China Power Equipment, Inc. - FORM 10-Q

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EX-32.1 - EX-32.1 - China Power Equipment, Inc.	ex32-1.htm
EX-32.2 - EX-32.2 - China Power Equipment, Inc.	ex32-2.htm
EX-31.2 - EX-32.1 - China Power Equipment, Inc.	ex31-2.htm
EX-31.1 - EX-31.1 - China Power Equipment, Inc.	ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - China Power Equipment, Inc.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-51379

CHINA POWER EQUIPMENT, INC.

(Exact Name of Registrant as Specified in its Charter)

Maryland	20-5101287
(State or other jurisdiction of	(IRS. Employer
incorporation or organization)	Identification No.)

Yongle Industry Zone, Jingyang Industry Concentration Area

Shaanxi, P.R.China 713702

86-29-62619758

(Address of Principal Executive Offices)(Zip Code)

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 the 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 ¨

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 1, 2013, the Company had 19,602,557 shares of common stock, par value $0.001 per share, outstanding.

Table of Contents

			Page
PART I


Financial Information
Item 1		Financial Statements	F-1
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3		Quantitative and Qualitative Disclosures about Market Risk	10
Item 4		Controls and Procedures	10

PART II
Other Information
Item 1	Legal Proceedings		11
Item 1A.	Risk Factors		11
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		11
Item 3	Defaults Upon Senior Securities		11
Item 4	Mine Safety Disclosures		11
Item 5	Other Information		11
Item 6	Exhibits		11

Signatures
Exhibit Index

Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

China Power Equipment, Inc.

Consolidated Balance Sheets

	September 30, 2013		December 31, 2012
	(unaudited)
Assets
Current Assets
Cash and cash equivalents	$	31,755,479	$	21,983,641
Restricted cash (Note 3)		228,045		-
Accounts receivable, net		6,117,544		10,104,736
Inventory (Note 4)		882,025		135,229
Prepaid expenses and other receivables (Note 5)		2,946,760		3,014,017
Total Current Assets		41,929,853		35,237,623

Property, plant and equipment, net (Note 6)		8,382,203		8,734,845
Intangible assets, net (Note 7)		203,905		243,790
Deposit on contract rights (Note 8)		714,565		993,496
Prepaid capital lease (Note 10)		101,177		103,010
Total Assets	$	51,331,703	$	45,312,764

Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	3,149,429	$	1,886,413
Other payables and advances from customers		716,690		1,194,936
Lease payable - current portion (Note 10)		3,248		3,164
Short-term loan (Note 9)		65,153		63,452
Income taxes payable		479,577		460,545
Total Current Liabilities		4,414,097		3,608,510

Long-term Liabilities
Lease payable - noncurrent portion (Note 10)		119,746		116,619
Total Long-term Liabilities		119,746		116,619

Total Liabilities		4,533,843		3,725,129

Stockholders' Equity
Series B convertible preferred stock, $0.001 par value, 5,000,000 shares authorized, 4,102,000 shares issued and outstanding at September 30, 2013 and December 31, 2012 (Note 11)		4,102		4,102
Undesignated preferred stock, $0.001 par value, 5,000,000 shares authorized, None issued and outstanding		-		-
Common stock: par value $0.001 per share, 100,000,000 shares authorized; 19,602,557 and 19,522,557 shares issued and outstanding at September 30, 2013 and December 31, 2012 (Note 11)		19,603		19,523
Additional paid in capital		25,878,364		25,874,629
Statutory surplus reserve fund (Note 13)		2,415,732		2,415,732
Retained earnings		14,409,745		10,328,155
Accumulated other comprehensive income		4,070,314		2,945,494
Total stockholders' equity		46,797,860		41,587,635

Total Liabilities and Stockholders' Equity	$	51,331,703	$	45,312,764

The accompanying notes are an integral part of these financial statements.

F-1

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China Power Equipment, Inc.

