UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

 
FORM 10-Q  
 
 
(Mark One)
 
þ            Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2012
 
o            Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                                to                                    .
 
Commission File Number 001-51379
 
CHINA POWER EQUIPMENT, INC.
(Exact name of registrant as specified in its charter)

Maryland
 
20-5101287
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

 Yongle Industry Zone,
Jingyang Industry Concentration Area
Shaanxi, P.R.China 713702
(Address of Principal Executive Offices including zip code)

86-29-62619758
 (Registrant’s Telephone Number, Including Area Code)

                                                                                                                                         
(Former name, former address and former fiscal year, if changed since last report)

 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
 
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 þ   No o
 
Indicate by check mark if 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.
 
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer (Do not check if a smaller reporting company) o
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  Yes o   No þ

As of November 12, 2012, 19,459,680 shares of the issuer’s common stock, par value $0.001, were outstanding.  
 
 
Table of Contents
 
   
Page
Part I
FINANCIAL INFORMATION
F-1
     
ITEM 1
F-1
     
ITEM 2
1
     
ITEM 3
7
     
ITEM 4 
7
     
Part II
OTHER INFORMATION
8
     
ITEM 1
8
     
ITEM 1A.
8
     
ITEM 2
8
     
ITEM 3
8
     
ITEM 4
8
     
ITEM 5
8
     
ITEM 6
8
 
 
Part I
 
FINANCIAL INFORMATION
 
ITEM 1  FINANCIAL STATEMENTS
 
China Power Equipment, Inc.
 
Consolidated Balance Sheets
 
             
   
September 30, 2012
   
December 31, 2011
 
   
(unaudited)
       
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 21,922,324     $ 23,090,102  
Accounts receivable, net
    7,205,074       1,990,127  
Inventory (Note 3)
    844,826       304,372  
Prepaid expenses and other receivables
    2,931,753       1,090,142  
Total Current Assets
    32,903,977       26,474,743  
                 
Property, plant and equipment, net (Note 4)
    8,896,792       9,415,894  
Intangible assets, net (Note 5)
    258,245       301,653  
Deposit on contract rights (Note 6)
    1,058,395       1,266,504  
Prepaid capital lease (Note 8)
    104,254       108,111  
Total Assets
  $ 43,221,663     $ 37,566,905  
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Accounts payable
  $ 1,642,829     $ 1,172,603  
Other payables and advance from customers
    941,402       889,470  
Lease payable - current portion (Note 8)
    2,854       2,838  
Short-term loan (Note 7)
    63,301       62,948  
Income taxes payable
    551,867       452,627  
Total Current Liabilities
    3,202,253       2,580,486  
                 
Long-term Liabilities
               
Lease payable - noncurrent portion (Note 8)
    119,499       118,831  
Total Long-term Liabilities
    119,499       118,831  
                 
Total Liabilities
    3,321,752       2,699,317  
                 
Stockholders' Equity
               
Series B convertible preferred stock, $0.001 par value, 5,000,000 shares authorized,
4,102,000 shares issued and outstanding at September 30, 2012 and 4,149,667 shares issued and outstanding at December 31, 2011 (Note 9)
    4,102       4,150  
Undesignated preferred stock, $0.001 par value, 5,000,000 shares authorized,
None issued and outstanding
     -        -  
Common stock: par value $0.001 per share, 100,000,000 shares authorized;
19,459,680 shares issued and outstanding at September 30, 2012 and 19,412,013 shares issued and outstanding at December 31, 2011 (Note 9)
    19,460       19,412  
Additional paid in capital
    25,848,783       25,819,701  
Statutory surplus reserve fund (Note 11)
    1,914,074       1,914,074  
Retained earnings
    9,253,186       4,422,741  
Accumulated other comprehensive income
    2,860,306       2,687,510  
Total stockholders' equity
    39,899,911       34,867,588  
                 
Total Liabilities and Stockholders' Equity
  $ 43,221,663     $ 37,566,905  
 
The accompanying notes are an integral part of these financial statements.
 
 
China Power Equipment, Inc.
 
Consolidated Statements of Operations and Comprehensive Income
 
   
                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Revenue, net
  $ 10,675,377     $ 10,288,401     $ 27,421,060     $ 27,716,131  
Cost of goods sold
    (7,822,520 )     (7,786,511 )     (20,225,776 )     (20,977,398 )
Gross profit
    2,852,857       2,501,890       7,195,284       6,738,733  
                                 
Selling, general and administrative expenses
    353,678       437,119       1,385,818       1,311,292  
                                 
Net income from operations
    2,499,179       2,064,771       5,809,466       5,427,441  
                                 
Other income (expenses)
                               
Other income
    -       -       31,707       789  
Other expenses
    (11 )     (21 )     (4,811 )     (90 )
Interest income
    4,858       3,733       15,697       31,659  
Interest expense
    -       -       (2,879 )     -  
Total other income
    4,847       3,712       39,714       32,358  
                                 
Net income before income taxes
    2,504,026       2,068,483       5,849,180       5,459,799  
                                 
Income taxes (Note 12)
    412,625       370,788       1,018,735       964,139  
                                 
Net income
  $ 2,091,401     $ 1,697,695     $ 4,830,445     $ 4,495,660  
                                 
Other Comprehensive Income
                               
Change in foreign currency translation adjustment
    (56,471 )     324,875       172,796       799,965  
Comprehensive income
  $ 2,034,930     $ 2,022,570     $ 5,003,241     $ 5,295,625  
                                 
Earnings per share - basic (Note 10)
  $ 0.11     $ 0.09     $ 0.25     $ 0.23  
Earnings per share - diluted (Note 10)
  $ 0.09     $ 0.07     $ 0.20     $ 0.19  
                                 
Weighted average common shares outstanding:
                               
Basic
    19,459,680       19,382,013       19,445,415       19,382,013  
Diluted
    23,671,770       23,581,945       23,657,641       23,588,610  
 
The accompanying notes are an integral part of these financial statements.
 
