Cang Bao Tian Xia International Art Trade Center, Inc. - Quarter Report: 2009 December (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____

Commission file number: 000-31091

Equicap, Inc.

(Exact name of small business issuer as specified in its charter)

	Nevada		33-0652593
	(State or other jurisdiction of		(I.R.S. employer
	incorporation or organization)		identification number)

	224 Tianmushan Road,
	Zhongrong Chengshi Huayuan 5-1-602,
	Zhangzhou, P.R. China		310007
	(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number: (904) 418-9133

Not Applicable

(Former name, former address and former

fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 27,613,019 shares of common stock, par value $.001 per share, outstanding as of February 10, 2010.

EQUICAP, INC.

- INDEX -

		Page
PART I – FINANCIAL INFORMATION:

Item 1.	Financial Statements	4

	Unaudited Consolidated Balance Sheet as of December 31, 2009 and June 30, 2009	4

	Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended December 31, 2009 and 2008	5

	Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4	Controls and Procedures	18

PART II – OTHER INFORMATION:

Item 6.	Exhibits	19

Signatures		20

FORWARD-LOOKING STATEMENTS

Statements made in this Form 10-Q (the “Quarterly Report”) that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified by the use of terms such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”, “approximate”, or “continue”, or the negative thereof. Equicap, Inc. (the “Company”) intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include our current dependence on a limited number of products and customers, the focus of the business on the gear and gearbox (transmission) markets in the Peoples Republic of China, the need to develop new products and create demand for them, the effect of the global recession and availability of credit, pricing pressures on our products and margins, product quality, customer satisfaction and the ability to sustain and grow sales and expand the customer base, warranty obligations and claims, operating a business primarily in the Peoples Republic of China, currency controls and exchange rate exposure, and the other risk factors discussed in our reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

EQUICAP, INC.

Consolidated Balance Sheets

	December 31,			June 30,
	2009			2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	819,999		$	3,990,767
Restricted cash		143,033			315,151
Accounts receivable, net of allowance for doubtful accounts of $9,347
and $7,732 at December 31, 2009 and June 30, 2009, respectively		1,627,674			1,540,402
Inventory		2,168,114			1,568,445
Notes receivable		47,500			57,500
Trade notes receivable		378,110			391,155
Other receivables, net		555,055			76,491
Advance payments		5,251,501			2,988,235
Prepaid expenses		35,178			38,775

Total current assets		11,026,164			10,966,921

Property and equipment, net		2,825,632			2,662,924

Goodwill		3,411,913			3,407,262

Other assets:
Intangible assets, net		986			1,522
Deferred compensation		9,211			63,606
Deferred expenses		47			447
Total other assets		10,244			65,575

Total assets	$	17,273,953		$	17,102,682

Liabilities
Current liabilities:
Short-term bank loans	$	1,422,990		$	2,197,500
Accounts payable and accrued expenses		2,205,539			1,562,217
Trade notes payable		143,033			315,151
Taxes payable		6,222			54,292
Other current liabilities		729,279			635,408
Total current liabilities		4,507,063			4,764,568

Total liabilities		4,507,063			4,764,568

Equity
Stockholders’ equity:
Common stock, $.001 par value, 500,000,000 shares authorized,
27,613,019 shares issued and outstanding at December 31, 2009
and June 30, 2009, respectively		27,613			27,613
Stock subscription receivable		(33,120	)		(33,120	)
Additional paid-in capital		16,484,097			16,484,097
Statutory reserves		124,460			124,460
Retained earnings (deficit)		(8,422,278	)		(8,440,255	)
Accumulated other comprehensive income		1,432,392			1,415,474
Total stockholders’ equity		9,613,164			9,578,269

Noncontrolling interest		3,153,726			2,759,845

Total equity		12,766,890			12,338,114

Total liabilities and equity	$	17,273,953		$	17,102,682

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

EQUICAP, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2009			2008			2009			2008

Revenue	$	1,889,823		$	820,527		$	3,838,229		$	2,007,097

Cost of sales		1,483,353			693,897			3,026,527			1,545,984

Gross profit		406,470			126,630			811,702			461,113

Operating expenses
Selling, general and administrative		287,950			513,528			632,190			982,216

Income (loss) from operations		118,520			(386,898	)		179,512			(521,103	)

Other income (expenses):
Interest income (expenses), net		(15,502	)		2,815			(34,269	)		5,528
Other income, net		36,069			17,720			40,309			49,159
Total other income		20,567			20,535			6,040			54,687

Income (loss) before provision for income taxes		139,087			(366,363	)		185,552			(466,416	)

Provision for income taxes		31,588			383			67,093			1,171

Net income (loss) before noncontrolling interest		107,499			(366,746	)		118,459			(467,587	)

