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| CHDAE.OB > SEC Filings for CHDAE.OB > Form 10-K on 20-Oct-2009 | All Recent SEC Filings |
20-Oct-2009
Annual Report
Results of Operations
The reformation of our operations from a focus on network integration to a focus on animation development had an immediate positive impact on our results of operations. Our revenue for the year ended June 30, 2009 were 34% greater than our revenue in the year ended June 30, 2008. Moreover, because animation development is primarily a service industry, the 34% increase in revenue was achieved with 2% lower cost of goods sold. Our gross margin, therefore, was 73% in the 2009 fiscal year, compared to 63% in fiscal 2008.
Network engineering still contributed 27% of our revenue in fiscal 2009. At the end of the year, we terminated all of our network engineering activities, and sold the related property and equipment. The primary reason for abandoning this line of business was the level of competition in the Chinese IT industry. Chinese educational institutions have produced a plethora of graduates with training in network and software design. The result is intense competition, which leads to reduced margins. Given the opportunity to refocus in the animation industry, which is growing rapidly in China, we determined that the future would be more profitable in that area. The greater portion of our revenue in future periods will come from animation development. As a result, we expect our gross margin ratio to remain high.
Hairong's expansion into new business areas resulted in a significant increase in our operating expenses, which rose from $1,064,779 (24% of revenue) in fiscal 2008 to $1,529,106 (25% of revenue) in fiscal year 2009. The increase in expenses reflects the expenses that attend entry into new business ventures. In addition, during November 2008 we established ourselves as a U.S. public company and opened an office in New York City. The expenses of those initiatives also increased our operating costs. As we expand in these new areas, we expect our operating expenses to increase as well. However, the ratio of operating expenses to revenue should decrease as our new operations experience the efficiencies of size.
The transformation of our business operations also resulted in additional income for the year ended June 30, 2009. We realized a gain of $239,746 when we sold the building and equipment associated with our network engineering business - this is recorded on our Statements of Income as "Gains on Disposal of Fixed Assets." This was partially offset, however, by the loss of $104,005 that we incurred on the sale of the inventory we carried for the network engineering business, which is included in "Other Expense" on our Statements of Income. On the other hand, during the year we also sold our management consulting subsidiary, Fortune Global Investment Advisory Co., Ltd. ("FGIA"). FGIA had been contributed to Hairong by Fu Qiang, our Chairman, and was carried on our books at zero basis. For that reason, we recorded the entire sales price - $219,036 - as a "Gain from Investment."
Our revenue less expenses for year ended June 30, 2009 yielded a net income before taxes of $3,274,757, almost double the net pre-tax income of $1,768,392 during the year ended June 30, 2008. For 2008 and subsequent years, the Government of China reduced the corporate tax rate from 33% to 25%. In preparing our financial statements for the years ended June 30, 2009 and 2008, we applied the new tax rate retroactively to July 1, 2007. As a result, we recorded net income of $2,451,614 ($.12 per share) for the 2009 fiscal year, and net income of $1,246,777 ($06 per share) for the 2008 fiscal year.
Our business operates in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our statement of stockholders equity labeled "accumulated other comprehensive income," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the year ended June 30, 2009, the unrealized gain on foreign currency translations added $116,491 to our accumulated other comprehensive income. In the prior fiscal year, when the changes in value between the Dollar and the Renminbi were more dramatic, we added $1,070,501 to our shareholders equity by reason of foreign currency translation adjustments.
Liquidity and Capital Resources
To date, our operations have been funded by capital contributions from Hairong's management and employees. Approximately 54% of the capital contribution has been made by members of management and their business associates. The remaining 46% was contributed by the employees, acting through a trustee. The Company expects that in the future it will issue equity to the employees to compensate them for their financial contributions to the growth of Hairong, and to incentivize them for future loyalty to Hairong.
This program of internal financing has left us with a balance sheet that, at June 30, 2009, included no debt, either short-term or long-term, other than a $5,000 loan. It also left us with working capital of $4,947,393 at June 30, 2009, including $2,282,786 in cash. Since our operations have been cash positive in each of the past two fiscal years - providing $819,226 in cash during the 2009 fiscal year and $2,030,233 in cash during the 2008 fiscal year - we believe that our cash resources are adequate to fund our operations for the forseeable future.
We expect to fund several significant capital improvement during the next twelve months:
· a significant upgrade to our Website's infrastructure, in order to facilitate a rapid expansion of the user base;
· acquisition of specialized equipment for our Ice Tour;
· additional animation equipment; and
· a dedicated education facility for the training center associated with our animation department.
We expect the overall cost of these capital improvements to be approximately 3 million RMB ($439,000). At present, we anticipate that we will finance these projects from our capital resources. However, if we are able to obtain financing on favorable terms, we may use external financing for one or more of the projects. Currently we have fixed assets with a book value of $5,036,127 on which there is no lien. This provides us the ability to obtain secured debt financing, if we decided to preserve our working capital. Based on this experience, we anticipate that our capital resources will be adequate to fund our operations for the foreseeable future.
Critical Accounting Policies and Estimates
In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for 2009, there was one estimate made which was (a) subject to a high degree of uncertainty and (b) material to our results. These was the determination, explained in Note 3 to the Consolidated Financial Statements, to record a bad debt reserve of $15,464 as of June 30, 2009. This determination was based on application of our standard evaluation of accounts receivable, which resulted in a high level of confidence regarding the collectability of our receivables.
Impact of Accounting Pronouncements
There were no recent accounting pronouncements that have had a material effect on the Company's financial position or results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
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