China
Power
Equipment, Inc.
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Consolidated Balance Sheets
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March 31, 2013
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December 31, 2012
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(unaudited)
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Assets
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Current Assets
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Cash and cash equivalents
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$
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24,261,696
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$
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21,983,641
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Accounts receivable, net
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8,586,778
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10,104,736
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Inventory (Note 3)
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704,499
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135,229
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Prepaid expenses and other receivables(Note 4)
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2,691,554
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3,014,017
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Total Current Assets
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36,244,527
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35,237,623
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Property, plant and equipment, net (Note 5)
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8,593,963
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8,734,845
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Intangible assets, net (Note 6)
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230,085
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243,790
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Deposit on contract rights (Note 7)
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942,297
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993,496
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Prepaid capital lease (Note 9)
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102,124
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103,010
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Total Assets
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$
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46,112,996
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$
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45,312,764
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Liabilities and Stockholders' Equity
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Current Liabilities
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Accounts payable
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$
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1,536,139
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$
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1,886,413
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Other payables and advances from customers
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1,116,588
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1,194,936
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Lease payable - current portion (Note 9)
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3,182
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3,164
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Short-term loan (Note 8)
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63,830
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63,452
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Income taxes payable
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384,929
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460,545
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Total Current Liabilities
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3,104,668
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3,608,510
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Long-term Liabilities
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Lease payable - noncurrent portion (Note 9)
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117,315
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116,619
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Total Long-term Liabilities
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117,315
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116,619
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Total Liabilities
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3,221,983
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3,725,129
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Commitments and Contingencies (Note 9)
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-
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-
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Stockholders' Equity
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Series B convertible preferred stock, $0.001 par value, 5,000,000 shares authorized,
4,102,000 shares issued and outstanding at March 31, 2013 and December 31, 2012 (Note 10)
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4,102
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4,102
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Undesignated preferred stock, $0.001 par value, 5,000,000 shares authorized,
None issued and outstanding
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-
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-
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Common stock: par value $0.001 per share, 100,000,000 shares authorized;
19,522,557 shares issued and outstanding at March 31, 2013 and December 31, 2012 (Note 10)
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19,523
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19,523
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Additional paid in capital
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25,876,536
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25,874,629
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Statutory surplus reserve fund (Note 12)
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2,415,732
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2,415,732
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Retained earnings
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11,388,069
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10,328,155
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Accumulated other comprehensive income
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3,187,051
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2,945,494
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Total Stockholders' Equity
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42,891,013
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41,587,635
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Total Liabilities and Stockholders' Equity
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$
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46,112,996
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$
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45,312,764
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The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Operations and Comprehensive Income
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Three Months Ended March 31,
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2013
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2012
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(unaudited)
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(unaudited)
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Revenue, net
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$
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6,854,897
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$
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7,255,342
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Cost of goods sold
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(5,154,949
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)
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(5,417,974
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)
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Gross profit
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1,699,948
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1,837,368
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Selling, general and administrative expenses
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395,914
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534,587
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Net income from operations
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1,304,034
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1,302,781
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Other income (expenses)
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Other expenses
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(56
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)
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(4,776
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)
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Interest income
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123
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5,621
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Interest expense
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-
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(1,262
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)
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Total other income (expenses)
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67
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(417
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)
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Net income before income taxes
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1,304,101
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1,302,364
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Income taxes (Note 13)
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244,187
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260,004
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Net income
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$
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1,059,914
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$
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1,042,360
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Other Comprehensive Income
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Change in foreign currency translation adjustment
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241,557
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212,370
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Comprehensive income
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$
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1,301,471
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$
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1,254,730
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Earnings per share - basic (Note 11)
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$
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0.05
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$
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0.05
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Earnings per share - diluted (Note 11)
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$
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0.04
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$
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0.04
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Weighted average common shares outstanding:
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Basic
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19,522,557
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19,416,727
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Diluted
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23,769,764
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23,655,385
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The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Cash Flows
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Three Months Ended March 31,
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2013
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2012
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(unaudited)
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(unaudited)
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Cash Flows from Operating Activities
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Net income
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$
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1,059,914
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$
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1,042,360
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Adjustments to reconcile net income to net cash:
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Depreciation and amortization expense
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267,345
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270,028
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Stock-based compensation
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1,908
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14,125
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Changes in operating assets and liabilities:
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Accounts receivable
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1,575,675
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22,787
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Inventory
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(567,530
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)
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(188,350
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)
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Prepaid expenses and other receivables
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339,493
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613,593
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Accounts payable
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(360,939
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)
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(335,254
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Other payables and advance from customers
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(85,152
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)
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(63,225
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)
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Income taxes payable
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(78,236
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)
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(57,068
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Net cash provided by operating activities
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2,152,478
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1,318,996
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Cash Flows from Investing Activities
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Addition in plant and equipment
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(982
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)
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(852
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)
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Net cash used in investing activities
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(982
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)
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(852
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)
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Cash Flows from Financing Activities
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-
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-
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Effect of exchange rate changes on cash and cash equivalents:
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126,559
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133,466
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Increase in cash and cash equivalents
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2,278,055
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1,451,610
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Cash and cash equivalents, beginning of period
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21,983,641
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23,090,102
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Cash and cash equivalents, end of period
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$
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24,261,696
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$
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24,541,712
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Supplemental disclosure of cash flow information
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Interest paid in cash
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$
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-
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$
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1,262
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Income taxes paid in cash
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$
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322,424
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$
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317,073
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Non-cash investing and financing activities:
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Conversion of preferred stock to common stock
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$
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-
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$
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48
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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, 2012 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, 2012, included in the Company’s 2012 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, 2013.