Less: Noncontrolling interest		61,167			(45	)		100,482			29,652

Net income (loss)		46,332			(366,701	)		17,977			(497,239	)

Other comprehensive income
Foreign currency translation adjustment		56			34,273			16,918			59,929

Comprehensive income (loss)	$	46,388		$	(332,428	)	$	34,895		$	(437,310	)

Loss per common share:
Basic	$	0.00		$	(0.01	)	$	0.00		$	(0.02	)
Diluted	$	0.00		$	(0.01	)	$	0.00		$	(0.02	)

Weighted average number of common shares
outstanding:
Basic		27,613,019			28,169,013			27,613,019			28,169,013
Diluted		27,613,019			28,169,013			27,613,019			28,169,013

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

EQUICAP, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months Ended
	December 31,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	17,977		$	(497,239	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Noncontrolling interest		100,482			29,652
Depreciation and amortization		148,156			88,988
Loss on disposal of fixed assets		4,846			-
Provision for bad debts		1,604			86,071
Share-based payments		54,395			54,394
Non-cash payments of rent		-			2,500
Changes in assets and liabilities:
Accounts receivable		(86,738	)		25,095
Inventory		(597,283	)		(143,498	)
Trade notes receivable		13,573			16,939
Other receivables		(478,264	)		86,591
Advance payments		(2,258,262	)		3,351,709
Prepaid expenses		3,601			148,175
Deferred expenses		400			(176	)
Accounts payable and accrued expenses		641,186			(93,054	)
Trade notes payable		(172,478	)		-
Taxes payable		(48,124	)		502
Other current liabilities		93,208			47,289
Total adjustments		(2,579,698	)		3,701,177

Net cash (used in) provided by operating activities		(2,561,721	)		3,203,938

Cash flows from investing activities:
Additions to property and equipment		(311,472	)		(270,032	)
Proceeds from notes receivable		10,000			-

Net cash used in investing activities		(301,472	)		(270,032	)

Cash flows from financing activities:
Repayment for short-term bank loans		(777,192	)		-
Contribution from minority shareholders		293,280			-

Net cash used in financing activities		(483,912	)		-

Effect of foreign currency translation on cash		4,219			8,371

Net (decrease) increase in cash and cash equivalents and restricted cash		(3,342,886	)		2,942,277

Cash and cash equivalents and restricted cash – beginning		4,305,918			956,973

Cash and cash equivalents and restricted cash – ending	$	963,032		$	3,899,250

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

EQUICAP, INC.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Unaudited)

Note 1 – Organization and Nature of Business

Equicap, Inc. (“Equicap” or “the Company”), a Nevada corporation, is a manufacturer and distributor of gears and gearboxes (transmissions), which are marketed and sold to customers in China.

On July 6, 2007, the Board of Directors of Zhejiang Zhongchai Machinery Co., Ltd. (“Zhongchai”), the China based and 75% owned subsidiary of the Company, approved and finalized a Share Purchase Agreement (“Share Purchase Agreement”) with Xinchang Keyi Machinery Co., Ltd., (“Keyi”) a corporation incorporated in the People’s Republic of China. Pursuant to the Share Purchase Agreement, Zhongchai purchased all the outstanding equity of Zhejiang Shengte Transmission Co., Ltd. (“Shengte”) from Keyi, the sole owner of Shengte for approximately $3.7 million.

On March 7, 2007, the Company and Usunco Automotive, Ltd. (“Usunco”), a British Virgin Islands company, entered into a Share Exchange Agreement (“Exchange Agreement”) which was consummated on March 9, 2007. Under the terms of the Exchange Agreement, the Company acquired all of the outstanding equity securities of Usunco in exchange for 18,323,944 shares of the Company’s common stock.

For accounting purposes, because the Company had been a public shell company prior to the share exchange, the share exchange was treated as a recapitalization of the Company. As such, the historical financial information prior to the share exchange is that of Usunco and its subsidiaries. Historical share amounts have been restated to reflect the effect of the share exchange.

On June 18, 2006, Usunco acquired 100% of IBC Automotive Products Inc (“IBC”), a California Corporation as of May 14, 2004 (date of inception), through a Share Exchange Agreement of 28% of Usunco’s shares. IBC was considered a “predecessor” business to Usunco as its operations constituted the business activities of Usunco formed to consummate the acquisition of IBC. The consolidated financial statements reflect all predecessor statements of income and cash flow activities from the inception of IBC in May 2004.