 
China Power Equipment, Inc.
 
Consolidated Statements of Cash Flows
 
   
             
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Cash Flows from Operating Activities
           
Net income
  $ 4,830,445     $ 4,495,660  
Adjustments to reconcile net income to net cash:
               
Depreciation and amortization expense
    841,720       531,719  
Stock-based compensation
    29,083       69,379  
Reversal of provision for impairment on advance to suppliers
    (20,001 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,206,039 )     (759,905 )
Inventory
    (539,547 )     54,966  
Prepaid expenses and other receivables
    (1,813,974 )     (359,977 )
Accounts payable
    462,497       (623,706 )
Other payables and advance from customers
    47,445       (150,719 )
Income taxes payable
    96,646       112,142  
Net cash (used in) provided by operating activities
    (1,271,725 )     3,369,559  
                 
Cash Flows from Investing Activities
               
Addition in plant and equipment
    (3,557 )     (2,052,747 )
Addition in construction in progress
    -       (576,395 )
Proceeds from disposal of investments
    -       330,454  
Net cash used in investing activities
    (3,557 )     (2,298,688 )
                 
Cash Flows from Financing Activities
    -       -  
                 
Effect of exchange rate changes on cash and cash equivalents:
    107,504       444,258  
                 
 (Decrease) Increase in cash and cash equivalents
    (1,167,778 )     1,515,129  
Cash and cash equivalents, beginning of period
    23,090,102       17,932,447  
Cash and cash equivalents, end of period
  $ 21,922,324     $ 19,447,576  
                 
Supplemental disclosure of cash flow information
               
Interest paid in cash
  $ 2,879     $ -  
Income taxes paid in cash
  $ 922,090     $ 851,998  
                 
Non-cash investing and financing activities:
               
Conversion of preferred stock into common stock
  $ 48     $ -  
 
 The accompanying notes are an integral part of these financial statements.
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

China Power Equipment, Inc. (“China Power”) was incorporated in the State of Maryland on May 17, 2006 for the purpose of acquiring an existing company with continuing operations. China Power formed An Sen (Xi’an) Power Science & Technology Co., Ltd. (“An Sen”) which was granted a license as a wholly-owned foreign enterprise in the city of Xi’an under the laws of the People’s Republic of China (“PRC”) on November 3, 2006. An Sen is a wholly-owned subsidiary of China Power and a limited liability company organized under the laws of the PRC.

On November 8, 2006, An Sen entered into a Management Entrustment Agreement (“the Agreement”) with Xi’an Amorphous Alloy Zhongxi Transformer Co., Ltd. (“Zhongxi”) whereby An Sen assumed financial and operating control over Zhongxi. In exchange for entering into this agreement, shareholders of Zhongxi were issued 9,000,000 shares of China Power common stock, resulting in a change of control of China Power. As discussed in Principles of Consolidation in Note 2, An Sen has been determined to have a controlling financial interest in Zhongxi as a result of the Agreement, requiring the accounts of Zhongxi to be consolidated with those of An Sen. Applying the rules of Accounting Standards Codification (“ASC”) 805, Business Combinations, Zhongxi was determined to be the accounting acquirer and the transaction was accounted for as a reverse acquisition resulting in the recapitalization of Zhongxi. Costs and expenses incurred by China Power and An Sen were made in anticipation of the transaction with Zhongxi and have therefore been pushed down and included in the consolidated financial statements.

Zhongxi was founded in Xi’an China under the laws of the PRC on June 29, 2004, and currently manufactures 59 different products, including amorphous alloy core and transformers.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and include the accounts of China Power, its wholly owned subsidiary An Sen, and Zhongxi, a contractually controlled entity (together “the Company”). An Sen controls Zhongxi through the Agreement dated November 8, 2006.

Under the Agreement,
1. Zhongxi agrees to irrevocably entrust the right of operation management and the responsibilities and authorities of its shareholders’ meeting and the board of directors to An Sen.
2.  The contents of the entrusted operation shall include but not be limited to the following:
1) An Sen shall be in charge of all aspects of Zhongxi’s operations; nominate and replace the members of Zhongxi’s board of directors, engage Zhongxi’s management staff and decide their compensation.
2) An Sen shall manage and control all the funds of Zhongxi.  The account of Zhongxi shall be managed and decided solely by An Sen.  The seals and signatures for such account shall be the seals and signatures of the personnel appointed and confirmed by An Sen.  All the cash of Zhongxi shall be kept in this entrusted account and shall be handled through this account, including but not limited to receipt of all Zhongxi’s business income, current working capital, recovered accounts receivable, etc., and the payment of all accounts payable and operation expenses, employee salaries and asset purchases, etc.
3) All the matters of Zhongxi, including internal financial management, day-to-day operation, external contract execution and performance, tax filing and payment, change of rights and personnel, etc., shall be controlled and managed by An Sen in all aspects.
4) An Sen shall enjoy all the other responsibilities and rights enjoyed by Zhongxi’s shareholders’ meeting in accordance with the Company Law and the articles of association of Zhongxi.
5) An Sen enjoys all the other responsibilities and rights enjoyed by Zhongxi’s board of directors.

As of November 8, 2006, the date the Agreement became effective, the Company determined to consolidate the results of Zhongxi based on the ASC 810, Consolidation . According to that topic, the execution of the Agreement is considered to be a business combination. Accordingly, Zhongxi was determined to be the accounting acquirer and the consolidation with China Power is considered to be a recapitalization of Zhongxi. Periods prior to the combination contain the accounts of Zhongxi and periods subsequent to the combination include the accounts of Zhongxi combined with those of China Power and An Sen. Assets and liabilities are recorded at their historical cost basis and the combination resulted in no gain, loss, or goodwill. All inter-company accounts have been eliminated in consolidation.
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

In concluding that the accounts of Zhongxi should be consolidated, the Company reviewed An Sen’s relationship with Zhongxi under the provisions of the Agreement and determined that there was a controlling financial interest based on the criteria of ASC 810 relating to the term of the Agreement; An Sen’s ability to exercise control over the operations of Zhongxi and the relationship with its employees and directors; and the fact that An Sen maintains a significant financial interest in Zhongxi.

