Battered investors in China Wind Power International Corp. (TSX: V.CNW, Stock Forum) were left stranded Wednesday, when the TSX Venture Exchange cease traded the stock saying the company had failed to file key financial statements and related documents within the required time period.
China Wind Power, which has a corporate office in Toronto, but appears to run its business from Daqing in northeastern China, says it is uniquely positioned to capitalize on growing demand for wind power in China. It says it indirectly holds the exclusive rights to a wind energy development in Heilongjiang Province, with an installed capacity of 1,150 megawatts.
However, the stock has been a disaster for investors who bought in earlier this year.
Before the Venture Exchange stepped in, the stock was trading at 20 cents, leaving China Wind Power with a market cap of $13.3 million, based on 66.3 million shares outstanding. That’s down from a 52-week high of 72 cents.
Trouble began on July 27, 2012 when the company announced that filing of its financial and related statements for the year ended March 31, 2012, would be delayed beyond the July 30, 2012 filing deadline date. At that time, the stock was trading at around 45 cents.
On August 1, 2012, the company issued a press release explaining that it expects to record an allowance in its financial statements for “doubtful account” of up to $13.6 million in relation to prepayments for equipment made to a supplier of wind turbines in prior years.
“This supplier has not delivered the related equipment nor have they refunded the pre-payments received,’’ said China Wind, adding that the total outstanding amount owed to the company on March 31, 2012 is $13.6 million.
Cease trade order
The company said it has been unable to file its financial statements because its auditors have requested additional information in relation to the above transaction and has asked to review transactions with related parties to ensure proper accounting treatment and disclosure.
China Wind insisted that it is diligently working with its audit committee to resolve this issue and anticipated that the duration of the default will be approximately two to four weeks.
As a result of the delay in filing, the Ontario Securities Commission issued a management cease trading order on August 8, 2012, which imposed restrictions on all trading in securities of the company by Chairman and chief executive officer Jun Liu and chief financial officer Wendell Zhang until the company delivered the required filings.
Liu could not be reached for comment when Stockhouse tried to reach him at the company’s Toronto office. A receptionist said he is currently in China.
A management information circular filed last November reveals that Liu held 43.6 million shares. Based in Heilongjiang, Liu is the sole shareholder of Ruihao Investment Management (PTC) Corp., the Trustee of the Ruihao Trust, and holder of 68.2% of the China Wind’s outstanding shares, according to the information circular.
On Wednesday, The TSX Venture Exchange did not elaborate on its decision to impose the cease trade order. However, it said the shares will remain suspended until the company meets the Venture Exchange requirements.
One Stockhouse bullboard poster expressed the view that these developments are another sign that investors should avoid China-based companies which trade on the TSX and TSX Venture Exchange. “I dumped this as soon as the Sino Forest scam unfolded,’’ said JohnnyBlazzwa in a China Wind post.
China Agricultural Development Bank
The post is a reference to failed forestry firm Sino-Forest Corp. which saw its share price collapse in the wake of fraud allegations. Once Canada’s largest publicly traded forest firm, Sino-Forest’s shares have been delisted from the Toronto Stock Exchange and the company is now insolvent.
Previous financial statements reveal that China Wind posted a loss of $193,242 or $0.00 a share in the quarter ended December 31, 2011 on revenue of $2.3 million. That compared to a year earlier profit of $92,177 or $0.00 on revenue of $2.42 million.
By the end of 2011, the company had an accumulated deficit of $14.8 million and a working capital deficiency of $16.2 million, an amount which left the company in doubt as to whether it could meet its financial obligations and sustain its operations, it said.
China Wind also said that the continuing operations of the company are dependent on its ability to obtain necessary financing and repay a loan of $11.1 million to China Agricultural Development Bank Du Mon Branch.
Financial documents reveal that China Wind has contractual agreements with Daqing Longjiang Wind Power Co. and its shareholders which, allow the company to run the business operations of Longjiang, “including entitlements to economic benefits.”
During the nine months ended December 31, 2011 Longjiang entered into various agreements with China Ming Yang Wind Power Group Ltd. to construct its Phase 3 wind project. It consists of four wind farms, each with a total output of 49.5 megawatts in Du Mon County, Heilongjiang Province
It said the total investment in each wind farm project is $64.1 million.
Last year, China Wind says Longjiang entered into various agreements with the China Ming Yang Wind Power Group Ltd., which has committed to finance and construct Phase 3 by taking possession of the majority of the shares of four entities [the project companies] that “hold” the wind farms.
Min Yang is entitled to receive $300,000 from each project company. Within five years after the last set of wind turbines passes the 240-hour testing inspection, Longjiang is obligated to purchase at least 51% of Ming Yang’s equity interest in the project companies at the end of the first year and at least 10% in each of the following years until Longjiang has repurchased all the shares held by Ming Yang.