock of Luckcharm (Note 14).
2)
US$10 million convertible promissory notes issued to New Margin, CV and CV Advisors in July 2009 were converted into 12,500,000 shares of the Company's common share (Note 13).
3)
The Company assigned two previously issued promissory notes to Clarus Capital Ltd. in the amount of US$1 million ("Clarus Note I") (Note 13).
4)
The Group entered into an agreement with Clarus Capital Ltd. for a forward issuance of US$1 million promissory note ("Clarus Note II") (Note 13).
5)
The Group completed a private placement offering by issuing 6,400,000 shares of its common share to third party investors for a total consideration of US$8 million (Note 14). In conjunction with the private placement, the Group also granted 640,000 shares of warrants ("Warrant I") to these investors on a pro-rata basis and 560,000 shares of warrants ("Warrant II") to the private placement agents (Note 15).
(Amounts expressed in US dollars, except share data)
6)
Golden Wind, the parent company of the Group, entered into a make good escrow agreement with the private placement investors, whereby Golden Wind pledged 640,000 common shares of the Group for the benefit of these investors when certain events occur (Note 14).
On December 30, 2009, GC Nordic incorporated an 85% owned subsidiary, Guoce Nordic AB, ("Nordic AB") in accordance with the laws of Sweden, which would be engaged in wind turbine technology research and market development. Tomas Lyrner, the Chief Technology Officer of the Company, holds the remaining 15% interest.
On January 12, 2010, the Group incorporated a 100% owned company named Baicheng Kairui Wind Power Co., Ltd ("Baicheng Kairui") located in Baicheng SiJianFang, Jilin Province PRC, which is mainly engaged in production and erection of wind turbines and providing technical support during installation, operation, maintenance and after-sales service for wind turbines, and construction and management of wind farms.
Baicheng Guoce Wind Power Development Co., Ltd ("Baicheng Guoce") was established in September 2009 and located in Baicheng Private Development Zone, Jilin Province PRC. The Group acquired 70% ownership of Baicheng Guoce for a consideration of US$205,032 from Wuhan Guoce Electricity Investment Co., Ltd ("Guoce Electricity Investment"), a related party, on January 14, 2010. The Group paid part of the cash consideration in the amount of US$146,492 to Guoce Electricity Investment in February 2010. The acquisition has been accounted for as a business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements subsequent to the acquisition date. Since there was no business activity nor contract
signed from the establishment date through acquisition date, the purchase consideration approximated the fair value of the net assets acquired, therefore no goodwill was recorded. Baicheng Guoce is mainly engaged in production and erection of wind turbines and providing technical support during installation, operation, maintenance and after-sales service for wind turbines, and construction and management of wind farms.
On May 27, 2010, the Company established an 85% owned subsidiary, GC Windpower AB, ("Windpower AB") in accordance with the laws of Sweden, which is engaged in wind turbine technology research and market development. Tomas Lyrner, the Chief Technology Officer of the Company, holds the remaining 15% interest. The wind turbine technology research has been transferred from Nordic AB to Windpower AB. Nordic AB became dormant.
On June 30, 2010, the Group incorporated a 100% owned subsidiary, Taonan Guoce New Energy Co., Ltd ("Taonan Guoce") located in Taonan, Jilin Province PRC, which is mainly engaged in production and erection of wind turbines and providing technical support during installation, operation, maintenance and after-sales service for wind turbines.
GC China Turbine Corp., Luckcharm Holding Limited, GC Nordic, Nordic AB, Baicheng Guoce, Baicheng Kairui, Windpower AB and Taonan Guoce are collectively referred to as the "Group", which is primary engaged in the design, manufacture, commission and distribution of wind turbine generator and provides related technical support service in the PRC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation
The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). The Group's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely basis and to obtain additional financing as may be required.
(Amounts expressed in US dollars, except share data)
(b)
Basis of consolidation
The consolidated financial statements include the financial statements of the Company and its majority-owned subsidiaries. All transactions and balances among the Group and its subsidiaries have been eliminated upon consolidation.
(c)
Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that reported in the accompanying consolidated financial statements and related disclosures, and the reported amounts of revenues and expenses during the reporting period. These estimates are based on management’s best knowledge of current events and actions that the Group may take in the future. Actual results could materially differ from these estimates.
Significant accounting estimates and assumptions reflected in the financial statements include but are not limited to allowance for doubtful accounts, useful lives of property, plant and equipment and finite lived intangible assets, valuation of inventories, impairment for long-lived assets, accruals for warranty costs, recoverability of prepayments, assumptions related to the valuation of financial instruments and valuation of deferred tax assets.
(d)
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when purchased.
(e)
Term deposit
Term deposit consists of bank deposit with an original maturity of over three months.
(f)
Restricted cash
Restricted cash are bank demand deposits used as security against bank drafts. These are used by the Group as short term instruments to reduce financing cost.
(g)
Accounts receivable
Accounts receivable are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. The Group determines the allowance by both specific identification of customer account where appropriate and the application of the general provision primarily based on the age of the receivables. Bad debts are written off as incurred. As of December 31, 2010 and 2009, the Group had an allowance for doubtful accounts of $267,423 and nil, respectively. Long-term accounts receivable represent the non-current portion of accounts receivable with fixed or determinable payments pursuant to contract terms. Long-term accounts receivable are recorded in the consolidated balance sheets at their net present value on the date
of recognition based on a discount rate that approximated the discount rate generally available for discounting similar instruments with commercial bank in PRC.
(h)
Inventories
Inventories are stated at the lower of cost or market. Cost is calculated on the first-in-first-out basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Group provides inventory write-down to the estimated market value for excessive, slow moving and obsolete inventories as well as inventories whose carrying value is in excess of net realizable value. The estimated market value is measured as the estimated selling price of each class of the inventories in the ordinary course of business less estimated costs of completion and disposal. As of December 31, 2010 and 2009, there were no such charges to inventory.
