UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| S | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarter ended September 30, 2012 or | |
| £ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from ___________ to ____________ |
Commission File Number: 000-54125
| ZHONG WEN INTERNATIONAL HOLDING CO, INC. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 99-0368416 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
1458 North Yunmenshan Rd Qingzhou, Shandong, PR China | ||
| (Address of principal executive offices) | (Zip Code) | |
| Registrant's telephone number, including area code: | (86536) 330-8317 |
| Not Applicable |
| (Former name, address and 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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES S NO £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulations 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 S NO £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer £ | Accelerated filer £ |
| Non-accelerated filer £ (Do not check if a smaller reporting company) | Smaller reporting companyS |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES £ NO S
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
At November 16, 2012, there were issued and outstanding 4,000,000 shares of the Company’s common stock, $.001 par value.
| (1) |
Zhong Wen International Co., Inc. and Subsidiaries
| Page No | ||
| PART I. | FINANCIAL INFORMATION | |
| Item 1. | Financial Statements. | |
| Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011 (audited) | 3 | |
| Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited) | 4 | |
| Consolidated Statement of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited) | 5 | |
| Notes to Consolidated Financial Statements (unaudited) | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 |
| Item 4. | Controls and Procedures | 13 |
| PART II. | OTHER INFORMATION | |
| Item 6. | Exhibits | 14 |
| Signatures | 15 | |
| (2) |
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
| ZHONG WEN INTERNATIONAL HOLDING CO., LTD. AND SUBSIDIARY | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011 | ||||||||
| 9/30/2012 | 12/31/2011 | |||||||
| ASSETS | (Unaudited) | (Audited) | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,215,338 | $ | 67,003 | ||||
| Trade receivables | 267,695 | 317,500 | ||||||
| Deposits | — | 1,034,624 | ||||||
| Total current assets | 1,483,033 | 1,419,127 | ||||||
| TOTAL ASSETS | $ | 1,483,033 | $ | 1,419,127 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Amount due to a director | $ | 1,431,283 | $ | 1,301,283 | ||||
| Income tax payables | 1,280 | 14,366 | ||||||
| Other payables and accruals | 121,797 | 220,965 | ||||||
| Total current liabilities | 1,554,360 | 1,536,614 | ||||||
| Stockholders' deficit | ||||||||
| Common stock | ||||||||
| Authorized: 6,000,000 shares, par value $0.001 | ||||||||
| Issued and outstanding: 4,000,000 shares at September 30, 2012 and December 31, 2011 | 4,000 | 4,000 | ||||||
| Additional paid-in-capital | 36,000 | 36,000 | ||||||
| Accumulated other comprehensive income | 70,724 | 68,585 | ||||||
| Statutory reserve - restricted | 30,867 | 23,238 | ||||||
| Retained deficit | (212,918) | (249,310) | ||||||
| TOTAL STOCKHOLDERS’ DEFICIT | (71,327) | (117,487) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,483,033 | $ | 1,419,127 | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
| (3) |
| ZHONG WEN INTERNATIONAL HOLDING CO., LTD. AND SUBSIDIARY | ||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | ||||||||||||||||
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 | ||||||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||
| 9/30/2012 | 9/30/2011 | 9/30/2012 | 9/30/2011 | |||||||||||||
| Revenue | $ | 9,495 | $ | 77,578 | $ | 123,913 | $ | 248,698 | ||||||||
| Operating Expenses | ||||||||||||||||
| General and administrative expenses | (15,967) | (31,280) | (54,462) | (80,588) | ||||||||||||
| Operating income (loss) | (6,472) | 46,298 | 69,451 | 168,110 | ||||||||||||
| Other income | — | — | — | 92 | ||||||||||||
| Income (loss) before income taxes | (6,472) | 46,298 | 69,451 | 168,202 | ||||||||||||
| Income taxes | (1,059) | (16,941) | (25,430) | (53,667) | ||||||||||||
| Net income (loss) | ($ | 7,530 | ) | $ | 29,357 | $ | 44,021 | $ | 114,535 | |||||||
| Other comprehensive income | ||||||||||||||||
| Foreign currency translation | 15,282 | 7,725 | 2,139 | 48,333 | ||||||||||||
| Comprehensive income | $ | 7,752 | $ | 37,082 | $ | 46,161 | $ | 162,868 | ||||||||