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.
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Sales contract for transformer:
Method, time and venue for settlement: complete the payment within three months after delivery or pay after check and accept upon 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.
For transformer core, the customer can make a return or exchange within 10 days after receiving the goods if the goods are found to be 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 a one-year warranty from delivery for product defects. As there has been 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. As of March 31, 2013, cash of $20,557,171 was maintained with one single financial institution in the PRC. In common with local practice, 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 three months ended March 31, 2013 and 2012, 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.
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3 – INVENTORY
Inventory consists of:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
628,695
|
|
|
$
|
66,583
|
|
|
Work in progress
|
|
|
16,515
|
|
|
|
20,190
|
|
|
Finished goods
|
|
|
59,289
|
|
|
|
48,456
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
704,499
|
|
|
$
|
135,229
|
|
NOTE 4 – PREPAID EXPENSES AND OTHER RECEIVABLES
At March 31, 2013 and December 31, 2012, prepaid expenses and other receivables include a performance bond of $2,320,078 and $2,306,313 respectively for a highway construction project.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Plant and office building
|
|
$
|
6,721,380
|
|
|
$
|
6,681,503
|
|
|
Machinery and production equipment
|
|
|
4,721,374
|
|
|
|
4,692,387
|
|
|
Automobile
|
|
|
129,453
|
|
|
|
128,685
|
|
|
Office equipment
|
|
|
55,073
|
|
|
|
54,746
|
|
|
Total
|
|
|
11,627,280
|
|
|
|
11,557,321
|
|
|
Less: accumulated depreciation
|
|
|
(3,033,317
|
)
|
|
|
(2,822,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
8,593,963
|
|
|
$
|
8,734,845
|
|
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consist of:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Technical know-how
|
|
$
|
239,364
|
|
|
$
|
237,944
|
|
|
Amorphous Transformer Technique
|
|
|
367,025
|
|
|
|
364,848
|
|
|
Total
|
|
|
606,389
|
|
|
|
602,792
|
|
|
Less: accumulated amortization
|
|
|
(376,304
|
)
|
|
|
(359,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
230,085
|
|
|
$
|
243,790
|
|
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
On June 18, 2009, Zhongxi purchased an amorphous transformer aluminum wire technology for $239,364. 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 $79,788. 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 is a related party of the Company, with common owners and directors for $159,576. 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 $127,661. The technology is being amortized over 10 years based on useful life estimation.
The estimated future amortization expenses related to intangible assets as of March 31, 2013 are as follows:
|
Years Ending December 31,
|
|
|
|
|
2013
|
|
$
|
45,479
|
|
|
2014
|
|
|
55,320
|
|
|
2015
|
|
|
37,889
|
|
|
2016
|
|
|
31,554
|
|
|
2017
|
|
|
23,936
|
|
|
Thereafter
|
|
|
35,907
|
|
NOTE 7 – CONTRACT RIGHTS DEPOSIT
The contract right was purchased from AT&M for $1,436,185 (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 months ended March 31, 2013 and 2012, $57,128 and $60,835 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 March 31, 2013 and concluded that no impairment is needed to be recorded as of the date of evaluation.
NOTE 8 – 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 $63,830 (RMB400,000) at 5% stated annual interest rate. The loan is repayable on demand.