On June 15, 2009, IBC was sold to certain of the management persons of IBC in exchange for the following: (i) the cancellation of an aggregate of 555,994 shares of common stock of the Company which those individuals owned, and (ii) the payment of $60,000 in installments pursuant to the terms of an unsecured promissory note, the final payment of which will be November 15, 2010. As part of the transaction, the Company cancelled $428,261 through the closing date, of inter-company debt which funds had been used in the business of IBC prior to the transaction.

On September 22, 2009, Xinchang Xian Lisheng Machinery Co., Ltd. (“Lisheng”) was incorporated by Zhongchai and two individual investors. Total registered capital of Lisheng is RMB 5 million, of which Zhongchai accounts for 60%. The Company plans to start production of die casting products in 2010 for use in gearboxes, diesel engines and other machinery products.

On December 16, 2009, Equicap and its wholly owned subsidiaries, Usunco and Zhongchai Holding (Hong Kong) Limited, a Hong Kong company (“Zhongchai Holding”), took action to approve transfer of the shares of Zhejiang Zhongchai Machinery Co., from Usunco to Zhongchai Holding. The transfer was completed on December 23, 2009. The purpose of the transfer was to take advantage of the tax treaty between the Peoples Republic of China and the Special Administrative Region of Hong Kong which reduces the withholding tax rate of the PRC on payments to entities outside of China. Usunco no longer has any assets after transferring all of them to Zhongchai Holding and therefore will be dissolved in the future. The consolidated financial statements will continue to account for Zhejiang Zhongchai Machinery Co., in the same manner as before the transfer of the ownership. Shareholder approval by the shareholders of Equicap was not required under Nevada law, as there was no sale of all or substantially all the assets of the Company. The shareholder ownership and shareholder rights of Equicap remain the same as before the transaction.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements include the accounts of Equicap, Inc. and its wholly and majority owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

Interim Financial Statements

These interim financial statements should be read in conjunction with the Company’s audited financial statements for the years ended June 30, 2009 and 2008, as not all disclosures required by GAAP for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the years ended June 30, 2009 and 2008.

Recent Accounting Pronouncements

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) officially launched the FASB Accounting Standards Codification (“ASC”), which has become the single official source of authoritative nongovernmental U.S. GAAP, in addition to guidance issued by the Securities and Exchange Commission. The ASC is designed to simplify U.S. GAAP into a single, topically ordered structure. All guidance contained in the ASC carries an equal level of authority. The ASC is effective for all interim and annual periods ending after September 15, 2009. The Company’s implementation of this guidance effective July 1, 2009 did not have a material effect on the Company’s condensed consolidated financial statements.

On July 1, 2009, the Company adopted the accounting and disclosure requirements of Statement of Financial Accounting Standard (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, which is now included with ASC Topic 810 Consolidation. This standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. On a prospective basis, any changes in ownership will be accounted for as equity transactions with no gain or loss recognized on the transactions unless there is a change in control.

Goodwill and Other Intangible Assets

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized. All other intangible assets are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are subject to annual impairment test using the guidance and criteria described in Statement of Financial Accounting Standard No. 142, (ASC 350) “Goodwill and Other Intangible Assets”. This test compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value.

Note 3 – Restricted Cash

As of December 31, 2009 and June 30, 2009, the Company had restricted cash of $143,033 and $315,151, respectively. These restricted cash balances are reserved for settlement of trade notes payable in connection with inventory purchases. The cash held in custody by bank issuing the trade notes payable is restricted as to withdrawal or use, and is currently earning interest.

Note 4 – Inventory

Inventory at December 31, 2009 and June 30, 2009 consists of the following:

	December 31,		June 30,
	2009		2009

Gears products	$	1,006,376	$	885,559
Gearbox products		1,064,591		680,317
Other		97,147		2,569
Total	$	2,168,114	$	1,568,445

Note 5 – Advance Payments

Advance payments amounted to approximately $5.3 million as of December 31, 2009, approximately $4.6 million of which represented an advance payment made by the Zhongchai JV to Zhejiang Xinchai Holdings Co., Ltd. ("Xinchai Holdings"), a corporation in China, for the purchase of land use rights and building for Zhongchai JV’s future expansion of its production capabilities. Zhongchai JV is currently leasing a portion of the land and building to be purchased. The total land area to be purchased is approximately 250,000 square feet. The total contract price for the land use rights, building and fixtures is approximately $4.6 million. The Company is currently in the process of transferring title.

Note 6 – Property and Equipment

Property and equipment at December 31, 2009 and June 30, 2009 consists of the following:

	December 31,		June 30,
	2009		2009

Manufacturing equipment	$	3,238,314	$	2,923,420
Office equipment and furniture		50,158		56,597
Vehicles		62,124		62,039
Subtotal		3,350,596		3,042,056
Less: Accumulated depreciation		524,964		379,132
Total	$	2,825,632	$	2,662,924

Depreciation expense for the three months ended December 31, 2009 and 2008 was $75,728 and $46,535, and for the six months ended December 31, 2009 and 2008 was $147,618 and $88,451, respectively.