| Earnings per share | ||||||||||||||||
| Basic | ** | $ | 0.01 | $ | 0.01 | $ | 0.04 | |||||||||
| Weighted average number of common stock outstanding | ||||||||||||||||
| Basic | 4,000,000 | 4,000,000 | 4,000,000 | 4,000,000 | ||||||||||||
| ** less than $0.01 | ||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||
| (4) |
| ZHONG WEN INTERNATIONAL HOLDING CO., LTD. AND SUBSIDIARY | ||||||||
| CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) | ||||||||
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 | ||||||||
| For the nine months ended | ||||||||
| 9/30/2012 | 9/30/2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 44,021 | $ | 114,535 | ||||
| Changes in operating assets and liabilities: | ||||||||
| Trade receivables | 49,834 | (215,123) | ||||||
| Prepayment, deposits and other receivables | 1,028,453 | (8,163) | ||||||
| Other payables and accrued expenses | (99,183) | 22,242 | ||||||
| Income tax payables | (13,010) | 6,252 | ||||||
| Net cash provided by (used in) operating activities | 1,010,115 | (80,257) | ||||||
| Cash flows from financing activities: | ||||||||
| Amount due to a director | 130,000 | 22,031 | ||||||
| Net cash provided by financing activities | 130,000 | 22,031 | ||||||
| Effect of exchange rate | 8,220 | 36,592 | ||||||
| Increase in cash and cash equivalents | 1,148,335 | (21,634) | ||||||
| Cash and cash equivalents at beginning of period | 67,003 | 90,718 | ||||||
| Cash and cash equivalents at end of period | $ | 1,215,338 | $ | 69,084 | ||||
| Cash paid for: | ||||||||
| Income tax | $ | 38,680 | $ | 47,415 | ||||
| Interest | — | — | ||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
| (5) |
ZHONG WEN INTERNATIONAL HOLDING CO., LTD. AND SUBSIDIARY
| NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2012 |
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2011 and 2010 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2011.
NOTE 2. NATURE OF BUSINESS
Nature of Business
Zhong Wen International Holding Co., Ltd. (the “Company”) was incorporated in the State of Delaware on May 24, 2010. Since November 2010, the Company through its subsidiaries commenced the business, which is product procurement for the construction industry and project consultation for construction projects. During the first quarter of fiscal year 2011, the Company was no longer considered to be in development stage.
Hong Kong Zhongwenbo International Group Company Limited
Hong Kong Zhongwenbo International Group Company Limited (“Zhongwenbo”) is a private limited liability company incorporated in Hong Kong on June 23, 2010. Zhongwenbo is a holding company and has no operations other than its 100% ownership of Qingzhou RuiDong Trading Limited.
Qingzhou RuiDong Trading Limited
Qingzhou RuiDong Trading Ltd (“Qingzhou RuiDong”) was incorporated in Shangdong province of the People’s Republic of China (the “PRC”) in September 2010. Qingzhou RuiDong is engaged in export of construction machinery and equipment.
Zhong Wen International Holding Co., Ltd., Hong Kong Zhongwenbo International Group Company Limited and Qingzhou RuiDong Trading Limited are hereinafter referred to as (the “Company”).
Going Concern Uncertainty
The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”), which contemplate continuation of the Company as a going concern. As of September 30, 2012, the Company had accumulated deficit of $212,918 and total stockholders’ deficit of $71,327. The Company estimates that its cash and cash equivalents will fund its operations through the financial support from the Company’s shareholders. The Company’s shareholders have indicated their continuing support to enable the Company to meet its obligations to third parties as and when they fall due and to continue as a going concern. This belief is based on the Company’s current cost structure and the Company’s current expectations regarding operating expenses and anticipated revenues. If the Company is unable to obtain additional funds, it will not be able to sustain its operations and would be required to cease its operations and/or seek bankruptcy protection. Given the difficult current economic environment, the Company believes it will be difficult to raise additional funds and there can be no assurance as to the availability of additional financing or the terms upon which additional financing may be available. As a result of these conditions, there is substantial doubt regarding the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
| (6) |
NOTE 3.RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.