(Amounts expressed in US dollars, except share data)
(i)
Property, plant and equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss, if any.
Property, plant and equipment are depreciated over their estimated useful lives on a straight-line basis. Residual rates are determined based on the economic value of the property, plant and equipment at the end of the estimated useful period, with a range from 3% to 5%. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in statement of operations. Repairs and maintenance costs are expensed as incurred. The estimated useful lives are as follows:
Useful lives
Electronic equipment and computers
5 years
Furniture, office equipment and vehicles
5 years
Machinery and tools
5-20 years
Leasehold improvements
Shorter of the lease term or the estimated useful lives
(j)
Intangible assets, net
Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. Intangible assets with finite lives are amortized over their estimated useful lives on a straight-line basis.
(k)
Impairment of long-lived assets
The Group evaluates its long-lived assets and finite lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. When these events occur, the Group compares the carrying amount of the asset group to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets. There was no impairment charge recognized for the years ended December 31, 2010, 2009 and 2008, respectively.
(l)
Equity investment
Equity investments are comprised of investments in privately held companies. The Group uses the equity method to account for an equity investment over which it has significant influence but does not own a majority equity interest or otherwise control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The Group records equity method adjustments in share of earnings and losses. Equity method adjustments include: the Group's proportionate share of investee income or loss, adjustments to recognize certain differences between the Group's carrying value and its equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method.
The Group assesses its equity investments for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the technological feasibility of the investee's products and technologies, the general market conditions in the investee's industry or geographic area, factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and other company-specific information.
(Amounts expressed in US dollars, except share data)
(m)
Income taxes
The Group accounts for income taxes in accordance with ASC 740 (pre-codification reference as SFAS No. 109, “Accounting for Income Taxes,”) which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax liabilities and assets are determined based on the temporary difference between the financial statement and tax basis of assets and liabilities using presently enacted tax rates in effect. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of operations in the period of change. A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such deferred tax assets will not be realized. The total income tax provision includes current tax expenses under applicable
tax regulations and the change in the balance of deferred tax assets and liabilities.
(n)
Foreign currency translation
The functional currency and reporting currency of the Company is United States Dollar ("US Dollar"). Monetary assets and liabilities denominated in currencies other than the US Dollar are translated into US Dollar at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the US Dollar during the year are converted into the US Dollar at the applicable rates of exchange prevailing on the day transactions occurred. Transaction gains and losses are recognized in the statements of operations.
The financial records of the Group's PRC subsidiaries are maintained in Renminbi ("RMB") which is their functional currency, while for Nordic AB and Windpower AB, Swedish Krona ("SEK") is their functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of accumulated other comprehensive income (loss) in the statement of equity and comprehensive income (loss).
The RMB is not a freely convertible currency. The State Administration for Foreign Exchange of People's Republic of China ("PRC"), under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China foreign exchange trading system market. The Group's aggregate amount of cash and cash equivalents dominated in RMB amounted to US$1,657,101 and US$2,628,538 as of December 31, 2010 and 2009, respectively.
(o)
Revenue recognition
The Group recognizes revenues in accordance with ASC 605-10 (pre-codification reference as Staff Accountant Board ("SAB") No.104, "Revenue Recognition"), when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.
For an arrangement with multiple deliverables, the Group prospectively adopted ASU 2009-13 on January 1, 2010, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. (Note 3)
The Group is not contractually obligated to accept returns. The sales of goods and services involve inconsequential or perfunctory performance obligations. These obligations can include non-essential installation or training, provision of product manuals and materials, and limited, pre-scheduled technical maintenance support. When the only remaining undelivered performance obligation under an arrangement is inconsequential or perfunctory, the Group recognizes revenue on the delivery of turbines, the predominant deliverable in the total contract and provides for the cost of the unperformed obligations. Cash advances received from customers before the revenue is earned are classified as deferred revenue.
(Amounts expressed in US dollars, except share data)
From time to time, revenue is recognized under a bill and hold arrangement. Recognition of revenue on bill and hold arrangements occurs when risk of ownership has passed to the customer, a fixed commitment has been provided by the customer, the goods are complete and ready for shipment, the goods are segregated from inventory, no performance obligation remains, and a schedule for delivery has been established.
(p)
Cost of Sales
Cost of sales represents production cost, which includes material, direct labor and manufacturing expenses (i.e. depreciation and amortization expenses), and indirect costs, as well as shipping and handling costs for products sold and warranty costs.
(q)
Warranty cost
Limited warranties are provided to the wind turbine generators for two years following delivery for defects in equipment hardware. Various suppliers provide warranties to the Group on components purchased. Warranty costs are accrued as revenues are recognized and are offset by any recoveries received from suppliers. Actual warranty costs are accumulated and charged against the accrued warranty liability. Product warranties are accrued at 2% of wind turbine sales based on an assessment of industry norms which also represents the Group's best estimate to date. The Group accrued nil, US$236,629 and US$57,525 warranty costs, and used US$29,993, US$20,244 and nil warranty accrual during the years ended December 31, 2010, 2009 and 2008, respectively. If the Group begins to experience
warranty claims differing from the current accrual rate, the warranty accrual rate would be prospectively revised. On January 1, 2010, the Group prospectively adopted ASU 2009-13 (Note 3), according to which the revenue of the two-year period maintenance service will be deferred at the time of service rendered and recognized on a straight-line basis over the two years. Upon the adoption of ASU 2009-13, the Group ceased to accrue any warranty costs for those agreements entered into or materially modified after January 1, 2010.