NOTE 9 – 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 $3,182 for the year ending December 31, 2013 and annual rent payments are expected to increase every year by at least 10% until the expiration of the agreement.
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
As a result, approximately $151,647 (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 $102,124 and $103,010 as of March 31, 2013 and December 31, 2012, respectively.
Future minimum lease payments as of March 31, 2013 are as follows based on the 10% discounted factor:
|
For the period ending December 31:
|
|
|
|
|
2013
|
|
$
|
3,182
|
|
|
2014
|
|
|
3,520
|
|
|
2015
|
|
|
3,893
|
|
|
2016
|
|
|
4,306
|
|
|
2017
|
|
|
4,762
|
|
|
Thereafter
|
|
|
100,834
|
|
|
Less Current Portion
|
|
|
(3,182
|
)
|
|
Long Term Portion
|
|
$
|
117,315
|
|
CAPITAL COMMITMENTS
As of March 31, 2013 and December 31, 2012, the Company had capital commitments to acquire land use right of $111,703 and $111,041, 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 $14,362 are required for the year ending December 31, 2013.
NOTE 10 – 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.
There has not been any movement during the three months ended March 31, 2013. At March 31, 2013 and December 31, 2012, 4,102,000 shares are outstanding.
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 March 31, 2013 and December 31, 2012, the Company has 100,000,000 shares of common stock authorized and 19,522,557 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.
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The warrants are equity classified and amounts attributable to the warrants are classified within additional paid-in capital.
All warrants were expired in December 2012.
Stock Options
The following table summarizes the activities for the Company’s options for the three months ended March 31, 2013:
|
|
|
Options Outstanding
|
|
|
|
|
Number of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Life
(in years)
|
|
|
Balance at December 31, 2012
|
|
|
25,000
|
|
|
$
|
0.23
|
|
|
|
1.5
|
|
|
Balance at March 31, 2013
|
|
|
25,000
|
|
|
$
|
0.23
|
|
|
|
1.2
|
|
|
Vested and exercisable as of March 31, 2013
|
|
|
25,000
|
|
|
$
|
0.23
|
|
|
|
1.2
|
|
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at March 31, 2013 and the related exercise price of the underlying options, was $3,000 for outstanding and exercisable options as of March 31, 2013.
At March 31, 2013, 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
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 three months ended March 31, 2013:
|
|
|
Number of Shares
|
|
|
Weighted-Average
Grant-Date Fair
Value per share
|
|
|
Unvested at December 31, 2012
|
|
|
40,000
|
|
|
$
|
0.42
|
|
|
Granted
|
|
|
43,636
|
|
|
$
|
0.55
|
|
|
Vested
|
|
|
(63,636
|
)
|
|
$
|
0.51
|
|
|
Unvested at March 31, 2013
|
|
|
20,000
|
|
|
$
|
0.42
|
|
As of March 31, 2013, there was $1,908 of unrecognized compensation cost related to unvested RSAs. This amount is expected to be recognized over a weighted-average period of 0.1 year.
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
During the three months ended March 31, 2013, the Company granted 43,636 RSAs to a director for service provided.
The Company has granted 246,513 RSAs (both vested and unvested in aggregate). Out of 226,513 vested RSAs, 92,877 shares of restricted stock were issued as of March 31, 2013.
For the three months ended March 31, 2013 and 2012, stock-based compensation expense of $1,908 and $14,125 respectively was included in general and administrative expenses.
NOTE 11 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of common stock:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income used in computing basic earnings per share
|
|
$
|
1,059,914
|
|
|
$
|
1,042,360
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
19,522,557
|
|
|
|
19,416,727
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income used in computing diluted earnings per share
|
|
$
|
1,059,914
|
|
|
$
|
1,042,360
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
19,522,557
|
|
|
|
19,416,727
|
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Convertible preferred stocks
|
|
|
4,102,000
|
|
|
|
4,144,953
|
|
|
Stock warrants, options and awards
|
|
|
145,207
|
|
|
|
93,705
|
|
|
Shares used in computing diluted earnings per share
|
|
|
23,769,764
|
|
|
|
23,655,385
|
|
|
Diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.
NOTE 12 – 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 $2,415,732 as reserve for the statutory surplus reserve requirement as of March 31, 2013 and December 31, 2012.
