ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In addition to the historical information contained herein, we make statements in this Quarterly Report on Form 10-Q that are forward-looking statements. Sometimes these statements will contain words such as "believes," "expects," "intends," "should," "will," "plans," and other similar words. Forward-looking statements include, without limitation, assumptions about our future ability to increase income streams, reduce and control costs, to grow revenue and earnings, and our ability to obtain additional debt and/or equity capital on commercially reasonable terms, none of which is certain. These statements are only predictions and involve known and unknown risks, uncertainties and other factors included in our periodic reports with the SEC. Although forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment, actual results could differ materially from those anticipated in such statements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
The following discussion and analysis should be read in conjunction with our March 31, 2013 unaudited consolidated financial statements and related notes thereto included in the quarterly report and with our consolidated financial statements and notes thereto for the year ended December 31, 2012.
Overview
We have transitioned our business from mining to clean new energy in the middle of 2012, and mainly focused on the solar PV downstream market at the present stage. Though the solar PV business did not generate revenue for the three months ended March 31, 2013, our Huanghe Bay Project was expected to begin the operation in 2013. And at the end of 2013, our Baisui Project is expected to complete its construction works. In the near future, we plan to gradually increase the resource devoted to marketing.
We also hold land use rights in a land parcel and we lease a portion of the land use rights on the 5.7 square kilometer parcel to Shaanxi Huanghe Bay Springs Lake Theme Park Ltd. (“Huanghe”), a company with a common control person. The term of the lease agreement is from January 1, 2011 to December 31, 2029. Our land use rights are amortized over their 50 year term. The Land use right was not only our largest asset, but also the stable operating income to support our other business, with an annual rent of approximately $ 1.2 million (RMB7,500,000).
The following is a summary of the book value of our land use rights as of March 31, 2013:
| Cost | | $ | 20,407,410 | |
| Less: Accumulated amortization | | | (3,689,110) | |
| Land use rights, net | | $ | 16,718,300 | |
Amortization expenses were approximately $101,950 and $101,620 for the three months ended March 31, 2013, and 2012, respectively.
As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $3,899,148 as of March 31, 2013, which includes net income of $1,747,213 for the three months ended March 31, 2013. The Company’s operations provided cash of $189,374 for the three months ended March 31, 2013.
We began to generate revenue for the year ended December 31, 2011, of which the revenue from land use right leasing was expected to provide stable cash flow. In the future, we expect that there will no longer be a need for us to continue to rely on loans from our directors and other related parties. We believe that we have adequate capital to assure that we will be able to meet our obligations or obtain sufficient capital to complete our plan of operations for the next twelve (12) months.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2013 and March 31, 2012
Sales revenue
We generated total revenue of $ 298,700 for the three months ended March 31, 2013, compared with the revenue of $ 297,732 for the three months ended March 31, 2012. The revenue was the rent of Land use rights for both of the periods and are related party transactions.
Operating Expenses
Total operating income for the three months ended March 31, 2013 was $2,038,451 compared with operating expense of $166,806 for the three months ended March 31, 2012. The increase was partially due to a gain of $2,262,952 recognized and an increase in the administrative expense, which increased to $115,825 from $57,723,. The amortization expense for the three months ended March 31, 2013 remained stable, as no addition or disposal occurred for Land use rights and the depreciation for the three months ended March 31, 2013 decreased by $737.
Income before taxes for the three months ended March 31, 2013 was $2,323,328 as compared to an income of $ 101,732 for the three months ended March 31, 2012. The significant increase for our operating results was attributable to the transaction for the disposal of mines recognized in the first quarter of 2013.
Net Income
We achieved a net income of $1,747,213 for the three months ended March 31, 2013, compared to a net income of $109,295 for the three months ended March 31, 2012. The significant increase was primarily due to the transaction for the disposal of mines recognized in the first quarter of 2013.
Comprehensive Income
Our comprehensive income for the three months ended March 31, 2013 was $1,784,489 compared with comprehensive income of $ 116,474 for the three months ended March 31, 2012. The comprehensive income (loss) for each period only referred to the foreign currencies translation gain (loss), between the U.S. Dollar and the Chinese Yuan RMB (or Hong Kong Dollar for Wah Bon).