Government subsidies are recognized when received and when all the conditions for their receipt have been met. Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognized as non-current liabilities in the balance sheet and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Government grants for revenue and/or expenses should be recognized in statements of operations when the related revenue and/or expense are recorded.
The Group received unrestricted government subsidies from local government agency that allow the Group to have full discretion in the fund utilization of US$184,255 and US$79,047 during the years ended December 31, 2010 and 2009, respectively, which were recorded in other operating income in the consolidated statements of operations. In 2008, the Group received a government grant, which was related to the Group's activities in research and development projects, from a local government agency in the amount of US$42,435. The Group recorded such government grant against the research and development expenses when incurred.
(Amounts expressed in US dollars, except share data)
(s)
Fair value of financial instruments
The Group estimates fair value of financial assets and liabilities as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants. The fair value measurement guidance establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority, Level 3, to measurements based on unobservable inputs and classifies assets and liabilities with limited observable inputs or observable inputs for similar assets or liabilities as Level 2 measurement. The Group determines the fair value of an asset or liability using valuation techniques that maximize the use of observable
inputs.
(t)
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing earnings attributable to holders of common shares by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Common share equivalents are excluded from the computation in loss periods as their effects would be anti-dilutive.
(u)
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in equity except those resulting from investments by owners and distributions to owners and is comprised of net income (loss) and foreign currency translation adjustments.
(v)
Research and development
Research and development costs are expensed as incurred. Generally all research and development is performed internally for the benefit of the Group. The Group does not perform such activities for others. Research and development costs include salaries, amortization of intangible asset used for research and development purposes, utilities, and miscellaneous items directly related to research and development activities. Research and development expenses for the years ended December 31, 2010, 2009 and 2008 amounted to $918,732, $90,437 and $94,300, respectively.
(w)
Concentration of credit and business risks
Financial instruments that potentially expose the Group to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and long-term accounts receivable and advance to suppliers. The Group places its cash and cash equivalents with financial institutions with high-credit ratings and quality.
The Group conducts credit evaluation of customers and generally does not require collateral or other securities from its customers. The Group establishes an allowance for doubtful accounts based on specific identification of customer accounts, and the age of the receivables and factors surrounding the credit risk of specific customers. With respect to advances to suppliers, who are primarily the suppliers of wind turbine components, the Group performs ongoing credit evaluations of its suppliers' financial conditions. The Group generally does not require collateral or other security against advance to suppliers; however, it maintains reserves for potential credit losses and such losses have historically been within management's expectations.
(Amounts expressed in US dollars, except share data)
The Group's near term, and possibly long term, prospects are significantly dependent upon several customers. Revenues and outstanding accounts receivable for the years ended December 31, 2010, 2009 and 2008 were from only four, two and one customers, respectively. As a result, currently the Group is substantially dependent upon limited customers. Significantly reducing the Group's dependence on these customers is likely to take a long time and there can be no guarantee that the Group will succeed in reducing that dependence.
The following table summarizes revenues and accounts receivable for customers that accounted for 10% or more of accounts receivable or revenues:
The Group follows the provision of ASC 280-10 (pre-codification reference as SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"), which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker. The Group's chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. The Group is a single segment entity whose business is production and distribution of wind turbine generators in the PRC. All of its revenues are derived in the PRC. The Group's long-lived assets and operations are substantially located in the PRC.
(y)
Recently issued accounting pronouncements
On December 21, 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-29 to address differences in the ways entities have interpreted ASC 805’s requirements for disclosures about pro forma revenue and earnings in a business combination. The ASU states that “if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.” In addition, the ASU “expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.” The Group considers
that the adoption of ASU 2010-29 has no significant impact on its consolidated financial statements.
(Amounts expressed in US dollars, except share data)
On July 21, 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. For public entities, the new and amended disclosures that relate to information as of the end of a reporting period will be effective for the first interim or annual reporting periods ending on or after December 15, 2010. That is, for calendar-year-end public entities,
most of the new and amended disclosures in the ASU will be effective for this year-end reporting season. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications of financing receivables. For calendar-year-end public entities, those disclosures will be effective for the first quarter of 2011. The Group considers that the adoption of ASU 2010-20 has no significant impact on its consolidated financial statements.
3.
CHANGE IN ACCOUNTING POLICY OF REVENUE RECOGNITION DUE TO THE ADOPTION OF ASU 2009-13
In October 2009, the FASB published FASB ASU 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in ASC Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence if available ("VSOE"); (b) third-party evidence ("TPE") if vendor-specific objective is not available; or (c) estimated selling price ("ESP") if neither vendor-specific objective evidence nor third-party evidence is available. This guidance also eliminates
the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. The provisions of ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
On January 1, 2010, the Group prospectively adopted ASU 2009-13. Based on the selling price hierarchy established by ASU 2009-13, when the Group is unable to establish selling price using VSOE or TPE, the Group will establish an ESP. ESP is the price at which the Group would transact a sale if the product or service were sold on a stand-alone basis. The Group establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, and percentage of the fee charged for a primary product or service relative to a related product or service. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The determination of ESP is a formal process within the Group that includes review and approval by the Group's management.
In addition, the Group regularly reviews VSOE and TPE for its products and services, in addition to ESP. Under this standard, the Group allocates revenue in arrangements with multiple deliverables using estimated selling prices because they do not have VSOE or TPE of the selling prices of the deliverables. Sales of the wind turbines are considered arrangements with two deliverables, consisting of the delivery of the wind turbines and the two-year period maintenance service. Under the prior accounting standard, the Group accounted for sales upon the delivery of the wind turbines. According to ASU 2009-13, revenue of the two-year period maintenance service will be deferred at the time of service rendered and recognized on a straight-line basis over the two years.
