10-Q 1 v239001_10q.htm FORM 10-Q Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 

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

For the quarterly period ended September 30, 2011
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ______to______.

WINLAND OCEAN SHIPPING CORP.

 (Exact name of registrant as specified in Charter)
 
TEXAS
 
333-142908
 
 20-5933927
(State or other jurisdiction of
incorporation or organization)
 
(Commission File No.)
 
(IRS Employee Identification No.)

Rm 703, 7/F, Bonham Trade Centre, 50 Bonham Strand, Sheung Wan, Hong Kong, China

(Address of Principal Executive Offices)
 
00852-28549088

 (Issuer Telephone number)
 

 (Former Name or Former Address if Changed Since Last Report)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨     Nox

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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
 
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 ¨     No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 9, 2011: 195,000,000 shares of common stock.
 
 
 

 
 
TABLE OF CONTENTS

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
15
 
 
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
15
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
15
 
 
 
 
 
ITEM 1A.
RISK FACTORS
16
 
 
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
24
 
 
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
24
 
 
 
 
 
ITEM 4.
(REMOVED AND RESERVED)
24
 
 
 
 
 
ITEM 5.
OTHER INFORMATION
24
 
 
 
 
 
ITEM 6.
EXHIBITS
25
 
 
SIGNATURES
30
 
 
- 2 -

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES

FINANCIAL STATEMENTS
TABLE OF CONTENTS

   
Page
     
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010 (UNAUDITED)
 
F-2
     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
F-4
     
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
F-6
     
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
F-8
 
 
F-1

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSETS

   
September 30, 2011
   
December 31, 2010
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 4,290,790     $ 8,253,476  
Accounts receivable
    825,982       776,034  
Inventories
    3,277,765       1,097,992  
Prepayments
    1,950,825       839,708  
Other receivables and other assets
    741,248       808,521  
Due from related parties
    886,694       1,102,581  
Discontinued operations
    -       7,814,817  
Total current assets
    11,973,304       20,693,129  
                 
Vessels, net
    95,714,810       36,620,403  
Vessels under construction
    -       47,700,567  
Fixed assets, net
    10,622       9,194  
Deferred dry dock fees, net
    4,402,454       3,835,613  
Discontinued operations
    -       7,179,431  
Total long-term assets
    100,127,886       95,345,208  
                 
TOTAL ASSETS
  $ 112,101,190     $ 116,038,337  

See accompanying notes to condensed consolidated financial statements.

 
F-2

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

LIABILITIES AND SHAREHOLDERS’ EQUITY

   
September 30, 2011
   
December 31, 2010
 
CURRENT LIABILITIES
           
Accounts payable
  $ 8,170,686     $ 7,471,772  
Current portion of long-term loans
    5,600,568       6,627,576  
Current portion of long-term notes payable, net of discount of $2,207,828 and
    $589,740 at September 30, 2011 and December 31, 2010, respectively
    3,253,978       2,906,832  
Advance from customers
    1,873,051       854,902  
Payroll payable
    1,302,619       1,363,287  
Payable to ship builder
    1,820,624       -  
Due to related parties
    178,420       3,753,933  
Other current and accrued liabilities
    1,921,484       1,948,030  
Discontinued operations
    -       3,763,512  
Total current liabilities
    24,121,430       28,689,844  
                 
LONG-TERM LIABILITIES
               
Long-term loans
    42,058,172       40,031,919  
Long-term notes payable (including related parties), net of discount of
    $3,672,578 and $817,430 at September 30, 2011 and December 31, 2010, respectively
    12,767,649       14,084,609  
Payable to ship builder
    3,800,000       2,850,000  
Discontinued operations
    -       2,961,739  
Total long-term liabilities
    58,625,821       59,928,267  
                 
TOTAL LIABILITIES
    82,747,251       88,618,111  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock, $0.001 per share;  20,000,000 shares authorized; 0 share issued and outstanding
    -       -  
Common stock, $0.001 per share; 400,000,000 shares authorized, 195,000,000 shares issued and outstanding
    195,000       195,000  
Additional paid-in capital
    3,257,966       3,257,966  
Accumulated other comprehensive income
    925,413       919,494  
Retained earnings
    24,975,560       23,047,766  
Total Shareholders’ Equity
    29,353,939       27,420,226  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 112,101,190     $ 116,038,337  

See accompanying notes to condensed consolidated financial statements.

 
F-3

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
REVENUES
  $ 14,697,536     $ 15,304,244     $ 45,436,489     $ 42,477,241  
                                 
COSTS AND EXPENSES
                               
Vessel operating costs
    12,127,440       11,856,382       35,842,270       32,066,623  
Depreciation and amortization
    1,661,023       1,050,953       4,377,536       3,194,966  
General and administrative
    544,982       524,392       1,578,429       1,396,225  
Selling
    93,984       81,219       257,818       262,553  
TOTAL COSTS AND EXPENSES
    14,427,429       13,512,946       42,056,053       36,920,367  
                                 
OTHER EXPENSES
                               
                                 
Interest, net
    (1,137,360 )     (336,148 )     (2,790,942 )     (853,599 )
Other income, net
    14,791       201,521       110,221       142,122  
                                 
(LOSS) INCOME FROM CONTINUING OPERATIONS
    (852,462 )     1,656,671       699,715       4,845,397  
                                 
DISCONTINUED OPERATIONS
                               
                                 
Gain from disposition of discontinued operations
    4,216,285       -       1,612,882       -  
(Loss) gain from discontinued operations
    (358,024 )     (64,800 )     (375,421 )     1,385,428  
Income tax expense from discontinued operations
    -       (8,387 )     (9,382 )     (25,531 )
                                 
NET GAIN (LOSS) FROM DISCONTINUED OPERATIONS
    3,858,261       (73,187 )     1,228,079       1,359,897  
                                 
NET INCOME
    3,005,799       1,583,484       1,927,794       6,205,294  
                                 
OTHER COMPREHENSIVE INCOME
                               
                                 
Foreign currency translation gain
    156       49,310       5,919       68,349  
                                 
COMPREHENSIVE INCOME
  $ 3,005,955     $ 1,632,794     $ 1,933,713     $ 6,273,643  

See accompanying notes to condensed consolidated financial statements.

 
F-4

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Weighted average shares outstanding
                       
- Basic
    195,000,000       195,000,000       195,000,000       195,000,000  
- Diluted
    195,000,000       195,000,000       195,000,000       195,000,000  
                                 
(Loss) income per share from continuing operations
                               
- Basic
  $ (0.00 )   $ 0.01     $ 0.00     $ 0.02  
- Diluted
  $ (0.00 )   $ 0.01     $ 0.00     $ 0.02  
                                 
Gain (loss) per share from discontinued operations
                               
- Basic
  $ 0.02     $ (0.00 )   $ 0.01     $ 0.01  
- Diluted
  $ 0.02     $ (0.00 )   $ 0.01     $ 0.01  
                                 
Net income per share
                               
- Basic
  $ 0.02     $ 0.01     $ 0.01     $ 0.03  
- Diluted
  $ 0.02     $ 0.01     $ 0.01     $ 0.03  

See accompanying notes to condensed consolidated financial statements.

 
F-5

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
Net income
  $ 1,927,794     $ 6,205,294  
Net gain from discontinued operations
    (1,228,079 )     (1,359,897 )
Income from continuing operations
    699,715       4,845,397  
                 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation
    3,047,582       1,948,696  
Amortization of deferred dry dock fees
    1,329,954       1,246,270  
Amortization of long-term notes payable discount
    453,511       528,502  
                 
Changes In Operating Assets and Liabilities:
               
                 
(Increase) Decrease In:
               
Accounts receivable
    (49,948 )     (1,085,116 )
Inventories
    (2,179,773 )     (900,083 )
Prepayments
    (1,111,117 )     (1,597,739 )
Other receivables and other assets
    67,274       120,717  
Deferred dry dock fees
    (1,896,795 )     (516,213 )
                 
Increase (Decrease) In:
               
Accounts payable
    698,914       1,747,489  
Advance from customers
    1,018,149       997,575  
Payroll payable
    (60,668 )     11,332  
Other current and accrued liabilities
    (26,546 )     (201,447 )
Repayments to related parties
    (3,359,626 )     (4,103,099 )
Net cash (used in) provided by continuing operations
    (1,369,374 )     3,042,281  
                 
Net cash provided by discontinued operations
    962,173       4,178,069  
                 
Net cash (used in) provided by operating activities
    (407,201 )     7,220,350  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Payments for vessels under construction
    (5,967,027 )     (4,141,047 )
Purchases of fixed assets
    (5,199 )     (5,169 )
Termination fees of discontinued operation, net
    151,319       -  
Proceeds from disposition of discontinued operations, net
    8,383,584       -  
Net cash provided by (used in) investing activities
    2,562,677       (4,146,216 )

See accompanying notes to condensed consolidated financial statements.