Note 7 – Intangible Assets

Intangible assets at December 31, 2009 and June 30, 2009 consist of the following:

	December 31, 2009		June 30, 2009

Computer Software	$	3,227	$	3,223
Less: accumulated amortization		2,241		1,701

Total	$	986	$	1,522

Amortization expenses for the three months ended December 31, 2009 and 2008 were $269 and $269, and for the six months ended December 31, 2009 and 2008 were $538 and $537, respectively.

Note 8 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	December 31,		June 30,
	2009		2009

Accounts payable	$	1,950,618	$	1,400,162
Accrued expenses		254,921		162,055

Total	$	2,205,539	$	1,562,217

The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.

Note 9 – Short Term Bank Loans

Short-term bank loans consist of the following:

	December 31,		June 30,
	2009		2009

On May 25, 2009, the Company obtained a loan from Agricultural Bank of China, which was re-paid on August 26, 2009. The annual interest was At the fixed interest rate of 4.374% and paid monthly. The loan was secured by a third party.	$	-	$	776,450

On June 15, 2009, the Company obtained a loan from Agricultural Bank of China, which is due on June 16, 2010. The interest is calculated using an annual fixed interest rate of 5.31% and paid monthly. The loan is secured by a third party.		1,422,990		1,421,050

Total short-term bank loans	$	1,422,990	$	2,197,500

Note 10 – Rental Expense

The Company’s Chinese operations are located in Zhejiang, China, and the rental expense for the three months ended December 31, 2009 and 2008 was $13,062 and $27,753, and for the six months ended December 31, 2009 and 2008 was $23,932 and $42,356, respectively.

Note 11 – Risk Factors

Two customers, Zhejiang Xinchai Co., Ltd. and Lonking (Shanghai) Forklift Co., Ltd., accounted for 45% and 17%, respectively, of the Company’s net revenue for the three months ended December 31, 2009. The same two customers accounted for 46% and 23%, respectively, of the Company’s net revenue for the six months ended December 31, 2009,

Five major suppliers, Zhejiang Yuyang Machinery Co., Ltd., Xinchang Liyuan Foundry Co., Ltd., Chongqing Shenjian Auto Transmission Parts Co., Ltd., Zhejiang Hengchun Machinery Co., Ltd., and Hangzhou Qianjin General Machinery Co., Ltd., accounted for approximately 21%, 11%, 9%, 5% and 5%, respectively, of the Company’s total purchases for the three months ended December 31, 2009. Six suppliers, Zhejiang Yuyang Machinery Co., Ltd., Chongqing Shenjian Auto Transmission Parts Co., Ltd., Xinchang Liyuan Foundry Co., Ltd.,Changzhou No. 2 Gears Co., Ltd., Wuxi Hydraulic Marchinery Co., Ltd., and Hangzhou Qianjin General Machinery Co., Ltd., accounted for approximately 24%, 7%, 7%, 5%, 4% and 4%, respectively, of the Company’s total purchases for the six months ended December 31, 2009.

Note 12 – Deferred Compensation

As described in Note 14 (“Share-Based Payments”), the Company granted options to employees and warrants to the private placement agent. Following SFAS No. 123R (ASC 718), the Company recognizes expenses based on the fair value of the options and warrants. Deferred compensation represents share based payments that will be expensed in future periods based on the vesting time of such options and warrants.

Note 13 – Supplemental Disclosure of Cash Flow Information

	For the Six Months Ended December 31,
	2009		2008

Cash paid for interest	$	43,871	$	191
Cash paid for income taxes	$	78,163	$	1,171

Note 14 – Earnings (Loss) Per Share

The Company presents earnings (loss) per share on a basic and diluted basis. Basic earnings (loss) per share have been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings (loss) per share has been computed by dividing net earnings by the weighted average number of shares outstanding including the dilutive effect of equity securities. All share and per share data have been adjusted to reflect the recapitalization of the Company after the share exchange agreement with Usunco. The weighted average number of shares calculated for Diluted EPS excludes the potential common stock that would be exercised under the options granted to employees and warrants granted to agents because of their anti-dilutive effect.