For the year ended December 31, 2010, the adoption of ASU 2009-13 decreased revenue, income before income tax and net income by US$1,799,993, US$599,476 and US$507,756, respectively, with a decrease of US$0.01 on both basic and diluted EPS, as compared to application of the previous guidance.
(Amounts expressed in US dollars, except share data)
The Group did not elect to adopt ASU 2009-13 retrospectively for prior periods. As a result, revenue recognition for those arrangements signed prior to the fiscal year of 2010 will not be affected by ASU 2009-13. If the arrangements accounted for under Subtopic 605-25 were subject to the measurement requirements of ASU 2009-13, the Group's revenue would have been US$12,377,441 for the year ended December 31, 2009, or would have decreased by US$382,807 compared to the revenue recognized under Subtopic 605-25.
4.
FAIR VALUE MEASUREMENT
Information about inputs into the fair value measurements of the Group’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
Fair value of the Level 3 liability was US$85,889 and US$1,267,388 as of December 31, 2010 and 2009 respectively. A summary of changes in Level 3 liability is as follows:
The amount of total gains for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
(Amounts expressed in US dollars, except share data)
The fair value of the warrant is estimated using binomial model (Note 15). It is classified as level 3 in the fair value hierarchy as the fair value estimation involves significant assumptions that are not observable in the market.
The estimated fair value of the Company’s financial instruments, including cash, term deposit, restricted cash, accounts receivable, advance to suppliers, accounts payable, amount due from (to) related parties and short-term borrowings, approximates their carrying value as of December 31, 2010, and 2009 due to their short-term nature. The fair value of long-term accounts receivable approximates carrying value, because long-term accounts receivable are recorded at net present value upon recognition and amortized using an effective interest rate method, which approximated the prevailing market interest rate as of the reporting dates. The fair value of convertible promissory note is approximately US$1,182,750 as of December
31, 2009 and is estimated based on the fair value of common shares the note is convertible into on the valuation date.
Unbilled receivable represents amounts earned under sales contracts but not billable at the respective balance sheet dates. These amounts become billable according to the contract terms.
As of December 31, 2010, US$18,119,520 (RMB120,000,000) accounts receivable had been pledged as collateral for the same amount of loan facility obtained from a PRC bank. (Note 10)
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. Related parties may be individuals or corporate entities.
The following entities are considered to be related parties to the Group because they are affiliates of the Group under the common control of the Group's major shareholder or the Group has the ability to exercise significant influence over the operating and financial policies of the other party. The related parties only act as service providers and borrowers to the Group. The Group is not obligated to provide any type of financial support to these related parties.
The Group had US$3,453,918 and US$1,837,636 due from GC-Tech as of December 31, 2010 and 2009, respectively. The amount of US$3,453,918 as of December 31, 2010 represented the 1) prepayment of US$259,529 to GC-Tech who imported raw materials from overseas on behalf of the Group and 2) short-term lending and related interest receivable of US$3,194,389 with stated due date in June 2011. The amount of US$1,837,636 as of December 31, 2009 represented the prepayment of US$407,549 to GC-Tech and the related party lending of US$1,430,087, the Group extended to GC-Tech in August 2009. Weighted average interest rates of the related party lending are 5.6% and 5.4% for the years ended December
31, 2010 and 2009 respectively, which benchmark to the one year borrowing rate for bank loans from People's Bank of China.
The Group had US$1,213,228 and US$266,687 due from Guoce Electricity Investment as of December 31, 2010 and 2009, respectively. The amount of US$1,213,228 as of December 31, 2010 represented other receivable of US$96,637, and a short-term lending and related interest receivable of US$1,116,591 with stated due date in June 2011. Weighted average interest rate of the related party loan is 5.6%, which benchmarks to the one year borrowing rate for bank loans from People's Bank of China. The amount of US$266,687 as of December 31, 2009 represented a short-term loan to Guoce Electricity Investment that did not bear interest, and this amount was settled in March 2010.
(Amounts expressed in US dollars, except share data)
The Group had US$453,029 due to Wuhan Sanlian as of December 31,2010 which represented a short-term borrowing from Wuhan Sanlian. Such borrowing does not bear any interest and is payable upon demand. The Group had a balance of US$210,889 due from the same related party as of December 31, 2009. The balance was a result of a prepayment to Wuhan Sanlian for purchase of raw materials. After the establishment of Wuhan Mita-Sanlian, the purchase and prepayment for the raw materials were all transferred from Wuhan Sanlian to Wuhan Mita-Sanlian.
The Group had US$104,264 and nil due to Wuhan Mita-Sanlian as of December 31, 2010 and 2009 respectively. The amount represented the accounts payable to Mita-Sanlian for purchase of raw materials. The Group purchased US$419,376 raw materials from Wuhan Mita-Sanlian during the year ended December 31, 2010.
The Group had short-term borrowing from Join Right in the amount of US$173,000 as of December 31, 2010. Such borrowing does not bear any interest and is payable upon demand. In addition, the Group had other receivable of US$10,000 from Join Right as of December 31, 2009.
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following:
The Group recorded amortization charges of US$744,175, US$197,297and US$197,717 for the years ended December 31, 2010, 2009 and 2008, respectively.
Upon the termination of the technical license in November 2010 (Note 18 (d)), one of the purchased intangible assets with net carrying amount of US$589,690 was fully amortized. In addition, other intangible assets had been fully amortized by the end of December 31, 2010, according to the amortization schedule.
(Amounts expressed in US dollars, except share data)
10.