ASC 810 requires the term of the Agreement be at least the entire remaining life of Zhongxi or a period of 10 years or more. The Company determined that it met the term criteria because termination is prohibited by Zhongxi, making termination within the control of the Company.

In addition, the Company determined that the control criteria under ASC 810 was met because the Agreement assigns to An Sen the charge of normal business operations as well as the ability to nominate and replace the board of directors, hire and fire management staff, and determine compensation.

Finally, the financial interest criteria under ASC 810 require that An Sen be able to control the ability to sell or transfer the operations of Zhongxi and the income generated by Zhongxi. The Agreement specifically gives An Sen the responsibility of formulating plans regarding matters including merger, division, change of corporate form and dissolution of Zhongxi and assigns the income and operations of Zhongxi to An Sen.

Unaudited Interim Financial Information
These financial statements and other financial information included in this quarterly report on Form 10-Q are unaudited, with the exception of the December 31, 2011 balance sheet which was derived from audited financial statements. These unaudited interim consolidated financial statements have been prepared in accordance with US GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with the GAAP have been condensed or omitted. Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and related notes for the year ended December 31, 2011, included in the Company’s 2011 Annual Report on Form 10-K. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Revenue Recognition
Revenue is recognized when product is shipped to customers and a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and cash collection is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as advance from customers. The Company is subject to value added tax (VAT) withholdings and payments. Sales are recorded net of VAT.
 
The material terms of the Company’s sales include the following.
 
Sales contract for Amorphous Metal Distribution Transformer Core:
Payment term: complete the payment within one month after delivery.
Responsibility of any breach: if the buyer cannot pay on time, the fine for any breach should be paid by the buyer, the fine is 20% of the part of the contract not executed.
Time for quality guarantee and raising an objection: within 10 days if find defective after receiving the goods.

Sales contract for transformer:
Method, time and venue for settlement: complete the payment within three months after delivery.
The ownership of goods: will be transferred upon the shipping of goods.
Seller's obligation related to the quality: warranty for one year from delivery.
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

For transformer core, the customer can make return or exchange within 10 days after receiving the goods if the goods are found defective.  As the historical return was very minimal, no sales return and allowance is estimated based on the historical return rate.
 
For transformer, there’s no specific return or exchange policy because in the transformer industry, transformer is purchased according to careful project design and planning, thus return or exchange rarely happens. The Company provides one year warranty from delivery for product defects. As there has had almost no historical warranty claim, no anticipated warranty liability is accrued based on the historical warranty claim rate.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions, but at times, the amount may exceed the federally insured limit or not be covered by federal insurance. As of September 30, 2012, cash of $20,113,236 was maintained with one single financial institution in the PRC.  In common with local practice in the PRC, such amount is not insured or otherwise protected should this financial institution be unable to meet its liabilities. There has been no history of credit losses. Management believes the Company is not exposed to any significant credit risk on those accounts.

The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Segment Reporting
ASC 280, Segment Reporting, requires the use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

During the nine months ended September 30, 2012 and 2011, all revenues of the Company represented net sales of amorphous alloy core and transformers. No financial information by business segment is presented. Furthermore, as all revenues are derived from the PRC, no geographic information by geographical segment is presented. In addition, all tangible and intangible assets are located in the PRC.

Recent Accounting Pronouncements
As of the date this quarterly report is filed, there are no recently issued accounting pronouncements which adoption would have a material impact on the Company’s financial statements.

NOTE 3 – INVENTORY

Inventory consists of:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Raw materials
  $ 716,060     $ 255,227  
Work in progress
    17,998       13,791  
Finished goods
    110,768       35,354  
                 
Total inventory
  $ 844,826     $ 304,372  
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Plant and office building
  $ 6,665,643     $ 6,628,405  
Machinery and production equipment
    4,681,248       4,652,406  
Automobile
    128,379       127,662  
Office equipment
    45,249       44,151  
Total
    11,520,519       11,452,624  
Less: accumulated depreciation
    (2,623,727 )     (2,036,730 )
                 
Property, plant and equipment, net
  $ 8,896,792     $ 9,415,894  

NOTE 5 – INTANGIBLE ASSETS

Intangible assets consist of:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
Technical know-how
  $ 237,380     $ 236,053  
Amorphous Transformer Technique
    363,981       361,948  
Total
    601,361       598,001  
Less: accumulated amortization
    (343,116 )     (296,348 )
                 
Intangible assets, net
  $ 258,245     $ 301,653  

On June 18, 2009, Zhongxi purchased an amorphous transformer aluminum wire technology for $237,379. The technology is being amortized over 10 years based on estimated useful life.

On April 14, 2005, Zhongxi purchased technical know-how from Xi’an Northwest Industry University Gaoshang Science & Technology Co., Ltd for $79,126. The technical know-how is being amortized over 10 years based on useful life estimation.

On September 2, 2004, Zhongxi purchased technical know-how from Xi'an Amorphous Alloy Science And Technology Co., Ltd. (“ Alloy Science”), which at the time was a related party of the Company with common owners and directors for $158,254. The technical know-how is being amortized over 10 years based on useful life estimation.

On July 24, 2004, Zhongxi purchased amorphous transformer core manufacturing technology from Advanced Technology & Materials Co., Ltd. (“AT&M”) for $126,602.  The technology is being amortized over 10 years based on useful life estimation.
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

The estimated future amortization expenses related to intangible assets as of September 30, 2012 are as follows:

Years Ending December 31,
     
2012
  $ 15,033  
2013
    60,132  
2014
    54,860  
2015
    37,575  
2016
    31,293  
Thereafter
    59,352  

NOTE 6 – CONTRACT RIGHTS DEPOSIT

The contract right was purchased from AT&M for $1,424,276 (RMB9,000,000) to guarantee the supply of amorphous raw material for 5 years starting from the first date of supplying raw material by AT&M. The contract rights deposit is amortized based on the proportion of actual purchase quantity to the estimated total purchase quantity over the 5-year period starting from the date of first purchase from AT&M.