In May 2011, FASB issued Accounting Standards Update No. 2011-04,“Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”(“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially expand its financial statement note disclosures.
In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentationof Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company is reviewing ASU 2011-05 to ascertain its impact on the Company’s financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.
In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect that the adoption of this standard will have a material impact on the Company’s results of operations, cash flows or financial condition.
In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, the Company does not expect that the adoption of this standard will have a material impact on the Company’s results of operations, cash flows or financial condition.
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.
ASU 2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for any indefinite-lived intangible in any period.
ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its consolidated financial statements.
NOTE 4. AMOUNT DUE TO A DIRECTOR
The amount due to a director, Sun, Hongyi, was $1,431,283 and $1,301,283 as of September 30, 2012 and December 31, 2011, respectively. It represents a current account between Mr. Sun and the Company, which Mr. Sun paid on behalf of the Company. There is no written agreement between Mr. Sun and the Company. This loan from Mr. Sun is unsecured, interest free and repayable on demand.
| (7) |
NOTE 5. INCOME TAXES
The Company conducts all its operating business through its subsidiaries in China. The subsidiaries are governed by the income tax laws of the PRC and do not have any deferred tax assets or deferred tax liabilities under the income tax laws of the PRC because there are no temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company by itself does not have any business operating activities in the United States and is therefore not subject to United States income tax.
The Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the previous laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate previously applicable to both DEs and FIEs.
The Company generated substantially its net income from its PRC operation and has recorded income tax provision for the nine months ended September 30, 2012 and 2011.
The components of (loss) income before income taxes separating U.S. and PRC operations are as follows:
For the nine months ended
| 9/30/2012 | 9/30/2011 | |||||||
| Loss subject to U.S. operation | $ | (30,000) | $ | (175,014) | ||||
| Income (loss) subject to PRC operation | 99,451 | 343,216 | ||||||
| Income (loss) before income taxes | $ | 69,451 | $ | 168,202 | ||||
United States of America
The Company is registered in the State of Delaware and is subject to United States of America tax law.
As of September 30, 2012, the U.S. operation had $484,014 of net operating losses available for federal tax purposes, which are available to offset future taxable income. The net operating loss carry forwards begin to expire in 2031. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
The PRC
The reconciliation of income tax rate to the effective income tax rate based on income before income taxes stated in the consolidated statement of operations for nine months ended September 30, 2012 and 2011 is as follows:
| For the nine months ended | ||||||||
| 9/30/2012 | 9/30/2011 | |||||||
| Income (loss) before income taxes | $ | 99,451 | $ | 343,216 | ||||
| Statutory income tax rate | 25% | 25% | ||||||
| 24,863 | 85,804 | |||||||
| Non-deductible and other various items for tax purposes: | 567 | (32,137) | ||||||
| Income tax expense | $ | 25,430 | $ | 53,667 | ||||
The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of September 30, 2012 and December 31, 2011:
As of
| 9/30/2012 | 12/31/2011 | |||||||
| Deferred tax assets: | ||||||||
| - Net operating loss carryforwards | $ | 169,405 | $ | 158,905 | ||||
| Less: valuation allowance | (169,405) | (158,905) | ||||||
| Deferred tax assets | $ | - | $ | - | ||||
As of September 30, 2012 and December 31, 2011, valuation allowances of $169,405 and $158,905 were provided to the deferred tax assets due to the uncertainty surrounding their realization.
The following table reconciles the U.S. statutory rate to the Company’s effective tax rate:
For the nine months ended
| 9/30/2012 | 9/30/2011 | |||||||
| U.S. Statutory rate | 35% | 35% | ||||||
| Foreign income not recognized in USA | (35) | (35) | ||||||
| China income taxes | 25 | 25 | ||||||
| China exemption | (25) | (25) | ||||||
| Total provision for income taxes | 0 | 0 | ||||||
TheCompanyaccountsforincometaxesunderASCtopic740,IncomeTaxes,ASCtopic740definesan assetandliabilityapproachthatrequiresthe recognition of deferredtaxassetsandliabilitiesfortheexpected futuretaxconsequencesofeventsthathavebeenrecognizedintheCompany’sfinancialstatementsortax returns. ASCtopic 740furtherrequiresthat ataxpositionmustbemorelikelythannotto besustained before beingrecognizedinthefinancialstatements,aswellas theaccrualofinterestandpenaltiesasapplicableon unrecognized tax positions.