Consolidated Statements of Operations and Comprehensive Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue, net	$	9,129,507		$	10,675,377		$	24,866,878		$	27,421,060
Cost of goods sold		(6,865,019	)		(7,822,520	)		(18,692,155	)		(20,225,776	)
Gross profit		2,264,488			2,852,857			6,174,723			7,195,284

Selling, general and administrative expenses		317,262			353,678			1,238,066			1,385,818

Net income from operations		1,947,226			2,499,179			4,936,657			5,809,466

Other income (expenses)
Other income		8,115			-			8,115			31,707
Other expenses		(5	)		(11	)		(70	)		(4,811	)
Interest income		11,454			4,858			16,410			15,697
Interest expense		-			-			-			(2,879	)
Total other income		19,564			4,847			24,455			39,714

Net income before income taxes		1,966,790			2,504,026			4,961,112			5,849,180

Income taxes (Note 14)		335,118			412,625			879,522			1,018,735

Net income	$	1,631,672		$	2,091,401		$	4,081,590		$	4,830,445

Other Comprehensive Income
Change in foreign currency translation adjustment		248,977			(56,471	)		1,124,820			172,796
Comprehensive income	$	1,880,649		$	2,034,930		$	5,206,410		$	5,003,241

Earnings per share - basic (Note 12)	$	0.08		$	0.11		$	0.21		$	0.25
Earnings per share - diluted (Note 12)	$	0.07		$	0.09		$	0.17		$	0.20

Weighted average common shares outstanding:
Basic		19,602,557			19,459,680			19,560,652			19,445,415
Diluted		23,789,436			23,671,770			23,747,531			23,657,641

The accompanying notes are an integral part of these financial statements.

F-2

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China Power Equipment, Inc.

Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
	2013			2012
	(unaudited)			(unaudited)
Cash Flows from Operating Activities
Net income	$	4,081,590		$	4,830,445
Adjustments to reconcile net income to net cash:
Depreciation and amortization expense		940,044			841,720
Stock-based compensation		3,816			29,083
Reversal of provision of impairment on advance to suppliers		-			(20,001	)
Changes in operating assets and liabilities:
Accounts receivable		4,196,881			(5,206,039	)
Inventory		(729,514	)		(539,547	)
Prepaid expenses and other receivables		140,437			(1,813,974	)
Accounts payable		1,208,635			462,497
Other payables and advance from customers		(502,969	)		47,445
Income taxes payable		7,772			96,646
Net cash provided by (used in) operating activities		9,346,692			(1,271,725	)

Cash Flows from Investing Activities
Addition in plant and equipment		(7,183	)		(3,557	)
Net cash (used in) investing activities		(7,183	)		(3,557	)

Cash Flows from Financing Activities
Restricted cash		(228,045	)		-
Net cash (used in) financing activities		(228,045	)		-

Effect of exchange rate changes on cash and cash equivalents:		660,374			107,504

Increase (decrease) in cash and cash equivalents		9,771,838			(1,167,778	)
Cash and cash equivalents, beginning of period		21,983,641			23,090,102
Cash and cash equivalents, end of period	$	31,755,479		$	21,922,324

Supplemental disclosure of cash flow information
Interest paid in cash	$	-		$	2,879
Income taxes paid in cash	$	871,750		$	922,090

Non-cash investing and financing activities:
Conversion of preferred stock to common stock	$	-		$	48
Issuance of restricted stocks to officer	$	80		$	-

The accompanying notes are an integral part of these financial statements.

F-3

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China Power Equipment, Inc.

Condensed 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.

F-4

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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.

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.

F-5

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

The material terms of the Company’s sales include the following.

Sales contract for Amorphous Metal Distribution Transformer Core:

Payment term: complete the payment within one month after delivery.

Responsibility of any breach: if the buyer cannot pay on time, the fine for any breach should be paid by the buyer, the fine is 20% of the part of the contract not executed.

Time for quality guarantee and raising an objection: within 10 days if find defective after receiving the goods.

Sales contract for transformer:

Method, time and venue for settlement: complete the payment within three months after delivery 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 September 30, 2013, cash of $28,791,490 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 nine months ended September 30, 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.

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3 – RESTRICTED CASH

The restricted cash serves as collateral for a one-off irrevocable letter of credit granted to the Company for importing amorphous alloy strip.

