Wuhan General Group (NASDAQ:WUHN)

Wuhan General Group (China), Inc.

Consolidated Statements of Income

For the three months ended March 31, 2012 and 2011

(Stated in US Dollars)

GeoTeam® Note: 2012 vs. 2011 First Quarter Adjusted EPS was $0.04 vs. $0.07.

Wuhan General Group (China), Inc. (the “Company”) received written notification (the “Notification”) on May 14, 2012 from The NASDAQ Stock Market LLC (“Nasdaq”) stating that the Company’s common stock is subject to delisting from Nasdaq, pending the Company’s opportunity to request a hearing before the NASDAQ Hearings Panel (the “Panel”).

As previously disclosed, on May 17, 2011, the Company received a letter from Nasdaq stating that based on the closing bid price of the Company’s common stock for the previous 30 consecutive business days, the Company did not meet the minimum bid price requirement for continued listing set forth in Listing Rule 5550(a)(2) (the “Rule”).  In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had a grace period of 180 calendar days, until November 14, 2011, to regain compliance with the minimum bid price requirement.  The Company did not regain compliance by November 14, 2011. On November 15, 2011, Nasdaq granted the Company an additional extension of 180 calendar days, until May 11, 2012, to meet the minimum bid price requirement.

The Notification stated that the Company has not regained compliance with the Rule and if the Company does not request an appeal before the Panel on or before May 21, 2012, the Company’s common stock will be scheduled for delisting at the opening of business on May 23, 2012. The Company has determined that it will appeal Nasdaq’s determination on or before May 21, 2012, which will stay the delisting of the Company’s common stock pending the Panel’s decision. There can be no assurance that the Company will be successful in an appeal before the Panel.

Wuhan General Group (China), Inc.

Consolidated Statements of Income

For the years ended December 31, 2011 and 2010

(Stated in US Dollars)

Second  Quarter 2011 Results

GeoTeam Note: 2010 vs. 2009 Adjusted EPS

• Full Year:  $0.20 vs. $0.31
• Fourth Quarter:  $0.08 vs. $0.22

Our cost of sales increased $14.84 million, or 21.47%, to $83.95 million in 2010 from $69.11 million in 2009. This increase was primarily attributable to our increase in sales. As a percentage of sales, the cost of sales was 76.10% for 2010 compared to 74.85% for 2009. This increase was due to inflation of the overall cost of production.
 
Our gross profit increased $3.14 million, or 13.50%, to $26.36 million in 2010 from $23.23 million in 2009. Gross profit as a percentage of sales was 23.90% in 2010 compared to 25.15% in 2009.

Our selling expenses in 2010 decreased $26,486 or 1.71%, to approximately $1.52 million from approximately $1.55 million in 2009. As a percentage of sales, selling expenses were 1.38% in 2010 compared to 1.68% in 2009. This decrease as a percentage of sales was primarily attributable to a decrease in the payment of sales commissions in 2010 as a result of slower collection rates with respect to our accounts receivable and lower gross margins.

 Our general and administrative expenses increased approximately $4.95 million, or 72.61%, to $11.76 million in 2010 from approximately $6.81 million in 2009. As a percentage of sales, general and administrative expenses were 10.66 % in 2010 compared to 7.38% in 2009. This increase as a percentage of sales was primarily attributable to (i) an arrangement fee incurred in connection with the establishment of the Standard Chartered Loan agreement; (ii) legal fees, auditor fees and a management and consultancy fee incurred in connection with the early termination of the Standard Chartered Loan Agreement; and (iii) additional write offs of bad debt.

Based on comments received from the Securities and Exchange Commission (the “SEC”), the Company’s Chief Financial Officer, after consultation with the Company’s Audit Committee, concluded on March 7, 2011 that the Company’s previously filed financial statements for the year ended December 31, 2009 and for the quarter ended March 31, 2010 should no longer be relied upon because of errors in such financial statements. To correct these errors, the Company has amended and restated the affected financial statements.