	Three Months Ended December 31,
	2009		2008

Net income (loss)	$	46,332	$	(366,701	)

Weighted average common shares
(denominator for basic loss per share)		27,613,019		28,169,013

Effect of dilutive securities:		-		-

Weighted average common shares
(denominator for diluted loss per share)		27,613,019		28,169,013

Basic net income (loss) per share	$	0.00	$	(0.01	)
Diluted net income (loss) per share	$	0.00	$	(0.01	)

	Six Months Ended December 31,
	2009		2008

Net income (loss)	$	17,977	$	(497,239	)

Weighted average common shares
(denominator for basic loss per share)		27,613,019		28,169,013

Effect of dilutive securities:		-		-

Weighted average common shares
(denominator for diluted loss per share)		27,613,019		28,169,013

Basic net income (loss) per share	$	0.00	$	(0.02	)
Diluted net income (loss) per share	$	0.00	$	(0.02	)

Note 15 – Share-Based Payments

As of December 31, 2009, there were 366,550 outstanding options to employees (“Employee Options”) and 422,535 outstanding warrants to the private placement agent (“Agent Warrants”). Both the Employee Options and Agent Warrants vest over three years and have a life of five years. For the three and six months ended December 31, 2009, the Company recorded approximately $27,197 and $54,395, respectively, of stock-based compensation based on the fair value method of SFAS. No. 123R (ASC 718) using the following assumptions: volatility of 34.94%, risk free interest rate of 4.63%, dividend yield of 0%, and expected life of 5 years. No estimate of forfeitures was made as the Company has a short history of granting options and warrants.

The fair value of the options and warrants was determined based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The fair value of stock-based compensation was determined using the Black-Scholes model.

Note 16 – Stock Authorization and Issuance

On March 9, 2007, the Company completed the sale of an aggregate of 8,450,704 shares of its common stock to a limited number of institutional investors in a private placement transaction pursuant to offering exemptions under the Securities Act of 1933. The shares, which represented approximately 30% of the outstanding common stock on an after-issued basis, were sold at a price of $1.42 per share, for net proceeds of approximately $10 million.

The Company has a registration payment arrangement with regard to the common stock issued in the private offering. The Company was required to file a registration statement within 45 days of closing and caused the registration statement to become effective on or prior to 150 days after the closing date. The registration statement was filed within the 45 day limit thus fulfilling part of this obligation. In addition, the Company is required to use reasonable commercial efforts to maintain the registration statement’s effectiveness and file additional registration statements in the future, to continue to provide to the stockholders the opportunity to sell the shares of restricted stock that they hold. This obligation ends if the shares can be sold pursuant to Rule 144.

In the event the Company does not satisfy the registration obligations of the registration rights agreement, (“Registration Default”), the Company shall pay the investors an amount in cash equal to 1% of the aggregate investment amount for each 30-day period of a Registration Default. The maximum penalty that the Company may incur under this registration payment arrangement is 10% of the aggregate investment amount, or $1,200,000. Any payments made are to be prorated for the portion of a 30-day period of a Registration Default.

Although the Company has the obligation to register shares of common stock for other persons under the above described registration rights agreement, the Company is not obligated to pay liquidated damages in the event that their shares are not registered or the registration statement is not available for their sale.

Note 17 – Employee Welfare Plan

The Company has established an employee welfare plan in accordance with Chinese laws and regulations. Full-time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company to accrue for these benefits based on a certain percentage of the employees’ salaries.

Note 18 – Legal Proceedings

On November 6, 2008, a group of the investors filed a law suit in federal court in New York against the Company, Usunco Automotive Ltd., Mr. Peter Wang and vFinance Investment, Inc. based on alleged violations of the Securities Exchange Act of 1934 and Rule 10b-5, fraud, fraudulent inducement, professional malpractice and negligent misrepresentation arising out of the private placement closed on March 7, 2007. The action was settled by an agreement dated July 31, 2009, which provided (i) for a third party, Ruihua International Limited ("Ruihua"), to purchase all the shares of common stock of the Company owned and held by the plaintiffs, (ii) upon the purchase of the shares, for the Company and Mr. Wang and each of the plaintiffs to exchange general mutual releases as to all matters arising concerning the plaintiffs' purchase and holding of the common shares of the Company, and (iii) for a stipulation to dismiss the action. The action was discontinued with prejudice by stipulation among all the parties which was ordered by the court on August 4, 2009.

In connection with the purchase by Ruihua of the shares sold to it as part of the settlement of the above described action, Ruihua also bought shares from another shareholder who was not a party to the action. As a result of the two share acquisitions, Ruihua acquired a total of 17,431,104 shares, currently representing 61.88% of the issued and outstanding shares of common stock of the Company. Ruihua does not have any registration rights with respect to the shares or other provisions related to control of the Company, such as the right to have specific representation on the board of directors or nominate potential directors for election, other than their rights as a shareholder under the certificate of incorporation and by laws of the Company and under the provisions of Nevada law and the United States securities laws.

NOTE 19 – Subsequent Events

None.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operations.