 
F-6

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Repayments of long-term loans
    (4,700,755 )     (3,096,711 )
Repayments of long-term notes payable
    (1,423,326 )     (790,881 )
Net cash used in financing activities
    (6,124,081 )     (3,887,592 )
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (3,968,605 )     (813,458 )
Effect of exchange rate changes on cash
    5,919       68,349  
Cash and cash equivalents at beginning of year
    8,253,476       1,934,993  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 4,290,790     $ 1,189,884  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:
               
Interest paid
  $ 2,849,842     $ 1,019,647  

SUPPLEMENTARY NON-CASH DISCLOSURES:

1.      During the nine months ended September 30, 2011, vessels under construction of $62,138,217 were transferred to vessels upon the delivery of vessels Fon Tai and Rui Lee in January and May 2011.

2.      During the nine months ended September 30, 2011, the payment for vessel Rui Lee of $5,700,000 was facilitated through proceeds from a long-term loan.

See accompanying notes to condensed consolidated financial statements.

 
F-7

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

1.  ORGANIZATION AND PRINCIPAL ACTIVITIES

Trip Tech, Inc. (“Trip Tech”) was incorporated under the laws of Texas on November 17, 2006. On September 23, 2008, Trip Tech changed its name to Winland Online Shipping Holdings Corporation. On March 22, 2011, Winland Online Shipping Holdings Corporation changed its name to Winland Ocean Shipping Corp. (“WLOL”).

On February 16, 2011, the Company terminated the technical service agreements with Dalian Winland International Shipping Agency Co., Ltd. (“DWIS”), Dalian Winland International Logistic Co., Ltd. (“DWIL”) and Dalian Shipping Online Network Co., Ltd. (“DSON”). The operating results of DWIS, DWIL and DSON have been presented as discontinued operations for the nine months ended September 30, 2011 and 2010 and as of December 31, 2010. See Note 11.

On March 28, 2011, the Company declared to (i) effect a 1.5-for-1 forward stock split of the Company’s common stock; (ii) increase the number of authorized shares of common stock from 200,000,000 shares to 400,000,000 shares. As a result, all the amounts in the accompanying condensed consolidated financial statements have been restated to give effect to the 1.5-for-1 forward stock split.

The Company sold three vessels Win Glory, Win Star and Bodar to the unrelated parties on August 6, August 16 and September 30, 2011, respectively. The operating results of these vessels have been presented as discontinued operations for the nine months ended September 30, 2011 and 2010 and as of December 31, 2010. See Note 11.

WLOL and subsidiaries (the “Company”) are mainly engaged in ocean transportation of dry bulk cargoes worldwide through the ownership and operation of dry bulk vessels and chartering brokerage services.

2.    LIQUIDITY

The Company had a working capital deficit of $12,148,126 as of September 30, 2011. To improve liquidity, the Company obtained written commitments from certain shareholders and related parties to provide working capital to the Company, if needed, in the form of notes payable or personal loans.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)  Basis of Presentation

The unaudited condensed consolidated financial statements of Winland Ocean Shipping Corp. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q, Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of December 31, 2010 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report.

 (b)  Principles of Consolidation

The condensed consolidated financial statements include the accounts of WLOL and its subsidiaries (the Company”) as of September 30, 2011 as follows:

 
F-8

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 (b)  Principles of Consolidation (Continued)

I. Subsidiaries and Holding Companies:

a)
SkyAce is a wholly-owned subsidiary of WLOL and incorporated under the law of British Virgin islands (“BVI”).

b)
Plentimillion Group Limited (“PGL”) is a wholly-owned subsidiary of SkyAce and incorporated in BVI.

c)
Best Summit Enterprise Limited (“BSL”) is a wholly-owned subsidiary of SkyAce and incorporated in BVI.

d)
Hong Kong Wallis Development Limited (“Wallis”) is registered in Hong Kong and is a wholly-owned subsidiary of BSL.

e)
Beijing Huate Xingye Technology Limited (“Huate”) is registered in PRC on March 18, 2008 and is a wholly-owned subsidiary of Wallis.

II. Subsidiaries of PGL - Businesses in dry bulk shipping and chartering brokerage:

f)
Winland Shipping Co., Limited, is registered in Hong Kong.

g)
Win Star Shipping Co., Limited, is incorporated and registered in St. Vincent and the Grenadines (“S.V.G.”).

h)
Bodar Shipping Co., Limited, is incorporated and registered in S.V.G.

i)
Winland Dalian Shipping S.A. is incorporated in Panama and registered in Hong Kong,

j)
Treasure Way Shipping Limited is incorporated and registered in Hong Kong.

k)
Win Eagle Shipping Co., Limited, is incorporated and registered in Valletta, Malta.

l)
Win Ever Shipping Co., Limited, is incorporated and registered in Valletta, Malta.

II. Subsidiaries of PGL - Businesses in dry bulk shipping and chartering brokerage (Continued):

m)
Win Bright Shipping Co., Limited, is incorporated and registered in Valletta, Malta.

n)
Kinki International Industrial Limited is registered in Hong Kong, managing chartering brokerage business of vessels.

o)
Bestline Shipping Limited is registered in Hong Kong, managing chartering brokerage business of vessels.

p)
Lancrusier Development Co., Limited is registered in Hong Kong, management and accounting of the above companies.

q)
Win Glory S.A. is incorporated in Panama, registered in Hong Kong.

r)
Win Grace Shipping Co., Limited is incorporated and registered in Malta.

 
F-9

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
(b)  Principles of Consolidation (Continued)

II. Subsidiaries of PGL - Businesses in dry bulk shipping and chartering brokerage (continued):

s)
Win Hope Shipping Co., Limited is incorporated and registered in Malta.

t)
Win Moony Shipping Co., Limited is incorporated and registered in Malta.

u)
Bodar Shipping S.A. is incorporated and registered in Panama.

v)
Win Moony Shipping S.A. is incorporated and registered in Panama.

w)
Bao Shun Shipping S.A. is incorporated and registered in Panama.

x)
Winland International Shipping Co., Limited is incorporated and registered in Hong Kong.

y)
Kin Ki International Industrial Limited is incorporated and registered in BVI.

z)
Fon Tai Shipping Co., Limited is incorporated and registered in Hong Kong.

aa)
Won Lee Shipping Co., Limited is incorporated and registered in Hong Kong.

bb)
Win Ever Shipping S.A. is incorporated and registered in Panama.

cc)
Win Bright Shipping S.A. is incorporated and registered in Panama.

Inter-company accounts and transactions have been eliminated in consolidation.

 
F-10

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(c)  Concentrations

The Company’s major customer who accounted for the following percentages of total revenues and account receivable are as follows:

   
Revenues
   
Account Receivable
 
Major Customers
 
For The Nine
Months Ended
September 30, 2011
   
For The Nine
Months Ended
September 30, 2010
   
September 30, 
2011
   
December 31,
2010
 
G U Shipping Pte., Ltd.
    21.52 %     15.67 %     17.02 %     14.64 %

The Company’s major oil suppliers who accounted for the following percentages of total oil purchases and total accounts payable are as follows:

   
Oil Purchases
   
Accounts Payable
 
Major Suppliers
 
For The Nine
Months Ended
September 30, 2011
   
For The Nine
Months Ended
September 30, 2010
   
September 30,
2011
   
December 31,
2010
 
A/S Dan-Bunkering Ltd.
    20.25 %     21.57 %     5.14 %     0.35 %
Seabridge Bunkering Pte Ltd.
    16.65 %     -       4.21 %     -  
Chimbusco Pan Nation Petro-Chemical Co., Ltd.
    11.39 %     -       -       1.32 %

(d)  Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ materially from those estimates.

 
F-11

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(e)
Fair Value of Financial Instruments
 
Fair Value of Financial Instruments - FASB (Financial Accounting Standards Board) ASC 820-10 (Accounting Standards Codification: Fair Value Measurements and Disclosures) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

These tiers include:
 
(I)
Level 1—defined as observable inputs such as quoted prices in active markets;
(II)
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
(III)
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Cash and cash equivalents consist primarily of high rated money market funds at a variety of well-known PRC and international institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.