China Power Equipment, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 13 – 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 three months ended March 31, 2013 and 2012 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 three months ended March 2013 and 2012 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 three months ended March 31, 2013 and 2012, 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 14 – 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 15 – CONCENTRATION
For the three months ended March 31, 2013, three suppliers accounted for 84% of the Company’s total purchases and three customers accounted for 40% 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 16 – 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
This Quarterly Report on Form 10-Q (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as information relating to China Power Equipment, Inc. that is based on management’s exercise of business judgment and assumptions made by and information currently available to management. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases and reports released by us, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “the facts suggest” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward looking statements. Other unknown, unidentified or unpredictable factors could materially and adversely impact our future results. You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report
, as well as the audited financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
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
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2013 and 2012
Revenue
|
|
|
Three Months Ended March 31,
|
|
|
%
|
|
|
|
|
2013
|
|
|
2012
|
|
|
change
|
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
|
|
|
Amorphous Alloy Core
|
|
$
|
5,036,006
|
|
|
|
73.5
|
%
|
|
$
|
5,483,534
|
|
|
|
75.6
|
%
|
|
|
(8.2
|
) %
|
|
Amorphous Alloy Transformer
|
|
|
1,818,891
|
|
|
|
26.5
|
%
|
|
|
1,771,808
|
|
|
|
24.4
|
%
|
|
|
2.7
|
%
|
|
Total:
|
|
$
|
6,854,897
|
|
|
|
100.0
|
%
|
|
$
|
7,255,342
|
|
|
|
100.0
|
%
|
|
|
(5.5
|
) %
|
Total revenues decreased $400,445 or 5.5% during the three months ended March 31, 2013 compared to the same period of 2012. The decrease was primarily due to the lower average selling prices of our amorphous alloy cores and transformers and the lower tonnage of amorphous alloy cores sold, partly offset by more units of amorphous alloy transformers sold. The lower tonnage of sold amorphous alloy cores in the first quarter of 2013 was mainly due to a longer Chinese New Year’s holiday break for employees to compensate for the overtime worked by employees in year 2012.
During the three months ended March 31, 2013, the average selling prices per ton of amorphous alloy cores were 3.0% lower compared with the same period of 2012. The slightly lower average prices of amorphous alloy cores were mainly due to our marketing strategy to attract more orders.
During the three months ended March 31, 2013, the average selling prices per unit of amorphous alloy transformers were 24.5% lower compared with the same period of 2012. The lower average unit prices of amorphous alloy transformers were primarily due to more units of lower priced low capacity alloy transformers sold.
Cost of Goods Sold
|
|
|
Three Months Ended March 31,
|
|
|
%
|
|
|
|
|
2013
|
|
|
2012
|
|
|
change
|
|
|
|
|
COGS
|
|
|
%
|
|
|
COGS
|
|
|
%
|
|
|
|
|
|
Amorphous Alloy Core
|
|
$
|
3,765,807
|
|
|
|
73.1
|
%
|
|
$
|
4,016,839
|
|
|
|
74.1
|
%
|
|
|
(6.2
|
) %
|
|
Amorphous Alloy Transformer
|
|
|
1,389,142
|
|
|
|
26.9
|
%
|
|
|
1,401,135
|
|
|
|
25.9
|
%
|
|
|
(0.9
|
) %
|
|
Total:
|
|
$
|
5,154,949
|
|
|
|
100.0
|
%
|
|
$
|
5,417,974
|
|
|
|
100.0
|
%
|
|
|
(4.9
|
) %
|
Cost of goods sold decreased $263,025 or 4.9% during the three months ended March 31, 2013 compared to the same period of 2012. The decrease was primarily due to the lower tonnage of amorphous alloy cores sold, 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, remain largely unchanged in the first quarter of 2013 compared to the same period of 2012.
Gross Profit
|
|
|
Three Months Ended March 31,
|
|
|
%
|
|
|
|
|
2013
|
|
|
2012
|
|
|
change
|
|
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
|
|
|
|
Amorphous Alloy Core
|
|
$
|
1,270,199
|
|
|
|
25.2
|
%
|
|
$
|
1,466,695
|
|
|
|
26.7
|
%
|
|
|
(13.4
|
) %
|
|
Amorphous Alloy Transformer
|
|
|
429,749
|
|
|
|
23.6
|
%
|
|
|
370,673
|
|
|
|
20.9
|
%
|
|
|
15.9
|
%
|
|
Total:
|
|
$
|
1,699,948
|
|
|
|
24.8
|
%
|
|
$
|
1,837,368
|
|
|
|
25.3
|
%
|
|
|
(7.5
|
) %
|
Gross profit decreased $137,420 or 7.5% during the three months ended March 31, 2013 compared to the same period of 2012. The decrease of gross profit was primarily due to the lower sales from amorphous alloy cores.