Equicap, Inc. (“Equicap”), a Nevada corporation, does business through its subsidiary, Zhongchai Holding (Hong Kong) Limited, a Hong Kong company (“Zhongchai Holding”), which in turn operates through Zhejiang ZhongChai Machinery Co., Ltd. (the “ZhongChai JV”), a 75%-owned joint venture established under the laws of the People’s Republic of China (the “PRC” or “China”), Zhejiang Shengte Transmission Co., Ltd. (“Shengte”) a company established under the laws of the PRC and wholly owned by ZhongChai JV, and Xinchang Xian Lisheng Machinery Co., Ltd. (“Lisheng”), a company established under the laws of the PRC and 60% owned by ZhongChai JV. Through its operating subsidiaries, Equicap is currently engaged in the manufacturing and sale of gears and gearboxes (transmissions) in China.

Company Background

Equicap was a public “shell” company with nominal assets until March 9, 2007, when it conducted a share exchange with the equity owners of Usunco (“Share Exchange”) and sold common stock in a private placement to eleven accredited and institutional investors for gross proceeds of $12,000,000. Prior to the Share Exchange, its sole business had been to identify, evaluate and investigate various companies with the intent that, if such investigation warranted, a reverse merger transaction be negotiated and completed pursuant to which Equicap would acquire a target company with an operating business with the intent of continuing the acquired company’s business as a publicly held entity.

Share Exchange

Equicap and Usunco entered a Share Exchange Agreement on March 7, 2007 which was consummated on March 9, 2007. Under the terms of the Exchange Agreement, Equicap acquired all the outstanding equity securities of Usunco in exchange for 18,323,944 shares of common stock of Equicap, and thereby Equicap acquired Usunco as a wholly-owned subsidiary.

In connection with the Share Exchange, Equicap engaged Fountainhead Capital Partners Limited, to act as a financial advisor. At the closing of the Share Exchange, Fountainhead was paid an advisory fee of $450,000 by Equicap.

For advice in connection with the Share Exchange, vFinance Investments, Inc., was issued 161,633 shares of restricted common stock as compensation.

Since the former shareholders of Usunco at the time of the reverse merger owned approximately 65% of the shares of common stock of Equicap, the former shareholders of Usunco had control over Equicap immediately after the Share Exchange. As a result, Usunco was deemed to have been the acquiring company in the Share Exchange for accounting purposes, and the Share Exchange transaction was treated as a reverse acquisition with Usunco as the acquirer and Equicap as the acquired party. Equicap changed its fiscal year to end June 30.

Conversion of Convertible Note of Equicap

Equicap and Fountainhead Capital Partners Limited entered into a convertible note on December 31, 2006, the principal of which was for working capital and discharge of accrued payables of Equicap. As part of the Share Exchange, Fountainhead agreed to convert the outstanding principal and accrued interest of approximately $100,000 into 702,132 shares of common stock, contingent on the closing of the Share Exchange. Upon the conversion, the note was cancelled.

2007 Private Placement Offering

As a condition to the Share Exchange, Equicap conducted a private placement of its common stock to 11 accredited, institutional investors in which Equicap raised gross proceeds of $12 million (“Offering”) under an exemption from registration under Section 4(2) of the Securities Act of 1933. After commissions and expenses related to the Offering and the $450,000 advisory fee payable to Fountainhead, Equicap received net proceeds of approximately $10,000,000 in the Offering. The investors were issued an aggregate of 8,450,704 shares of common stock, representing approximately 30% of the issued and outstanding common stock of Equicap.

vFinance Investment, Inc. was the exclusive placement agent for the Offering. For their services as placement agent, Equicap paid vFinance a fee of approximately $983,000. Equicap also reimbursed vFinance its expenses of approximately $120,000. In addition, Equicap issued to vFinance a five-year warrant to purchase an aggregate of 422,535 shares of common stock at an exercise price of $2.13 per share (“Agent Warrant”). The warrant vests over a three-year period and terminates March 6, 2012.

In connection with the Offering, Equicap granted registration rights to the investors, vFinance and the holders of the Agent Warrant, and provided for registration rights for certain former principal shareholders of Equicap through piggy-back rights for their respective shares of common stock. Equicap entered into one registration rights agreement with the aforementioned persons. In addition, if certain make good shares were distributed to the investors, Equicap was obligated to register these shares in addition. If any of the registrable shares are not eligible for registration because of the rules and regulations of the Securities and Exchange Commission, when they are eligible for registration, Equicap will be obligated to take such action to have them registered for sale by the holder by filing successive registration statements. The initial registration statement for sale of the common shares was filed within the 45 day time limit of the registration rights agreement. Equicap had to have the registration statement effective within 150 days of the closing date of the Offering. If these actions were not achieved by the specified dates, then Equicap had to pay each of, and only, the investors an amount equal to 1% of the share purchase price actually paid by such investor for each month thereafter that the shares could not be sold under the registration statement. Similar penalties for the failure to file or have declared effective a registration statement within the stated time periods and maintain its effectiveness apply to the subsequent required registration statements. The maximum penalties under the liquidated damages provision payable to the investors is 10% of the share purchase price paid by the investors in the Offering. The registration statements required for the investors and vFinance under the registration rights agreement had to be kept effective until all the shares of these parties are sold or may be sold without limitation under Rule 144. Equicap did not meet the effectiveness deadline for the initial registration statement and paid $32,000 to the investors under the liquidated damages provision.