The carrying amounts of other financial assets and liabilities, such as accounts receivable, prepayments, other receivables and other assets, due from related parties, accounts payable, current portion of long-term bank loans and notes payable, advance from customers, payroll payable, payable to ship builder, due to related parties and other payables and accrued liabilities approximate their fair values because of the short maturity of these instruments. The fair value of the Company’s long-term bank loans and notes payable is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Under this method, the Company’s fair value of long-term bank loans and notes payable was not significantly different from the carrying value at September 30, 2011.

(f) Revenue Recognition

Revenue is recognized based on the following four criteria:

(I)           The amount of revenue can be measured reliably;

(II)         It is probable that the economic benefits will flow to the Company;

(III)        The stage of completion at the balance sheet date can be measured reliably;

(IV)        The costs incurred, or to be incurred can be measured reliably.

For dry bulk shipping service, the allocation of revenue between reporting periods is based on relative transit time in each reporting period with expenses recognized as incurred.

For chartering brokerage services, sales are recognized when the ship leaves port.

 
F-12

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 (g) Earnings Per Share

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company does not have dilutive securities for the nine months ended September 30, 2011 and 2010.

(h) Foreign Currency Translation

Assets and liabilities of foreign subsidiaries are translated into United States dollars at currency exchange rates in effect at period-end and revenues and expenses are translated at average exchange rates in effect for the period. Gains and losses resulting from foreign currency transactions are included in results of operations. Gains and losses resulting from translation of foreign subsidiaries balance sheets are included as a separate component of shareholders’ equity.
 
   
September 30, 2011
   
December 31, 2010
 
Period end RMB: US$ exchange rate
    6.3885       6.6118  

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Average period RMB: US$ exchange rate
    6.4034       6.7533       6.4884       6.7676  

(i) Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income should be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s only component of comprehensive income is the foreign currency translation adjustment.

 
F-13

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(j) Reporting Segments

Accounting standards require public business enterprises to report information about each of their operating business segments that exceed certain quantitative threshold or meet certain other reporting requirements. Operating business segments have been defined as a component of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has determined that there are two reportable segments: (1) Dry bulk shipping and (2) Chartering brokerage.

Dry Bulk Shipping Service - Dry bulk shipping service operates a fleet of twelve vessels that provides marine shipping services for dry and liquid bulk cargo shipping. The segment contributed 55% and 61% of combined operating revenues for the nine months ended September 30, 2011 and 2010, respectively.

Chartering Brokerage Service - Chartering brokerage service provides ship chartering services for shipping companies and shippers. The segment contributed 45% and 39% of consolidated operating revenues for the nine months ended September 30, 2011 and 2010, respectively.

Also see Note 13.

(k) New Accounting Pronouncements

In December 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-28 (“ASU 2010-28”), Intangibles — Goodwill and Other (“ASC 350”): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The objective of this standard is to address questions about entities with reporting units with zero or negative carrying amounts because some entities concluded that Step 1 of the test is passed in those circumstances because the fair value of their reporting unit will generally are greater than zero. The amendments in this standard modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 will have a material impact on its financial statements.

 
F-14

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(k) New Accounting Pronouncements (Continued)

In December 2010, the FASB issued ASU No. 2010-29 (“ASU 2010-29”), Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASC 805”). The objective of this standard is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This standard specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This standard also expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This standard is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption of ASU 2010-29 will have a material impact on its financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 
F-15

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

4.
VESSELS

The Company’s current fleet consists of eleven vessels as bulk carriers as of September 30, 2011 and December 31, 2010. Two vessels denoted (a) were acquired through the long-term loans, also see Note 7; three vessels denoted (b) were acquired through the long-term loans and long-term notes payable, also see Notes 7 and 8.

The vessels of the Company consist of the following:

     
September 30, 2011
   
December 31, 2010
 
At cost:
             
Win Hope
    $ 2,679,285     $ 2,679,285  
Win Ever
      1,737,966       1,737,966  
Win Bright
      1,739,258       1,739,258  
Win Eagle
      3,560,852       3,560,852  
Win Grace
      3,677,861       3,677,861  
Win Moony
      3,682,178       3,682,178  
Winland Dalian
(a)
    18,243,139       18,243,139  
Win Honey
(a)
    4,500,000       4,500,000  
Baoshun
(b)
    20,881,125       20,881,125  
Fon Tai
(b)
    30,986,337       -  
Rui Lee
(b)
    31,151,880       -  
      $ 122,839,881     $ 60,701,664  

     
September 30, 2011
   
December 31, 2010
 
Less:  Accumulated depreciation
             
Win Hope
    $ 2,411,356     $ 2,250,597  
Win Ever
      1,564,169       1,564,169  
Win Bright
      1,565,332       1,565,332  
Win Eagle
      3,204,767       3,204,767  
Win Grace
      3,310,075       3,310,075  
Win Moony
      3,313,961       3,313,961  
Winland Dalian
(a)
    6,658,746       5,837,805  
Win Honey
(a)
    1,965,938       1,776,094  
Baoshun
(b)
    2,013,537       1,258,461  
Fon Tai
(b)
    743,672       -  
Rui Lee
(b)
    373,518       -  
      $ 27,125,071     $ 24,081,261  
Vessels, net
    $ 95,714,810     $ 36,620,403  

Vessel depreciation expense for the nine months ended September 30, 2011 and 2010 was $3,043,810 and $1,946,713, respectively.
 
 
F-16

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

4.
VESSELS (CONTINUED)

The Company pledged the following vessels as collateral against long-term loans. Also see Note 7.

   
September 30, 2011
   
December 31, 2010
 
Net Book Value
           
Winland Dalian
  $ 11,584,393     $ 12,405,334  
Win Honey
    2,534,062       2,723,906  
Baoshun
    18,867,588       19,622,664  
Fon Tai
    30,242,665       -  
Rui Lee
    30,778,362       -  
Total
  $ 94,007,070     $ 34,751,904  

Insurance Costs:

There are four kinds of marine insurance for the Company which insures the vessels and shipping business as follows:

         
Premium Expense
 
Insurance
 
Coverage
   
For The Nine Months Ended September
30,
 
         
2011
   
2010
 
Hull insurance
  $ 140,530,000     $ 575,989     $ 528,282  
Protection & indemnity insurance
    8,000,000       624,708       526,360  
Freight demurrage and defense insurance
    59,680,000       67,516       56,474  
Delay insurance
            36,801       61,712  
Total
          $ 1,305,014     $ 1,172,828  

Insurance costs are amortized on a straight-line basis over the beneficial periods and are recorded in vessel expenses in the condensed consolidated statements of income and comprehensive income for the nine months ended September 30, 2011 and 2010. Premium expenses were $1,305,014 and $1,172,828 for the nine months ended September 30, 2011 and 2010, respectively. The prepayment for insurance was $58,905 and $0 as of September 30, 2011 and December 31, 2010, respectively.
 
 
F-17

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

5.
DEFERRED DRY DOCK FEES

Deferred dry dock fees consist of the following:

   
September 30, 2011
   
December 31, 2010
 
Cost
  $ 9,774,692     $ 7,877,897  
Less: Accumulated amortization
    5,372,238       4,042,284  
Deferred dry dock fees, net
  $ 4,402,454     $ 3,835,613  

Amortization expense for the next five years and thereafter is as follows:
 
 
Periods Ended September 30,
 
Amount
 
2012
  $ 1,684,050  
2013
    1,116,867  
2014
    831,026  
2015
    531,876  
2016
    238,635  
Total
  $ 4,402,454  

The roll-forward of the beginning and ending balance of deferred dry dock fees consist of the following:

   
September 30, 2011
   
December 31, 2010
 
Beginning balance
  $ 3,835,613     $ 4,386,137  
Addition of deferrals
    1,896,795       1,069,075  
Less: Amortization expense
    (1,329,954 )     (1,619,599 )
Deferred dry dock fees, net
  $ 4,402,454     $ 3,835,613  

The Company’s vessels are required to be drydocked approximately every 60 months for major repairs and maintenance that cannot be performed while the vessels are operating. The Company defers the costs associated with the drydockings as they occur and amortizes these costs on a straight-line basis over the period between drydockings. Cost deferred as part of a vessel’s drydocking include actual costs incurred at the drydocking yard, cost of travel, lodging and subsistence of personnel sent to the drydocking site to supervise, and the cost of hiring a third party to oversee the drydocking. If the vessel is drydocked earlier than originally anticipated, any remaining deferred drydock costs that have not been amortized are expensed at the beginning of the next drydock. Amortization expense for drydocking for the nine months ended September 30, 2011 and 2010 was $1,329,954 and $1,246,270, respectively. All other costs incurred during drydocking are expensed as incurred.
 