Stockholders’ Equity
Stockholders' equity increased to $14,513,025 as of March 31, 2013, or approximately 14%, from $12,728,536 as of December 31, 2012. The significant increase was primarily due to our net income of $1,747,213 generated for the three months ended March 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Net cash provided by operating activities of $189,374 for the three months ended March 31, 2013 compared with net cash provided of $232,783 for the three months ended March 31, 2012. The cash flow in operating activities maintained stable as the Company did not collect revenue for both of the periods. The adjustments to reconcile our net income to net cash flow mainly include depreciation expense of $ 6,726, amortization of $ 101,950 for land use rights, an increase in operating assets of $40,067, an increase in operating liability of $622,132 and the gain of $2,262,952 on disposal of the mine exploration right.
Cash Flows From Investing Activities
Net cash used in investing activities of $455,015 for the three months ended March 31, 2013 was the cash provided to the related parties and the purchase of property, plant and equipment.
Cash Flows From Financing Activities
Net cash of $ 39,370 used by financing activities for the three months ended March 31, 2013 resulted from the repayment to related parties.
General
Collectability of our account receivable for the land use right leasing is important to our continuation of operation. In addition, we have access to short and long term loans of cash from our directors or other related parties.
We provided loans of $454,011 to our related parties for the three months ended March 31, 2013.
We returned cash of $ 39,370 to our related parties for the three months ended March 31, 2013.
Our current assets increased by $655,079 and total assets increased by $1,075,979 respectively.
We have cash of $ 1,432,788 and $1,763,381 as of March 31, 2013 and December 31, 2012 respectively.
We believe that we have sufficient cash to fund operations for the next 12 months.
FINANCING
We anticipated the cash generated from operating activities will be sufficient to sustain our daily operations for the next twelve months.
INFLATION
Our management believes that inflation did not have a material effect on our results of operations f.or the three months ended March 31, 2013.
OFF-BALANCE SHEET ARRANGEMENTS.
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
None
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities to comply with generally accepted accounting principles. We base our estimates on historical experience and on various other assumptions that we believe are 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 could differ from our estimates, which would affect the related amounts reported in our financial statements.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the significant estimates and assumptions which are used in the preparation of the consolidated financial statements and affect our financial condition and results of operations.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, both significant risks and rewards of ownership are transferred or services have been rendered and accepted, the selling price is fixed or determinable, and collectability is reasonably assured.
We are currently leasing the land use right to Huanghe for the development and operation of a theme park. We generally collect the annual rent every year, and then recognize land use right leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.
Related Party
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, member of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting party might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Our related parties are the following individuals and entities: (i) Mr. Wang Shengli (a director of the Company), Mr. Chen Weidong (our President, Chief Executive Officer and Chairman of the Board), Ms Li Ping (a director of the Company), and Ms. Chen Min (a director of the Company), all of whom are shareholders of the Company; (ii) Mr. Zhang Hong Jun, who is currently a director of the Company; (iii) Ms Li Ping (our Chief Financial Officer and who has the same name with our Director Ms Li Ping); and (iv) the following companies: Du Kang Liquor Development Co., Ltd., Huiton World Property Superintendent Company, Xi Deng Hui Development Stock Co., Ltd. Zhongke Lvxiang Development Stock Co., Ltd., Shaanxi Du Kang Liquor Group Co., Ltd., Shaanxi Bai Shui Du Kang Brand Management Co., Ltd, Shaanxi Changjiang electricity & new energy Co.,Ltd, Shaanxi Huanghe Bay Springs Lake Theme Park Ltd, Shaanxi Changfa Industrial Co.,LTD, Shaanxi Tangrenjie Advertising Media Co.,Ltd and Zhongke Aerospace & Agriculture Development Stock Co.,Ltd.