NOTE 4 – INVENTORY

Inventory consists of:

	September 30,		December 31,
	2013		2012

Raw materials	$	729,418	$	66,583
Work in progress		17,511		20,190
Finished goods		135,096		48,456

Total inventory	$	882,025	$	135,229

NOTE 5 – PREPAID EXPENSES AND OTHER RECEIVABLES

At September 30, 2013 and December 31, 2012, prepaid expenses and other receivables include a performance bond of $2,368,147 and $2,306,313 respectively for a highway construction project.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

	September 30,			December 31,
	2013			2012

Plant and office building	$	6,860,638		$	6,681,503
Machinery and production equipment		4,825,460			4,692,387
Automobile		132,135			128,685
Office equipment		56,214			54,746
Total		11,874,447			11,557,321
Less: accumulated depreciation		(3,492,244	)		(2,822,476	)

Property, plant and equipment, net	$	8,382,203		$	8,734,845

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 7 – INTANGIBLE ASSETS

Intangible assets consist of:

	September 30,			December 31,
	2013			2012

Technical know-how	$	244,323		$	237,944
Amorphous Transformer Technique		374,630			364,848
Total		618,953			602,792
Less: accumulated amortization		(415,048	)		(359,002	)

Intangible assets, net	$	203,905		$	243,790

On June 18, 2009, Zhongxi purchased an amorphous transformer aluminum wire technology for $244,324. 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 $81,441. 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 $162,882. 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 $130,306. The technology is being amortized over 10 years based on useful life estimation.

The estimated future amortization expenses related to intangible assets as of September 30, 2013 are as follows:

Years Ending December 31,
2013	$	15,474
2014		56,466
2015		38,676
2016		32,208
2017		24,432
Thereafter		36,649

NOTE 8 – CONTRACT RIGHTS DEPOSIT

The contract right was purchased from AT&M for $1,465,941 (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 nine months ended September 30, 2013 and 2012, $302,604 and $215,224 of the contract rights deposit were amortized and recorded in cost of goods sold, respectively.

The Company conducted the evaluation for the impairment of the asset at September 30, 2013 and concluded that no impairment is needed to be recorded as of the date of evaluation.

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9 – 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 $65,153 (RMB400,000) at 5% stated annual interest rate. The loan is repayable on demand.

NOTE 10 –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 $3,248 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.

As a result, approximately $154,788 (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 $101,177 and $103,010 as of September 30, 2013 and December 31, 2012, respectively.

Future minimum lease payments as of September 30, 2013 are as follows based on the 10% discounted factor:

For the period ending December 31:
2013	$	3,248
2014		3,593
2015		3,974
2016		4,395
2017		4,861
Thereafter		102,923
Less Current Portion		(3,248	)
Long Term Portion	$	119,746

CAPITAL COMMITMENTS

As of September 30, 2013 and December 31, 2012, the Company had capital commitments to acquire land use right of $114,018 and $111,041, respectively.

OPERATING LEASE

The Company is committed to a lease for its office in Xi’an, PRC expiring on September 19, 2014. Minimum lease payments of $5,049 are required for the year ending December 31, 2013.

NOTE 11 – 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 nine months ended September 30, 2013. At September 30, 2013 and December 31, 2012, 4,102,000 shares are outstanding.

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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

Common Stock

At September 30, 2013 and December 31, 2012, the Company has 100,000,000 shares of common stock authorized of which 19,602,557 and 19,522,557 shares issued and outstanding at par value $0.001 per share.

During the nine months ended September 30, 2013, 80,000 shares were issued as stock-based compensation to the officer of the Company. (Restricted stock awards)

Warrants

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

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

All warrants were expired in December 2012.

Stock Options

The following table summarizes the activities for the Company’s options for the nine months ended September 30, 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 September 30, 2013		25,000	$	0.23		0.7
Vested and exercisable as of September 30, 2013		25,000	$	0.23		0.7

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2013 and the related exercise price of the underlying options, was $5,500 for outstanding and exercisable options as of September 30, 2013.

At September 30, 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.

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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 nine months ended September 30, 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		(83,636	)	$	0.49
Unvested at September 30, 2013		-

As of September 30, 2013, there was no unrecognized compensation cost related to RSAs.

During the nine months ended September 30, 2013, the Company granted 43,636 RSAs to a director for services provided.

The Company has granted 246,513 RSAs (both vested and unvested in aggregate). Out of 246,513 vested RSAs, 172,877 shares of restricted stock were issued as of September 30, 2013.

For the nine months ended September 30, 2013 and 2012, stock-based compensation expense of $3,816 and $29,083 respectively was included in general and administrative expenses.