 
F-18

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

6.
DUE FROM/TO RELATED PARTIES

Due from/to related parties consist of the following:

(I)   Due From Related Parties 
   
September 30,
2011
   
December 31,
2010
 
Winland Container Lines Ltd.
a)
  $ 700,588     $ 1,088,359  
Dalian Winland Shipping Co., Ltd
b)
    -       14,222  
Dalian Winland Group Co., Ltd
c)
    19,443       -  
Dalian Master Well Ship Management Co., Ltd
d)
    66,673       -  
Winland Shipping Japan Co., Ltd
e)
    35,923       -  
DWIS
g)
    64,067       -  
Total due from related parties
    $ 886,694     $ 1,102,581  

(II)   Due To Related Parties
   
September 30,
2011
   
December 31,
2010
 
Dalian Winland Shipping Co., Ltd
b)
  $ 5,122     $ -  
Dalian Winland Group Co., Ltd
c)
    -       2,194,746  
Dalian Master Well Ship Management Co., Ltd
d)
    -       28,824  
Winland Shipping Japan Co., Ltd
e)
    -       6,803  
Rich Forth Investment Limited
f)
    8,266       1,523,560  
DWIL
h)
    146,445       -  
DSON
i)
    18,587       -  
Total due to related parties
    $ 178,420     $ 3,753,933  

a)
Winland Container Lines Ltd. is controlled by the relatives of the Chairman and Chief Executive Officer of the Company. The Company provided shipping agency and freight forwarding services to Winland Container Lines Ltd. For the nine months ended September 30, 2011 and 2010, the Company recognized charter income for the vessel Winland Dalian of $0 and $153,507, respectively; the Company recognized service revenues of $1,434,360 and $1,410,518, respectively. For the nine months ended September 30, 2011 and 2010, the Company paid $19,837,788 and $21,651,111 of expenses to ports, and received $21,659,918 and $22,439,143 of payments from ports on behalf of Winland Container Lines Ltd., respectively. The outstanding balance at September 30, 2011 is interest-free, unsecured and was subsequently settled.

b)
Dalian Winland Shipping Co., Ltd (“DWSC”) is controlled by the Chairman and Chief Executive Officer of the Company. DWSC rented an office to the Company. The rental fees for the office of the Company were $38,501 and $0 for the nine months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010, on behalf of DWSC, the Company paid $1,990,107 and $13,500, and received $1,968,592 and $0, respectively. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term.

 
F-19

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

6.
DUE FROM/TO RELATED PARTIES (CONTINUED)

c)
Dalian Winland Group Co., Ltd (“DWIG”) is controlled by the Chairman and Chief Executive Officer of the Company.  The Company paid $6,474,287 and $9,033,868 on behalf of DWIG for the nine months ended September 30, 2011 and 2010, respectively. The Company collected $4,260,100 and $8,900,636 on behalf of DWIG for the nine months ended September 30, 2011 and 2010, respectively. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term.

d)
Dalian Master Well Ship Management Co., Ltd is controlled by the Chairman and Chief Executive Officer of the Company. It operates as the vessel management company for the Company. The vessel management fees for the nine months ended September 30, 2011 and 2010 were $170,400 and $153,900, respectively. The Company paid $383,297 and $0 on behalf of Dalian Master Well Ship Management Co., Ltd. for the nine months ended September 30, 2011 and 2010, respectively. The Company collected $117,400 and $65,260 on behalf of Dalian Master Well Ship Management Co., Ltd. for the nine months ended September 30, 2011 and 2010, respectively. The outstanding balance at September 30, 2011 is interest-free, unsecured, and has no fixed repayment term.

e)
Winland Shipping Japan Co., Ltd is controlled by the Chairman and Chief Executive Officer of the Company. The Company recognized relevant agency service fees of $0 and $44,599 for the nine months ended September 30, 2011 and 2010, respectively. The Company paid $46,926 and $81,792, and received $4,200 and $32,796 on behalf of Winland Shipping Japan Co., Ltd. for nine months ended September 30, 2011 and 2010, respectively. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term.

f)
Rich Forth Investment Limited is controlled by relatives of the Chairman and Chief Executive Officer of the Company. It operates as a vessel management company for the Company. The vessel management fee was $68,400 and $37,800 for the nine months ended September 30, 2011 and 2010, respectively. The Company paid $8,306,878 and $457,115, and collected $6,424,196 and $600,097 for the nine months ended September 30, 2011 and 2010, respectively. The Company recognized interest expense for long-term notes payable of $298,987 and $131,423 for the nine months ended September 30, 2011 and 2010, respectively. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term. Also see Note 8 for long-term notes payable to related parties.

g)
DWIS is controlled by the Chairman and Chief Executive Officer of the Company. On February 16, 2011, DWIS was disposed of by the Company. DWIS provided shipping agency services to the Company. During February 2011 to September 30, 2011, the Company recognized agency fees for agency services of $100,365, paid $1,505,973 and collected $1,281,434 on behalf of DWIS. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term. Also see Note 11.

h)
DWIL is controlled by the Chairman and Chief Executive Officer of the Company. On February 16, 2011, DWIL was disposed of by the Company. During February 2011 to September 30, 2011, the Company paid $4,025,195 and collected $351,531 on behalf of DWIL. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term. Also see Note 11.

i)
DSON is ultimately controlled by the Chairman and Chief Executive Officer of the Company. On February 16, 2011, DSON was disposed of by the Company. During February 2011 to September 30, 2011, the Company paid $19,950 and collected $19,953 on behalf of DSON. The outstanding balance at September 30, 2011 is interest-free, unsecured and has no fixed repayment term. Also see Note 11.
 
 
F-20

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

7.
LONG-TERM LOANS

Long-term loans consist of the following:
   
September 30,
2011
   
December 31,
2010
 
Loans from Dialease Maritime S.A.:
           
Due on August 1, 2011, monthly interest payment is at 1-month USD LIBOR plus 1.75% per annum (1.99% at September 30, 2011), secured by the vessel Winland Dalian (also see Note 4), assignment of insurance of the vessel, and guaranteed by the Chairman of the Company. Principal is repaid every month in 72 equal installments from September 2005.
  $ -     $ 1,407,792  
                 
Due on July 21, 2012, monthly interest payment is at 1-month USD LIBOR plus 1.75% per annum (1.99% at September 30, 2011), secured by the vessel Win Honey (also see Note 4), assignment of insurance of the vessel, and guaranteed by the Chairman of the Company. Principal is repaid every month in 72 equal installments from August 2006.
    583,292       1,108,298  
                 
Term of the loan is 7 years with interest at the 1-month JPY LIBOR plus 2.30% per annum (2.44% at September 30, 2011), monthly payment of principal is fixed at $109,773, initial payment on October 24, 2009, secured by the vessel Baoshun (also see Note 4).
    11,855,448       12,843,405  
                 
Loan facility of $37,000,000 from China Merchants Bank:
               
Drawdown from the loan facilities due on September 21, 2012, with interest rate at the 3-month USD LIBOR plus 1.5% per annum (1.747% at September 30, 2011), plus the annual fee of 2% of average daily outstanding balance. The principal payment is fixed at $497,500 quarterly, starting September 21, 2011, with final payment of $995,000 on May 5, 2021. The interest is accrued from June 29, 2010 and paid quarterly starting December 21, 2010 till the principal is paid. The loan is secured by the vessel Rui Lee, and guaranteed by the Chairman and the CEO of the Company (also see Note 4).
    19,402,500       14,200,000  
                 
Drawdown from the loan facilities due on June 21, 2014, with interest rate at the 3-month USD LIBOR plus 1.5% per annum (1.747% at September 30, 2011), plus the annual fee of 2% of average outstanding balance . The principal payment is fixed at $427,500 quarterly, starting March 21, 2011, with final payment of $427,500 due June 21, 2014. The interest is accrued from July 9, 2010 and paid quarterly starting December 21, 2020 till the principal payoff. The loan is secured by the vessel Fon Tai, and guaranteed by the Chairman and the CEO of the Company (also see Note 4).
    15,817,500       17,100,000  
                 
Total long-term loans
    47,658,740       46,659,495  
                 
Less: Current portion
    5,600,568       6,627,576  
                 
Long-term portion
  $ 42,058,172     $ 40,031,919  

Interest expense for the nine months ended September 30, 2011 and 2010 was $1,139,320 and $325,057, respectively.
 