Cash flows from due from related parties are classified as cash flows from investing activities. Cash flows from due to related parties are classified as cash flows from financing activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form10-Q, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2013.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework and Internal Control over Financial Reporting-Guidance for Smaller Public Companies. As a result of this assessment, management identified a material weakness in internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We note the following deficiencies that management believes to be material weaknesses:
| a) | Various members of the Company’s executive management are also members of its board of directors, including the board’s chairman. This situation prevents a truly independent review of the actions of the Company’s management. |
| b) | The Company does not have an independent audit committee to oversee the external financial reporting process and the internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002. This, in combination with the lack of an independent board of directors, creates a material weakness in the oversight of the Company’s management, its internal control and its financial reporting process. |
| c) | The Company does not have sufficient knowledge of all the necessary financial statement disclosures that are required to be made in accordance with U.S. generally accepted accounting principles. |
Based on the material weakness described above, management has concluded that, as of March 31, 2013, the Company's internal control over financial reporting was not effective based on the criteria in Internal control - Integrated framework issued by the COSO.
The Company intends to take the following steps as soon as practicable to remediate the material weakness we identified as follows:
| 1. | We intend to recruit independent directors such that at least a majority of our Board is independent. |
| 2. | We intend to constitute audit, nominating and compensation committees comprised entirely of independent directors and to adopt committee charters for those committees, in accordance with the corporate governance standards of the New York Stock Exchange. We intend that at least one member of our Audit Committee will qualify as an “Audit Committee financial expert.” |
Changes in Internal Controls over Financial Reporting
There has been no significant change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)- 15(f) of the Exchange Act) that occurred during the three months ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS.
We received a document subpoena dated April 4, 2011, pursuant to which the Enforcement Division of the SEC informed us that it was conducting an investigation of the Company to determine whether the Company has committed a violation of the federal securities laws. The subpoena required us to produce certain documents to the SEC, and we complied and responded on May 2, 2011.
On June 7, 2011, the SEC issued another subpoena in furtherance of its investigation and required the Company to produce additional documents relating to its land use right. We complied with the subpoena and responded on June 24, 2011 to the Los Angeles Regional Office of the SEC.
On September 5, 2012, the Securities and Exchange Commission officially notified us of its termination of the investigation against us that began in April 2011. The SEC also confirmed that it had no intention of recommending any enforcement action by the Commission.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 25, 2009, the Company issued an aggregate of 4,500,000 shares of common stock to Messrs. Donald R. Monroe and Stanley F. Wilson, the principals of Capital Advisory Services, Inc., in connection with our share exchange transaction. To the best of our knowledge, each of them now holds 2,250,000 shares of common stock the shares were issued without registration in reliance on section 4(2) of the Securities Act. All issued and outstanding shares of series C Preferred Stock have been converted into an aggregate amount of 609 million shares of our common stock which were issued without registration in reliance on SEC Regulation S and section 3(a)(9) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED).
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA CHANGJIANG MINING AND NEW
ENERGY COMPANY, LTD.
(Registrant)
| Date: May 15, 2013 | By | /s/ Chen Wei Dong | | |
| | | Chen Wei Dong | | |
| | | Chief Executive Officer and President | | |
| | | | | |
| Date: May 15, 2013 | By | /s/ Li Ping | | |
| | | Li Ping | | |
| | | Chief Financial Officer (Principal Financial Officer) | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | | Capacity | | Date | |
| | | | | | |
| /s/ Chen Wei Dong | | Chief Executive Officer President and Chairman of Board of Directors (Principal Executive Officer) | | May 15, 2013 | |
| | | | | | |
| /s/ Li Ping | | Chief Financial Officer (Principal Financial Officer) | | May 15, 2013 | |
| | | | | | |
| /s/ Zhang Hong Jun | | Director | | May 15, 2013 | |
| | | | | | |
| /s/ Wang Sheng Li | | Director | | May 15, 2013 | |
| | | | | | |
| /s/ Tian Hai Long | | Director | | May 15, 2013 | |
| | | | | | |
| /s/ Chen Min | | Director | | May 15, 2013 | |
| | | | | | |
| /s/ Li Ping | | Director | | May 15, 2013 | |