In the three and nine months ended September 30, 2012, $80,076 and $215,224 of the contract rights deposit were amortized and recorded in cost of goods sold, respectively.

The Company conducted the evaluation for the impairment of the asset at September 30, 2012 and concluded that no impairment is needed to be recorded as of the date of evaluation.

NOTE 7 – SHORT-TERM LOAN

On December 28, 2006, the Company signed a loan agreement with Xi’an New City District Science & Technology Bureau to borrow approximately $63,301 (RMB400,000) at 5% stated annual interest rate. The loan is repayable on demand.

NOTE 8 – CAPITAL LEASES AND COMMITMENTS

CAPITAL LEASES

The Company is currently leasing a factory from Zhongxi Zhengliu Dianlu Transformer Co., Ltd.  The term of the lease runs for a period of 24 years beginning January 1, 2005. The lease agreement contains ownership transfer terms at the end of the lease and calls for annual rent payments in the amount of approximately $2,854 for the year ending December 31, 2012 and annual rent payments are expected to increase every year by at least 10% until the expiration of the agreement.

As a result, approximately $150,389 (RMB 950,308) was recorded as leased assets on January 1, 2005 when the lease commenced based on the 10% discounted factor. The lease was classified as a capital lease since a majority of the useful life would be used by the Company. The net leased asset amount was $104,254 and $108,111 as of September 30, 2012 and December 31, 2011, respectively.

Future minimum lease payments as of September 30, 2012 are as follows based on the 10% discounted factor:
 
For the period ending December 31:      
2012
  $ 2,854  
2013
    3,156  
2014
    3,491  
2015
    3,861  
2016
    4,270  
Thereafter 
    104,721  
Less Current Portion
    (2,854 )
Long Term Portion
  $ 119,499  
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

CAPITAL COMMITMENTS

As of September 30, 2012 and December 31, 2011, the Company had capital commitments to purchase land use right of $110,777 and $110,158, respectively.

OPERATING LEASE

The Company is committed to a lease for its office in Xi’an, PRC expiring on August 31, 2014. Minimum lease payments of $14,243 annually are required until August 31, 2014.

NOTE 9 – STOCKHOLDERS’ EQUITY

Preferred Stock

Series B Convertible Preferred Stock
In a private placement closed on December 2, 2009, the Company issued an aggregate of 4,166,667 shares of its series B convertible preferred stock, par value $0.001 per share (the “Series B Preferred Stock”), with attached warrants (the “Warrants”) to purchase a total of 1,000,000 shares of its common stock, par value $0.001 per share (the “Common Stock”) to a number of accredited investors (the “Buyers”), in consideration of an aggregate purchase price of $5,000,000 (the “Private Placement”). The Series B Preferred Stock is convertible into 4,166,667 shares of Common Stock.   During the period ended September 30, 2012, 47,667 shares of the Series B Preferred stock were converted into 47,667 shares of common stock. At September 30, 2012 and December 31, 2011, 4,102,000 and 4,149,667 shares are outstanding respectively.   

The Series B Preferred Stock does not pay annual dividends and shall not have any voting rights except as required by law. In case of the liquidation, the holders of shares of Series B Preferred Stock then outstanding are entitled to receive $1.20 per share (out of available assets) before any distribution or payment can be made to the holders of any junior securities.

Common Stock

At September 30, 2012, the Company has 100,000,000 shares of common stock authorized and 19,459,680 shares issued and outstanding at par value $0.001 per share.

Warrants

The warrants issued in connection with the Series B Preferred Stock Private Placement are exercisable for a period of three years from the date of issuance at an initial exercise price of $2.40.  The Company has the right, on at least ten (10) day written notice, to require that the holders of the warrants exercise the warrants in full and in the event the holders fail to do so, to redeem the outstanding warrants at a price of one cent ($0.01) per share, provided that the market price of the Company’s common stock shall equal or exceed $3.50 on each trading day for the consecutive twenty (20) trading days.

The warrants are equity classified and amounts attributable to the warrants are classified within additional paid-in capital.

The following table summarizes the activities for the warrants for the nine months ended September 30, 2012:

         
Weighted
 
   
Number of
   
Average
 
   
Shares
   
Exercise Price
 
Warrants outstanding, December 31, 2011
    1,000,000     $ 2.40  
Warrants outstanding, September 30, 2012
    1,000,000     $ 2.40  
                 
Exercisable as of September 30, 2012
    1,000,000     $ 2.40  
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Stock Options

The following table summarizes the activities for the Company’s options for the nine months ended September 30, 2012:

   
Options Outstanding
 
   
Number of Shares
   
Weighted-Average
Exercise Price
   
Weighted-Average
Remaining Life
(in years)
 
Balance at December 31, 2011
    150,000     $ 1.26       2.0  
Cancelled
    (125,000 )   $ 1.47       2.1  
Balance at September 30, 2012
    25,000     $ 0.23       1.7  
Vested and exercisable as of September 30, 2012
    25,000     $ 0.23       1.7  

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2012 and the related exercise price of the underlying options, was $1,250 for outstanding and exercisable options as of September 30, 2012.

At September 30, 2012, there was no unrecognized compensation cost related to outstanding stock options.

On May 17, 2012, the Company granted 80,000 restricted stock awards (RSAs) to an officer of the Company to replace 125,000 stock options previously granted to this officer. The incremental compensation cost of $7,631 resulting from the replacement of stock options by RSAs will be amortized over the vesting periods of the newly granted RSAs. The incremental compensation cost was measured as the excess of the fair value of the RSAs over the fair value of the options immediately before cancellation based on the share price and other pertinent factors at that date.