 
F-21

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

7.
LONG-TERM LOANS (CONTINUED)

The interest on the loan facility which was used to build the vessels Fon Tai and Rui Lee was capitalized as part of vessels upon the vessel delivery. For the nine months ended September 30, 2011, the interest capitalized to vessels was $99,692.
  
The repayment schedule for the principal amount of long-term loans is as follows:

Periods Ended September 30,
 
Amount
 
2012
  $ 5,600,568  
2013
    5,017,276  
2014
    5,017,276  
2015
    5,017,276  
2016
    5,017,276  
Thereafter
    21,989,068  
Total
  $ 47,658,740  
 
 
F-22

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

8.
LONG-TERM NOTES PAYABLE

Long-term notes payable consists of the following:
     
September 30, 2011
   
December 31, 2010
 
Notes payable to unrelated party:
             
Sea Carrier Shipping Co., Ltd., net of discount of $953,658 and $1,407,170 at September 30, 2011 and December 31, 2010, respectively, due September 25, 2014, fixed repayment of $2,897 per day, monthly payment due one month in advance.
a)
  $ 2,204,071     $ 2,541,441  
                   
Sea Carrier Shipping Co., Ltd., due March 31, 2016, net of discount of $2,463,366 and $0 at September 30, 2011 and December 31, 2010. Starting from April 1, 2011, fixed repayment of $3,717 per day, due at month end.
b)
    3,641,278       3,850,000  
                   
Sea Carrier Shipping Co., Ltd., due March 31, 2016, net of discount of $2,463,382 and $0 at September 30, 2011 and December 31, 2010. Starting from April 1, 2011, fixed repayment of $3,718 per day, due at month end.
c)
    3,641,278       3,850,000  
                   
Subtotal
      9,486,627       10,241,441  
                   
Notes payable to related party:
                 
Rich Forth Investment Limited, due March 31, 2016, monthly interest at an interest rate of 5.841% on unpaid principal balance per annum paid from June 1, 2010 to March 31, 2016. Beginning June 30, 2011, interest payment and fixed $215,000 repayment of principal paid quarterly.
f)
    4,085,000       4,300,000  
                   
Rich Forth Investment Limited, due June 30, 2016, monthly interest at an interest rate of 5.841% on unpaid principal balance per annum paid from June 1, 2010 to June 30, 2016. Beginning October 1, 2011, interest payment and fixed $122,500 repayment of principal paid quarterly.
g)
    2,450,000       2,450,000  
                   
Subtotal
      6,535,000       6,750,000  
                   
Total long-term notes payable
      16,021,627       16,991,441  
                   
Less: Current portion
      3,253,978       2,906,832  
                   
Long-term portion
    $ 12,767,649     $ 14,084,609  

The long-term note denoted a) was used to purchase the vessel Baoshun (see Note 4). The amortization of discount on this long-term note for the nine months ended September 30, 2011 and 2010 was $453,511 and $528,502, respectively.

 
F-23

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

8.
LONG-TERM NOTES PAYABLE (CONTINUED)

The long-term notes denoted b) and f) were used to build the vessel Fon Tai which was delivered on January 10, 2011. The interest on these long-term notes before the delivery was capitalized and expensed afterwards. For the nine months ended September 30, 2011, the capitalized interest on these long-term notes was $19,874, and expensed interest on these long-term notes was $756,564.

The long-term notes denoted c) and g) were used to build the vessel Rui Lee which was delivered on May 5, 2011. The interest on these long-term notes before the delivery was capitalized and expensed afterwards. For the nine months ended September 30, 2011, the capitalized interest on these long-term notes was $253,698, and expensed interest on these long-term notes was $441,546.

The repayment schedule for long-term notes payable is as follows:

Periods Ended September 30,
 
Amount
 
2012
  $ 3,253,978  
2013
    3,355,041  
2014
    3,902,767  
2015
    3,452,246  
2016
    2,057,595  
Total
  $ 16,021,627  

9.
PAYABLE TO SHIP BUILDER

Upon the vessel Fon Tai’s delivery on January 10, 2011, the balance of $2,850,000 payable to ship builder will be repaid annually in three equal installments of $950,000, starting from January 9, 2012.

Upon the vessel Rui Lee’s delivery on May 5, 2011, the balance of $2,850,000 payable to ship builder will be repaid annually in three equal installments of $950,000, starting from May 4, 2012.

The Company paid $79,376 to the shipbuilder in advance of the due date of the current portion of the payable to ship builder.

10.
COMMITMENTS

Lease Commitments

The Company leases office space under operating leases. Lease expense was $56,000 and $63,983 for the nine months ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, future minimum payments required under non-cancelable leases are:

Periods  Ended September 30,
 
Amount
 
2012
  $ 33,676  
2013
    26,083  
Total
  $ 59,759  
  
 
F-24

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

11.
DISCONTINUED OPERATIONS

(a)
Disposition of VIEs

On February 16, 2011, the Company ultimately and voluntarily entered into a Termination of Services Agreement with the VIEs (DWIS, DWIL and DSON) and the stockholders of the VIEs. The stockholders of the VIEs paid the Company a termination fee of RMB1,000,000 ($151,319) as consideration. The Company considers the operations of  these VIEs as discontinued operations.

The results of operations of VIEs were presented separately as discontinued operations in the condensed consolidated statements of income and comprehensive income for the nine months ended September 30, 2011 and 2010 with prior period restated to conform to the current presentation as follows:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Revenue
  $ 589,713     $ 4,100,380  
Costs and expenses
    (702,744 )     (4,496,846 )
Income tax expense
    (9,382 )     (25,531 )
Loss from discontinued operations
  $ (122,413 )   $ (421,997 )

The following represents the assets and liabilities of discontinued operations at the date of the disposition:

   
February 16, 2011
 
Assets:
     
Cash and cash equivalents
  $ 3,266,836  
Accounts receivable
    2,231,363  
Other current assets
    4,376,091  
         
Vessel, net
    1,758,770  
Other long-term assets
    126,101  
         
Total assets
    11,759,161  
         
Liabilities:
       
Accounts payable
    811,631  
Short-term bank loan
    1,513,936  
Other current liabilities
    3,717,133  
         
Long-term notes payable
    2,961,739  
         
Total liabilities
    9,004,439  
         
Total net assets disposed
    2,754,722  
Consideration
    151,319  
Loss on disposition
  $ 2,603,403  
  
 
F-25

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

11.
DISCONTINUED OPERATIONS (CONTINUED)

 (b)
Disposition of Vessel Win Glory

On June 10, 2011, the Company signed a Memorandum of Agreement (“MOA”) with Pacific Pty., Ltd., Belize (“Buyer”) to sell the vessel Win Glory for $1,700,000. The vessel Win Glory was delivered to the buyer on August 6, 2011. In accordance with ASC 205-20, the results of operations of Win Glory were presented separately as discontinued operations in the condensed consolidated statements of income and comprehensive income for the nine months ended September 30, 2011 and 2010 with the prior period restated to conform to the current presentation as follows:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Revenue
  $ 1,215,744     $ 1,591,950  
Costs and expenses
    (1,289,606 )     (1,464,549 )
(Loss) income from discontinued operation
  $ (73,862 )   $ 127,401  

The following represents the assets and liabilities of the discontinued operation at the date of the disposition:

   
August 6, 2011
 
Vessel, net
  $ 250,369  
Other long-term assets
    210,730  
Total assets
    461,099  
         
Net assets disposed
    461,099  
Net proceeds from disposition
    1,639,750  
Gain from disposition of discontinued operation
  $ 1,178,651  

(c)
Disposition of Vessel Win Star

On July 29, 2011, the Company signed a Memorandum of Agreement (“MOA”) with Greatwall Shipping Limited (“Buyer”) to sell the vessel Win Star for $3,278,451. The vessel Win Star was delivered to the buyer on August 16, 2011. In accordance with ASC 205-20, the results of operations of Win Star were presented separately as discontinued operations in the condensed consolidated statement of income and comprehensive income for the nine months ended September 30, 2011 and 2010 with the prior period restated to conform to the current presentation as follows:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Revenue
  $ 1,939,262     $ 3,538,436  
Costs and expenses
    (2,417,844 )     (3,228,593 )
(Loss) income from discontinued operation
  $ (478,582 )   $ 309,843  
  