SHORT-TERM BORROWINGS
The Group had a loan facility in the amount of US$18,119,520 (RMB120,000,000) from a PRC bank for procuring raw material purpose, which was guaranteed by GC-Tech and four shareholders of the Company, and collateralized by the same amount of the Group's accounts receivable. The debt-to-assets ratio of the borrower, which is GC Nordic, shall not exceed 65% for the duration of the loan. As of December 31, 2010, the Group was in compliance with all the covenant requirements under this loan agreement.
On June 24, 2010, the Group has drawn down the first tranche of the loan facility in the amount of US$9,059,760 (RMB60,000,000) with a fixed annual interest rate of 6.37%. On November 26, 2010, another tranche of US$4,529,880 (RMB30,000,000), with a fixed annual interest rate of 6.67% under the same loan facility, was granted to the Group, via a simultaneous pass through from Hou Tie Xin, the chairman and the principal shareholder of the Group. As of December 31, 2010, US$4,529,880 (RMB30,000,000) was available from the loan facility for future borrowing.
11.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
In 2006, the Group entered into a technical license related to its development of wind turbine generator products. Under this agreement, the Group is obligated to pay a royalty for each wind turbine generator sold that utilized the technology covered by this agreement. On November 30, 2010, the licensor and the Group entered into a termination, release and settlement agreement (Note 18 (d)). Upon the termination, all prior and future royalty payments had been waived by the licensor, the Group recorded the reversal of royalty accrual of US$1,531,930 in cost of sales in the statement of operations for the year ended December 31, 2010.
12.
EQUITY INVESTMENT
On April 19, 2010, the Group invested US$103,079 in Wuhan Mita-Sanlian for 16% equity interest. Wuhan Mita-Sanlian is mainly engaged in sales, production and service of control system for wind turbine as well as related supporting equipments of hydraulic, cooling and lubrication systems. The Group accounts for such investment under equity method of accounting as the Group can exercise significant influence over operating and financial policies of Wuhan Mita-Sanlian. The Group recognizes its share of the earnings or losses of Wuhan Mita-Sanlian and eliminates any unrealized intra-entity profits or losses on assets still remaining with the Group in the statements of operations.
13.
PROMISSORY NOTE AND CONVERTIBLE PROMISSORY NOTES
On July 31, 2009, the Company executed convertible promissory notes in favour of New Margin, CV and CV Advisors in the amount of US$5 million, US$4.8 million and US$0.2 million, respectively (collectively, the "Promissory Notes"). The Promissory Notes earn simple interest at an annual percentage rate equal to 6% or the lowest rate permissible by law (i.e., 0%). The Promissory Notes do not have a contractual maturity date. They will either be converted into common shares of the Company at US$0.80 per share when the Exchange Transaction is consummated, or be converted into a 29.87% equity interests in GC Nordic if the Exchange Transaction fails. The Promissory Notes were accounted for as equity instruments
because legally they were equity instruments and the holders would not be entitled to creditor's rights in any situation including bankruptcy and liquidation. Immediately after the issuance, the proceeds received were transferred to Luckcharm in the form of short-term borrowings, which were eliminated upon consummation of the Exchange Transaction. The Promissory Notes were converted into 12,500,000 common shares of the Company pursuant to the contractual conversion provision on October 30, 2009 (Note 14).
(Amounts expressed in US dollars, except share data)
In contemplation of the Exchange Transaction between the Company and Luckcharm, on June 8, 2009, the Company issued a promissory note of US$600,000 to New Margin ("New Margin Note") and a promissory note of US$415,000 to Coach Capital LLC (“Coach Note”), respectively. Both notes were due on demand and carried an interest of one percent per month. The New Margin Note had no conversion feature. The Coach Note was convertible into the common shares of the Company by the holder at a price equal to the lesser of US$1.00 per share or the issue price of the latest share offering prior to the exercise of the conversion
option. The proceeds received were transferred to Luckcharm via a promissory note, which was eliminated upon consummation of the Exchange Transaction. On October 30, 2009, the New Margin Note and the Coach Note were assigned to Clarus Capital Ltd., a United States based company who served as the financial advisor for the Group and the agent for the US$8 million private placement (Note 14) and superseded by a promissory note to Clarus Capital Ltd. (the “Holder”) in the principal amount of US$1,000,000. All accrued but unpaid interest on the previous two notes were waived. Clarus Note I shall be due and payable by the Company on or before October 31, 2011 ("Maturity Date") and bears no interest. It is convertible, in whole but not in part, into shares of the
Company at a price of US$2.00 (“Conversion Price”) per share at anytime on or before the Maturity Date. On the six-month anniversary of the date that the Company provides a confirmation to Holder of the delivery of twenty wind turbine systems by the Company’s direct wholly-owned subsidiary, GC Nordic to its customers, Clarus Note I shall be automatically converted into common shares of the Company at the Conversion Price. The Company accounted for the assignment and modification of the Coach Note as a debt extinguishment, and recorded a loss on debt extinguishment of US$57,802 in the consolidated statements of operations
for the year ended December 31, 2009. The Company accounted for the assignment and modification of the New Margin Note as a capital transaction given New Margin's equity shareholder capacity on October 30, 2009 (the “Extinguishment Date”). The amount that otherwise would have been recognized as loss on debt extinguishment, or US$83,478, was recorded against additional paid-in capital. The Clarus Note I was deemed as a new debt instrument and recorded at fair value of US$1,205,000 on October 30, 2009. The fair value in excess of principal amounted US$205,000 is accounted for as premium to be amortized by effective interest rate method through the Maturity Date. US$50,500 and US$22,250 were amortized into interest income for the
years ended December 31, 2010 and 2009, respectively. The conversion option was not an embedded derivative requiring bifurcation under US GAAP, and the Company did not record a beneficial conversion feature on Clarus Note I as the effective conversion price was not less than the estimated fair value of the Company's common share the note is convertible into on the note issuance date.