• The Company reclassified inventory related to the Huangli Project, which is considered a correction of a classification error.  The amount of $2,188,439 was previously classified in construction-in-progress at December 31, 2008.  The Company moved the amount to the inventory account, and it has been subcategorized as raw materials.  The reclassification caused a $2,188,439 decrease in construction in progress from $30,276,011 to $28,087,572 and a corresponding increase of $2,188,439 in the inventory accounts from $8,395,467 to $10,583,906.  The related total of current assets increased from $88,760,427 to $90,948,867 while the total of non-current assets decreased from $66,311,941 to $64,123,502.  Total assets remain unchanged.  The statement of cash flows for the year ended December 31, 2008 was also impacted by the reclassification.  Cash sourced from operating activities were previously overstated, and cash used in investing activities was previously overstated.  The correction of error decreased the cash generated by operating activities by $2,188,439 and also decreased the amount of cash used in investing activities by $2,188,439.  The impact of the restatement was limited to the presentation of the balance sheet and the related statements of cash flows.  There was no related impact to earnings for the year ended December 31, 2008.
  
• The Company restated the long term loans outstanding due to Standard Chartered Bank at December 31, 2009 as short term, rather than long term as a result of the Company’s noncompliance with certain loan covenants disclosed in Note 12 to the Company’s amended and restated financial statements.  The impact of the restatement is limited to the Company’s classification of liabilities on the Company’s Consolidated Balance Sheets and Note 12.  As a result of the restatement, the short term balance increased from $35,276,347 to $46,758,253 while the corresponding long term loans decreased from $11,481,906 to $0.  The Company’s current liabilities increased from $59,671,630 to $71,153,536.  The Company’s long term liabilities decreased from $11,481,906 to $0.  The Company’s total liabilities remain unchanged.
  
• The Company restated its diluted earnings per share for the year ended December 31, 2008, as a correction of error.  The Company previously reported diluted earnings per share of $0.26 based on the assumption that the constructive preferred dividend related to the issuance of Series B Convertible Preferred Stock during the year should not be added back to “net income available to common stockholders” to arrive at “income available to common stockholders on a converted basis” for the purposes of computing the diluted earnings per share.  The Company assumed that even if the holders of the Series B Convertible Preferred Stock had converted their preferred stock using the “as-if” method the constructive preferred dividend would not be made available to common stockholders because the constructive preferred dividend was charged immediately upon the issuance of the Series B Convertible Preferred Stock.  The Company later determined that this treatment was erroneous.  Therefore, the Company revised the calculation of the “income available to common stockholders on a converted basis” to include the constructive preferred dividend.  As a result of the restatement, the Company’s diluted earnings per share increased to $0.34 per share.  For detailed computations, see Note 18 to the Company’s amended and restated financial statements.
  
• The Company restated its statements of cash flow for the year ended December 31, 2008.  The change is related to the purchase of Sukong Assets as detailed in Note 1 to the Company’s amended and restated financial statements.  The purchase was previously presented as an all cash transaction.  The restated presentation shows that a significant portion of the total purchase price was a non-cash transaction where the Company transferred certain advances to suppliers and receivables without recourse valued at $20,064,965 to the seller in exchange for the Sukong Assets.  The Company did not make any adjustment to its general ledger accounts.  The restatement was limited to the presentation of the statement of cash flows.  Net cash sourced from operations was previously $16,776,026.  The restated presentation shows net cash used in operations is $5,477,378.  The net cash used in investing activities was previously $39,087,376.  The restated presentation shows cash used in investing activities as $16,833,972.  The restated figures in the statement of cash flows are primarily attributable to the effect of the non-cash purchase of Sukong assets; however, a small portion of the difference is attributable to the restatement of the inventory and construction in progress account as detailed in Note 23 to the Company’s amended and restated financial statements.  The Company’s earnings for the year ended December 31, 2008 were unaffected by the change in presentation caused by the non-cash investing activity related to both the non-cash purchase of the Sukong Assets and the restatement of inventory and construction in progress.
  