The former principal shareholders of Equicap who have piggy-back rights also have a demand registration right after all the shares of the investors and vFinance have either been sold or may be sold without limitation under the then Rule 144k. The Company is obliged to keep this registration statement effective until all the shares have been sold or are eligible for sale under Rule 144k. Currently, Equicap believes that the shares may be sold under Rule 144, being the effective equivalent of Rule 144k or the obligation is no longer applicable because the shares have been sold.

Equicap completed the capitalization of its PRC joint venture shortly after the above described private placement. Pursuant to PRC law, foreign joint ventures have to be capitalized pursuant to the terms of their approval. Equicap, through Usunco contributed $8,000,000 and its joint venture partner contributed $2,600,000, all of which will be used as working capital and other corporate purposes. Future capital contributions between the parties are to be on a 75% - 25% basis, with Usunco being the majority party.

Results of Operations

Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008

Revenue

Revenue increased by $1,069,296 or 130% to $1,889,823 for the three months ended December 31, 2009 compared to $820,527 for the three months ended December 31, 2008. Sales revenue for the three months ended December 31, 2009 consisted solely of sales of gears and gearboxes in China, as a result of the Company’s sale of IBC, the North America / Auto Parts segment in June 2009. Revenue for the three months ended December 31, 2008, consisted of sales of automotive parts in North America and sales of gears and gearboxes in China, for $288,470 and $532,057, respectively. The sales revenue of gears and gearboxes for the period grew by approximately 255% compared to the sales of the same products in China for comparable period in the prior fiscal year. The increase in gears and gearboxes sales was attributable to the Company’s introduction of new gearbox products, expansion in production capacity and its continued marketing efforts to develop its customer base. Revenues during the period were also beneficially affected by the recovery of domestic market in China for gear and gearbox products as a result of Chinese government’s economic stimulus plan.

Cost of Sales and Gross Margin

Cost of sales was $1,483,353 for the three months ended December 31, 2009, increasing by $789,456, or 114%, from $693,897 for the three months ended December 31, 2008. The gross margin was approximately 22% for the three months ended December 31, 2009, compared to approximately 24% (excluding auto parts business) for the three months ended December 31, 2008. The decrease in gross margin in this quarter as compared to the same period in prior fiscal year was attributable mainly to a general decrease in gear prices and the launch of new gearbox products, the margin of which is lower than for gears. The shift in product mix and development of new products has been implemented by the Company as a strategy to quickly penetrate the market for its products and build sales.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consisted primarily of labor costs and overhead costs for sales, marketing, finance, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123R (ASC 718).

SG&A expenses decreased by $225,578 to $287,950 in the three months ended December 31, 2009, from $513,528 in three months ended December 31, 2008. The decrease primarily was attributable to the exclusion of the expenses associated with IBC, reduction in rental expense for less office space leased, and reduction in some professional and consulting service expenses due to less capital market related services incurred in the period compared to the same period in the prior fiscal year.

Net Income (Loss)

Net income was $46,332 in three months ended December 31, 2009, compared to a net loss of ($366,701) in the three months ended December 31, 2008. The Company became profitable in the quarter mainly attributable to increased revenue and gross profit and lower operating expenses.

Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008

Revenue

Revenue increased by $1,831,132 or 91% to $3,838,229 for the six months ended December 31, 2009 compared to $2,007,097 for the six months ended December 31, 2008. Sales revenue for the six months ended December 31, 2009 consisted solely of sales of gears and gearboxes in China, as a result of the Company’s sale of IBC, the North America / Auto Parts segment in June 2009. Revenue for the six months ended December 31, 2008, consisted of sales of automotive parts in North America and sales of gears and gearboxes in China, for $628,033 and $1,379,064, respectively. The sales revenue of gears and gearboxes for the period grew by approximately 178% compared to the sales of the same products in China for same period in the prior fiscal year. The increase in gears and gearboxes sales was attributable to the Company’s introduction of new gearbox products, expansion in production capacity and its continued marketing efforts to develop its customer base. Revenues during the period were also beneficially affected by the recovery of domestic market in China for gear and gearbox products as a result of Chinese government’s economic stimulus plan.