 
F-26

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

11.
DISCONTINUED OPERATIONS (CONTINUED)

(c)
Disposition of Vessel Win Star

The following represents the assets and liabilities of the discontinued operation at the date of the disposition:

   
August 16, 2011
 
Assets:
     
Other current assets
  $ 92,933  
         
Vessel, net
    333,660  
Other long-term assets
    2,120,425  
Total assets
    2,547,018  
         
Net assets disposed
    2,547,018  
Net proceeds from disposition
    3,193,011  
Gain from disposition of discontinued operation
  $ 645,993  

 (d)
Disposition of Vessel Bodar

On September 15, 2011, the Company signed a Memorandum of Agreement (“MOA”) with Maritime Delivery Inc. (“Buyer”) to sell the vessel Bodar for $3,550,823. The vessel Bodar was delivered to the buyer on September 30, 2011. In accordance with ASC 205-20, the results of operations of Bodar were presented separately as discontinued operations in the condensed consolidated statement of income and comprehensive income for the nine months ended September 30, 2011 and 2010 with the prior period restated to conform to the current presentation as follows:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Revenue
  $ 2,264,189     $ 3,558,157  
Costs and expenses
    (1,974,135 )     (2,213,507 )
Income from discontinued operation
  $ 290,054     $ 1,344,650  

The following represents the assets and liabilities of the discontinued operation at the date of the disposition:

   
September 30, 2011
 
Assets:
     
Other current assets
  $ 84,888  
         
Vessel, net
    498,544  
Other long-term assets
    575,750  
Total assets
    1,159,182  
         
Net assets disposed
    1,159,182  
Net proceeds from disposition
    3,550,823  
Gain from disposition of discontinued operation
  $ 2,391,641  


 
F-27

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

11.
DISCONTINUED OPERATIONS (CONTINUED)

(e)
Proforma

The following is the unaudited proforma net income and basic net income per share of the Company for the nine months ended September 30, 2011 and 2010 assuming all discontinued operations were completed on January 1, 2011 and 2010, respectively:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
 Net income
  $ 699,715     $ 4,845,397  
Basic and diluted net income per share
  $ 0.00     $ 0.02  

12.
INCOME TAX

Winland Shipping Co., Limited, Treasure Way Shipping Limited, Kinki International Industrial Limited, Bestline Shipping Limited, Lancrusier Development Co., Limited, Winland International Shipping Co., Limited, Fon Tai Shipping Co., Limited and Won Lee Shipping Co., Limited are incorporated and registered in Hong Kong. All the income derived from these companies is exempt from income tax under the local tax law; there is no income tax expense for the nine months ended September 30, 2011 and 2010.

Win Star Shipping Co., Limited and Bodar Shipping Co., Limited are incorporated and registered in S.V.G. Win Eagle Shipping Co., Limited, Win Ever Shipping Co., Limited, and Win Bright Shipping Co., Limited are incorporated and registered in Valletta, Malta. These five companies obtained tax exemptions from the local governments, so they did not have any tax expense for the nine months ended September 30, 2011 and 2010. Winland Dalian Shipping S.A. and Win Glory S.A. are incorporated in Panama and are registered in HongKong. Win Grace Shipping Co., Limited, Win Hope Shipping Co., Limited, Win Moony Shipping Co., Limited are incorporated and registered in Valletta, Malta. Bodar Shipping S.A., Win Moony Shipping S.A., Bao Shun Shipping S.A., Win Bright Shipping S.A. and Win Ever Shipping S.A. are incorporated and registered in Panama. Kin Ki International Industrial Limited is incorporated and registered in BVI. Since these companies are exempt from income tax under the local tax law, they did not have any income tax for the nine months ended September 30, 2011 and 2010.

 
F-28

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

13.
SEGMENT INFORMATION

The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer who, as of September 30, 2011, reviews the results of the operating segments when making decisions about allocating resources and assessing performance. The segments are: (1) Dry bulk shipping and (2) Chartering brokerage.

The Company's segment information for the nine months ended September 30, 2011 and as of December 31, 2010 is as follows:

Nine Months Ended
September 30, 2011
 
Dry Bulk
Shipping
   
Chartering
Brokerage
   
Corporate and
Eliminations
   
Consolidated
 
Sales to unaffiliated customers
  $ 25,139,482     $ 20,329,204     $ (32,197 )   $ 45,436,489  
Intersegment sales
    -       702,231       (702,231 )     -  
Net sales
    25,139,482       21,031,435       (734,428 )     45,436,489  
Costs
    18,711,303       17,865,395       (734,428 )     35,842,270  
Depreciation and amortization
    4,377,254       282       -       4,377,536  
Other expenses
    4,189,701       191,039       136,228       4,516,968  
Operations (loss) income
    (2,138,776 )     2,974,719       (136,228 )     699,715  
Gain (loss) from discontinued operations
    4,029,285       -       (2,801,206 )     1,228,079  
Net income (loss)
  $ 1,890,509     $ 2,974,719     $ (2,937,434 )   $ 1,927,794  
September 30, 2011
                               
Identifiable assets
  $ 96,119,965     $ 15,824,190     $ 157,035     $ 112,101,190  

Nine Months Ended
September 30, 2010
 
Dry Bulk
Shipping
   
Chartering
Brokerage
   
Corporate and
Eliminations
   
Consolidated
 
Sales to unaffiliated customers
  $ 25,938,310     $ 16,627,098     $ (88,167 )   $ 42,477,241  
Intersegment sales
    -       -       -       -  
Net sales
    25,938,310       16,627,098       (88,167 )     42,477,241  
Costs
    18,048,042       14,106,748       (88,167 )     32,066,623  
Depreciation and amortization
    3,194,966       -       -       3,194,966  
Other expenses
    1,927,687       268,884       173,684       2,370,255  
Operations income (loss)
    2,767,615       2,251,466       (173,684 )     4,845,397  
Gain from discontinued operations
    963,431       -       396,466       1,359,897  
Net income
  $ 3,731,046     $ 2,251,466     $ 222,782     $ 6,205,294  
December 31, 2010
                               
Identifiable assets
  $ 104,313,578     $ 11,538,814     $ 185,945     $ 116,038,337  
 
 
F-29

 

WINLAND OCEAN SHIPPING CORP.
(FORMERLY WINLAND ONLINE SHIPPING HOLDINGS CORPORATION)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(UNAUDITED)

13.
SEGMENT INFORMATION (CONTINUED)

Information for Company’s sales by geographical area for the nine months ended September 30, 2011 and 2010 is as follows:
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Sales to unaffiliated customers:
           
Japan, Korea and Russia
  $ 13,630,947     $ 8,495,448  
PRC (including Hong Kong)
    15,902,771       25,486,345  
Southern and Eastern Asia
    6,815,473       6,371,586  
Other
    9,087,298       2,123,862  
Total
  $ 45,436,489     $ 42,477,241  

14.
CONTINGENCIES

The Company signed a voyage charter contract with Sinoriches Global Ltd. on June 11, 2007. The Company canceled the contract on June 18, 2007. Sinoriches Global Ltd. filed an arbitration claim of $501,640 including interest for the dispute. As of September 30, 2011, the case is in the process of exchanging documents and evidence for arbitration. The Company does not believe the case will result in a significant unfavorable outcome.

In 2009, the Company recorded the claim in connection with an oil pollution accident that occurred in Korea in 2006 as other expenses. The case has not been settled as of September 30, 2011. The insurance underwriter will pay the settlement amount when the case is settled in the future.

 
F-30

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements
The following is management’s discussion and analysis of certain significant factors which have affected the financial position and operating results of Winland Ocean Shipping Corp., a Texas corporation (formerly known as Winland Online Shipping Holdings Corporation and hereinafter, “Winland” or “WLOL” and together with its subsidiaries, the “Company”) during the periods included in the accompanying condensed consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes”, “anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the U.S. Securities and Exchange Commission (the “SEC”) from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this report.
 