Restricted stock awards (RSAs)

The Company has granted RSAs to certain officers of the Company for their services provided to the Company.

The following table summarizes the activities for the Company’s unvested RSAs for the nine months ended September 30, 2012:

   
Number of Shares
   
Weighted-Average
Grant-Date Fair Value
 
Unvested at December 31, 2011
    32,500     $ 0.84  
Granted
    80,000     $ 0.42  
Vested
    (52,500 )   $ 0.68  
Unvested at September 30, 2012
    60,000     $ 0.42  

As of September 30, 2012, there was $5,723 of unrecognized compensation cost related to unvested RSAs. This amount is expected to be recognized over a weighted-average period of 0.4 years. Out of 202,877 granted RSAs, 30,000 shares of restricted stock were issued during the year ended December 31, 2011.

For the nine months ended September 30, 2012, stock-based compensation expense of $29,083 was included in general and administrative expenses.
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 10 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share of common stock:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Basic earnings per share:
                       
Numerator:
                       
Net income used in computing basic earnings per share
  $ 2,091,401     $ 1,697,695     $ 4,830,445     $ 4,495,660  
                                 
Denominator:
                               
Weighted average common shares outstanding
    19,459,680       19,382,013       19,445,415       19,382,013  
Basic earnings per share
  $ 0.11     $ 0.09     $ 0.25     $ 0.23  
                                 
Diluted earnings per share:
                               
Numerator:
                               
Net income used in computing diluted earnings per share
  $ 2,091,401     $ 1,697,695     $ 4,830,445     $ 4,495,660  
                                 
Denominator:
                               
Weighted average common shares outstanding
    19,459,680       19,382,013       19,445,415       19,382,013  
Weighted average effect of dilutive securities:
                               
Convertible preferred stocks
    4,102,000       4,149,667       4,116,265       4,149,667  
Stock warrants, options and awards
    110,090       50,265       95,961       56,930  
Shares used in computing diluted earnings per share
    23,671,770       23,581,945       23,657,641       23,588,610  
Diluted earnings per share
  $ 0.09     $ 0.07     $ 0.20     $ 0.19  

Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.

NOTE 11 – STATUTORY SURPLUS RESERVE FUND
 
As stipulated by the new Corporate Law of the PRC effective on January 1, 2006, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

i.   making up cumulative prior years’ losses, if any;

ii.   allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

iii.   allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

The Company has appropriated $1,914,074 and $1,914,074 as reserve for the statutory surplus reserve requirement as of September 30, 2012 and December 31, 2011.
 
 
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 12 – INCOME TAXES

China Power was incorporated in the United States of America (“USA”) and the Company has operations in two tax jurisdictions - the USA and the PRC. The Company generated substantially all of its net income from its PRC operations for the nine months ended September 30, 2012 and 2011 and has recorded income tax provision for the periods.

The Company’s China operation is subject to the PRC standard enterprise income tax rate of 25% based on its taxable net profit. However, due to its high technology products status, the National Tax Bureau in Xi’an High-Tech Development Zone granted Zhongxi the annual tax exemptions for the years ended December 31, 2005 and 2004 and a reduced tax rate of 15% for the nine months ended September 30, 2012 and 2011 and as long as Zhongxi meets the high-tech enterprise qualification.

Current PRC Tax Law also imposes a 10% withholding tax on all dividends paid by PRC companies to non-PRC shareholders  unless any foreign shareholder’s jurisdiction has a tax treaty with the PRC that provides for a different withholding arrangement and contains rules governing such matters as international transfer pricing.  No provision for withholding nor other tax on the undistributed earnings of the PRC companies has been made as the earnings of these PRC companies, in the opinion of the management, will be reinvested indefinitely.

Uncertain Tax Positions

Interest associated with unrecognized tax benefits are classified as income tax and penalties are classified in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income.

For the nine months ended September 30, 2012 and 2011, the Company had no unrecognized tax benefits and related interest and penalties expenses.  Currently, the Company is not subject to examination by major tax jurisdictions.

NOTE 13 – RELATED PARTY TRANSACTIONS

On November 8, 2006, An Sen and Zhongxi entered into a Management Entrustment Agreement with Zhongxi granting An Sen the right to manage and control Zhongxi, receive the financial benefits and be exposed to the financial risks of Zhongxi. An Sen and Zhongxi share common officers and directors. As a result, the Management Entrustment Agreement was not entered into at an arm’s length basis because the parties to the agreement are under common control.

NOTE 14 – CONCENTRATION

For the nine months ended September 30, 2012, three suppliers accounted for 85% of the Company’s total purchases and three customers accounted for 28% of the Company’s total revenue. The loss of any of these suppliers and customers could have a material adverse effect on the Company’s financial position and results of operations.

NOTE 15 – SUBSEQUENT EVENT

The Company has evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.

 
ITEM 2  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto that appear elsewhere in this report (the “Consolidated Financial Statements”). The results shown herein are not necessarily indicative of the results to be expected in future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. In some cases, you can identify forward-looking statements by words such as anticipate, believe, continue, could, estimate, expect, intend, likely, may, might, ongoing, plan, potential, predict, should, will, or the negative of these terms or other comparable terms. All forward-looking statements included in this document are based on information available to the management as of the date of this document. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review the risk factors shown in other reports and documents that we file with the Securities and Exchange Commission.
     
Overview
     
We design, manufacture, and distribute amorphous alloy transformer cores and amorphous alloy transformers in the People's Republic of China (“PRC”), devices that are used to step down voltage at the final phase of the distribution of electricity to consumers, businesses, and industry. Amorphous alloy cores are contained within the amorphous alloy electric transformers and constitute the main operating component of a new generation of energy saving electrical power transformers. We have discontinued our legacy distribution of traditional silicon steel transformer cores and transformers, and no longer make, sell, or distribute those products. Our sales of amorphous alloy cores and amorphous alloy transformers now account for all of our revenues. We expect that amorphous alloy cores and amorphous alloy core transformers will continue to be our major products for the foreseeable future.