On June 12, 2010, which was the six-month anniversary of the delivery of twenty wind turbine systems, the Clarus Note I was automatically converted into 500,000 common shares of the Company at the Conversion Price.
On October 30, 2009, the Company entered into another agreement with Clarus Capital Ltd. for a forward issuance of US$1 million promissory note to Clarus Capital Ltd. upon the date that GC Nordic has delivered 20 wind turbine systems to its customers. The Clarus Note II bears no interest and will have a maturity of two years from the date of issuance. The note will be convertible by the Holder into the Company's common share at anytime on or before maturity at a price of US$2.00 per share, and is automatically convertible six months after issuance. On August 11, 2010, the Company
and Clarus Capital Ltd. entered into an amendment to extend the issuance of Clarus Note II to November 15, 2010, with an extension payment by Clarus Capital Ltd. of US$10,000. The Company and Clarus Capital Ltd. have agreed to terminate the Clarus Note II, with negotiation on detailed terms ongoing.
(Amounts expressed in US dollars, except share data)
14.
COMMON SHARES
On October 30, 2009, the Company issued 32,383,808 shares of its common share to Golden Wind Holdings Ltd. in exchange for 100% of the issued and outstanding capital stock of Luckcharm. As stated in Note 1, the equity structure prior to October 30, 2009 was restated to reflect the number of common shares of GCTC issued to effect the transaction using the exchange ratio prescribed by the Exchange Agreement. The historical financial statements prior to the effective date of the Exchange Transaction are those of Luckcharm. All share and per share data have been presented to give retroactive effect of GCTC’s legal capital throughout the periods presented in these financial statements. The
Company had 7,686,207 shares outstanding immediately before the Exchange Transaction, which were deemed as shares issued by Luckcharm, the accounting acquirer, to the Company, the accounting acquiree.
On October 30, 2009, upon the closing of the Exchange Transaction, the US$10 million convertible promissory notes issued to New Margin, CV, and CV Advisors, were converted into 12,500,000 common shares at a conversion price per share equal to US$0.80, net off issuance costs of US$93,885 (Note 13).
Concurrent with the Exchange Transaction, on October 30, 2009, the Company also completed a private placement offering under which 6,400,000 common shares were issued to third party investors at US$1.25 per share for a total consideration of US$8 million. The Company received net cash proceeds of US$7,275,014. The issuance costs included 1) US$724,986 in cash for legal, accounting, and other direct issuance costs and 2) 560,000 shares of warrants (Warrant II) issued to a private placement agent for no consideration, which had fair value as US$917,130 upon issuance (Note 15). To those investors who subscribed for common shares, the
Company also granted a total of 640,000 shares of warrants (Warrant I) to purchase common shares on a pro rata basis, which was recognized as a warrant liability (Note 15). The net cash proceeds were further assigned to the fair value of the warrant liability for US$1,332,881 on the issuance date.
In connection with the private placement offering, the Company, Golden Wind and the investors entered into a make good escrow agreement, whereby Golden Wind pledged 640,000 common shares of the Company into escrow for the benefit of investors in the event the Company fails to satisfy certain After-Tax Net Income ("ATNI") threshold. Specifically, if the ATNI for the fiscal year ending December 31, 2010 reported in the Company's Annual Report on Form 10-K as filed with the Securities Exchange Commission is less than US$12,500,000, shares in escrow will be transferred to each investor on a pro rata basis for no additional
consideration, at a number equal to pre-set formula agreed between Golden Wind and investors (the "2010 Make Good Shares"), provided, that the number of 2010 Make Good Shares shall in no event exceed 640,000 shares. If the ATNI threshold is satisfied, no transfer of the 640,000 shares shall be made to the investors and all 640,000 shares deposited with the escrow agent shall immediately be returned to Golden Wind. The make good escrow agreement represents a transaction among shareholders and has no impact on the Group's consolidated financial statements because the Company is not legally liable for the escrow shares in any circumstances.
On June 12, 2010, pursuant to the conversion provision, Clarus Note I was automatically converted into 500,000 common shares of the Company at the Conversion Price (Note 13). The related common shares were issued on August 11, 2010.
15.
WARRANTS
In conjunction with the private placement offering of 6,400,000 common shares on October 30, 2009, the Company granted Warrant I to each investor in an amount equal to 10% of purchased common shares, or a total of 640,000 shares. The warrants had an exercise price of US$1.00 per share and were exercisable any time within three years from the date of issuance. However if the fiscal year 2010 ATNI is less than a guaranteed US$12,500,000, the Company will reduce the exercise price of each warrant to equal to Adjusted Exercise Price in accordance to a pre-set formula, provided that if the Adjusted Exercise Price is negative, the Adjusted Exercise Price will be deemed to equal to US$0.001 per share. The
Company recorded the fair value of the warrants of US$1,332,881 on day one as warrant liability in the consolidated balance sheets as the warrants do not qualify for equity classification under US GAAP. The warrant liability was remeasured at fair value of US$85,889 and US$1,267,388 at December 31, 2010 and 2009, respectively. The fair value change of US$1,181,499 and US$65,493 were recorded as gain on change in fair value of warrant liability in the consolidated statements of operations for the years ended December 31, 2010 and 2009, respectively.
(Amounts expressed in US dollars, except share data)
In connection with the same private placement, the Company granted 560,000 shares of Warrant II to the agents as compensation for received consulting services. The warrants had an exercise price of US$1.00 per share and were exercisable any time within three years from the date of issuance. The fair value of the warrants of US$917,130 was accounted for as equity instruments on the grant date, and was netted against proceeds from private placement offering as part of equity issuance costs.