• The Company restated the long term loans outstanding due to Standard Chartered Bank at March 31, 2010 as short term, rather than long term as a result of the Company’s noncompliance with certain loan covenants disclosed in Note 12 to the Company’s amended and restated financial statements.  The impact of the restatement is limited to the Company’s classification of liabilities on the Company’s Consolidated Balance Sheets and Note 12.  As a result of the restatement, the short term balance increased from $22,556,695 to $44,458,071 while the corresponding long term loans decreased from $21,901,376 to $0.  The Company’s current liabilities increased from $47,852,516 to $69,753,892.  The Company’s long term liabilities decreased from $21,901,376 to $0.  The Company’s total liabilities remain unchanged.
  

On December 13, 2010, Wuhan General Group (China), Inc. entered into a series of agreements designed to reduce the overhang of the Company’s Series A, B, C, AA, BB and JJ warrants and to simplify the Company’s capital structure.

Once all of the shares have been issued in connection with the warrant recapitalization, the Company will have approximately 32,505,015 shares of common stock outstanding. After the completion of the transactions, the Company will have one Series A warrant outstanding representing the right to purchase 128,755 shares of the Company’s common stock. The Company will no longer have any Series B, C, AA, BB or JJ warrants outstanding.

Third Quarter 2010 Highlights

• Third quarter revenue was $28.8 million, an increase of 16.3% from $24.7 million for the same period in 2009. 

• Gross profit was $8.1 million, an increase of 17.8% from $6.9 millionfor the same period in 2009

• Gross profit margin was 28.1% compared with 27.8% for the same quarter last year

• Operating income was $4.1 million, a decrease of 8.6% from the corresponding quarter last year

• Net income was $1.8 million, compared with $3.0 millionfor the same period in 2009

• Net income available to common stockholders was $1.7 million compared with $2.8 millionfor the same period in 2009. Adjusting for abnormal charges, adjusted net income available to common stockholders was $3.1 million for the third quarter of 2010

• Earnings per diluted share were $0.05 compared with $0.08 for the third quarter last year. Adjusting for abnormal charges, earnings per diluted share were $0.10 for the third quarter of 2010

"For the third quarter, our blower division was the main driver of revenue growth, supported by this year's economic recovery in China that encouraged our customers in the steel industry to increase orders of capital equipment. In addition to positive sales growth, the improved gross margin in our turbine segment sequentially and year-over-year is a sign of an improved competitive position, which also showed the scale effect and quality improvement attributable to our new Wuhan Generating facility," said Mr. Ruilong Qi, the CEO of Wuhan General. "While we are pleased about our sales growth, effective collection of accounts receivable remains a challenge for our business and we carefully monitor the financial positions of our customers to avoid unnecessary delay of payments."

"We are satisfied with the current outlook for our business as demonstrated by our backlog of RMB 212 million (approximately $32 million) for Wuhan Blower and RMB 150 million (approximately $22 million) for Wuhan Generating of which we expect to realize approximately $36 million in revenue for 2010. In light of the growing backlog and our firm, albeit slow, progress in collection of accounts receivable, we are optimistic about our performance as we move to the next year," said Mr. Qi, "While we recognize that challenges remain for our business to resume its former performance, we remain optimistic about our future prospects. We believe that our dedication to service and ability to deliver customized solutions will help us win a wider range of projects and obtain a broader customer base."

For the three months ended September 30, 2010, the Company expects to report

• Total unaudited net revenue of $28.8 million, compared with $24.7 million in the third quarter 2009

• unaudited net income of $1.8 million, or $0.05 per diluted share, compared with $3.0 million, or $0.08 per diluted share for the same period last year.  

The Company expects to report complete results for the three months ended September 30, 2010 by November 15, 2010.

On June 28, 2010, Wuhan General Group (China), Inc., through its wholly owned subsidiaries Wuhan Blower Co., Ltd. (“Wuhan Blower”), Wuhan Generating Equipment Co., Ltd. and Wuhan Sungreen Environment Protection Equipment Co., Ltd. (“Wuhan Sungreen,” together with Wuhan Blower and Wuhan Generating, the “Borrowers”), entered into a Loan Facility Agreement with Hankou Bank Company Limited, Wuhan Branch (“Hankou Bank”) for a loan facility totaling RMB 320,000,000 (approximately $47 million) in secured debt financing. The Borrowers, upon application, may access this loan facility from June 28, 2010 to June 28, 2013. Pursuant to certain Financial Consulting Service Agreements entered into between the Borrowers and Hankou Bank, dated June 29, 2010, the Borrowers must pay financial consultancy fees that aggregate to approximately RMB 2.84 million (approximately $417,000) in connection with the bank loan facility with Hankou Bank.