Deferredincometaxesarerecognized forthetaxconsequencesin future yearsofdifferences between thetax basis ofassets andliabilitiesandtheirfinancialreportingamountsateach periodend,based onenactedtax lawsandstatutorytax ratesapplicabletothe periodsin whichthe differencesareexpectedtoaffecttaxable income.Valuationallowancesareestablished,whennecessary,toreducedeferredtax assetstotheamount expectedtobe realized.The provisionfor incometaxesrepresentsthetax payable forthe period,ifany,and the changeduringtheperiod indeferredtax assets andliabilities.
Valuationallowanceare recordedwhenitismorelikelythannotthatsomeportionorallofthedeferred incometaxassetswillnot be realized.Incometaxexpenseisthetaxpayableorrefundablefortheperiod plus orminusthechangeduring theperiod in deferred income taxes.
Because the Company has no operations within the United States, there is no provision for US income taxes and there are no deferred tax amounts as of September 30, 2012 and December 31, 2011.
| (8) |
NOTE 6. EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of the common shares outstanding during the periods. There were no dilutive common stock equivalents for the nine months ended September 30, 2012 and 2011, respectively.
The following table sets forth the computation of earnings per share for the nine months ended:
| For the nine months ended | ||||||||
| 9/30/2012 | 9/30/2011 | |||||||
| Numerator: | ||||||||
| - Net income | $ | 44,021 | $ | 114,535 | ||||
| Denominator: | ||||||||
| - Weighted average common shares outstanding | 4,000,000 | 4,000,000 | ||||||
| Earnings per share | $ | 0.01 | $ | 0.04 | ||||
NOTE 7. CONCENTRATION AND RISK
(a) Concentration
For the nine months ended September 30, 2012 and 2011, majority of the Company’s assets were located in the PRC and 100% of the Company’s revenues and purchases were derived from customers and vendors located in the PRC.
For the nine months ended September 30, 2012, the Company had 100% revenue fromShandong Zhongwen Industrial Group Company Limited (“SZIG”),a corporation organized and existing under the laws of the PRC, sincethe Company serves as an agent of SZIGto sellproduct procurement for the construction industry.
(b) Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
NOTE 8. COMMITMENTS AND CONTINGENT LIABILITIES
Operating Lease Commitments
TheCompany leases its office space under non-cancellable operating leases in PRC. Minimum future rental payments required under non-cancellable operating leases in effect as of December 31, 2011 are as follows by year:
| 2012 | $ | 2,785 | ||
| 2013 | 2,785 | |||
| 2014 | 2,785 | |||
| 2015 | 2,785 | |||
| 2016 | 2,785 | |||
| Total | $ | 13,925 |
Rent expenses were $2,132 and $2,089 for the nine months endedSeptember 30, 2012and 2011, respectively.
| (9) |
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
The following discussion and analysis should be read in conjunction with the balance sheets as of September 30, 2012 (unaudited) and December 31, 2011 (audited) and the accompanying financial statements for the three and nine months ended September 30, 2012 and 2011.
The discussion and analysis contains forward-looking statements based on current expectations with respect to future events and financial performance and operating results, which statements are subject to risks and uncertainties, including but not limited to those discussed below and elsewhere in this Report that could cause actual results to differ from the results contemplated by these forward looking statements. We urge you to carefully consider all of the information set forth in this Report and the “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.