The fair value of the warrants was computed using binomial option pricing model and the following assumptions:
None of the above warrants had been exercised as of December 31, 2010.
16.
INCOME TAXES
(a)
Tax law of each tax jurisdictions
United States
Under the federal and state income tax law of United States, the Company is subjected to tax on its income or capital gains. As at December 31, 2010, the Company does not have any assessable profits and accordingly, no provision for federal and state income taxes have been provided thereon.
Hong Kong
Luckcharm did not have assessable profits that were earned in or derived from Hong Kong during the years ended December 31, 2010, 2009 and 2008. Accordingly, no Hong Kong profits tax has been provided for.
China
GC Nordic, Baicheng Guoce, Baicheng Kairui, and Taonan Guoce (collectively "PRC subsidiaries") are subject to Enterprise Income Tax, or EIT, on the taxable income as reported in their statutory financial statements adjusted in accordance with relevant PRC income tax laws.
Under the Law of the People's Republic of China on Enterprise Income Tax ("New EIT Law"), which was effective from January 1, 2008, domestically-owned and foreign-invested enterprises are subject to a uniform tax rate of 25%. In addition, according to the New EIT Law, entities that qualify as high-and-new technology enterprises, or "HNTE", especially supported by the PRC government are expected to benefit from a tax rate of 15% as compared to the uniform tax rate of 25%. Effective January 1, 2010, GC Nordic is entitled to enjoy a 15% preferential tax rate as a HNTE.
(Amounts expressed in US dollars, except share data)
Sweden
Under the income tax law of Sweden, GC Nordic AB and Windpower AB are subjected to 26.3% tax rate on the taxable income as reported in their statutory financial statements adjusted in accordance with relevant Swedish income tax laws.
(b)
Reconciliation from income tax at statutory rate to effective tax rate
The following table sets out the reconciliation from the statutory CIT rate to the Group’s effective tax rate:
The decrease of the effective tax rate for the year ended December 31, 2010 is mainly attributable to the tax holidays of GC Nordic as an HNTE. The increase of the effective tax rate for the year ended December 31, 2009 is mainly attributable to the income tax liability of US$825,000 arising from the US$3,300,000 cash consideration paid by Luckcharm to the Founders during the recapitalization (Note 1) which was deemed as donation subject to PRC income tax.
(c)
Deferred tax
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group's net deferred tax assets are as follows:
(Amounts expressed in US dollars, except share data)
As of December 31, 2010, majority deductible net operating loss carry-forwards were from the Company in the amount of US$851,982, which is subject to the federal tax rate of 34%. Net operating losses carry forward from other subsidiaries are not material. The Company does not have enough profit in the foreseeable future to realize the tax benefit. The Group believes that it is more likely than not that the benefit from the net operating loss carry forward will not be realized. The Group has fully provided a valuation allowance on the deferred tax assets relating to these operating losses carry forward. If or when
recognized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be recognized as a deduction of income tax expense.
(d)
Significant components of income tax expense
Income taxes for PRC subsidiaries are calculated on a separate entity basis. The Group's PRC subsidiaries file stand-alone tax returns. The provisions for the Group's income taxes for the years ended December 31, 2010, 2009 and 2008, respectively, are summarized as follows:
As of December 31, 2010 and 2009, the amounts of gross unrecognized tax benefits were zero. The Group does not anticipate any significant change for unrecognized tax benefits within the next 12 months. The Group will classify interest and penalties related to income tax matters, if any, in income tax expense.
According to PRC Tax Administration and Collection Law, the statute of limitations for tax underpayments is three years if the underpayment of taxes is due to computational errors made by the taxpayer or withholding agent. The statute of limitations will be extended five years under special circumstances, which are not clearly defined (but an underpayment of tax liability exceeding RMB 0.1 million is specifically listed as a special circumstance). In the case of a related party transaction, the statute of limitations is 10 years. There is no statute of limitations in the case of tax evasion. The Group's PRC subsidiaries are therefore subject to examination by the PRC tax authorities from 2006 through 2010.
(Amounts expressed in US dollars, except share data)
17.
EARNINGS (LOSS) PER SHARE
The weighted average number of outstanding common share as shown in the financial statements presented herewith was computed based on the Company's number of outstanding common share, and took into account of the recapitalization transactions and the reverse acquisition transaction as described in Note 1. Detail computations are set out as follow,
Net income (loss) attribute to common shareholders-basic
$
11,394,527
$
339,647
$
(378,588
)
Less: Interest income recorded on convertible promissory notes
(50,500
)
(22,250
)
-
Gain from change in fair value of the warrant liability
(1,181,499
)
(65,493
)
-
Net income (loss) attribute to common shareholders-diluted
$
10,162,528
$
251,904
$
(378,588
)
Weighted average common shares outstanding-basic
59,246,727
36,899,821
32,383,808
Convertible promissory notes
223,288
83,562
Warrants
552,838
1,132,507
-
Weighted average common shares outstanding-diluted
60,022,853
38,115,890
32,383,808
Earnings (loss) per share-basic
$
0.19
$
0.01
$
(0.01
)
Earnings (loss) per share-diluted
$
0.17
$
0.01
$
(0.01
)
There were no anti-dilutive instruments excluded from the computation of diluted earnings per share for the years ended December 31, 2010 and 2009. There were no common share equivalent instruments for the year ended December 31, 2008.
(Amounts expressed in US dollars, except share data)
18.
COMMITMENTS AND CONTINGENCIES
(a)
Purchase commitments
As of December 31, 2010, the Group had outstanding commitments in the amount of US$17,809,299 for raw material purchases.
(b)
Capital commitments
As of December 31, 2010, the Group's capital commitments amounted to US$1,769,019 in relation to asset improvement and new plant construction within the next twelve months.