Our business is conducted primarily through our operating company, Xi’an Amorphous Alloy Zhongxi Transformer Co., Ltd. (“Zhongxi”), a PRC company that is controlled through our wholly owned PRC-based subsidiary An Sen (Xi'an) Power Science & Technology Co., Ltd. (“An Sen”), a “wholly foreign-owned enterprise” (“WOFE”) under Chinese law.

Critical Accounting Policies, Judgments, and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to receivables from customers, bad debts, inventory, investments, intangible assets, income taxes, financing operations, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For further information on our critical accounting policies, please see the discussion in the financial notes of the Consolidated Financial Statements.
     
We believe the following critical accounting policies rely on the significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

Fair Value of Financial Instruments

Our financial instruments consist of cash, accounts receivable, accounts payable, and accrued liabilities. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short-term maturity of these instruments. Significant judgment is required to assess whether the impairment is other-than-temporary. Our judgment of whether an impairment is other-than-temporary is based on an assessment of factors including the severity of the impairment, expected duration of the impairment, and forecasted recovery of fair value.

Accounts Receivable

Accounts receivable includes billings for the products delivered. We recognize an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. Bad debt reserves are maintained for all customers based on a variety of factors, including our historical collection experience, customer creditworthiness, and current economic trends.
 

Inventory

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future pricing and market conditions. If actual future demands, future pricing or market conditions are less favorable than those projected by management, additional inventory write-downs may be required and the differences could be material. Such differences might significantly impact our financial position and results of operations.

Property , Plant, and Equipment
 
Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Judgment is required to determine the estimated useful lives of assets. We have determined that our property, plant and equipment have the following estimated useful lives:

Plant and office buildings
20 years
Machinery and production equipment
10 years
Automobile
10 years
Office equipment
5 years

Changes in these estimates and assumptions could materially affect our financial position and results of operations.

Intangible and Other Long-lived Assets

Intangibles and other long-lived assets are stated at cost, less accumulated amortization and impairments. Our intangible assets are being amortized over the expected useful economic life of 10 years.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.  If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the assets. Changes in these estimates and assumptions could materially affect our financial position and results of operations.

Foreign Currency Translation

Our functional currency and reporting currency is the United States dollar (“USD”). The functional currency of An Sen and Zhongxi is the Chinese renminbi (“RMB”).

Our assets and liabilities are translated into United States dollars at the end-of-period exchange rate. Revenues and expenses are translated into United States dollars at weighted average exchange rates. Equity transactions are translated using historical rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carry-forwards. Management must make assumptions, judgments, and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions, and estimates involved in our current provision for income taxes takes into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for income taxes in our consolidated financial statements.
 

Stock-based Compensation

Our stock-based compensation expense is estimated at the grant date, based on the award’s fair value as calculated using the Black-Scholes-Merton (BSM) option-pricing model, and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and option life. Changes in these assumptions could materially affect the financial position and results of operations.

Recent Accounting Pronouncements

As of the date this quarterly report is filed, there are no recently issued accounting pronouncements which adoption would have a material impact on the Company’s financial statements.

Results of Operations

Revenues

   
Three Months Ended September 30,
   
%
 
   
2012
   
2011
   
Change
 
   
Revenue
   
%
   
Revenue
   
%
       
Amorphous Alloy Core
  $ 7,376,245       69.1 %   $ 7,505,974       73.0 %     (1.7 ) %
Amorphous Alloy Transformer
    3,299,132       30.9 %     2,782,427       27.0 %     18.6 %
Total:
  $ 10,675,377       100.0 %   $ 10,288,401       100.0 %     3.8 %

   
Nine Months Ended September 30,
   
%
 
   
2012
   
2011
   
change
 
   
Revenue
   
%
   
Revenue
   
%
       
Amorphous Alloy Core
  $ 19,805,977       72.2 %   $ 20,358,865       73.5 %     (2.7 ) %
Amorphous Alloy Transformer
    7,615,083       27.8 %     7,357,266       26.5 %     3.5 %
Total:
  $ 27,421,060       100.0 %   $ 27,716,131       100.0 %     (1.1 ) %

Total net revenues increased $386,976 or 3.8% and decreased $295,071 or 1.1% during the quarter and nine months ended September 30, 2012, respectively, compared to the same periods of 2011. The increase in the third quarter was mainly due to higher tonnage of amorphous alloy cores sold and more units of amorphous alloy transformers sold as we continued to ramp up the production capacity utilization at our new amorphous alloy transformer production line.  This increase in net revenue was partly offset by the lower average selling prices of amorphous alloy cores and transformers.  The decrease in the first nine months of 2012 was primarily due to the lower average selling prices of our amorphous alloy cores and transformers, partly offset by the higher tonnage of amorphous alloy cores and more units of amorphous alloy transformers sold.

During the quarter and nine months ended September 30, 2012, the average selling prices per ton of amorphous alloy cores were 4.3% and 8.1% lower, respectively, compared with the same periods of 2011. The lower average prices of amorphous alloy cores were partly due to the decrease in the average purchase prices of our primary raw material (a portion of the cost savings were passed onto customers) and partly due to our marketing strategy to attract more orders.

During the quarter and nine months ended September 30, 2012, the average selling prices per unit of amorphous alloy transformers were 5.1% and 4.5% lower, respectively, compared with the same periods of 2011. The lower average unit prices of amorphous alloy transformers were primarily due to the overall price adjustment in the amorphous alloy transformers industry as amorphous alloy technologies mature. Also, we are able to sell our in-house produced amorphous alloy transformers at more competitive prices.
 