NOTE 12 -EARNINGS PER SHARE

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012

Basic earnings per share:
Numerator:
Net income used in computing basic earnings per share	$	1,631,672	$	2,091,401	$	4,081,590	$	4,830,445

Denominator:
Weighted average common shares outstanding		19,602,557		19,459,680		19,560,652		19,445,415
Basic earnings per share	$	0.08	$	0.11	$	0.21	$	0.25

Diluted earnings per share:
Numerator:
Net income used in computing diluted earnings per share	$	1,631,672	$	2,091,401	$	4,081,590	$	4,830,445

Denominator:
Weighted average common shares outstanding		19,602,557		19,459,680		19,560,652		19,445,415
Weighted average effect of dilutive securities:
Convertible preferred stocks		4,102,000		4,102,000		4,102,000		4,116,265
Stock warrants, options and awards		84,879		110,090		84,879		95,961
Shares used in computing diluted earnings per share		23,789,436		23,671,770		23,747,531		23,657,641
Diluted earnings per share	$	0.07	$	0.09	$	0.17	$	0.20

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

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 13 – 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 September 30, 2013 and December 31, 2012 which amount has reached 50% of the Company’s registered capital.

NOTE 14 – INCOME TAXES

China Power was incorporated in the United States of America (“USA”) and the Company has operations in two tax jurisdictions - the USA and the PRC. The Company generated substantially all of its net income from its PRC operations for the nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 15 – 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.

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China Power Equipment, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 16 – CONCENTRATION

For the nine months ended September 30, 2013, three suppliers accounted for 85% of the Company’s total purchases and three customers accounted for 25% 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 17 – SUBSEQUENT EVENTS

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

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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.

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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.

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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.

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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 and Nine- Month Periods Ended September 30, 2013 and 2012

Revenue

	Three Months Ended September 30,										%
	2013					2012					change
	Revenue		%			Revenue		%
Amorphous Alloy Core	$	7,119,617		78.0	%	$	7,376,245		69.1	%		(3.5	) %
Amorphous Alloy Transformer		2,009,890		22.0	%		3,299,132		30.9	%		(39.1	) %
Total:	$	9,129,507		100.0	%	$	10,675,377		100.0	%		(14.5	) %

	Nine Months Ended September 30,										%
	2013					2012					change
	Revenue		%			Revenue		%
Amorphous Alloy Core	$	18,601,026		74.8	%	$	19,805,977		72.2	%		(6.1	) %
Amorphous Alloy Transformer		6,265,852		25.2	%		7,615,083		27.8	%		(17.7	) %
Total:	$	24,866,878		100.0	%	$	27,421,060		100.0	%		(9.3	) %

Total revenues decreased $1,545,870 or 14.5% and $2,554,182 or 9.3% during the quarter and nine months ended September 30, 2013, respectively, compared to the same periods of 2012. The decrease in the quarter was primarily due to the lower average selling prices of amorphous alloy cores and fewer units of amorphous alloy transformers sold, partly offset by higher average unit prices of amorphous alloy transformers. The decrease in the first nine months of 2013 was mainly due to the lower average selling prices of amorphous alloy cores and transformers and fewer units of amorphous alloy transformers sold.

During the quarter and nine months ended September 30, 2013, the average selling prices per ton of amorphous alloy cores were 9.3% and 7.5% lower, respectively, compared with the same periods of 2012. The lower average prices of amorphous alloy cores were mainly due to an increased percentage of lower priced amorphous alloy cores made of domestic amorphous alloy strip in the sales mix.

During the quarter and nine months ended September 30, 2013, the average selling prices per unit of amorphous alloy transformers were 10.7% higher and 4.8% lower, respectively, compared with the same periods of 2012. The higher average unit prices of amorphous alloy transformers in the quarter was mainly due to more units of higher priced high capacity alloy transformers sold. The lower average unit prices of amorphous alloy transformers in the first nine months of 2013 were primarily due to more units of lower priced low capacity alloy transformers sold in the first quarter when we fulfilled orders from the oil field.