(c)
Operating lease commitments
As of December 31, 2010, the Group had operating lease commitments in the amount of US$44,612, which will be paid in 2011.
(d)
Legal proceedings
On December 4, 2009, Nordic Windpower USA, Inc. (“Nordic Windpower”) filed a lawsuit (the “Lawsuit”) against the Group in the U.S. District Court for the Northern District of California, alleging trademark infringement, trademark dilution, unfair competition and trade dress infringement. The Group has substantially complied with all of Nordic Windpower's requests related it its claims, including changing its name to "GC China Turbine Corp." on September 14, 2009.
On November 30, 2010, the Group entered into a Termination, Release and Settlement Agreement with Nordic Windpower, pursuant to which the parties agreed to the settlement of all disputes between the parties and to dismiss the Lawsuit. Further, the parties agreed that Nordic Windpower shall not use the mark “NORDIC WINDPOWER” in China and the Group shall not use the mark “NORDIC” or any confusingly similar marks outside of China, subject to legal requirements. Further, the Group consented to Nordic Windpower’s use and registration of the mark or any mark incorporating the term “NORDIC” outside of China, and Nordic Windpower consented to the Group's use and registration of the mark “GC NORDIC” or “GUOCE NORDIC” in China. In addition, the parties agreed to terminate the technical license that all past, present and future rights and obligations under the
technical license is null, void and of no further force or effect from the effective date of the original technical license agreement.
The Group is not a party to any other legal proceeding, the adverse outcome of which is likely to have a material adverse effect on the Group's consolidated financial condition or results of operations.
19.
PRC EMPLOYEE BENEFITS
Full-time employees of the Group are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits. The Group is required to accrue for these benefits based on certain percentages of salaries in accordance with the relevant regulations and make contributions to the state-sponsored pension, medical and welfare plans. The Chinese government is responsible for the medical benefits and ultimate pension and welfare liabilities to these employees. The total contribution for such employee benefits were $61,430, $50,067 and $20,310 for the years ended December 31, 2010, 2009 and 2008, respectively.
20.
PROFIT APPROPRIATION AND STATUTORY RESERVES IN CHINA
PRC subsidiaries are required to make appropriations from after-tax profits to non-distributable reserve funds. The subsidiaries, after recouping their losses, must make appropriations to general reserve fund and staff bonus and welfare fund, in accordance with the Law of the PRC on Enterprises Operated Exclusively with Foreign Capital. The general reserve fund requires annual appropriations of 10% of after-tax profit (determined by generally accepted accounting principles in the PRC (“PRC GAAP”)) until such fund has reached 50% of the subsidiaries’ registered capital; the percentage of appropriation for staff bonus and welfare fund is determined
at the discretion of its Board. The statutory reserves can only be used for specific purposes, such as offsetting accumulated losses, enterprise expansion or staff welfare. These reserves are not distributable to the shareholders except in the event of liquidation. Appropriations to these funds are accounted for as transfers from retained earnings to the statutory reserves.
Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. PRC laws and regulations require that annual appropriations of 10% of after-tax income should be set aside prior to payment of dividends as a general reserve fund. In addition, there are restrictions on the distribution of share capital from the Group’s PRC subsidiaries. As a result of these PRC laws and regulations, the Group’s PRC subsidiaries
are restricted in its ability to transfer a portion of its net assets to the Group in the form of dividends, loans or advances. Such restricted portions amounted to US$17,776,327 as of December 31, 2010.
F-27
GC China Turbine Corp.
ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I
BALANCE SHEET
(Amounts expressed in US dollars, except share data)
Common share (US$0.001 par value; 100,000,000 shares authorized, 59,470,015 and 58,970,015 shares issued and outstanding as of December 31, 2010 and 2009, respectively)
59,470
58,970
Additional paid-in capital
17,517,050
16,385,299
Retained earnings
13,271,890
1,877,363
Accumulated other comprehensive income
1,001,158
158,757
Total equity
31,849,568
18,480,389
Total liabilities and equity
$
32,759,187
$
21,395,527
F-28
GC China Turbine Corp.
ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I
STATEMENT OF OPERATIONS
(Amounts expressed in US dollars)
Year Ended December 31
2010
2009
Operating expenses:
General and administrative expenses
$
358,730
$
339,241
Loss from operations
358,730
339,241
Interest expense
-
48,720
Interest income
(50,500
)
(22,250
)
Loss from debt extinguishment
-
57,802
Gain from change in fair value of warrant liability
Net proceeds from issuance of convertible promissory notes
-
9,906,115
Proceeds from issuance of promissory notes
-
1,015,000
Net cash provided by financing activities
-
18,196,129
NET CHANGE IN CASH AND CASH EQUIVALENTS
-
-
Cash and cash equivalents at the beginning of the year
-
-
Cash and cash equivalents at the end of the year
$
-
$
-
Note to Schedule I:
The parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the Company accounts for its subsidiaries using the equity method. Please refer to the notes to the consolidated financial statements presented above for additional information and disclosures with respect to these financial statements. As the parent company is acquired through a reverse recapitalization (Note 1) in 2009, Luckcharm was deemed as the parent company of the Group prior to the consummation of the Exchange Transaction, which was established in June 2009. Therefore the condensed financial information of the parent company for the
year ended December 31, 2009 represents the accounts of Luckcharm for the period from June 28, 2009 to October 30, 2009, and the accounts of the Company for the period from October 31, 2009 to December 31, 2009.
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04(c) of Regulation S-X, which require condensed financial information as to the financial position, changes in financial position and results of operations of a parent company as of the same dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
F-30
GC China Turbine Corp.
ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE II
* Includes foreign currency translation adjustments
F-31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