Overview
Zhong Wen International Holding Co., Ltd. (the “Company,” “we,” “us”) was incorporated under the laws of the State of Delaware on May 24, 2010. On June 23, 2010, our wholly-owned subsidiary, Hong Kong Zhongwenbo International Group Company Limited (“Zhongwenbo”), was incorporated in Hong Kong. In September 2010, Qingzhou RuiDong Trading Ltd (“Qingzhou RuiDong”) was incorporated in Shandong province of the People’s Republic of China. Qingzhou RuiDong is wholly owned by Zhongwenbo, and is engaged in export of construction machinery and equipment. Zhongwenbo has no operations other than its ownership of Qingzhou RuiDong Trading Limited. We are a holding company and conduct all of our operations through our indirect, wholly-owned subsidiary, Qingzhou RuiDong, which acts as an agent under a Sales Agency Agreement with Shandong Zhongwen Industrial Group Co. Limited (“SZIG”), which focus on developing sales of certain construction industry machinery.
A Sales Agency Agreement (the “Agreement”) was entered into between SZIG and Zhongwenbo on June 23, 2010. Under the Agreement, Zhongwenbo acts as an exclusive agent to sell SZIG’s products in the territory other than Brazil and the PRC (excluding the Special Adminstration Region of Hong Kong and Macau and Taiwan). Zhongwenbo is entitled to the commission equal to 5% of the Net Sales Value of all products for which a contract of sales is made by Zhongwenbo on behalf of SZIG. The Agreement continues in force for a period of two (2) years unless or until either party gives to the other written notice expiring. An amendment to the Sales Agency Agreement (the “Amended Agreement”) was entered into on November 8, 2010 between SZIG and Qingzhou RuiDong. Under the Amended Agreement, Qingzhou RuiDong also acts as an agent to sell SZIG’s products. Qingzhou RuiDong is entitled to the commission equal to 5% of market price of all products for which a contract sale is made by Qingzhou RuiDong on behalf of SZIG and additional 50% of any sales value above market price. In the event that Qingzhou RuiDong does not fulfill 80% of the sales according to the sales plan, SZIG has the right to terminate the Amended Agreement. Otherwise, the duration of the Amended Agreement is two (2) years.
For the three and nine months ended September 30, 2012 we had 5 and 47 transactions, respectively. In order to enhance our operations, we need to continue to improve our marketing strategy. We also have to initiate marketing of consulting services to the civil and commercial construction industry, which is expected to include some companies to be targeted for selling SZIG products.
Results of Operations
The following table shows the financial data of the consolidated statements of operations of the Company and its subsidiaries for the nine and three months ended September 30, 2012 and 2011. The data should be read in conjunction with the audited consolidated financial statements of the Company and related notes thereto.
| For the nine months ended September 30, | For the three months ended September 30, | ||||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||
| In dollars | As a percentage of net sales | In dollars | As a percentage of net sales | In dollars | As a percentage of net sales | In dollars | As a percentage of net sales | ||||||||||||||||||
| Revenue | $ | 123,913 | 100% | $ | 248,698 | 100% | $ | 9,495 | 100% | $ | 77,578 | 100% | |||||||||||||
| General and administrative expenses | (54,462) | 44% | (80,588) | 32% | (15,967) | 168% | (31.280) | 40% | |||||||||||||||||
| Operating income (loss) | 69,451 | 56% | 168,110 | 68% | (6,472) | 68 | 46,298 | 60% | |||||||||||||||||
| Other income | - | -% | 92 | -% | - | -% | - | -% | |||||||||||||||||
| Income (loss) before income taxes | 69,451 | 56% | 168,202 | 68% | (6,472) | 68% | 46,298 | 60% | |||||||||||||||||
| Income taxes | (25,430) | 21% | (53,667) | 22% | (1,059 ) | 11% | (16,941) | 22% | |||||||||||||||||
| Net income | 44,021 | 36% | 114,535 | 46% | (7,530) | 79% | 29,357 | 38% | |||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||
| Foreign currency translation | 2,139 | 2% | 48,333 | 19% | 15,282 | 161% | 7,725 | 10 % | |||||||||||||||||
| Comprehensive income | 46,161 | 37% | 162,868 | 65% | 7,752 | 82% | 37,082 | 48% | |||||||||||||||||
| Earnings/(loss) per share | |||||||||||||||||||||||||
| Basic | $ | 0.01 | $ | 0.04 | $ | - | $ | 0.01 | |||||||||||||||||
| Diluted | $ | 0.01 | $ | 0.04 | $ | - | $ | 0.01 | |||||||||||||||||
| (10) |
Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011
Operating Revenue
For the three months ended September 30, 2012, we had revenue of $9,495 compared to $77,578 for the three months ended September 30, 2011. The decrease in revenue of approximately 88% between the two periods is mainly attributable to less commission income from SZIG due to lower product sales in the quarter.