Cost of Goods Sold

   
Three Months Ended September 30,
   
%
 
   
2012
   
2011
   
change
 
   
COGS
   
%
   
COGS
   
%
       
Amorphous Alloy Core
  $ 5,400,730       69.0 %   $ 5,687,321       73.0 %     (5.0 ) %
Amorphous Alloy Transformer
    2,421,790       31.0 %     2,099,190       27.0 %     15.4 %
Total:
  $ 7,822,520       100.0 %   $ 7,786,511       100.0 %     0.5 %

   
Nine Months Ended September 30,
   
%
 
   
2012
   
2011
   
change
 
   
COGS
   
%
   
COGS
   
%
       
Amorphous Alloy Core
  $ 14,491,423       71.6 %   $ 15,423,425       73.5 %     (6.0 ) %
Amorphous Alloy Transformer
    5,734,353       28.4 %     5,553,973       26.5 %     3.2 %
Total:
  $ 20,225,776       100.0 %   $ 20,977,398       100.0 %     (3.6 ) %

Cost of goods sold increased $36,009 or 0.5% and decreased $751,622 or 3.6% during the quarter and nine months ended September 30, 2012, respectively, compared to the same periods of 2011. The increase in the third quarter was mainly due to more units of amorphous alloy transformers sold, partly offset by the lower average prices of primary raw material.  The decrease in the first nine months of 2012 was primarily due to the lower average prices of primary raw material, partly offset by the cost of goods sold incurred from more units of amorphous alloy transformers sold.

The average purchase prices of the primary raw material, amorphous alloy strip, decreased 6.1% and 11.1% in the third quarter and the first nine months of 2012, respectively, compared to the same periods of 2011 in part due to the increase in the purchase mix of the lower priced domestically made raw material and in part due to the decrease in the price of amorphous alloy strip supplied by the world’s main supplier.

Gross Profit

   
Three Months Ended September 30,
   
%
 
   
2012
   
2011
   
change
 
   
Gross Profit
   
Gross Margin
   
Gross Profit
   
Gross Margin
       
Amorphous Alloy Core
  $ 1,975,515       26.8 %   $ 1,818,653       24.2 %     8.6 %
Amorphous Alloy Transformer
    877,342       26.6 %     683,237       24.6 %     28.4 %
Total:
  $ 2,852,857       26.7 %   $ 2,501,890       24.3 %     14.0 %

   
Nine Months Ended September 30,
   
%
 
   
2012
   
2011
   
change
 
   
Gross Profit
   
Gross Margin
   
Gross Profit
   
Gross Margin
       
Amorphous Alloy Core
  $ 5,314,554       26.8 %   $ 4,935,440       24.2 %     7.7 %
Amorphous Alloy Transformer
    1,880,730       24.7 %     1,803,293       24.5 %     4.3 %
Total:
  $ 7,195,284       26.2 %   $ 6,738,733       24.3 %     6.8 %

Gross profit increased $ 350,967 or 14.0% and $ 456,551 or 6.8% during the quarter and nine months ended September 30, 2012, respectively, compared to the same periods of 2011. The increases of gross profit in the third quarter and the first nine months of 2012 were primarily due to the higher sales from amorphous alloy transformers and lower cost of goods sold associated with amorphous alloy cores.

The gross profit margin (gross profit as a percent of total revenues) increased 2.4 percentage points to 26.7% in the third quarter of 2012 from 24.3% in the third quarter of 2011, and increased 1.9 percentage points to 26.2% in the first nine months of 2012 from 24.3% in the first nine months of 2011. This was mainly due to that the average prices of primary raw material decreased to a greater extent than average selling prices of our amorphous alloy cores and transformers   in the third quarter and the first nine months of 2012 compared to the same periods of 2011 as well as the lower costs of in-house produced amorphous alloy transformers in the third quarter.
 

Selling, General and Administration Expenses

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
% Change
   
2012
   
2011
   
% Change
 
Selling, general and administrative expenses
  $ 353,678     $ 437,119       (19.1 )%   $ 1,385,818     $ 1,311,292       5.7 %
% of Revenue
    3.3 %     4.2 %             5.1 %     4.7 %        

Selling, general, and administrative (“SG&A”) expenses decreased by $83,441 or 19.1% and increased by $74,526 or 5.7% during the quarter and nine months ended September 30, 2012, respectively, compared to the same periods of 2011.

The lower SG&A expenses in dollars and as a percentage of revenue in the third quarter of 2012 were mainly due to a decrease in   professional fee of $48,303, a decrease in administrative personnel expenses of $31,329 resulting from lower director and officer insurance expenses upon the insurance policy renewal in July and lower staff travel expenses, and a decrease in stock-based compensation expense of $23,167. The decrease in SG&A in the third quarter of 2012 was partly offset by an increase in sales-related tax levy of $13,711 due to the higher sales.

The higher SG&A expenses in dollars and as a percentage of revenue in the first nine months of 2012 were mainly due to an increase in   administrative personnel expenses of $167,734 resulting from higher director and officer insurance and higher salary and related employee benefit, partly offset by a decrease in professional fee of $40,280 and a decrease in stock based compensation expense of $40,296.

Income Taxes

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income taxes
  $ 412,625     $ 370,788     $ 1,018,735     $ 964,139  
Effective tax rate
    16.5 %     17.9 %     17.4 %     17.7 %

The increase in the income taxes for the quarter and nine months ended September 30, 2012 compared to the same periods of 2011 was mainly due to the higher taxable income from Zhongxi which is taxed as a separate legal entity.  The effective tax rates was slightly higher compared to consolidated net income because the general and administrative expenses incurred by us in the United States are not tax deductible against Zhongxi’s taxable income.  This resulted in a higher overall effective tax rate compared to what would be expected based on the consolidated operating results because the income taxes are calculated based on Zhongxi’s taxable income alone without taking the expenses of the other division into account.