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Cost of Goods Sold

	Three Months Ended September 30,										%
	2013					2012					change
	COGS		%			COGS		%
Amorphous Alloy Core	$	5,376,238		78.3	%	$	5,400,730		69.0	%		(0.5	) %
Amorphous Alloy Transformer		1,488,781		21.7	%		2,421,790		31.0	%		(38.5	) %
Total:	$	6,865,019		100.0	%	$	7,822,520		100.0	%		(12.2	) %

	Nine Months Ended September 30,										%
	2013					2012					change
	COGS		%			COGS		%
Amorphous Alloy Core	$	14,038,658		75.1	%	$	14,491,423		71.6	%		(3.1	) %
Amorphous Alloy Transformer		4,653,497		24.9	%		5,734,353		28.4	%		(18.8	) %
Total:	$	18,692,155		100.0	%	$	20,225,776		100.0	%		(7.6	) %

Cost of goods sold decreased $957,501 or 12.2% and 1,533,621 or 7.6% during the quarter and nine months ended September 30, 2013, respectively, compared to the same periods of 2012. This was mainly due to the average prices of primary raw material stayed low in the third quarter of 2013. Fewer units of amorphous alloy transformers sold in the quarter and the first nine months of 2013 also contributed to the lower cost of goods sold.

The average purchase prices of the primary raw material, amorphous alloy strip, decreased 6.2% and 4.4% in the third quarter and the first nine months of 2013, respectively, compared to the same periods of 2012. The decrease in the quarter was primarily due to the import of some amorphous alloy strip in lower prices. We purchased some old model amorphous alloy strip from Advanced Technology & Materials Co., Ltd. (“AT&M”) at discounted prices in the second quarter of 2013 which also contributed to the lower average purchase prices in the first nine months of 2013.

Gross Profit

	Three Months Ended September 30,										%
	2013					2012					change
	Gross Profit		Gross Margin			Gross Profit		Gross Margin
Amorphous Alloy Core	$	1,743,379		24.5	%	$	1,975,515		26.8	%		(11.8	) %
Amorphous Alloy Transformer		521,109		25.9	%		877,342		26.6	%		(40.6	) %
Total:	$	2,264,488		24.8	%	$	2,852,857		26.7	%		(20.6	) %

	Nine Months Ended September 30,										%
	2013					2012					change
	Gross Profit		Gross Margin			Gross Profit		Gross Margin
Amorphous Alloy Core	$	4,562,368		24.5	%	$	5,314,554		26.8	%		(14.2	) %
Amorphous Alloy Transformer		1,612,355		25.7	%		1,880,730		24.7	%		(14.3	) %
Total:	$	6,174,723		24.8	%	$	7,195,284		26.2	%		(14.2	) %

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Gross profit decreased $588,369 or 20.6% and $1,020,561 or 14.2% during the quarter and nine months ended September 30, 2013, respectively, compared to the same periods of 2012. The decreases of gross profit were primarily due to the lower sales from amorphous alloy cores and transformers.

The gross profit margin (gross profit as a percent of total revenues) decreased 1.9 percentage points to 24.8% in the third quarter of 2013 from 26.7% in the third quarter of 2012, and decreased 1.4 percentage points to 24.8% in the first nine months of 2013 from 26.2% in the first nine months of 2012. This was mainly due to the lower gross profit margin of amorphous alloy cores caused by its average selling prices decreased to a greater extent than the average cost of its primary raw material.

Selling, General and Administrative Expenses

	Three Months Ended September 30,									Nine Months Ended September 30,
	2013			2012			% Change			2013			2012			% Change
Selling, general and administrative expenses	$	317,262		$	353,678			(10.3	)%	$	1,238,066		$	1,385,818			(10.7	)%
% of Revenue		3.5	%		3.3	%					5.0	%		5.1	%

Selling, general, and administrative (“SG&A”) expenses decreased by $36,416 or 10.3% and decreased by $147,752 or 10.7% during the quarter and nine months ended September 30, 2013, respectively, compared to the same periods of 2012.

The lower SG&A expenses in dollars in the third quarter of 2013 were primarily due to a decrease in administrative facility expense of $22,389, a decrease in stock-based compensation of $8,433 and a decrease in profession fee of $6,077. The lower SG&A expenses in dollars in the first nine months of 2013 were mainly due to a decrease in administrative personnel and facility expenses of $171,380 resulting from lower salary and lower director and officer insurance expenses and a decrease in professional fee of $54,860 resulting from lower investor relations expense, partly offset by an increase in shipping expense of $59,613 and an increase in sales related tax levy of $35,333. The increase in shipping expense was mainly due to a higher percentage of long-distance customers and the freight for amorphous alloy transformers covered by Zhongxi.