Operating Expenses
General and administrative expenses decreased by approximately 49% to $15,967 for the three months ended September 30, 2012 from $31,280 for the corresponding period in 2011. The lower general and administrative expenses were primarily due to decreased expenses related to a reduction in sales of SZIG products for the quarter.
Net Income (Loss)
We had a net loss of $7,530 for the three months ended September 30, 2012 compared to net income of $29,357 for the corresponding period in 2011, a decrease of $36,887 or approximately 126%. The decrease in net income was mostly the result of a decrease in trade receivables for the quarter.
Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011
Operating Revenue
For the nine months ended September 30, 2012, we had revenue of $123,913 compared to $248,698 for the nine months ended September 30, 2011. The 50% decrease in revenue between the two periods is mainly attributable to less commission income from SZIG due to lower product sales for the period.
Operating Expenses
General and administrative expenses decreased by approximately 32% to $54,462 for the nine months ended September 30, 2012 from $80,588 for the corresponding period in 2011. The lower general and administrative expenses were primarily due to decreased expenses related to a reduction in sales of SZIG products for the period.
Net Income
We had net income of $44,021 for the nine months ended September 30, 2012 compared to $114,535 for the corresponding period in 2011, a decrease of $70,514 or approximately 62%. The decrease in net income was mostly the result of a decrease in trade receivables for the period.
Liquidity and Capital Resources
At September 30, 2012, we had cash and cash equivalents of $1,215,338 compared to $69,084 at September 30, 2011. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.
Cash Flow
| For the nine months ended | ||||||
| September 30, 2012 | September 30, 2011 | |||||
| Net cash provided by (used in) operating activities | $ | 1,010,115 | $ | (80,257) | ||
| Net cash provided by financing activities | 130,000 | 22,031 | ||||
| Effect of exchange rate on cash and cash equivalents | 8,220 | 36,592 | ||||
| Cash and cash equivalents at end of period | 1,215,338 | 69,084 | ||||
Operating Activities
Net cash provided by (used in) operating activities was $1,010,115 and $(80,257) for the nine months ended September 30, 2012 and 2011, respectively. The net cash provided by operating activities for the nine months ended September 30, 2012 was mainly attributable to the decrease in prepayment and other receivables and increase in deposits of $1,028,453.
Financing Activities
Net cash provided by financing activities was $130,000 and $22,031 for the nine months ended September 30, 2012 and 2011, respectively. During the nine-month period, the cash provided by financing activities was due to advances from a director, Mr. Sun Hongyi, of $130,000 to working capital.
Contractual Obligations
At September 30, 2012, we had operating lease obligations of $13,925 for the years ending December 31, 2012 to 2016, but we do not have any debt (other than the obligation to repay the advance to Mr. Sun Hongyi), or capital lease or purchase obligations or long term liabilities.
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Going Concern
We have incurred net losses and losses from operations in the past and we may have negative cash flows in the future. There is no assurance we will be able to successfully execute our business plan and be able to operate as a going concern.
We estimate that our cash and cash equivalents will fund our operations through the financial support from our shareholders. Our shareholders have indicated their continuing support to enable us to meet our obligations to third parties as and when they fall due and to continue as a going concern. This belief is based on our current cost structure and our current expectations regarding operating expenses and anticipated revenues. If we are unable to obtain additional funds, we will not be able to sustain our operations and would be required to cease our operations and/or seek bankruptcy protection. Given the difficult current economic environment, we believe it will be difficult to raise additional funds and there can be no assurance as to the availability of additional financing or the terms upon which additional financing may be available. As a result of these conditions, we may be unable to continue as a going concern.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available for such items as depreciable lives. We revise the recorded estimates when better information is available, facts change or actual amounts can be determined. These revisions can affect operating results.