Our Chinese operating company, Zhongxi, is subject to a 25% standard enterprise income tax in China. However, due to Zhongxi’s high-tech enterprise status, the National Tax Bureau in Xi’an High-Tech Development Zone granted Zhongxi tax exemptions for the years ended December 31, 2005 and 2004, and a reduced tax rate of 15% as long as Zhongxi meets the high-tech enterprise qualification.

Net Income

For the quarter ended September 30, 2012, net income was $2,091,401 compared to $1,697,695 for the corresponding period of 2011, an increase of $393,706 or 23.2%. The increase in net income was mainly due to the higher gross profit, lower SG&A expenses, offset by higher income taxes.

For the nine months ended September 30, 2012, net income was $4,830,445 compared to $4,495,660 for the corresponding period of 2011, an increase of $334,785 or 7.4%. The increase in net income was mainly due to the higher gross profit, offset by higher SG&A expenses and income taxes.

Liquidity and Capital Resources

We have funded our operations and capital expenditures using cash generated from operations and funds raised from issuing convertible preferred stock. We will continue our investment in the development and enhancement of the production facilities for amorphous alloy cores and transformers. Cash generated from operations will be used to fulfill such commitments. We believe our existing cash will be sufficient to maintain our operations at the present level for at least the next 12 months.
 

The following table summarizes our liquidity and capital resources for the periods presented:

   
September 30, 2012
   
December 31, 2011 
 
Cash
  $ 21,922,324     $ 23,090,102  
Working capital
  $ 29,701,724     $ 23,894,257  
Stockholders' equity
  $ 39,899,911     $ 34,867,588  

The following table shows the movements of our cash for the periods presented.

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Net cash (used in) provided by operating activities
  $ (1,271,725 )   $ 3,369,559  
Net cash used in investing activities
    (3,557 )     (2,298,688 )
Net cash provided by financing activities
    -       -  
Effect of exchange rate changes on cash
    107,504       444,258  
Net (decrease) increase in cash
  $ (1,167,778 )   $ 1,515,129  

Operating activities:

For the nine months ended September 30, 2012, net cash used by operating activities was $1,271,725. This was primarily due to net income of $4,830,445, adjusted by non-cash related expenses including depreciation and amortization of $841,720, stock-based compensation of $29,083 and reversal of impairment on advance to suppliers of $20,001, then reduced by unfavorable changes in working capital of $6,952,972. The unfavorable changes in working capital mainly resulted from an increase in accounts receivable of $5,206,039 due to granting extended payment terms to customers that resulted in a longer collection period , an increase in prepaid expenses and other receivables of $1,813,974 due to a performance bond for a highway construction project and an increase in inventory of $539,547, partly offset by an increase in accounts payable of $462,497.

For the nine months ended September 30, 2011, net cash provided by operating activities was $3,369,559. This was primarily due to net income of $4,495,660, adjusted by non-cash related expenses including depreciation and amortization of $531,719 and stock-based compensation of $69,379, then reduced by unfavorable changes in working capital of $1,727,199. The unfavorable changes in working capital was mainly due to an increase in accounts recei vable of $759,905 resulting from higher revenues, a decrease in accounts payable of $623,706 and an increase in prepaid expenses and other receivables of $359,977, partly offset by an increase in income tax payable of $112,142.

Investing activities:

Net cash used in investing activities was $3,557 for the nine months ended September 30, 2012. It was primarily due to the acquisition of equipment.

Net cash used in investing activities was $2,298,688 for the nine months ended September 30, 2011. It was primarily due to the acquisition of plant and equipment of $2,052,747 and the $576,395 spent on construction in progress, offset by the $330,454 proceeds from disposal of long-term investment in Yan An.

Contractual Obligations

As of September 30, 2012, we prepaid $210,476 for the land use right of the new plant in the Jingyang Yongle Industrial Zone and are obligated to pay the remaining balance of $110,777 upon receiving the land use right certificate.

Off-Balance Sheet Arrangements
 
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ 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.
 

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not required.
 
ITEM 4  CONTROLS AND PROCEDURES
 
We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as required by Rule 13a-15(d) under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2012 our disclosure controls and procedures were effective in ensuring that material information relating to us, is made known to the Chief Executive Officer and Chief Financial Officer by others within our company during the period in which this report was being prepared.
 
There were no changes in our internal controls over financial reporting identified in connection with the evaluation that occurred during the quarter ended  September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
 
 
Part II
 
OTHER INFORMATION
 
ITEM 1  LEGAL PROCEEDINGS
 
None.
 
ITEM 1A  RISK FACTORS
 
Not required for smaller reporting companies.
 
ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Not applicable.
 
ITEM 3  DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
ITEM 4  MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITE M 5  OTHER INFORMATION
 
Not applicable.
 
ITE M 6  EXHIBITS
 
The exhibits listed on the Exhibit Index are filed or furnished with this report.
 
(a)           Exhibits:
 
 
31.1
     
 
31.2
     
 
32.1
     
 
101.INS
XBRL Instance Document*
     
 
101.SCH
 XBRL Taxonomy Extension Schema Document*
     
 
101.CAL
 XBRL Taxonomy Extension Calculation Linkbase Document*
     
 
101.DEF
 XBRL Taxonomy Extension Definition Linkbase Document*
     
 
101.LAB
 XBRL Taxonomy Extension Label Linkbase Document*
     
 
101.PRE
 XBRL Taxonomy Extension Presentation Linkbase Document*
     
 
* Furnished electronically with this filing
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Dated: November 14, 2012
 
 
CHINA POWER EQUIPMENT, INC.
   
 
By:
/s/Yongxing Song
   
Name: Yongxing Song
   
Title: Chief Executive Officer and President (Principal Executive Officer)
     
 
By:
/s/Elaine Zhao
   
Name: Elaine Zhao
   
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
EXHIBIT INDEX
 
Exhibit No.
 
Description
31.1
 
31.2
 
32.1
 
101.INS
 
XBRL Instance Document*
101.SCH
 
XBRL Taxonomy Extension Schema Document*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
* Furnished electronically with this filing
 
 
 
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