The gross profit margin (gross profit as a percent of total revenues) decreased 0.5 percentage points to 24.8% in the first quarter of 2013 from 25.3% in the first quarter of 2012. This was mainly due to the lower gross profit margin of amorphous alloy cores caused by its lower average selling prices.
Selling, General and Administrative Expenses
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
% Change
|
|
|
Selling, general and administrative expenses
|
|
$
|
395,914
|
|
|
$
|
534,587
|
|
|
|
(25.9
|
)%
|
|
% of Revenue
|
|
|
5.8
|
%
|
|
|
7.4
|
%
|
|
|
|
|
Selling, general, and administrative (“SG&A”) expenses decreased by $138,673 or 25.9% during the three months ended March 31, 2013 compared to the same period of 2012.
The lower SG&A expenses in dollars and as a percentage of revenue in the first quarter of 2013 were mainly due to a decrease in
professional fee of $71,100 and a decrease in administrative personnel expenses of $55,752 resulting from lower salary and lower director and officer insurance expenses after the insurance policy renewal in July 2012.
Income Taxes
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Income taxes
|
|
$
|
244,187
|
|
|
$
|
260,004
|
|
|
Effective tax rate
|
|
|
18.7
|
%
|
|
|
20.0
|
%
|
The decrease in the income taxes for the three months ended March 31, 2013 compared to the same period of 2012 was mainly due to the lower taxable income from Zhongxi which is taxed as a separate legal entity. The effective tax rates as a percentage of consolidated net income before income taxes was higher than 15%, Zhongxi’s reduced income tax rate, 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 originally 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 three months ended March 31, 2013, net income was $1,059,914 compared to $1,042,360 for the corresponding period of 2012, an increase of $17,554 or 1.7%. The slight increase in net income was mainly due to the lower SG&A expenses and lower income taxes, offset by lower gross profit.
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. We intend to use cash generated from operations to meet 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:
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
Cash
|
|
$
|
24,261,696
|
|
|
$
|
21,983,641
|
|
|
Working capital
|
|
$
|
33,139,859
|
|
|
$
|
31,629,113
|
|
|
Stockholders' equity
|
|
$
|
42,891,013
|
|
|
$
|
41,587,635
|
|
The following table shows cash flows for the periods presented.
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Net cash provided by operating activities
|
|
$
|
2,152,478
|
|
|
$
|
1,318,996
|
|
|
Net cash used in investing activities
|
|
|
(982
|
)
|
|
|
(852
|
)
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
|
Effect of exchange rate changes on cash
|
|
|
126,559
|
|
|
|
133,466
|
|
|
Net increase in cash
|
|
$
|
2,278,055
|
|
|
$
|
1,451,610
|
|
Operating activities:
For the three months ended March 31, 2013, net cash provided by operating activities was $2,152,478. This was primarily due to net income of $1,059,914, adjusted by non-cash related expenses including depreciation and amortization of $267,345 and stock-based compensation of $1,908, then increased by favorable changes in working capital of $823,311. The favorable changes in working capital mainly resulted from a decrease in accounts receivable of $1,575,675 as some prior period accounts receivable got collected and a decrease in prepaid expenses and other receivables of $339,493, partly offset by an increase in inventory of $567,530 and a decrease in accounts payable of $360,939.
For the three months ended March 31, 2012, net cash provided by operating activities was $1,318,996. This was primarily due to net income of $1,042,360, adjusted by non-cash related expenses including depreciation and amortization of $270,028 and stock-based compensation of $14,125, then decreased by unfavorable changes in working capital of $7,517. The unfavorable changes in working capital were mainly due to an increase in inventory of $188,350, a decrease in accounts payable of $335,254, a decrease in other payables and advance from customers of $63,225 and a decrease in income tax payable of $57,068. The unfavorable changes in working capital were partly offset by a decrease in prepaid expenses and other receivables of $613,593.
Investing activities:
Net cash used in investing activities was due to the acquisition of equipment of $982 and $852 for the three months ended March 31, 2013 and 2012 respectively.
Contractual Obligations
As of March 31, 2013, we prepaid $212,236 for the land use right of the new plant in the Jingyang Yongle Industrial Zone and are obligated to pay the remaining balance of $111,703 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.