The critical accounting policies and use of estimates are discussed in and should be read in conjunction with the audited annual consolidated financial statements and notes included in our latest 10-K for the year ended December 31, 2011, as filed with the SEC on April 16, 2012.
Recent Accounting Pronouncements
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our consolidated financial condition or the consolidated results of our operations.
In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. We anticipate that the adoption of this standard will not materially expand our financial statement note disclosures.
In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. We are reviewing ASU 2011-05 to ascertain its impact on our financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.
In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.
In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, we do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.
ASU 2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for any indefinite-lived intangible in any period.
ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its consolidated financial statements.Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force (“EITF”)) and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.
Uncertainties and Trends
Our operations and possible revenues principally are dependent upon signing up customers to buy SZIG’s machinery products, and to a lesser extent, on engaging parties for our consulting services.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Effects of Inflation
Inflation has not had a material effect on our business and we do not expect that inflation will materially affect our business in the foreseeable future. However, our management will closely monitor inflation, if any, and continually maintain effective cost control in operations.
Plan of Operations
Our plan of operations for fiscal year 2012 is set forth below.
We will focus our development of business in the PRC during fiscal year 2012. At the same time, we will further expand our marketing service team and improve our distribution networks in order to promote the products to customers outside the PRC. According to our business plan, our target of commission on sales of construction equipment will increase 3.8 times to approximately RMB 1,769,000, equivalent to $262,000, but this target is not certain of attainment.
Apart from the sales of manufacture machinery, we started our consultancy services in the third quarter of fiscal year 2011. Since we currently do not have enough professional employees to perform consultancy services, we will hire additional professional employees and/or retain consultants in the future, especially during fiscal year 2012, depending on business volume.
Since expansion of our business plan, our general and administrative expense is expected to increase as more employees are employed for both marketing and consulting services. Besides, to improve our distribution network, travel expense is also expected to increase in proportion. We will need additional funds to develop and implement the plan.
From January 1, 2012 through October 31, 2012, we have already signed 49 new contracts and sold 62 construction industry machines. In these transactions, we have already generated approximately $135,248 of commission income in 2012.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
(a) Concentration
For the nine months ended September 30, 2012 and 2011, the majority of our assets were located in the PRC and 100% of our revenues and purchases were derived from customers and vendors located in the PRC.
For the nine months ended September 30, 2012, we had 100% revenue from Shandong Zhongwen Industrial Group Company Limited (“SZIG”), a corporation organized and existing under the laws of the PRC, since we serve as an agent of SZIG to sell product procurement for the construction industry.
(b) Credit risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and trade accounts receivable. We perform ongoing credit evaluations of our customers' financial condition, but do not require collateral to support such receivables.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2012, our management, including our Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded:
| (a) | That our disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by us in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure; and |
| (b) | That our disclosure controls and procedures are effective. |
Changes in Internal Control over Financial Reporting
During the nine months ended September 30, 2012, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits
| 31.1* | Certificati on of Chief Executive Officer Pursuant to Rule 13a-15(e) / Rule 15d-15(e) |
| 31.2* | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / Rule 15(e)/15d-15(e) |
| 32.1* | Certification of Chief Executive Officer a nd Chief Financial Officer Pursuant to 18 U.S.C. 1350 |
| 101.INS** | XBRL Instance |
| 101.SCH** | XBRL Taxonomy Extension Schema |
| 101.CAL** | XBRL Taxonomy Extension Calculation |
| 101.DEF** | XBRL Taxonomy Extension Definition |
| 101.LAB** | XBRL Taxonomy Extension Labels |
| 101.PRE** | XBRL Taxonomy Extension Presentation |
| * | Filed herewith. |
| ** | Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| Zhong Wen International Holding Co, Inc. | ||||
| (Registrant) | ||||
| Date: November 19, 2012 | By: | /s/ Sun Hongyi | ||
| Sun Hongyi, CEO and CFO | ||||
| (Principal Executive Officer and Principal Financial and Accounting Officer) | ||||