Income Taxes

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Income taxes	$	335,118		$	412,625		$	879,522		$	1,018,735
Effective tax rate		17.0	%		16.5	%		17.7	%		17.4	%

The decrease in the income taxes for the quarter and nine months ended September 30, 2013 compared to the same periods 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.

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Net Income

For the quarter ended September 30, 2013, net income was $1,631,672 compared to $2,091,401 for the corresponding period of 2012, a decrease of $459,729 or 22.0%. The decrease in net income was mainly due to the lower gross profit, offset by lower SG&A expenses, higher other income and lower income taxes.

For the nine months ended September 30, 2013, net income was $4,081,590 compared to $4,830,445 for the corresponding period of 2012, a decrease of $748,855 or 15.5%. The decrease in net income was mainly due to the lower gross profit and lower other income, offset by lower SG&A expenses and lower income taxes.

Liquidity and Capital Resources

We have funded our operations and capital expenditures using cash generated from operations and funds raised from issuing convertible preferred stock. We will continue our investment in the development and enhancement of the production facilities for amorphous alloy cores and transformers. 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:

	September 30, 2013		December 31, 2012
Cash and restricted cash	$	31,983,524	$	21,983,641
Working capital	$	37,515,756	$	31,629,113
Stockholders' equity	$	46,797,860	$	41,587,635

The following table shows cash flows for the periods presented.

	Nine Months Ended September 30,
	2013			2012
Net cash provided by (used in) operating activities	$	9,346,692		$	(1,271,725	)
Net cash (used in) investing activities		(7,183	)		(3,557	)
Net cash (used in) financing activities		(228,045	)		-
Effect of exchange rate changes on cash		660,374			107,504
Net increase in cash	$	9,771,838		$	(1,167,778	)

Operating activities:

For the nine months ended September 30, 2013, net cash provided by operating activities was $9,346,692. This was primarily due to net income of $4,081,590, adjusted by non-cash related expenses including depreciation and amortization of $940,044 and stock-based compensation of $3,816, then increased by favorable changes in working capital of $4,321,242. The favorable changes in working capital mainly resulted from a decrease in accounts receivable of $4,196,881 as some prior period accounts receivable got collected and an increase in account payable of $1,208,635, partly offset by an increase in inventory of $729,514 and a decrease in other payables and advance from customers of $502,969.

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

Investing activities:

Net cash used in investing activities was due to the acquisition of equipment of $7,183 and $3,557 for the nine months ended September 30, 2013 and 2012 respectively.

Financing activities

Net cash used in financing activities was due to an increase in restricted cash of $228,045. The restricted cash serves as collateral for a one-off irrevocable letter of credit granted to the Company for importing amorphous alloy strip.

Contractual Obligations

As of September 30, 2013, we prepaid $216,633 for the land use right of the new plant in the Jingyang Yongle Industrial Zone and are obligated to pay the remaining balance of $114,018 upon receiving the land use right certificate.

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4. Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. We have carried out an evaluation as required by Rule 13a-15(d) under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2013 our disclosure controls and procedures were effective in ensuring that material information relating to us, is made known to the Chief Executive Officer and Chief Financial Officer by others within our company during the period in which this report was being prepared.

There were no changes in our internal controls over financial reporting identified in connection with the evaluation that occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is involved in legal matters arising in the ordinary course of business. Management currently is not aware of any legal matters or pending litigation that would have a significant effect on the Company’s financial statements as of September 30, 2013.

Item 1A. Risk Factors

Except as set forth below, there were no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not engage in any unregistered sales of equity securities during the fiscal quarter ended September 30, 2013; nor did the Company repurchase any of its equity securities during the same fiscal period.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are furnished as part of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

China Power Equipment, Inc.

Date: November 14, 2013 By: /s/ Yongxing Song

Name: Yongxing Song

Title: Chief Executive Officer and President

(Principal Executive Officer)

Date: November 14, 2013 By: /s/ Elaine Zhao

Name: Elaine Zhao

Title: Chief Financial Officer

(Principal Financial and Accounting Officer)

Table of Contents

EXHIBIT INDEX

Number	Title

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the SOX of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the SOX of 2002.
32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350.

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

China Power Equipment, Inc. - FORM 10-Q - November 14, 2013

Attached files

China Power Equipment, Inc. Reports