Current Operations of the Company (General Development of Business)

The following is disclosure regarding WLOL, WLOL’s wholly-owned subsidiary SkyAce Group Limited, a British Virgin Islands company (“SkyAce”) and SkyAce’s two wholly-owned subsidiaries: (a) Plentimillion Group Limited (“PGL”), a British Virgin Islands holding company, the principal business activities of which are (through its wholly-owned subsidiaries) ocean transportation and chartering brokerage and (b) Best Summit Enterprise Limited (“BSL” and together with PGL, the “SkyAce Group”), a British Virgin Islands holding company.

SkyAce

SkyAce is a holding company founded in the British Virgin Islands (“BVI”) on September 22, 2006 with no significant operations. SkyAce was formed solely for the purpose of acquiring PGL and BSL from Mr. Li Honglin and Ms. Xue Ying, each of whom had owned fifty percent (50%) of both PGL and BSL and each of whom now own fifty percent (50%) of SkyAce.

SkyAce has authorized capital of $50,000 consisting of 50,000 ordinary shares authorized, two of which are currently issued and outstanding and held by Trip Tech as a result of the Exchange. Li Honglin, a Director and the President of Winland, serves as a Director of SkyAce. Xue Ying, a Director, the Chief Executive Officer and the Secretary of Winland, also serves as a Director of SkyAce.

PGL

PGL is a holding company founded in the BVI on July 5, 2006. PGL was formed solely for the purpose of acquiring each of the following wholly-owned subsidiaries from Li Honglin and Xue Ying (both of whom previously owned fifty percent (50%) of each of the following entities), which such transfers occurred between January 1, 2008 and March 31, 2008:
 
 
(a)
Winland Shipping Co., Ltd. was organized under the laws of Hong Kong on August 11, 2000 (“Winland Shipping”);

 
(b)
Kinki International Industrial Limited was organized under the laws of Hong Kong on May 2, 2006 (“Kinki”);

 
(c)
Bestline Shipping Limited was organized under the laws of Hong Kong on January 27, 1994 (“Bestline”);
 
 
- 3 -

 
 
 
(d)
Lancrusier Development Co., Limited was organized under the laws of Hong Kong on July 11, 1995 (“Lancrusier”);

 
(e)
Win Star Shipping Co., Ltd. Was organized under the laws of St. Vincent and the Grenadines (“SVG”) on June 21, 2000 (“Win Star”);

 
(f)
Bodar Shipping Co., Ltd. was organized under the laws of SVG on January 7, 2004 (“Bodar”);

 
(g)
Winland Dalian Shipping S.A. was organized under the laws of Panama on June 8, 2005 (“Winland Dalian”); and

 
(h)
Treasure Way Shipping Limited was organized under the laws of Hong Kong on May 27, 2002 (“Treasure Way”).

PGL acquired the following additional entities in 2008:
 
 
(i)
Win Eagle Shipping Co., Ltd. was organized under the laws of Malta on July 29, 2002 (“Win Eagle”);

 
(j)
Win Bright Shipping Co., Ltd. was organized under the laws of Malta on February 8, 2002 (“Win Bright”);

 
(k)
Win Ever Shipping Co., Ltd. was organized under the laws of Malta on February 8, 2002 (“Win Ever”);

 
(l)
Win Glory S.A. was organized under the laws of Panama on April 2, 2003 (“Win Glory”); and

 
(m)
Win Moony Shipping Co., Ltd. was organized under the laws of Malta on September 26, 2003 (“Win Moony”).

PGL acquired the following entities in 2009:

 
(n)
Win Grace Shipping Co., Ltd. Was organized under the laws of Malta on September 4, 2003 (“Win Grace”); and

 
(o)
Win Hope Shipping Co., Ltd. was organized under the laws of Malta on June 14, 2001 (“Win Hope”).

PGL established the following entities in 2009:

 
(p)
Bodar Shipping S.A. was incorporated and registered in Panama on February 12, 2009 (“Bodar Shipping”);

 
(q)
Win Moony Shipping S.A. was incorporated and registered in Panama on April 30, 2009 (“Win Shipping”);

 
(r)
Bao Shun Shipping S.A. was incorporated and registered in Panama on June 10, 2009 (“Bao Shun”); and

 
(s)
Winland International Shipping Co., Ltd. was incorporated and registered in Hong Kong on August 27, 2009 ("Winland International").

PGL established the following entities in 2010:

 
(t)
Fon Tai Shipping Co., Limited was incorporated and registered in Hong Kong on March 1, 2010 (“Fon Tai”);
 
 
- 4 -

 
 
 
(u)
Won Lee Shipping Co., Limited was incorporated and registered in Hong Kong on March 1, 2010 (“Won Lee”);

 
(v)
Kin Ki International Industrial Limited was incorporated and registered in BVI on January 4, 2010 (“Kin Ki International”);

 
(w)
Win Bright Shipping S.A. was incorporated and registered in Panama on November 15, 2010 (“Win Bright Shipping”); and

 
(x)
Win Ever Shipping S.A. was incorporated and registered in Panama on December 3, 2010 (“Win Ever Shipping”).
 
PGL and each of its wholly-owned subsidiaries set forth above (collectively, the “PGL Group”) are engaged in ocean transportation of dry bulk cargo worldwide through the ownership and operation of dry bulk vessels. The principal business activities of the PGL Group are ocean transportation and chartering brokerage. The operations of each of the Company’s vessels are managed by Winland Shipping, while the chartering brokerage businesses are managed by Kinki and Bestline. Lancrusier’s primary business is management and accounting.  Winland Dalian, Treasure Way, Win Eagle, Win Bright, Win Ever, Win Grace, Win Hope, Win Shipping, Bao Shun, Fon Tai and Won Lee collectively own 11 of the Company’s vessels.  Win Glory, Win Star, Bodar and Win Moony are currently in the process of winding down and have no operations.  Winland International's primary business is to develop and expand the global shipping market.  Kin Ki International, Win Bright Shipping and Win Ever Shipping had no operations in 2011. These three companies will take over the operations of Kinki, Win Bright and Win Ever once the corresponding governments with which such vessels are registered approve the applications to cancel these companies. Win Glory owns one vessel which was sold to an unrelated third party for a purchase price of $1,700,000 on August 6, 2011. Win Star owns one vessel which was sold to an unrelated third party for a purchase price of $3,278,452 on August 16, 2011. Bodar Shipping owns one vessel which was sold to an unrelated third party for a purchase price of $3,550,823 on September 30, 2011.

BSL

SkyAce’s wholly-owned subsidiary BSL was incorporated in the British Virgin Islands on November 30, 2006. BSL sole business is to act as a holding company for its wholly-owned subsidiary, Wallis Development Limited, a company organized under the laws of Hong Kong on December 9, 2006 (“Wallis”). The sole business of Wallis is to act as a holding company for its wholly-owned subsidiary, Beijing Huate Xingye Keji Co., Ltd., a company organized under the laws of the PRC on March 18, 2008 (“Beijing Huate”). Beijing Huate was formed with the purpose of producing IT software, developing new products and adopting advanced and applicable technology and scientific management methods to create economic benefits for its stockholders.  As of December 31, 2010, Beijing Huate controlled DWIS, DWIL and Shipping Online (each of which are defined below), however on February 16, 2011, Beijing Huate terminated its control of such entities as is more fully described below.

Disposition of Online Services Business

On March 31, 2008, Wallis and Beijing Huate entered into a series of Exclusive Technical Consulting and Service Agreements, (collectively, together with all related transaction documents executed in connection therewith, the “Service Agreements”) whereby Beijing Huate controlled (a) Dalian Winland International Shipping Agency Co., Ltd. (“DWIS”), a PRC company whose principal activities include shipping agency services, booking cargo space, storage of goods and declaration of customs, (b) Dalian Winland International Logistic Co., Ltd. (“DWIL”), a PRC company whose principal activities included freight forwarding services logistics shipping agency services and which owns one shipping vessel and (c) Dalian Shipping Online Network Co., Ltd. (“Shipping Online”) a PRC company whose principal activities are providing online services to its members.

In compliance with the PRC’s foreign investment restrictions on internet information services and other laws and regulations, the Company had conducted all of its internet information and media services and advertising in China (collectively, the “Online Services”) through DWIS, DWIL and Shipping Online, each a domestic variable interest entity (each, a “VIE” and collectively, the “VIEs”) and each of which are ultimately owned by Li Honglin, the President and Chairman of the Board of WLOL (50% of each VIE) and Xue Ying, the Chief Executive Officer, Secretary and director of WLOL (50% of each VIE).  Pursuant to the Service Agreements, Beijing Huate provided on-going technical services and other services to the VIEs in exchange for substantially all of the net income of the VIEs. In addition, the stockholders of the VIEs had pledged all of their shares in the VIEs to Beijing Huate, representing 100% of the total issued and outstanding capital stock of the VIEs, as collateral for non-payment under the Service Agreements or for fees on technical and other services due thereunder. Beijing Huate also had the power to appoint all directors and senior management personnel of the VIEs.
 