The obligations under the Loan Facility Agreement and Loan Agreements with Hankou Bank are secured by the real property of the Borrowers and guaranteed by Wuhan Blower and Wuhan Sungreen. The Loan Facility Agreement and the Loan Agreements are governed by the laws of the People’s Republic of China

The current demand for blowers and turbines is significantly stronger compared to the year ago period and in light of the growing backlog, the Company maintains its expectations of year-over-year revenue growth of around 20% for 2010. The Company expects the blower and turbine segments to contribute approximately 50% and 45% of total revenue for 2010 respectively, while Wuhan Sungreen is expected to contribute the remaining 5% of revenue. Meanwhile, the Company's other objective for 2010 is to further improve the collection of accounts receivable, thereby strengthening its financial position.

"We are pleased with the growing profitability of our business throughout the first quarter and hope to continue maintaining strict cost control as we resume growth. We expect the second and third quarter to make up for the lighter first months of the year," said Mr. Qi. "With more working capital and less cash tied to accounts receivable, we are better equipped to take on larger projects. We are currently assessing opportunities to provide blowers for urban infrastructure projects, as well as for Original Equipment Manufacturing (OEM) contracts, while maintaining our long-term stance in the turbine segment."

In 2009, our sales decreased 21.54% compared to 2008. This decrease in sales was primarily due to a delay in the equipment replacement cycle within China’s steel manufacturing companies which resulted in fewer sales and capital expenditure restrictions on our power plant customers due to the global economic crisis. For many of the same reasons, we also have experienced significant delays in receiving payments from our customers.  The number of days sales were outstanding increased 93 days at December 31, 2009, compared to December 31, 2008. The combination of these factors resulted in our income from operations being insufficient to meet our working capital needs. At the same time, banks tightened their lending policies as a result of the turmoil in the credit markets. This required us to use bridge loans to finance our working capital needs during this period.

We intend to expend a significant amount of capital to complete our facilities and the installation of equipment and to make deposits for performance bonds for new projects that we have obtained. In light of the Company’s new credit facility with Standard Chartered Bank the Company believes that its currently available working capital, combined with cash from operations and bank financing, should be adequate to sustain operations at current levels through at least the next 12 months. For our long-term strategic growth, the Company will continue to rely upon debt and capital markets for any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary objectives of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense.

"We are pleased to see strong recovery of our business in the fourth quarter of 2009," said Mr. Xu Jie, CEO of Wuhan General. "The turnaround has been especially pronounced in our turbine division, as we increased sales to hydropower plants. The number of projects available for bid in this field is increasing as the government encourages investment in hydropower and subsidizes the construction of these plants in certain regions. Therefore, we have decided to make hydropower an important part of our strategy going forward. Our current backlog is RMB 175 million (approximately $25.7 million) and RMB 138 million (approximately $20 million) for Wuhan Blower and Wuhan Generating, respectively."

"As the Company completed construction of its turbine facility at Wuhan Generating in 2009, its main focus for 2010 is ramping up the turbine business, focusing specifically on water turbines for hydropower plants. The Company's current backlog of turbine orders is $20 million, of which 60% is for water turbines."

"We are still in the process of finalizing equipment installation at our turbine facility at Wuhan Generating and completing construction at our Sungreen subsidiary, scheduled to be completed by the end of 2010. In 2010, we expect to expend approximately $15 million for the construction and equipment installation, which we expect to fund mainly through our credit facility from Standard Chartered Bank," said Mr. Xu. "We expect the new turbine facility to operate at close to full utilization by the end of 2010, while we expect Sungreen to reach around 70% utilization by the end of 2010."

"As Sungreen will mainly support our turbine and blower businesses by providing parts and components, we expect a reduction in outsourcing costs in 2010, which should support our gross margin. In light of the growing backlog, we expect around 20% growth in our top line for 2010," concluded Mr. Xu.