Cost of Sales and Gross Margin

Cost of sales was $3,026,527 for the six months ended December 31, 2009, increasing by $1,480,543 or 96%, from $1,545,984 for the six months ended December 31, 2008. The gross margin was approximately 21% for the six months ended December 31, 2009, compared to approximately 27% (excluding auto parts business) for the six months ended December 31, 2008. The decrease in gross margin in the period as compared to the same period in prior fiscal year was attributable mainly to a general decrease in gear prices and the launch of new gearbox products, the margin of which is lower than for gears. The shift in product mix and development of new products has been implemented by the Company as a strategy to quickly penetrate the market for its products and build sales.

Selling, General and Administrative Expenses

SG&A expenses decreased by $350,026 to $632,190 in the six months ended December 31, 2009, from $982,216 in six months ended December 31, 2008. The decrease primarily was attributable to the exclusion of the expenses associated with IBC, reduction in rental expense for less office space leased, and reduction in some professional and consulting service expenses due to less capital market related services incurred in the period compared to the same period in the prior fiscal year.

Net Income (Loss)

Net income was $17,977 for the six months ended December 31, 2009, compared to a net loss of ($497,239) for the six months ended December 31, 2008. The Company became profitable for the period mainly attributable to increased revenue and gross profit and lower operating expenses.

Liquidity and Capital Resources

As of December 31, 2009, Equicap had current assets equal to $11,026,164, current liabilities equal to $4,507,063 and working capital of $6,519,101. Equicap believes that it has sufficient operating capital for its current operations.

Operating Activities

Net cash used in operating activities was approximately $2.56 million for the six months ended December 31, 2009, as compared to $3.2 million net cash provided by operating activities for the same period in the prior fiscal year. The net outflow from our operating activities was mainly due to the increase of $2.26 million in advance payment during the six-month period. The advance payment was made by the Zhongchai JV to Zhejiang Xinchai Holdings Co., Ltd. ("Xinchai Holdings"), a corporation in China, for the purchase of land use rights and building for Zhongchai JV’s future expansion of its production capabilities. Inventory and receivables also increased during the period along with the growth in sales.

Investing Activities

Net cash used in investing activities was $0.3 million for the six-month period ended December 31, 2009, increased from $0.27 million for the same period in fiscal year 2008. The Company continued purchasing new equipment to expand its production capacity to meet increasing demand for its products.

Financing Activities

Net cash used in financing activities was $0.48 million for the six-month period ended December 31, 2009. During this period, the Company repaid bank loan of $0.78 million. There was also $0.29 million capital contribution to Lisheng from minority shareholders.

As Equicap expands its operations and considers additional acquisitions of private companies, divisions or product lines, it may require additional capital for its business development and operations. Equicap does not have any specific sources of capital at this time, therefore, it would need to find additional funding for its capitalization needs. Such capital may be in the form of either debt or equity or a combination. To the extent that financing is in the form of debt, it is anticipated that the terms will include various restrictive covenants, affirmative covenants and credit enhancements such as guarantees or security interests. The terms of any proposed financing may not be acceptable to Equicap. There is no assurance that funding will be identified or accepted by Equicap or, that if offered, it will be concluded.

Off-Balance Sheet Arrangements

The Company does not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

Critical Accounting Policies and Estimates

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended June 30, 2009, for disclosures regarding Equicap Inc.’s critical accounting policies and estimates. The interim financial statements follow the same accounting policies and methods of computations as those for the year ended June 30, 2009. There was no new accounting policies and estimates during the period ended December 31, 2009 which affects the Company.

Recent Accounting Pronouncements

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) officially launched the FASB Accounting Standards Codification (“ASC”), which has become the single official source of authoritative nongovernmental U.S. GAAP, in addition to guidance issued by the Securities and Exchange Commission. The ASC is designed to simplify U.S. GAAP into a single, topically ordered structure. All guidance contained in the ASC carries an equal level of authority. The ASC is effective for all interim and annual periods ending after September 15, 2009. Accordingly, the Company refers to Codification in respect to the appropriate accounting standards throughout this document as “ASC”. Implementation of the Codification did not have any impact on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information is not required for smaller reporting companies.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 6. Exhibits.

Exhibit		Description

31.1		Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009.

31.2		Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2009.

32.1		Certification of the Company’s Principal Executive Officer and Principal Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

SIGNATURES

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

Date: February 10, 2010		EQUICAP, INC.

	By:	/s/ Peter Wang
	Name: Peter Wang
	Title: President

	By:	/s/ David Ming He
	Name: David Ming He
	Title: Chief Financial Officer