 
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On February 16, 2011, Wallis and Beijing Huate voluntarily entered into a Termination of Services Agreement with the VIEs and the stockholders of the VIEs (the “Termination Agreement”), effective immediately, whereby all of the Service Agreements have terminated and are of no further force or effect.  The disinterested Board of Directors of WLOL resolved to terminate the Service Agreements with the belief that such disposition will help the Company focus on its core business of dry bulk shipping and charter brokerage services.  No termination penalties were incurred by the Company in connection with the Termination Agreement.  Pursuant to the terms of the Termination Agreement, the Company received a fee in the amount of RMB1,000,000 (US$151,319).

Summary of Current Business of the Company

The Company's core business is international bulk cargo transportation.  We believe that our Company is a well-known shipping enterprise based in China.  We currently have an ocean shipping fleet of 11 vessels, with a self-owned carrying capacity of over 240,000 tons.  Through monthly voyage charters and time charters, the Company can provide carrying capacity of about 1,000,000 tons with shipping lines to major ports around the world.
 
The Company continued to grow and reached the highest operating revenue of $84.2 million and net income of $19.1 million in 2008. With the global economic crisis and shipping market downturn since late 2008, our operating revenues in 2009 dropped to $50.2 million with a net loss of $7.0 million. Our operating revenues and net income improved in 2010 with an increase to $74.3 million and $3.1 million, respectively. For the nine months ended September 30, 2011, our operating revenues and net income were $45.4 million and $1.9 million, respectively.
 
The Company intends to steadily expand its capacity and enlarge the size of its ocean transport fleet by constructing new vessels and by acquiring additional vessels or businesses at lower prices in light of the current slump in the shipping market. The Company does not have any written purchase contracts as of the date of this filing.

On June 3, 2009, Winland Shipping and Bao Shun Shipping S.A. entered into a Memorandum of Agreement (“MOA”) with Mario Shipping Corporation (“MSC”) for the purchase by the Company from MSC of a 2003 built handysize vessel (20,212 gross tonnage, 10,948 net tonnage) known as “Bao Shun” for a price of $20,700,000.  On June 4, 2009, the MOA was amended to nominate Bao Shun as the actual buyer that would remain fully responsible for performing under the MOA, and on July 14, 2009 the MOA was further amended to change the expected time of delivery to the period of July 14, 2009 to October 10, 2009 and to modify certain payment and interest terms.  On August 14, 2009, the Company paid 10% of the purchase price for the vessel (approximately $2,070,000) in cash.

On September 25, 2009, the parties to the MOA closed on the purchase of the vessel whereby the Company paid the balance on the purchase price of $18,630,000 as well as acquisition cost of $181,125.  The Company funded $14,490,000 through a long-term loan with Mitsubishi UFJ Lease & Finance Co., Ltd., which is secured by the vessel “Bao Shun”, and funded $3,000,000 via a long-term note. The Company paid the remaining balance of $1,321,125 in cash.  The loan is to be repaid in 84 monthly payments with an interest rate at the Japanese LIBOR plus 2.3%.

On March 26, 2010, the Company obtained a loan facility of $37 million from China Merchants Bank Co., Ltd. to finance the construction of two new vessels “Fon Tai” and “Rui Lee”. As of September 30, 2011, we drew down the full $37 million from our loan facility, and executed four new notes payable totaling $14,036,500 million in the aggregate, for purposes of commencing the building of such vessels.

On May 20, 2010, Fon Tai entered into a novation agreement, which was subsequently amended on May 21, 2010, whereby Fon Tai assumed all of the rights and obligations of Rich Forth Investments Limited ("Rich"), a related party which is controlled by relatives of the Chairman and Chief Executive Officer (“CEO”) of the Company, under a shipbuilding contract with JiangSu Hantong Ship Heavy Industry Co., Ltd. ("JiangSu") previously executed on December 6, 2006 for the construction of one 57,000dwt bulk carrier vessel (Fon Tai). The contract amount of $29,950,000 included the ship building contract price of $28,500,000 payable to JiangSu and a contract transfer fee of $1,450,000 payable to Rich for the reimbursement of costs incurred in connection with the construction. Vessel Fon Tai was delivered and placed into service on January 10, 2011.
 
 
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Also, on May 20, 2010, Won Lee entered into a novation agreement, which was subsequently amended on May 21, 2010, whereby Won Lee assumed all of the rights and obligations of Rich under a shipbuilding contract with JiangSu for the construction of one 57,000dwt bulk carrier vessel (Rui Lee). The contract amount of $29,950,000 included the ship building contract price of $28,500,000 payable to JiangSu and a contract transfer fee of $1,450,000 payable to Rich for the reimbursement of costs incurred in connection with the construction.  Rui Lee was delivered and placed into service on May 5, 2011.

Effective March 22, 2011, the Company changed its name from “Winland Online Shipping Holdings Corporation” to “Winland Ocean Shipping Corp.” to more accurately reflect its current business in light of the disposition described above and increased its authorized common stock from 200,000,000 to 400,000,000 shares.  Effective March 25, 2011 (and paid on March 28, 2011), the Company effected a 1.5 for 1 forward stock split of its common stock, increasing its issued and outstanding shares from 130,000,000 to 195,000,000 shares.

On June 10, 2011, the Company executed a memorandum of agreement with an unrelated third party to sell a vessel owned by Win Glory for $1,700,000.  The Company closed the sale of such vessel on August 6, 2011.

On July 29, 2011, the Company executed a contract with an unrelated third party to sell a vessel owned by Win Star for $3,278,452.  The Company closed the sale of such vessel on August 16, 2011.

On September 15, 2011, the Company executed a Memorandum of Agreement with an unrelated third party to sell a vessel owned by Bodar Shipping for $3,550,823. The Company closed the sale of such vessel on September 30, 2011.

Critical Accounting Policies, Estimates and Assumptions

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our 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.
 
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

This section should be read together with the Summary of Significant Accounting Policies included as Notes to the Condensed Consolidated Financial Statements included in the report.

Revenue Recognition

Revenue is recognized based on the following four criteria:
 
 
(I)
The amount of revenue can be measured reliably;
 
 
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(II)
It is probable that the economic benefits will flow to the Company;

 
(III)
The stage of completion at the balance sheet date can be measured reliably;

 
(IV) 
The costs incurred

For dry bulk shipping service, the allocation of revenue between reporting periods is based on relative transit time in each reporting period with expenses recognized as incurred.

For chartering brokerage services, sales are recognized when the ship leaves port.
 
Estimates Affecting Accounts Receivable and Impairment of Long-Lived Assets

The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect our reporting of assets and liabilities. These estimates are particularly significant where they affect the reported net realizable value of the Company’s accounts receivable and impairment of long-lived assets.

As of September 30, 2011, the Company provided no reserve against accounts receivable. Management’s estimate of no reserve on accounts receivable at September 30, 2011 was based on the aged nature of these accounts receivable. In making its judgment, management assessed its customers’ ability to continue to pay their outstanding invoices on a timely basis, and whether their financial position might deteriorate significantly in the future, which would result in their inability to pay their debt to the Company.

Results of Operations

Results of Operations for the Nine Months Ended September 30, 2011 Compared With the Nine Months Ended September 30, 2010 (in U.S. dollars, except otherwise as indicated)

 
 
For The Nine Months Ended September 30,
 
 
 
 
 
 
2011
 
 
2010
 
 
Change
 
 
 
Amount
 
 
% of
Revenues
 
 
Amount
 
 
% of
Revenues
 
 
In
Amount
 
 
In %
 
Revenues
 
 
45,436,489
 
 
 
100.0
%
 
 
42,477,241
 
 
 
100.0
%
 
 
2,959,248
     
7.0
%
Vessel operating costs
 
 
35,842,270
 
 
 
78.9
%
 
 
32,066,623
 
 
 
75.5
%
 
 
3,775,647
     
11.8
%
Depreciation and amortization
 
 
4,377,536
 
 
 
9.6
%